Healthcare in Europe – Identifying the issues, lining up the options, selecting the system, avoiding mistakes
This is the third article in a series of five on the subject of taking your operation international and building an asset abroad.
We will assume that you have worked your way through the first parts of preparing for the launch and you feel ready to move on. I accept that things have a tendency not to happen according to plan, in detail, in order. You have over the last couple of years, before moving into gear internationally, talked to distributors and other parties that may be able to help you.
If things are well, you have considered the options available:
Recruit and appoint country distributors is the most common initial choice. We will discuss the issues in Europe (EMEA), the alternatives and the pros and cons.
In setting up distribution in Europe (EMEA, Europe, Middle East and Africa) it makes sense to take the following issues into account:
In spite of the sluggish economic circumstances (effectively since 2010) Europe is still a market of substantial size, serving more than 500 million people. Countries like Russia and Turkey are booming and if you consider EMEA instead of Europe, the Middle Eastern countries are growing to a size that make them interesting, but in absolute size they are a fraction of the traditional European markets.
The Medical Device markets are changing. Products (procedures, technologies) that can create a shift from stationary to ambulatory treatment or in any case reduce the hospital stay, are favored by “the healthcare system” (secondary care), including payers that get an increasing influence on the system. Lower cost of the procedure, increased safety and, for example, no (limited) need of analgesia (anesthesia) is well appreciated in the current climate.
Essential elements in the Medical Device markets are issues like “evidence based”, which leads to a reduction of offering, potentially to a “best in cluster” effect (cfr. pharmaceuticals). National institutes are weeding out less effective technologies, therapies and products and in combination with a rapidly increasing system of centralized purchasing this leads to a reduced variety of product, in general at a lower price (margin).
These issues, evidence based, reduction of the variety, the range of product, centralized purchasing has the effect of an increasing total market share of the larger, multinational (diversified) companies with a direct distribution operation. Distribution through national distributors becomes a less economical solution as a result of the larger order sizes and lower margins.
Most European countries have introduced a DRG system, one way or another. Italy adopted a system that is very much like the US system; Germany based its system on the Australian DRG system. France developed a heavily adapted positive/negative list based system, the UK with its National Health System has a DRG like system etc. etc. The first country to introduce a DRG (-like) system was Hungary (?!), almost 20 years ago. By know most systems have changed, adapted, “improved” in such a way that it may not look like the original anymore, but the key element is still the control of cost.
The current DRG’s in Europe are subject to constant scrutiny. Where necessary changes are made, the trend is to incorporate new techniques into (decreased) reimbursement. In some cases that has already led to reductions as much as 40-50%. DRG’s are adapted to improve but lower cost therapies.
In a market where prices (margins, DRG’s) are under pressure and have a tendency to slide down, distributors (in general) are facing substantial economical problems.
It is obvious that there are a number of options in setting up distribution in Europe, either direct or with distribution partners. The end result, is in general, geographically, a mixed bag.
Obviously there are a couple of elementary differences between the options and if we consider the two extremes, Strategic Alliance or a full Direct Operation, the differences are in the area’s of upfront investment, margins, speed of introduction. It leads to an end result of “more return late” or “less result early (earlier)”. The choice of a distribution set up is more complicated than that. It is very much dependent on the type of product or technology, the market/customers, competitive situation but also depends on the considerations of an (early) exit. Building up a direct organization has become less cumbersome over the years and has distinct advantages. Teaming up with a reputable and well organized partner could be very advantageous. One thing is sure: without a basic knowledge of the market and the situation it is difficult, close to impossible to make the right choices.
The distribution options that we cover are:
- Direct operation
- Mixed Direct operation and distributor network in (smaller, other) countries.
- Mixed as per #2, with additional (field) personnel (clinical support).
- Full Distributor network in all countries.
- Full distributor network, distributor function limited to marketing and sales and support. All back office services, cross border, by third part.
- Strategic Alliance (and distribution) with a larger US based manufacturer with a fully functional distribution organization (direct).
- Strategic alliance with a European manufacturer with a fully functional distribution organization.
Ad 1 – Direct
N.B. A “modern” direct operation does not require (anymore) local (office based) organizations. Just a sales force, possibly clinical consultants/support will suffice, in combination with a central European Head-office.
A direct operation is not necessarily an investment that is substantially higher than going through a distributor organization, assuming that setting up the clinical file, health economical file (evidence base) and generating a sufficiently adequate number of reference hospitals.
Important is that the order of things and the speed of investment is well guarded as a function of the issues arranged/solved.
Ad2 – Mixed: direct in larger countries.
The issues are similar to the issues of #1.
The assumption is that the countries with a substantial market (larger countries, homogeneous regions) will be direct, the other countries through distributors. The larger countries are assumed to be Germany, United Kingdom and France, possibly with additional regions like Benelux (Belgium, Netherlands) and Scandinavia (Sweden, Norway, Denmark) or Nordic (including Finland). This set-up is (was) relatively “standard” for US companies.
