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REGULATORY LANDSCAPE

Home REGULATORY LANDSCAPE Page 3

by EOS Intelligence EOS Intelligence No Comments

EU New Medical Device Regulations: Cause of Ache for Medical Device Players

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Circling around patient care and improving overall healthcare services, the European Parliament has set new requirements for medical device and in vitro diagnostic manufacturers that distribute products in the EU. However, medical device manufacturers have realized that they are bound to face many challenges in order to make their products market-ready, not to forget the gigantic task of implementing new protocols in a timely manner, which will not be easy.

Need for a comprehensive updated medical device regulatory system

EU’s Medical Device Regulation (MDR) and In Vitro Diagnostic Medical Devices Regulation (IVDR) were made official in May 2017, with transition period of three years (fully applicable from May 26, 2020) for the former and five years (fully applicable from May 26, 2022) for the latter. These regulations will replace EU’s previous directives: Medical Device Directive (MDD), Active Implantable Medical Devices Directive (AIMDD), and In Vitro Diagnostic Directive (IVDD).

The need for new regulations of medical devices in EU arose from the growing demand for technologically advanced medical products which necessitated more stringent monitoring of these devices to ensure a high level of efficacy and safety among patients.

Unlike earlier version of the regulations where the main focus revolved around the pre-approval stage of medical device manufacturing, the new regulatory guidelines promote an overall product-life cycle approach, focusing on both device safety and performance.

Enhanced supervision, easy documentation of devices, more stringent clinical evidence requirement, and increased supervision on part of authorities providing medical device certifications are some of the key changes in MDR as compared to the EU’s previous directives.

Bumpy road ahead for medical device manufacturers

Reclassifying existing product line-up

Based on the risk factor, changes have been made to the way medical devices are classified. Under MDR, the number of classification rules has expanded from 18 to 22 intensifying the task of product re-classifications by the manufacturer.

For instance, products using software for monitoring purposes being implanted in the body has been reclassified to higher-risk class (from Class I to Class III) which would now require conformity assessment by a notified body (NB – an organization that assess the conformity of medical devices before they are placed on the market), unlike earlier, when Class I products did not require assessment via a NB. This is going to burden players with increased operational costs; thus, it is imperative that the manufacturers familiarize themselves with the classification changes and study the impact on their product portfolio.

New products are also being added to the list of medical devices that earlier were not part of the medical device regulatory framework. For instance, products manufactured utilizing human tissues or cells and devices incorporating nanomaterial, under new regulations, will be considered medical devices. Manufacturers of such products have work cut out for them – from conducting clinical investigations, preparing technical documentation and evaluation processes, to product certification. Though such products could only form a very small percentage of the company’s product range, the task to make them available in the market is great, especially under current circumstances.

Manufacturers who do not comply with the new regulations will no longer be able to market their products in Europe. Thus, a robust strategy in terms of resource allocation, time management, and budget is an absolute must for manufacturers to make this transition possible.

EU MDR Cause of Ache for Medical Device Players - EOS Intelligence

Distress over notified bodies

Strict parameters are also being applied on NBs. Since all devices will require new certification from a NB, only designated NBs will be able to certify a device. The designation process is a complex procedure as it involves audits and corrective actions (once a NB expresses interest). However, while the medical device manufacturers have been in the process of switching to newer protocols since mid-2017, the first designated NB (BSI United Kingdom, the national standards body of the UK) was announced in January, 2019, almost 18 months after the regulations were announced and 14 months into the formally started designation process.

Such time-consuming process raises concern among medical device companies about the ability to complete the necessary conformity assessments within the allotted time. The huge task of recertifying medical devices with only a handful of designated NBs is a cause of worry for companies, as it could potentially result in significant backlogs as the last date approaches. However, there is only so much companies can do – even though they are proactive to comply with the new regulations much ahead of the deadline, poor process planning and lack of supporting bodies (notified bodies in this case) results in a long halt for these players.

The companies are heavily dependent on NBs for auditing and product certification, and the insufficient number of designated bodies adds to the risk of many devices being non-compliant according to new regulations. As of May 2019, less than 40 NBs have filed application for designation procedure (out of 58 designated NBs under the directives); only two have actually received a designated status – BSI UK and Germany based TÜV SÜD Product Service GmbH Zertifizierstellen (certification received in May 2019). With very little time at hand to reassess and rectify issues (if any), this could jeopardize the product availability in the market, resulting in not only risking the patients’ life (due to non-availability) but also in huge financial losses for the players.

