Pot Of Gold Or Fool's Gold? Opportunities In India's Medical Device Ecosystem
By Gunjan Bagla,managing director, and Rajnish Rohatgi, senior advisor, Amritt Inc.
3 important factors to consider when developing your strategy for the Indian market
India recently elected its most business-friendly government ever. In his first Independence Day speech, Prime Minister Narendra Modi announced his intent to dismantle the Soviet-style Planning Commission, to the cheers of free-market advocates around the world. Anticipating accelerating trade with India, U.S. Commerce Secretary Penny Pritzker visited Mumbai and New Delhi to emphasize hopes of increasing bilateral U.S.-India trade from the current $100 billion to $500 billion by 2019.
In August 2014, the Confederation of Indian Industry (CII) projected that India’s medical technology industry could grow aggressively to $50 billion in annual sales over the next decade, an increase of nearly 800 percent from the current estimate of $6.3 billion. Yet, in the same month, Omar Ishrak, CEO of the world’s largest independent medical device company, Medtronic, announced that the company’s sales in India actually fell by 7 percent in the previous quarter. Wall Street analysts raked Ishrak for this “trough” in revenue during the earnings call that followed.
Resolving these paradoxes is the key to American and European medical device companies finding success in India. In this article, we will focus on three broad areas that foreign medical technology companies need to care about in the near future.
Global M&A Involving Indian Companies
First, we believe that there may be untapped opportunities for international mergers and acquisitions in India’s medical technology ecosystem. Several years ago, Bangalore, India-based Opto Circuits purchased defibrillator maker Cardiac Sciences (Bothell, WA), vascular diagnostics maker Unetixs Vascular (North Kingstown, RI), and patient monitor company Criticare Systems (Milwaukee). And in 2013, Fort Worth, TX-based TPG Capital spent $23 million to acquire a quarter of surgical equipment company Sutures India. When Indian conglomerate Larsen & Toubro was ready to sell its medical equipment business, which made ultrasound and electrocardiogram (EKG) machines, in 2012, international buyers balked, and the final sale was made to fellow Indian firm Skanray Technologies.
In the meantime, the pharmaceutical and biotech sectors in India have seen significant global M&A activity from the U.S. and Japan. For example, Cancer Genetics, a Rutherford, NJ-based developer of DNA-based cancer diagnostics, bought Bioserve Biotechnologies, a genomics services company operating out of Hyderabad, India, in August 2014. England’s GlaxoSmithKline (GSK) announced in March 2014 that it had increased its stake in its Indian subsidiary from 50 percent to 75 percent. And in December 2013, Pittsburghbased Mylan acquired Indian drug maker Agila Specialties for $1.6 billion.
Inorganic growth in the form of an acquisition or a joint venture may present a great way for medical device companies to leapfrog into the Indian marketplace while building up low-cost manufacturing and engineering talent in a country where language and laws are less challenging than in China. The new government in India is deeply interested in attracting foreign investors. Medical technology could be a significant beneficiary of this capital flow.
What To Expect From New Delhi
Second, we think that some moderate progress might be expected from the new Indian government in the midterm. The Association of Indian Medical Device Industry (AIMED) and the American Chamber of Commerce in India (AMCHAM - India) are pressing for upgraded regulations around clinical trials, sale, and monitoring of medical devices. Legislation and regulations were in a quagmire for over five years under the previous government. There are some signs that legislators and bureaucrats in Prime Minister Modi’s government will be motivated to move more quickly. The Central Drugs Standards Control Organization (CDSCO), the federal agency that currently regulates devices, has released memos and notes that give signs of hope. They should be encouraged.
The new fiscal budget of the Modi government indicates some acceleration in healthcare spending. However, the majority of the benefit is likely to come from implementation of numerous programs that have been approved or announced in years past but not actualized.
While many India watchers have very high expectations of what Modi may be able to achieve — and we certainly think that India is capable of returning to growth rates close to 10 percent — we believe that foreign medical technology companies can perform exceedingly well in India’s current economy with only some minor adjustments to the regulatory process.
