Chindex

Source: Healthcare Digital

Date :22/11/2007 05:11:31

Judy Zakreski, VP of US Operations tells Exec US about the strategy behind Chindex’s impressive growth and how it is negotiating the challenges of the Chinese healthcare system.

Written by James Hurley and Produced by Tom Venturo

Chindex’s journey towards becoming a nationally recognized healthcare brand in China began over 25 years ago. In this time, it has grown from two employees to over 1,000. Based in Bethesda, Maryland, it began by marketing cutting-edge Western medical technologies to Chinese hospitals. It is now a nationwide distribution company serving over 3,000 institutions, and what was a small private concern has become a $106 million public healthcare company with numerous business platforms.

Evolution

Chindex supplies medical capital equipment, instrumentation and products to hospitals throughout the Chinese market, including Hong Kong, and also provides Western healthcare services in China. Its healthcare services are provided through the operations of its United Family Hospitals and Clinics, currently in the Beijing and Shanghai markets. Chindex also sells medical products manufactured by various multinational companies, including Siemens AG, its exclusive partner for the sale and servicing of color doppler ultrasound systems.

But as Judy Zakreski, VP of US Operations tells me, Chindex wasn’t always exclusively a healthcare company. “The company was founded by two American women, Roberta Lipson and Elyse Beth Silverberg when they were in their early twenties. They had studied Chinese in college and moved to China in the late 70s when the country re-established relations with the US.”

Part of a new wave of Westerners going into China, the pair met in Beijing, and saw an opportunity to bring all varieties of Western equipment into China. “Although we have always focused on the healthcare industry, in our early days, Chindex was also involved in construction and mining equipment and various areas of scientific instrumentation. China was an amazingly dynamic environment and the need for Western technologies was very broad. We had a really diverse company in those early days.”

So what changed? “As Chindex grew, the need to focus on our core healthcare market became increasingly important. In the late 80s and early 90s, we began a natural trend toward the healthcare side of the business. In addition, there was a maturing process of the machinery market in China through that period. In the mid-1990s, Chindex took a strategic decision to re-structure as a dedicated healthcare company and discontinued all non-healthcare related businesses.”

In essence, as the market has evolved, so has Chindex. This has been a consistent strength of the company. “As a distributor we’re not wedded to any one particular product line or even product category. When I started 13 years ago, I was working in the non-medical side of the business.”

Healthcare services

Now responsible for the company’s US-based export, business development, regulatory, and US administration operations, Judy joined Chindex in 1994. Around the same time, Roberta Lipson saw a need for better healthcare for expatriates in China. “Roberta lives in Beijing and has three children. Every time she had a child she had to up-root and come back to the States,” Judy says.

“It was very disruptive. This was a chronic problem for expatriates, so as that population began to grow, Roberta decided to open a hospital.” Originally this was to be a birthing centre, but she soon discovered there was a demand for much more than this. “Beijing United was opened in 1997 as a small primary care hospital that had in-patient maternity services and also outpatient family care.” Chindex’s hospital formula has expanded dramatically since then and its hospitals in Beijing and Shanghai now have 50 beds each, 24 hour ERs, inpatient day surgery suites, and offer psychological and pediatric services. They handle an increasing level of acuity as the United Family Healthcare network matures, and serve both the expatriates and growing wealthy Chinese population.

While the hospitals are seeing an approximately 65 percent expatriate patient base at the moment, the next stage of growth for the hospitals involves a different model. Chindex has just finalized a $50 million investment from JP Morgan to move ahead with its plan for new hospitals in Beijing and Guangzhou.

Both will be significantly larger (approximately 150 beds each), and the primary language will be Chinese, not English. “It’s very exciting for us because with fewer English speaking expatriate physicians required, combined with the economies of scale of a larger hospital, and the network that has already been established to run the administration of these hospitals, we’ll be able to establish a lower price point while still offering the same high standard of care. The care will be much more accessible to a much larger population of local Chinese,” Judy enthuses.

