Emerging Markets Kelvin Johnson, President Emerging Markets 19-20 November 2009
Emerging MarketsKelvin Johnson, President Emerging Markets19-20 November 2009
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“Since the industrial revolution in the 19th Century, the rich countries of the ‘first world’ have dominated the global economy... That era may be over”
‘The Economist’, 21 January 2006
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Market characteristics Developed markets Developed markets
• Established healthcare regulation
Educational marketing
Compliance
Products and pricing
• Evolving regulation and developing business practices creates operational risks
Strong sales and
distribution
• Consumers are generally aware of various options and products - standard marketing campaigns can be applied
• Surgeon training focused on converting existing surgeons
• Products developed for western customers - full product portfolio can be leveraged
• Overall affordability less of an issue, and innovation is key
• Direct sales possible • Well-established distributors with strong
long-term relationship network
• Specific campaigns for customer education essential to improve consumer awareness and unlock demand
• Surgeon training can focus on winning new surgeons and unlock demand
• Products must be customised to cater for different needs, hospital environments
• Products must be provided at appropriate price points
• Direct sales mostly not yet possible• Key decision makers are changing quickly,
relationships must be continuously re-established/expanded
Emerging marketsEmerging markets
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Assessing the potential – our process
• Clear strategy on Emerging Market / Group fit
• Identify the markets
• Research the markets
• Execute
• Stick to the plan
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Addressing the potential
Set clear objectives for each market
Build the right local teams Drive efficient operations
Right products and pricing Effective educational marketing Strong sales and distribution
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Market size and competition
• Reconstruction– Major global companies have established
position– Much more ‘open’ than global market
positions
• Trauma– Significant local manufacturing competition
• Endoscopy– Relatively immature market
• AWM– ‘Traditional’ wound care remains ‘treatment
of choice’– Global companies established, but wide
variation on country specific basis
1.7
4.8
2008 2018F
Emer
ging
mar
ket r
even
ue ($
bn) CAGR
11%
2018F
Endoscopy
AWM
Trauma
Reconstruction42%
27%
12%
19%
1
2
3
4
5
0
Note: markets currently served by S&NSource: Smith & Nephew, BCG
General observationsGeneral observationsMarket sizeMarket size
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Market prioritisation – the 3 step approach
Global pool of all developed and emerging
markets
50 largest markets
27 largest emerging markets
27 largest emerging markets
prioritised
15 emerging markets
categorisedinto 5 groups
1Initial screening Prioritising Grouping
2 3
15 high-priority emerging markets selected
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Economic outlook and healthcare market opportunity used as key criteria for prioritisation
Key factorsKey factors
• Is the size of economy substantial?• How large is the population?• How many aged people in the market?• How many wealthy people who can afford
the premium products?• How large is the growth potential?• Any drivers to promote conversion /
trading up opportunities?
Data Data
• '12 real GDP• '12 total population• '12 population aged 60+• '12 household # with HH earning >
US$10k per year• '07-'12 real GDP CAGR• '12 real GDP/capita
WeightWeight
1111
12
Overall economic outlook
Current healthcare
market
Healthcare market
potential
• Is the healthcare market substantial?• Is healthcare expense affordable?• Are there enough healthcare
infrastructure / supply?• How large is the medical device market?
• '07 HC expenditure• '07 HC expenditure/capita• '07 doctors/1,000 pop• '07 hospital beds/1,000 pop• '06 medical device market
21112
• How large is the growth potential for healthcare market?
• Will the medical device market grow fast in the next few years?