There should be no need to seek distribution partners in the smaller countries until the “file is build”, the operation is ready to role.
The distribution margin is estimated to be around 40-50%, assuming that the clinical file and health economics dossier is suitable for use in the smaller countries (especially countries that would take e.g. Germany as a reference, like Switzerland, Austria, selected Eastern European countries).
It could make sense to work with selected hospitals in non-direct countries.
Ad3 – Direct in larger countries, clinical support in smaller countries.
Minimal local (clinical) support could solve the issue of local language but that could also be solved by a local distributor.
“Some” local headcount could add to the requirement of “commitment” to orthopedics/spinal for the company.
Ad4 – Full distributor network in all countries.
Will require to be involved in setting up clinical file, reference sites and health economics file (evidence based). Leaving that to distributors will bear the risk of reducing the speed of introduction.
The time to first sales will not necessary be shorter when working through a distributor.
It may be advisable to negotiate (final) distributors agreements after setting-up clinical files, reference sites etc. It may allow for a better (lower) distributor margin, it will be possible to get a better feel for the market requirements, market potential, speed of adoption, potential product adaptation etc.
The higher the distributor margin the higher the sales activity level of the distributor, unless the preparation by the manufacturer has given an indication of a substantial potential that is (relatively) easy to materialize.
A new product needs “legitimacy”, which can either be generated through clinical work and/or the support of reputable clinicians/hospitals in combination by a favorable report form institutions like NICE (evidence providers), OR can be provided by distributors with a very good reputation in the segment. Through a distributor can be faster and cheaper but the number of distributors that can provide such legitimacy is limited.
A new concept, a concept sell, is traditionally NOT well executed by distributors. It requires an investment, initially long lead times/time to first sales and distributors are not fond of that.
In Germany it may be necessary to find regional distributors. Nationwide operations are not common and/or not effective, not necessary the most optimal solution.
It may be advisable to allow for a (conditional) change of the distribution from exclusive to non-exclusive. That may be a shorter way to find a solution for representation in a country in case of a change of ownership or commercial situation of the company.
In case of a corporate exit, the fact that the company is locked into distributor contracts and local personnel may have an influence on the price. In Europe there are formal arrangements to depart from distributors and local personnel.
Ad5 – Full Distributor network, but function limited to marketing and sales (support).
It may be advisable to take back-office functions out of the hands of the distributors and seek third party warehousing and distribution (logistics). There are sufficient quality logistics providers that are able to take that role and delivery time is no longer than through the distributor.
This may allow for a lower distributor margin, a net margin improvement on the balance and better control of orders and filling orders.
Central, third party logistics will avoid the possibility of stocking-up distributors at the end of a quarter…end of a year. Question is if that (temporary) revenue effect will be a solution longer term.
Ad6 – Strategic (distribution) alliance with larger US based manufacturer
The commercial issue is obvious.
The choice is private label or not.
The time to market may be substantially shorter if the strategic partner is well established in the European market and has a mature distribution organization with all elements of support and commercialization.
The arrangement will lend instant legitimacy if the strategic partner has the right reputation in the market.
The price, loss of margin may be substantially higher than in the case of direct distribution or a distributor network. That does not mean that the bottom line is necessary reduced over the first 3-5 years of commercialization.
There are consequences in the case of an IPO or other exit, higher than in the case of a distributor organization or a direct organization.
Ad7 – Strategic (distribution) alliance with a (large) Europe based manufacturer.
The issues are not (necessarily) different than with a US based manufacturer.
From an exit consideration, a European manufacturer may have advantages.
As said before, before being able to make an educated choice between the possibilities it makes sense to find out as much as you can.
- Market size and expected development (CAGR) is a good thing to have, in onset, not necessary in excruciating detail.
- The same is true for market characteristics, potential business models, key-competitors (local versus international)
The market entry essentials:
- Decision making units and decision drivers (both weighed).
- Switch essentials
- Distribution system (requirements)
- Key success factors.
So far, including earlier articles, we have looked at the preparation for international expansion: Building the file, setting the stage, avoiding the traps.
In this article we have taken it one step further and looked at the possibilities we have in setting up a distribution system in Europe (International).
In the next article we will be looking at distributor selection, selection criteria, the distribution characteristics in the various countries in Europe and beyond.
About Helgert Van Raamt
Helgert van Raamt has 35 years of experience in running and setting up companies, big and small, in EMEA (and beyond). After his senior marketing positions with Organon Teknika and Abbott Labs and four years in Venture Capital as an investment manager for US, UK and NL based funds, he joined Nellcor Europe in 1989 and has lead this company through two consecutive M&A’s (Puritan Bennett and Mallinckrodt). The acquisition by Mallinckrodt for 2.7 Billion made Nellcor the most successful Medic venture after the Second World War. He left to set up the International Operation of Aspect Medical Systems and brought that to success. In three years it reached a revenue level of $10 million and was profitable two months after the start of the operation. Since then (2003) he has successfully advised numerous companies about setting up internationally or cleaning up an existing international operation, both independently and as a partner for TforG Group.