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Why shifts in Chinese regulation could benefit U.S. device makers

Amritpal Khalsa

Domestic device standards changing

Regulators in China have begun working on new standards to better control the domestic production of medical devices. The aim of the new regulations is to increase the quality of domestic production. Regulations to increase quality center around harsher guidelines for device inspections, like increases in the amount of officials inspecting per device, transport of samples, and new lab testing rules. According to the China Food and Drug Administration, last year, there were 180,000 reports filed citing issues associated with medical devices. As regulators attempt to reform their healthcare system, greater efforts are focusing on quality improvement in order to better protect patients.

(Read more: Must-know: Insurance exchanges will affect medical device stocks)

The new regulation is expected to drive domestic production down as manufacturers struggle with rising costs of production. There’s a significant amount of device makers in China yet without incentives via regulation, and the quality of these products is poorer compared to imported products. Analysts expect businesses that produce poorer-quality products to be pushed out of the market, making room for other device makers.

(Read more: Why the medical device tax repeal bill shouldn’t pass anytime soon)

Device imports expected to increase

The market for healthcare and medical devices in China is growing remarkably. China has invested billions of dollars into healthcare reform, and a large amount of that money is going to purchasing quality medical devices and equipment for hospitals.

The Chinese government expects the industry for medical devices to reach $38 billion by 2015—a 271% increase from 2009. The USITC (United States International Trade Commission) also published a report citing a projected 11% compound growth rate in device demand through 2018, with orthopedic procedures forecasted to increase 18% by 2015. Plus, with demand expected to outpace domestic production dramatically, analysts expect imports to increase. This could be a great opportunity for foreign device makers looking to increase export revenues. According to the China Association of Medical Device Industry, imports jumped almost 15% in 2012 alone. Public opinion in China already favors imported devices, as they’re reputed for their quality and more reliable.

(Read more: Why you should use the Sharpe ratio when investing in the medical device industry)

Distributors consolidating

China is consolidating its medical device distribution industry. China’s current Five Year Plan (2011 to 2015) aims to create ten medical devices groups, pushing out smaller third-party companies. Analysts expect competition in the distribution space to lessen in favor of large device makers such as Johnson & Johnson and GE Healthcare.

U.S. device makers poised to benefit

U.S. device exports to China reached $1.7 billion in 2012, and U.S. manufacturers have been increasing their investments in the market. In January 2013, Stryker Corp. acquired Trauson Holdings and establishing manufacturing centers in Suzhou. The company also established education centers for surgeons to learn how to better use their devices. Medtronics acquired Kanghui Holdings in 2012 while also establishing a research and development center in Shanghai. GE Healthcare recently established a three-year $2 billion commitment to expand medical device innovation in China.

Look for exports to China by these device makers, among other manufacturers, to increase in the future. This will drive up revenues and valuations.

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