• ‘07-’12 HC expenditure CAGR• ‘07-’12 HC expenditure/cap CAGR• '06-'11 medical device CAGR• '06-'11 medical device/bed CAGR
2121
20
7
7
6
Absolute-scale-related
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Growth-rate-
related
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Score of 1 (low) to 5 (high) to be assigned to each factor; weight of each factor then taken into account to arrive at the final score for each market
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China
Russia
Poland
India
Brazil
South Korea
Turkey
Mexico
Taiwan
Singapore
Argentina
Hong KongSouth Africa
Israel
8580
66
65626257
55
55
55
53
52
51
51
Malaysia
Saudi Arabia
Iran
Thailand
Indonesia
Chile
Venezuela
Colombia
Nigeria
Kuwait
UAE
Pakistan
Algeria
47
46
44
43
41
40
39
35
34
34
34
31
30
Markets with relatively stable business operation environment
Favorable environment / low risks Tough environment / high risksNote: 1. Based on EIU overall operation business environment index (June 2008) 2. Based on EIU business operation risks index (June 2008)Source: EIU, BCG analysis
MarketMarket ScoreScoreMarketMarket ScoreScore
Operation environment1
Operation environment1
Operation risks2
Operation risks2
Operation environment1
Operation environment1
Operation risks2
Operation risks2
23 markets selected with relatively stable business operation environment
10
0
10
20
30
40
50
Focus in on 5 Groups with China the most attractive
Sizable medium-term potential• Steady economic and healthcare
market growth
0
5
10
15
0 1,000 2,000 3,000 4,000
China
India
Russia
Brazil
South Korea
Mexico
Turkey
Saudi Arabia
Poland
Indonesia
South Africa
Thailand
UAE
Malaysia
Argentina
Medical device market
2006 (US$ Mn)
Medical device market
2006-2011 CAGR (%)
5
Smaller markets with lower growth
A clear strategic priority• Large overall size and good
affordability
Medical device market 2011 (US$ 500 Mn)
India
RussiaBrazil
South
Korea
MexicoTurkey
Poland
South
Africa
0 100 1,1002002006 population (Mn)
Medical device market per capita 2006 (US$)
2
1
3
4
A fast-growing market but will remain small in the medium-term
Already more developed markets
Source: BCG analysis
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Smith & Nephew’s Emerging Markets
Countries with direct presence
Countries with established distributors
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Smith & Nephew – local teams run by local talent
Managed directly
AfricaMiddle East
South America
ASEAN China SouthKorea
PuertoRico
EasternEurope
India Mexico
Finance
Supply Chain
HR
Strategy and Direction
Compliance
President
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Revenue analysis
2008 Revenue by GBU2008 Revenue by GBU
Asia
Europe
Central & South
America
Africa/Middle East
2008 Revenue by Regions2008 Revenue by Regions
19%
35%
15%31%
AWM
Endo
Orthopaedics27%
30%
43%
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Performance milestones
• Pre-2005
– Opportunistic
• 2006: Formation of Emerging Markets Team
• 2006-07
– Clarity on strategic intent
– Quantification and Research
– Dedicated structures and teams
– Focused teams, but matrixed with GBU’s
• 2009
– Strategy refined
– Clear priorities
– Investment increased
– Expectations exceeded
Emerging market revenues and growthEmerging market revenues and growth
0
50
100
150
200
250
300
2006 2007 2008
Reve
nues
(US$
m)
0%
5%
10%
15%
20%
25%
30%
Und
erly
ing
grow
th ra
te (%
)
Revenue Underlying growth
China
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Growth fueled by favorable demographic, economic and HC environment
Growth fueled by favorable demographic, economic and HC environment
Chinese medical device market willcontinue to boom
HC spending / cap (US$) 83 116 197 317
Med dev/ cap (US$) 2.3 2.7 3.5 4.5
6,130
4,739
3,635
3,005
0
2,000
4,000
6,000
8,000
+9%
US$ M
2005 2007 2010 2013
Chinese medical device market will reach US$ 6.1Bn in 20132
Chinese medical device market will reach US$ 6.1Bn in 20132
+10%
1. at price of US$ 20052. Market size based on price to distributorSource: Espicom, EIU, BCG analysis
86
1.3
2005
15
85
1.3
2007
17
83
1.3
2010
19
81
1.4
2013
Aged 60+
Aged 0-59
0
100 14
50
% of population
Large and agingpopulation
Rapidly increasing
wealth
Total (Bn)
3.32.62.11.8
0
2
4
6
20102005 2013
Real personal disposable income1 (k US$)
2007
+8%
Increasinginsurancecoverage
• Urban resident basic medical insurance started pilot in 2007 to cover unemployed urban residents
• Public insurance schemes gradually introduced into rural areas
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Reimbursement
Regulatory
Pricing control
Healthcare provision
Healthcare operational environment• Clear evidence of commitment to improve quality and ensure customer
safety• New domestic, and imported lines, require mandatory clinical trials
• Current policy differs by city and favors local products in some areas• Most imported products are not included
• Tendering significant component of market• Bidding ‘entry prices’ often double digit reduction on existing average
prices• Ominous signs of NDRC price controls
• Healthcare provision is very uneven across the county, and favours urban population
• Private insurance remains very low
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• High-level and speciality medical service providerDefinition
Specialisation
No of Hospitals
Av. No of Beds/Hospital
Healthcare infrastructure - hospitals
Av. No of Joint Procedures /
Year
Class IIIClass III Class IIClass II Class IClass I
• Regional Hospital offers comprehensive medical services
• Grass roots medical institution offers basic healthcare services
1,182 6,608 4,687
~600 ~200 ~50
• Dedicated Recon/Trauma Team in Orthopaedics Department
• Specialised Orthopaedics Department
• No specialised Orthopaedic Department
• Coastal / big cities: ~50• Inland / small cities ~30
• Coastal / big cities: ~20• Inland / small cities: ~10
• Coastal / big cities: 0• Inland / small cities: 0
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Mid-market an important opportunity
High-end
Low-end
Premium with advanced technology and features
• MNC high-end imported
Target customersTarget customers
Top hospitals in big cities• Experienced doctors using
advanced products• Less price sensitive
PricePrice
High price• ~US$2.5k
Mid-market
ProductProduct GrowthGrowth
Medium to high growth
