‘The import tax anomalies faced by MD manufacturers, are tariff barriers erected against domestic companies’
UK-based Smith and Nephew group, a global leader in orthopaedic segment recently announced the acquisition of Sushrut-Adler, a home grown medical devices (MD) company catering to the trauma segment. Ajay Pitre, Managing Director, Sushrut-Adler group shares his thoughts on the challenges facing the Indian medical device industry in an interview with Shalini Gupta
How do you see Sushrut’s acquisition by Smith and Nephew?
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Ajay Pitre |
This is a unique agreement for the Indian orthopaedic industry wherein two companies with complementary businesses– Sushrut-Adler with its leadership position in trauma and Smith & Nephew’ with an established position in the Indian orthopaedic reconstruction and sports medicine market have come together to build a sustainable Indian business, as well as develop mid-tier trauma offerings for other emerging regions. From a purely Sushrut-Adler perspective, it gives us access to the broader global network and resources of Smith & Nephew. The entire management team, including myself, will become part of Smith & Nephew once the agreement is complete.
Even as medical device imports continue to account for 60-70 per cent of the market, several innovative players such as Perfint, Trivitron and Forus have made a dent. How do you see the Indian medtech landscape?
The acceptance of medical devices in India is driven by a growing awareness in both the medical community and patients who want to recover fast and get back to work. There is a strong likelihood of demand for more effective medical technology growing at a faster pace to meet what could today be considered latent or unmet needs. However, this can happen only when the challenges of availability and affordability are suitably resolved. Hence, I do believe the question is not whether this will happen, but rather how much and how soon. Recognising this trend, West-based multinational device companies have established a presence in the Indian market recognising an emerging high growth opportunity here after having experienced a degree of saturation in their traditional high price realisation markets in Europe and the US.
It is also heartening to note some Indian companies are actually investing into meaningful innovation, addressing the needs of India for cost effective healthcare. This is imperative considering that the high cost models of healthcare have now proven to be unsustainable for even the most affluent countries. These efforts need to be supported. India with its capabilities in engineering and innovation acknowledged worldwide, I believe, is an ideal location for creation of such meaningful solutions. If we get our act together, in a consorted effort by all stakeholders and an enabling policy created by a holistic approach, we can lead the way in demonstrating via successful models, delivery of cost effective healthcare (a crying global need) over a couple of decades of committed efforts.
What challenges remain for medical device manufacturers in the country?
The nature of challenges faced by the Indian medical device industry varies and differs depending on the progress that individual sections of the industry have made. Companies that have been progressive and forward looking have been facing severe challenges of innovation and the high costs associated with R&D, testing, validation and regulatory approvals, especially in an environment of relatively low price realisations. With a long development cycle, the need to ensure safety at the outset and efficacy in a statistically significant manner over the long term, the ability to invest and ride the relatively longer lead time is critical. Additionally, it has to be noted that medical devices have a much shorter life cycle, as well as far smaller volumes when compared to the traditional engineering industries.
In India, where cost is an overriding consideration, companies find it difficult to make a business case considering that the end price realisations with a substantial lead time make it difficult to attract investments. However, paradoxically, Indian companies realise that their progress is going to be best achieved with innovation as its key driver.
It is due to this reason that the Government should directly financially support deserving companies based in India in the device industry to develop products, and even more importantly to develop capabilities. How should this be done? Companies that have demonstrated capabilities to design, develop, test and validate devices with an understanding of safety requirements and clinical considerations should be shortlisted and financially supported to enable them to create high quality infrastructure and further enhance internal skills that will enable them to take further steps in the journey of developing clinically safe and effective devices without straining their financials to breaking point.
The setting up of crucial knowledge-based facilities focused on testing and validation of devices is another critical area where Government-driven actions will go a long way in supporting the emergence of a strong medical device sector. These capabilities when developed can also support the regulators in correct implementation of regulations as well as industry to meet the regulations.
What changes need to be made in the tax, tariff and import duty structure, in order to incentivise the domestic medical device manufacturing industry?
Even before discussing incentives, we should first create a level playing field in terms of import tariffs and taxes. Currently, the import tax anomalies (import of inputs taxed higher than import of finished products) faced by medical device manufacturers, actually are ‘tariff barriers’ erected against domestic companies. Even in the recently introduced corrections (raw materials to manufacture orthopaedic implants, cardiac stents) to enable domestic companies to import raw material at rates that only equal the tariff imposed on import of finished products, the administrative conditions imposed on the domestic manufacturer are such that it leaves you wondering whether it is more cost efficient to pay the import tariff. The import of finished goods at this Nil to low tariff, however, is unconditional and without any additional administrative compliance requirements. Needless to mention, if the government realises the need to attract investment in medical technology industry for creating capabilities within the country, it would need to be suitably incentivised.
