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The heparin scare notwithstanding, multinationals are strengthening their ties with the Chinese medical industry
In the U.S., people worried about the safety of Chinese-made toys, food, and other products have been focusing on pharmaceutical company Baxter International (BAX), which has recalled much of its blood thinner heparin after suspicions that a tainted ingredient in the drug from China caused illness and deaths among some patients. The U.S. Food & Drug Administration on Apr. 21 announced that the Chinese factory producing the ingredient continued to have problems meeting safety standards. Meanwhile, Chinese officials deny that the problem originated in China.
The heparin scare may be dominating the health news in the U.S. media, but that's not stopping multinationals from boosting their ties with the Chinese medical industry. Dutch conglomerate Philips (PHG), which is switching its focus away from electronics and semiconductors and toward higher-growth areas like medical equipment, is boosting its alliances with manufacturers, universities, and hospitals in China.
Philips recently formed a research alliance with a hospital and university in the western Chinese city of Chengdu and announced the acquisition of a company making patient-monitoring equipment in the southern city of Shenzhen. The industry "will start to see more companies moving their manufacturing to China," predicts David Jin, chief executive for Greater China for Philips Health Care, which also operates a joint venture with a Chinese company in northeastern China, the Neusoft Group, making MRI, CT scan, ultrasound, and X-ray equipment.
Siemens and GE Are in the Mix
Other companies are paying attention to China, too. Siemens last September opened a medical research and development, manufacturing, service, sales, and marketing center in Shanghai that the German conglomerate expects to employ 1,000 people this year. It's the largest facility of its kind for Siemens in Asia, the company boasts. And General Electric's (GE) health-care division last August announced a plan to work with Premier Diagnostic Health Services, a Vancouver company with a Hong Kong subsidiary, to sell and operate positron emission tomography (PET) scans to Chinese health providers such as the People's Liberation Army 101 Hospital in the eastern city of Wuxi.
One of the most aggressive companies is Medtronic (MDT), which in December announced it was investing $221 million to buy a 15% stake in Shandong Weigao Group Medical Polymer, a Hong Kong-listed manufacturer of medical equipment based in China's northeastern Shandong province. The two companies also formed a joint venture to produce instruments used in spinal surgery, with the goal of selling not only in China but abroad, says Jiang Qiang, Weigao vice-president and chief financial officer. Medtronic is likely to shift more manufacturing to China, says Jean-Luc Butel, president of Asia-Pacific for the U.S. company. "We have very genuine intentions to expand the collaboration to other businesses."
At a time when American patients are quizzing their pharmacists about whether their drugs are made in China, it might seem odd for multinationals to be looking to increase their ties with the Chinese health-care sector. Yet company executives argue that there are no safety worries associated with manufacturing in China, and the country offers compelling advantages. The market inside China for all sorts of medical equipment, currently about $8.6 billion, according to Weigao's Jiang, is set to grow dramatically as economic growth creates a Chinese middle class able to spend more on health care. China is third behind the U.S. and Japan as a market for medical devices and is likely to become No. 2 within the next decade.
FDA Beefing up Capabilities in China
Despite the assurances of industry executives, the trend toward more Chinese manufacturing is likely to lead politicians and safety advocates to pressure the FDA to do more to ensure quality at Chinese facilities is up to U.S. standards. The FDA is setting up offices in three Chinese cities in order to improve its ability to inspect facilities in China, but the agency is already struggling to cope with demand. Both Democrats and Republicans in an Apr. 22 congressional hearing criticized it for not doing enough inspections.
Still, China's low wages are making the country a magnet for multinationals eager to find ways to cut costs. Such companies are likely to follow in the footsteps of electronics players like Motorola (MOT) and Hewlett-Packard (HPQ) by outsourcing production to Chinese partners, says Wai San Loke, managing director in Singapore for Baring Private Equity, which has invested in Amsino Medical, a producer of disposable medical equipment like gloves, syringes, and catheters with offices in Shanghai as well as Pomona, Calif. The situation today for the medical equipment industry is similar to that of the electronics industry in the early 1990s, before outsourcing took off, according to Loke. "We are at the same point with the medical device industry," he says. "The outsourcing trend is just starting."
Neusoft, the joint venture partner of Philips, is one of the leaders among Chinese medical equipment makers. Under the terms of the partnership, Neusoft has the right to market equipment under its own brand and has sold MRIs, CTs and other imaging equipment to more than 3,000 hospitals in China, boasts CEO Liu Jiren. The company is now trying to build export markets in the U.S. and other overseas locations. Liu says Neusoft sold 30 MRIs and 30 CT scanners to American hospitals last year. Working with Philips "has very much improved the manufacturing process" at Neusoft, he says.
Quality Is Essential to Sustain Life
Still, given the track record of Chinese companies in toys, food, and drugs, some Americans are bound to wonder whether Chinese manufacturing is reliable enough for sensitive medical equipment. "Many of these devices are life-sustaining, and it's critically important that they be manufactured to specification," says Dr. William Maisel, director of the Medical Device Safety Institute, Medicine Dept., at Beth Israel Deaconess Medical Center in Boston. When products are made outside the U.S., "it's difficult for the FDA to monitor," adds Dr. Maisel. "I would have some concerns about products that are manufactured in unregulated areas."
Companies operating in China insist that there's no reason to be concerned. When it comes to quality at its Chinese partner, "there is absolutely no compromise," says Medtronic's Butel. Others are equally adamant. "We are really confident with our quality-control process," says Li Xiting, president and chief executive officer of Mindray Medical International (MR), a New York Stock Exchange-listed company based in Shenzhen that on Mar. 11 paid $200 million to acquire the patient-monitoring division of Montvale (N.J.)-based Datascope. The deal provides the Chinese company with a sales network in the U.S.