Less advanced features, with product specificationsmeeting local demand
• MNC low-end imported
• MNC locally produced• Quality local
Basic features, with medium to low quality
• Local low-end
Large hospitals in lower-tier cities, or lower-tier hospitals in big cities
• Need training in specialty operations
• More price sensitive due to patient' lower affordability
Other hospitals in lower-tier cities
• Not fully mastered basic surgical skills
• Very price sensitive due to patient' affordability and hospital budget limit
Medium price• ~US$1.5k
Low price• ~US$0.5k
High growth
Medium growth
Note: MNC = Multi-national corporation
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Chinese Government launched new healthcare reform in early 2009
Main Healthcare Reform PoliciesMain Healthcare Reform Policies
Expand basic medical insurance program• Enroll 90% rural and urban residents by 2011• Medical assistance covers all families in hardship• Raise basic medical insurance standard
Develop primary healthcare system• Build complete rural and urban communities
healthcare network and facilities in 3 years• Improve quality and standard level of primary hospitals,
especially through GP education• Establish dual-direction referral system between
community healthcare center and hospitals
Accelerate public hospital reform• Encourage private sector to open non-profit hospitals• Reduce hospital dependency on drug sales (with
increased public spending and refined compensation policy)
Implication to Medical Device businessImplication to Medical Device business
More potential patients accessible to diagnosis
Improved patient affordability, with medical insurance support
Patients are more likely to be treated in their own cities instead of coming to large cities (with improved local insurance coverage and improved local hospital quality)
Increasing importance of community and primary hospitals (patients to be referred from them)
Private hospitals are more likely to become more important (but overall percentage still very low)
Surgery and service is likely to become more important revenue source for hospitals
Backed by $125billion increased public healthcare spending in next 3 years
The reform is more focused on developing primary healthcare service, but will also benefit overall medical
device market in the end, by widening patient base
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Smith & Nephew in China 1994: Establish S&N Office in Shanghai
2004: Teams organised along GBU lines, but essentially approach still opportunistic
2007: Plus acquisition grants entre to Ortho Recon mid market – S&N switches to Strategic Mould, formalise thinking and commits resources
2008: China manufacturing plans formalised and approved
2009: Opening of second S&N Manufacturing Unit – AWC plant in Suzhou
Ground breaking on additional OrthopaedicManufacturing Site outside Beijing
New S&N China Head Office in Shanghai
Establishment of S&N China Board to guide strategy
Opening of first S&N Surgeon Education Centre in Shanghai
Beijing™ Orthopaedic plant™ Site of new
orthopaedic plant
Shanghai™ China head office™ Training facility
Suzhou™ AWM manufacturing
plant
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Success in China is a core Group imperative
• China market is significant but challenging– Medical device market forecast to be $6bn+ by 2013
– Complex market : uneven healthcare provision, evolving insurance, long registrations, daunting pricing controls, tiered markets, geography
• Smith & Nephew is making the required investment
• Opportunity exists for both– China growth from high-end and mid-market products
– “Reverse” innovation source back to Western markets
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Emerging Markets summary
• Emerging markets offer significant opportunities
– Double digit CAGR forecast to give circa US$5bn+ market by 2018
– China growing faster and potentially a circa US$1bn market in less than 10 years
• Smith & Nephew has a clear focus on key markets
– 15 high-priority emerging markets selected and categorised into five groups with different potential investment priorities
– China stands out as the most attractive market
• Our initial success suggests a current competitive advantage
– Delivering strong growth rates
– Co-ordinated investment by business unit and manufacturing
• Emerging markets will be beneficial to our ‘mature’ key markets
– Reverse innovation to be deployed to widen impact
• Our strategy, structure and resources are aligned for success
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Forward looking statements
This presentation contains certain "forward-looking statements" within the meaning of the US Private Securities Litigation Reform Act of 1995. In particular, statements regarding expected revenue growth and trading margins discussed under "Outlook" are forward-looking statements as are discussions of our product pipeline. These statements, as well as the phrases "aim", "plan", "intend", "anticipate", "well-placed”, "believe", "estimate", "expect", "target", "consider" and similar expressions, are generally intended to identify forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors (including, but not limited to, the outcome of litigation, claims and regulatory approvals) that could cause the actual results, performance or achievements of Smith & Nephew, or industry results, to differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. Please refer to the documents that Smith & Nephew has filed with the U.S. Securities and Exchange Commission under the U.S. Securities Exchange Act of 1934, as amended, including Smith & Nephew's most recent annual report on Form 20F, for a discussion of certain of these factors.
All forward-looking statements in this presentation are based on information available to Smith & Nephew as of the date hereof. All written or oral forward-looking statements attributable to Smith & Nephew or any person acting on behalf of Smith & Nephew are expressly qualified in their entirety by the foregoing. Smith & Nephew does not undertake any obligation to update or revise any forward-looking statement contained herein to reflect any change in Smith & Nephew's expectation with regard thereto or any change in events, conditions or circumstances on which any such statement is based.