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China’s new free trade zone is a boon for medical device makers

Amritpal Khalsa

China's free trade zone and medical device stocks (Part 2 of 2)

(Continued from Part 1)

Boon for device makers

The free trade zone in Shanghai promises to create opportunities for hospitals and health insurance companies, making more opportunities for medical device manufacturers.

Although rules will continue to roll out for the next three years, three sectors of healthcare have been temporarily liberalized:

  1. Health insurance
  2. Private hospitals
  3. Capital equipment leases

The free trade zone already includes the port of Waigaoquao, which is the main port for importing medical devices into the country. The Pudong Medical Trade Association is also located in the zone, facilitating trade. Hundreds of device manufacturers already operate in the area and stand to benefit from reduced tariffs, making importing the devices much cheaper. In some cases, such as leasing medical equipment, the tariff can be waived completely, with a 15% lower VAT (value-added tax).

Hospital services investment will drive up medical device demand

As hospital services are also being deregulated, analysts expect an increase in demand for diagnostic equipment and an increased supply due to the reduced cost of importing goods. In China, only approximately 12% of hospital beds are privately run. According to PwC, the zone will spurn foreign investment in private hospitals and thus spurn device demand.

Analysts expect the health insurance market to grow 10% to 26% over the next ten years and be worth $111 billion by 2020, pushing up demand for elective medical device operations. Selling expenses will also reduce as Chinese officials strive to reduce the administrative tape manufacturers had to go through to import their devices.

Multinationals look to benefit

In 2012, device imports from the US reached $1.7 billion in China. In the past two years, there has also been a string of investments in the country by large medical device manufacturers. GE Healthcare (GE), Johnson & Johnson (JNJ), and Medtronics (MDT) created R&D (research and development) centers with GE investing $2 billion over three years to drive medical device innovation and customization for the Chinese market. Acquisitions in the past two years include Stryker Corp. purchasing Trauson holdings and Medtronic purchasing Kanghui holdings. Boston Scientific (BSX) was late to the game but recently opened an R&D center in Shanghai to improve outcomes and increase demand for products tailored to the Chinese market.

Look for boosts in earnings as these companies attempt to leverage the free trade zone. The USITC projects an 11% compound growth rate in device demand through 2018 for the Chinese market.

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