While a lax regulatory structure helps entrepreneurs and innovators, it can be a barrier when it comes to the approval of products in competitive marketplaces. Your comments.
It is my personal view that there is no place for a lax regulatory structure when it comes to products as critical as medical devices that directly influence patients’ health and well-being. The prevalence of inadequate devices, an inevitable consequence of inadequate regulation, imposes incalculable costs on not just the health system but on society at large.
From an industry perspective, a correctly constructed, appropriately staged and transparently implemented regulation is actually an enabler for progress. In the long-term quality always results in lowering of costs – and even if that were not to be, it is an imperative in this industry. Needless to mention, that the regulations have to result into meeting and continually enhancing quality objectives while retaining clarity rather than mandating processes. Regulation should also be supportive to innovation.
How is the funding(VC/PE) environment in the sector?
The VC / PE route for funding is typically capital that gets raised and deployed from the developed markets of the west. However, I personally notice that the biggest step in their learning curve is to understand the difference in the realities of our market and theirs -i.e. where they have developed their understanding and thereby established business models. Those who can achieve this realistic local understanding and thereby suitably calibrate their expectations in terms of business models, returns and most importantly time horizons. I am sure, will have success stories to share going forward.
At the moment, however, I would not be surprised if several struggle to justify investments in this industry, due to the differences in the models they are used to seeing vis-à-vis the realities of our market. CK Prahlad has expounded the concept of ‘Fortune at the bottom of the Pyramid’. However, it will need some innovative thinking to understand and relate this to the medical technology industry. Having said this, I strongly believe, that these models will need to be created here and can certainly not be replicated from the developed world for obvious reasons.
New guidelines on applying drug rules to medical devices were introduced in 2012, and an updated Bill will be presented to the Parliament bringing all medical devices sold in India under (CLAA) under the CDSCO. What are your expectations form the bill?
As is generally well known now, both the regulators and the industry were overtaken by events that moved rather abruptly (in 2006) wherein the need to regulate with immediate effect was forced on the government and unfortunately the government chose to notify selected ‘Medical Devices’ as ‘Drugs’ as an expedient route. This was a fundamental mistake – a fact not only evident by studying the global understanding on this subject but also a realisation by our regulators as of date. Hence, the regulators have needed to take stop gap steps to correct in the meanwhile, while pursuing the root objective of separately defining medical devices and building a suitable and correct regulation for the industry. Now that nearly six years have passed since the announcement of regulation, it is an appropriate time to take stock of what has been achieved and what more needs to be done.
Factually speaking, the implementation of regulation has thus far been restricted to reviewing of documentation and certifications of ‘imported’ products. Regulation of the domestic industry continues to be conspicuous by its absence (of implementation) at large. However, the lack of clarity on the implementation of the regulation, the application of the inappropriate drug law and the non-uniformity of understanding of the industry at the Central and State regulator levels has led to some rather piquant situations. Responsible domestic device companies who have voluntarily approached the regulatory authority are subjected to intrusive inspections and insistence on complying with inappropriate and unsuitable requirements by state level regulators whereas a large section of the domestic device industry who prefer to operate ‘below the radar’, continue to sell unregulated products with impunity.
On a positive note, our regulatory agency, at the senior most levels, has demonstrated excellent understanding and commitment to the course that needs to be set. The industry has been involved collaborating with the regulators to share their knowledge. The regulators have initiated these consultations by setting up of joint action groups to frame regulation that is suitable to medical devices and replace the drug rules that are not applicable or appropriate to the device industry.
However, a lot more needs to be done. Long awaited fundamental legislative actions need to be hastened. This is in the form of defining ‘Medical Devices’ separately from ‘Drugs’ in the Act. The expected new legislation must be followed by actions that take into account the fact that the regulatory agency needs to set up suitable and capable infrastructure and staffing with the qualifications, skills and capabilities appropriate to regulate devices that are primarily engineering products used in critical health related applications. Extensive recruitment and internal training are no doubt necessary by the regulatory authorities to create an organisation that can suitably regulate the industry in an appropriate manner with the objective of creating a vibrant domestic industry that can hold its head high on the world stage and earn recognition for quality and innovation.
What is your vision for Sushrut and for the Indian medical devices sector in the next few years?
It is a generally accepted in the world of medical devices today that innovation and new solutions emerge from the developed western world. However, the sustainability of their high cost device development model is questionable given the emerging financial pressures on healthcare costs. Further with 85 per cent of the world’s market in the less affluent developing economies, the situation is ripe for innovative device companies from countries such as India to develop solutions suited to them both from the point of view of clinical needs(that may be different), and cost effectiveness, a criteria that western world innovation has always found hard to meet. At Sushrut-Adler, we see this unique combination of circumstances as a significant opportunity to bring to these markets, innovation, new techniques and technologies that respect the fundamental principles of medical device safety and effectiveness while being cost-effective at the same time.
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