This also means Chindex will be able to accept more affordable locally-based health insurance. “A lower cost base hospital means access through lower cost insurance, so we’re looking at huge growth potential once we’re able to open these two new hospitals.”

And its healthcare services division is already producing some impressive results. Revenue for the six months ending September 30 2007 was $59.4 million, a 17 percent increase on the same period last year, and much of the company’s strong performance has been driven by these services.

White coat storm

Chindex’s traditional medical products business, while still profitable, has faced some significant hurdles in recent years. Judy says that ‘macro challenges’ in Chinese healthcare have been more acutely felt here.

In 2004, China’s Health Ministry officially stated that the reform plans that had been implemented had been unsuccessful; the rich weren’t satisfied with the medical care offered by the government, while the poor couldn’t even afford it.

“That threw the Chinese healthcare system into a state of chaos. People were thrown into jail for bribery and there was a strong anti-corruption campaign that went through the whole system. We are not at all opposed to reducing or eliminating systemic corruption, but on a day to day basis, we saw a large impact from the campaign as even fully compliant hospitals got very skittish about doing anything. We found purchases of imported medical equipment basically stopped as investigations were spreading throughout the country.”

Historically, Chindex’s medical equipment business grew at a healthy rate of approaching 15 percent a year. “During the worst of the ‘white coat storm’, we had flat growth. Last year, as we were coming out of it, our revenue growth was seven percent, consistent with growth in the market for imported medical devices, representing a significant slowdown in recent years,” Judy says.

Chindex still finds itself in a period of indecision as there is no clear replacement plan for what had been the reform. “There’s recognition by everyone in government that the healthcare system is inadequate and needs to be changed, but there’s no decision on what the best way would be. We recognize that no matter what happens, we are likely to benefit in both aspects of our business but we’re still facing the challenge of indecision.”

While these market issues have not fully abated, there is a pent up demand for imported medical devices which has been accumulating over the past two years, and this is now driving sales throughout China.

But there are always new challenges, one of which is a strict regulatory environment. “Even with FDA or CE approval, you can’t bring products to market in China without Chinese SFDA approval.” And the SFDA simply doesn’t have the capacity to move through the regulations that are in place. “This is made worse by the fact that the SFDA continues to promulgate new regulations, increasing the burden. Two years ago it took six months to get a product through the system, now it takes at least a year. Products are getting stuck in the process and just when they are about to emerge a new regulation will come out. It has been incredibly frustrating for all manufacturers and importers of medical equipment in China,” Judy explains.

The China market has never been an easy one to be in, but Chindex is not a company that gives up. “We’re very stubborn and we don’t take no for an answer if we think that there’s a way to solve an issue. But China is not an easy place to do business and I don’t see that changing. If it’s not one thing it’s going to be another. China is a huge country with massive economic potential, but trying to overcome some of these fundamental structural issues is not something that will be done easily.”

Corporate culture

Emilie Lu, General Manager of the Medical Products Distribution business, says the company puts a concerted effort into developing its supply chain, an aspect which is typical of Chindex’s commitment to bringing US public company professionalism to what is a developing market. “Right now, the hospital supply chain business in China is extremely fragmented, with even small hospitals making standard purchases for consumables and supplies from upwards of 100 vendors, whereas in the US those same items could be purchased from one or two large vendors.

“We have developed a consolidated hospital supply chain model which we use to service United Family hospitals and clinics in both Beijing and Shanghai,” Emilie explains. This exercise has provided the group with the ability to develop a model for future hospital supply chain management in what will inevitably be a more consolidated market. It has also provided the group with a new expertise in medical products sourcing in China – a service which Chindex can offer to international companies on a consulting basis.

“From a US public company perspective, we’ve brought in a US corporate culture into China. It’s a very different generic culture, but the business culture is different too. We’re held to US public company standards, but our competition is not always as ethical as we are,” Judy says.

“We’re in this for the long run and we’re happy to get involved in the policy making in China to make changes for the betterment of the country and its population. We’re not here simply to earn money – we’re here because we want to improve the lives of Chinese people.”