At the end of an overgrown pathway, ong a group of nondescript office buildings in the Chinese city of Hangzhou sits the headquarters of bionic ear maker Nurotron Biotechnology. is no big sign on the door, no reception area and no boardroom. The company’s chairman, in jeans and an open- necked shirt, stands at the top of a steep stairwell offering Chinese tea in a paper cup.But in China appearances can be deceiving. Nurotron’s modest digs are in stark contrast to Li Fangping’s grand plans.
This is the company which is looking to take on one of Australia' s biggest corporate success stories. It is aiming to break Cochleare stranglehold over the fast-growing Chinese market. In the next four years it plans to build a new factory, 10 times the size of its existing one, grow its staff numbers from 250 to 2000 and list on the Shanghai or nzhen sharemarket.Most concerning for the Sydney-based Cochlear, which has a 70 per cent market share in China, Li says the company is just months away from winning a key government approval to fit young children its devices. would allow it to compete for lucrative government contracts, providing cochlear implants to children under the age of six.“The big foreign players have dominated the market for the past 20 years,” Li says. “We want to break the stranglehold they have over the market.”
The local media have dubbed Nurotron the “price killed, as its devices currently sell for 78,000 yuan ($12,000), around half the price of those being sold by the big foreign players, including Cochlear.Li, one of the company’s co-founders, says he is “80 per cent” sure the company will be in a position to compete for a lucrative government tender in August. The Chinese government has a five-year progr to provide underprivileged children cochlear implants and tenders are held twice a year, in April and August. So far, Cochlear is the main supplier a contract to provide just over 2800 devices worth roughly $36 million. Its major competitor Advanced Bionics also won a contract to provide more than 1200 devices.
These Chinese contracts are ge-changers for Cochlear - whose total revenue in 2011-12 was $779 million - but China's massive population represents a key growth market for the Sydney company.Up until now Nurotron, which was set up in 2006 after reaching an agreement to use research from the University of California, has been unable to compete. However, Li told The Australian Financial Review he expects the company will soon be granted approval to provide devices to young patients.“The application was submitted in October 2012 and we think it is very likely to be approved this year,” Li claims, “ is an 80 per cent chance the company will be able to compete for the next government tender in August.”
Earlier this month, Cochlear chief executive Chris Roberts played down the threat of increasing competition in the $US1 billion cochlear implant market. He argued new products and untapped adult customers would underpin future growth.The competitive threat in China follows a costly product recall for Cochlear more than a year ago. Cochlear shares have tumbled ab 22 per cent after hitting a 12-month high of $82.87 in late January. The stock on Wednesday ended 19 cents lower at $59.81 per share.Nurotron has already received plenty of support from the central and provincial governments. After completing clinical trials at the end of 2010, it took less than a year for the company to secure approval for use of its devices in patients aged six and older. It has also received public funding of between 20 and 30 million yuan since 2009，according to Li, and been given subsidised land for its new factory, which will open in 2015.
Citigroup analyst Alex Smith says any approval gained by Nurotron for paediatrics in China will make the market more competitive and Cochlear may be forced to lower its prices to compete.“You will have four players competing for tenders [where] previously [you] had three,” he says. “Nurotron have the ability to price cheaply to gain traction in the market.”“We do think Nurotron is a legitimate threat to the China market for Cochlear and it will gain share and continue to put pressure on pricing. China is an important market for Cochlear and its future growth. It will be difficult for Cochlear to maintain its current market share a fourth player.”
In China are three elements to the market: the government tender, the private market and the donation market. Prices for implants sold into those markets vary the government tender the lowest priced, and the private market the highest.Dr Smith says the mere presence of Nurotron in the background in recent years has driven price reductions in the government tenders.
NUROTRON GARNERS CHINESE GOVERNMENT SUPPORT 诺尔康获得政府的支持
During the interview, Li showed The Financial Review a copy of a provincial government newsletter which included an item ab Nurotror’s development.Scrawled down one side of the page was a written instruction from the Zhejiang Communist Party secretary, who wrote: “we must support enterprises like this.”Endorsements such as these can make or break a company in China.It’s surprising Nurotron is being singled for special attention.
Nurotron’s emergence in the bionic ear market coincides a government push to transform the country’s manufacturing sector into one focused on higher end, innovative products, rather than low-end goods such as cigarette lighters and T-shirts. It also comes as the government is rolling an bitious plan to provide 90 per cent of deaf children hearing implants.Nurotron is “like a panda to China” and the government wouldn’t allow the big global players to take over or buy into the company, Li says.
In 2010, the government provided funding for 500 implants. grew to 1500 in 2011 and 4000 last year.“We want to help the Chinese government bring down the cost of progr,” he says.Li, a former real estate developer, first considered investing in the bionic ear industry in 2005 after meeting ZengFangang, a Chinese scientist and the director of the University of California’s Centre for Hearing Research.
“At first, the university was very reluctant,” Li says. “They couldn’t understand why a property developer was interested in investing in this technology.”After some tough negotiations, he reached an agreement the university to license its research, pulled together a group of investors and set up the company. At the time, he was living in Canada, where his fily still resides. But Li says he spends most of his time in Hangzhou now.“We think is a huge market for our product,” he says. “In China, 27 million people are hearing impaired. And every year ab 30,000 babies are born hearing problems.”
In China young children make up 90 per cent of the cochlear implant market. However, Zeng, who first ce up the idea of developing a more affordable cochlear implant, co-founded Nurotron and is now its head of development, says is a real opportunity in providing implants to hearing-impaired adults. In developed countries, adults make up half the market.“The adult market needs to be developed,” Zeng says.Zeng claims Nurotron’s technology is “just as good if better1’ than of the big global players. However, he says the company has a long way to go before it can "really compete” the likes of Cochlear.“We have to transform Nurotron from an R&p;D company to a marketing and operational company,” he says. “A year and a half ago, we didn’t have a sales te and we need to scale up our manufacturing and improve distribution.”Nurotron expects to produce 1000 devices this year. Next year, it aims to double or triple number. But the work is labor intensive. Nurotron currently has 80 operators, which produce just five devices a day, according to Li. He is hoping to rp up significantly once the new factory is up and running in 2015.
Dr Smith says while labour costs for Nurotron would be lower than for Cochlear, the Australian company has much larger volumes flowing through its manufacturing facilities giving it scale efficiency benefits. It is clear fore Nurotron has a lower cost-to-manufacture than Cochlear.“The issue for Cochlear is more to do increased competition," he says. “The China tenders has already achieved prices around half of the US.”Dr Smith adds Nurotron’s growth plan appears aggressive. He says longer term, Nurotron may enter other markets, however, he doesn’t think it will be in the US - the world’s largest healthcare market -any time soon.
While Li says Nurotron was mapping plans to apply to US Food and Drug Administration, he wouldn’t give any timing.For now Nurotron remains focused on China. It is training doctors to perform the implant operation. In 1995, only four doctors in China could do operation but should grow to 200 by 2020, according to Li.“We are in a hurry to get an investment return. This is a long-term investment,” he says. “If my product can be as effective as my competitors, why would the government want to buy those foreign products? It doesn’t make sense.”