Distributors Are Only Part Of The Answer
While many global medical device companies such as GE, Siemens, Philips, BD (Becton, Dickinson and Company), and Covidien have done well in India over the years, it is fair to say that a number of entrants have struggled to fulfill their potential. The causes for this are manifold, of course, but one of the most common fallacies about India is that selecting a good distributor is all you need for incremental success in this market.
Unfortunately, this is often insufficient.
Dealing with distribution is the third area where foreign companies make changes to increase their likelihood of success. Let’s set the scene: In many cases, we are approached by U.S. companies whose primary success in India consisted of registering some products and appointing a distributor. While they often hear from other U.S. and European companies that their prices were too high for the Indian market or that the product was not needed by Indian doctors, patients, or hospitals, sometimes the real reason for limited success is buried deeper.
India’s distributors work hard for small margins. But they are often under-capitalized and generally lack a national reach in terms of trusted relationships. Many such distributors lack the ability to create and stimulate demand, especially where concept and value selling are needed to justify price premiums. As a result, some distributors rely heavily on deep discounting to win any business at all. A few may ask for what seem like unreasonable margins; some of this margin may be intended to fund less-than-ethical practices in order to win sales. Many distributors in India are good for fulfillment of existing demand — delivering product, extending credit, calling on the purchasing function at accounts, and fulfilling the administrative requirement of RFPs — but they cannot draft a full proposal. If you are a multi-billiondollar company, you might want to fire such a distributor.
Medtronic CEO Ishrak faced “disruption from distributor terminations and inventory rebalancing.” He went on to add, “We’re executing a definite plan for optimizing our India distributor channels, but this will take the remainder of the fiscal year before we return to double- digit growth.”
To supplement a local Indian distributor’s efforts with in-house company salespeople to sell one-to-one seems to be too big a leap for many midsize foreign entrants. So we often develop blended middle-ground solutions that work well for India’s fragmented healthcare marketplace and for the Western companies who want to make an impact there.
For example, one model successfully developed and implemented was to design a train-the-trainer module for three nurses from 20 small hospitals in a central location, arming them with training tools to train other nurses in each of their hospitals. Using a loyal, local key opinion leader (KOL) as faculty, instead of flying out a corporate clinical resource, not only helped eliminate international travel costs, but also created higher cultural credibility among the audience.
There are many other ways to supplement and support your India distributor’s efforts that can increase sales without taking large investment or reputation risks. Choosing the right method requires careful analysis of your product’s place in the current market in India and your long-term aspiration for market share in India.
Conclusion
We think that the CII report projecting double-digit growth until 2025 for the medical technology market in India is credible. For most foreign companies today, respectable growth in India does not require huge investments in product development or sales teams. Instead, alertness toward M&A opportunities, gentle support of better regulations, and a nuanced approach to properly support the Indian distributors is largely all that is needed.
About The Authors
Based in Los Angeles, Gunjan Bagla is managing director of Amritt Inc., a California-based consulting firm focused on helping American companies to succeed in India. His clients include Covidien, Roche Diagnostics, BD, Nordic Naturals, Johnson & Johnson, Gojo, and many more. For his India expertise, Gunjan has appeared in The New York Times, The Wall Street Journal, the Los Angeles Times, and The Washington Post, and on Bloomberg TV, BBC Television, and Fox Business News. He also writes for the Huffington Post and the Harvard Business Review. He has an MBA from Southern Illinois University and a mechanical engineering degree from the Indian Institute of Technology (IIT) Kanpur in India.
Based in New Delhi, India, Rajnish Rohatgi is a senior advisor for Amritt’s Medical Technology Practice. He spent over seven years building BD’s medical surgical business in South Asia. Rajnish has over 25 years of marketing, sales, and leadership experience in India and Africa in the healthcare, medical device, and consumer sectors. This includes a stint as VP of marketing for Max Healthcare, a leading hospital chain in North India. He has an MBA from the Indian Institute of Management Calcutta (established by MIT’s Sloan School) and a bachelor’s degree in metallurgical engineering from IIT Kanpur.