“HEALTHCARE COMPANIES SHOULD REVISIT THEIR CHINA SETUP. ” INTERVIEW WITH MIKE HOFMANN FROM MELCHERS CHINA
Redfern Digital spoke with Mike Hofmann, the Managing Director of Melchers China in Beijing and Chairman of the Board of Directors of Koehler Pharmaceuticals Beijing Ltd., about the Chinese healthcare market and the support Melchers China provides to foreign companies in China.
Mr. Hofmann, Melchers is a well-established diverse company with a long history in China. What is Melchers’ experience and background in the healthcare industry in China?
For more than 155 years, Melchers has been doing business with China. We enable our brand partner to succeed in China. It is our mission to create long-term value through customer-centric and customized approaches. Driven by our entrepreneurial mindset, we have seized opportunities along different areas in the value chain of the Chinese healthcare industry. For instance, we work with partners in different sectors such as pharmaceuticals and medical devices, medical consumables, pharma packaging, and pharma machinery. We act in the capacity of sales and after-sales agency, provide corporate governance, management, and corporate services, and take equity shares in the local operation. We have identified healthcare as a strategic sector for the Group, where we will enhance our activities.
What changes has the healthcare industry in China experienced over the past decade?
The Chinese healthcare industry is a sector that is showing fast development, especially because of government reforms and several long-term trends that have emerged during the past decade. For example, we are seeing changes in lifestyle, consumption, and eating habits due to increasing prosperity, leading to an increase in lifestyle diseases such as high blood pressure, diabetes, obesity, or overweight.
Increasing life expectancy and the consequences of the one-child policy led to the rapid aging of society and the end of population growth. According to the UN, by 2035, over 409 million Chinese will be older than 60 years, corresponding to over 28 percent of the population. The family planning policy, which has now been relaxed to three children, can only delay this development somewhat.
One of the first drives of the reform policy from 10 years ago was for the healthcare sector to provide health insurance for everyone. While the insurance might not be as high as in other countries, it is still a basis for everyone to receive basic medical coverage in China. But this, of course, has driven up expenditures. According to a recent academic study, healthcare spending in the country is expected to increase to $2.5 trillion in the next decade or so. The market share of spending on healthcare as a percentage of China’s GDP will increase from where it is right now, at 6.6 percent, to over 9 percent in 2035. This means that the country’s healthcare segment grows faster than its GDP. However, since it still needs some growth before it can be compared to Europe or the US, the healthcare industry in China is still definitely at a development stage.
During the beginning of the COVID-pandemic, Melchers has further increased its healthcare industry footprint by establishing the joint venture company Koehler Pharmaceuticals (Beijing) Ltd. How did it come about? What are the aims of establishing this joint venture?
Koehler Pharmaceuticals (Beijing) Ltd. is a more-party joint venture formally established in the first half of 2020, with the main shareholder being Dr. Koehler Chemie from Germany, as the product’s manufacturer. The other shareholders are two entities of the Melchers Group and a local Chinese company. Although the product sold by the joint venture, CUSTODIOL, has been in China since 2004, it was only distributed by local distributors until we founded the company in 2020.
There were different reasons for setting up the joint venture, including increasing the local support and service level for customers and increasing the market participation and reach. The company was also set up to explore opportunities to work with Chinese medical experts in terms of research, such as conducting more research into myocardial protection and organ preservation. With China being so fast developing, its medical experts will also play more prominent roles in the medical field in Asia in the future.
In conclusion, the rationale behind the joint venture is a combination of improving distribution and setup optimization and providing an avenue for future research projects.
What expertise is Melchers able to bring to the joint venture in terms of experience within China?
The establishment and operation of the joint venture, Melchers is leveraging its experience of doing business in China and flexibility for the customization of its services to meet the needs of the company and its shareholders. Specifically, our role contained to provide support and experience in terms of a company set up, which included the establishment of corporate governance and compliance mechanisms and operating policies, taking certain management and supervisory function roles in the company, providing corporate services to the day-to-day operation, and ensure that the company runs in compliance with Chinese regulations.
Let us talk about the product for a moment. What is CUSTODIOL, and what is its use within the healthcare industry, both abroad and in China?
CUSTODIOL is a cardioplegic and organ preservation solution used during cardiac and organ transplant surgery. It is suitable for ‘in situ’ open heart surgery and kidney perfusion for blood free tumor resection and the removal of multiple organs during organ transplantation. It is used in more than 100 countries globally by renowned surgeons. Since the product has been in the Chinese market since 2004 and globally since the early 1980s, it is a well-established and known product.
What are the benefits of establishing this particular joint venture in China? How will it help to develop a closer relationship with Chinese customers? What can other companies learn from it?
Certainly, one of the main advantages of having established the joint venture is that the product owner is on the ground and closer to the customer, which allows for a better understanding of the specific needs and demands in the Chinese market. The reaction time is also faster, and market feedback is received unfiltered instantly. You can engage in key account management and better communication and relationship building with key experts. Being a healthcare company with a local entity in China means that you also can do more research in the future, such as participating in academic studies and cooperating with these clinical experts, making future product development easier. These are all the classic benefits of setting up a company in China that still hold true today. Considering the pandemic and the ongoing travel restriction, having its own setup in China has become a competitive advantage.
You mention the COVID-19 pandemic. What impact did the pandemic have on the operation of your healthcare business?
We established the joint venture during the height of the COVID-19 pandemic in China. Our choices were to wait and reconsider or to go ahead. It was a time of uncertainty. We decided to go ahead with the investment and the commitment, knowing that our first year might be a challenge. In hindsight, I can proudly say that we did the right decision, as the business has grown enormously since the company was set up. However, the pandemic sometimes interrupted or posed challenges to the business as hospitals postponed non-life treating surgeries, local travel restrictions delayed opening of new accounts and markets, academic conferences were canceled and postponed, and interruptions in the supply chain in terms of shortage of air freights and lengthen custom clearance processes drove costs.
On the general level, the pandemic posed a challenge to our strategic business development efforts as the discussion of Melchers with potential brand partners moved online, and some partners were hesitant to commit to an investment in times of uncertainty. On the other hand, the longer the travel restrictions are in place, the more discussions with companies who lost touch with the market and are looking for a reliable partner in China than can support them. This is also one reason that confirmed our direction to further engage in the healthcare space.
Looking back: Have there been improvements in 2021 regarding the impact of COVID-19? How will this change in 2022 and going forward?
Due to the successes of China’s zero COVID-policy, 2021 had fewer mass lockdowns than 2020, so surgery numbers were significantly higher, and we saw fewer interruptions. Furthermore, academic seminars and conferences took place again, albeit at a smaller scale or digital. However, the main challenge was that supply chain costs had increased significantly, especially for cold chain logistics, which flies the products in by air. In 2022, we expect the costs to continue to increase, with other impacts depending on how the current outbreaks develop and whether more restrictions will be implemented. That being said, the earlier discussed long-term trends will continue to unfold, and I would advise any company not to wait until China fully opens up its borders again but revisit their China setup or entry plans and consider the increased market participation actions.
What have been the main takeaways for Melchers during the past two years from its activities in the healthcare industry?
For many years already, we have been working with pharma companies, helping to supply their products and packaging materials specialized for pharma products, assisting with production lines, etc. Through Koehler Pharmaceuticals, we have continued to increase our exposure to medical technology and pharma. While establishing the joint venture has its specific challenges, it has also helped us streamline and optimize our strategy, building up our expertise in the healthcare category and increasing the value we can provide to brand partners.
With over 155 years of experience in the Chinese market, we are a reliable partner that looks for the long-term. This includes taking risks in times of the pandemic and having the courage to invest in businesses. Reliability is a core value of our company and is much appreciated from all sides. From our case studies, we are receiving more requests for assistance from companies facing COVID-19 related issues when it comes to entering the Chinese market. Through these talks, we realize that the biggest takeaway is that our knowledge and approach to a partnership to build and run a business in China continues to be highly relevant and valued by brand partners, particularly in times of crises like a pandemic.
In the market, we also see growing pressure in the healthcare industry, such as seeking domestic products and changing procurement methods. The pressure on prices and local production increases, making the Chinese market more complex. Companies need to make strategic choices for China to ensure future growth and market readiness.
Thank you for your time, Mr. Hofmann.
The Melchers China organization is a member of the globally operating Melchers Group. Establishing its first Asian branch in 1866 in Hong Kong, Melchers has been engaged in doing business with China ever since. The company supports foreign companies as a market expansion partner from various industries.
Koehler Pharmaceuticals Beijing Ltd. is a Joint Venture company established in 2020 by Dr. Franz Köhler Chemie GmbH with partners in China. The company distributes cardioplegic and organ preservation solutions in the field of cardiac and transplant surgery.