Detailed clinical evaluation of medical devices

Owing to reclassification of product categories, many devices will require changes to their existing clinical evaluation reports, another challenge for medical device manufacturers. Manufacturers that have not previously been required to perform clinical testing will have to do so now. For instance, mechanical heart valve sizers will be moved up from Class I to Class III, and unlike in MDD where clinical evaluation was based on literature analysis, new evaluation of valve sizers will require clinical investigation. This will require a huge deal of additional time, money, and expertise, further burdening the device manufacturers.

Medical devices already in the market that remain untouched by the reclassification criteria will still require reassessment of clinical data. If the data do not meet the new requirements, devices will need to undergo additional testing to be recertified, increasing the expense for manufacturers.

MDR also calls for inclusion of risk management within the clinical evaluation expecting clinical risks to be addressed in clinical investigations and evaluation studies – adding another task to the long list of activities to be accomplished before MDR fully rolls out.

Explore our other Perspectives on medical devices markets

Comprehensive demonstration of equivalence data

Unlike MDD, where device manufacturers were able to use clinical data of an equivalent device for their own product registration, under MDR, equivalence is going to be less accepted, particularly for higher risk devices.

There are two ways out – manufacturers can either conduct their own trials not having to deal with the equivalence commotion or they can demonstrate that they have access to the equivalent device (with respect to technical and clinical properties) data. The latter is highly unlikely to happen considering equivalent device would typically belong to a competitor unwilling to grant such access. Thus, with stern requirements for comparative evaluations, more effort, planning, money, and resources will be needed for device manufacturers to demonstrate product safety and performance.

As new medical devices are developed, multiple small incremental improvements (minor changes in design, addition or subtraction of small hardware parts such as bolts or screws) happen over time. Once the device is already in the market, it is practically impossible to conduct a re-trial to gain approval for such small changes. An expected solution to this would be a provision to accept such minor changes through pre-clinical evidence or prior trial results. However, with equivalence testing being reduced drastically under MDR, unless a solution for such cases is offered, manufacturers will have to conduct re-trial and re-document everything, which would result in significantly increased cost. Another issue that could arise from such situations is the reduction in R&D activities inclined towards product improvement.

Trouble galore for SME’s

While making amendments and prioritizing to comply with new regulations seems to be the top most priority for medical and diagnostic device manufacturers, it seems SMEs will be dramatically more impacted than large players – in Europe, a small-sized company employs less than 50 people and has a turnover of less than or equal to €10 million while a medium-sized company employs less than 250 people and has a turnover of less than or equal to €50 million. Owing to the increase in cost, time, and resources associated with the process, the new regulations may put smaller companies under pressure, possibly resulting in altering (such as merging with or being acquired by larger companies) the European medical device market structure, currently dominated by SMEs – there are nearly 27,000 medical technology companies in EU, 95% of which are SMEs.

SMEs also need to be more vigilant when it comes to being associated with a designated NB as not all currently functioning NBs are expected to get a designated status. With their already dwindling numbers married with an increased demand for their services, once the new regulations roll out, it is quite possible that small manufacturers are orphaned since NBs could be partial towards larger players and prioritize them over other small and medium players.

Smaller players will not only have to hire additional personnel for dealing with regulatory issues but also employ clinical trials specialists (for documenting insights to be presented and approved by the NB) for launching products in the market which means higher costs. Adjusting budgets to keep costs under control would hamper other critical business operations, e.g. reduce R&D activities or cut the number of products being launched in the market.

As a step to overcome these issues, players with limited financial resources should strategically study their product portfolio to determine which products are worth investing in for MDR compliance. For doing this, they should lay out a detailed plan for each product and decide whether to remediate, transition, or divest.

It is also advised that SMEs should devise a clear step-by-step approach plan to ensure compliance. As an alternative to hiring transition specialists, they could engage employees from various functions within the organization to take responsibility for specific processes thus keeping costs in check.

EOS Perspective

The changes and revisions required to be carried out under MDR are company-wide and require significant investment to plan and execute. This will lead to players devising a business strategy based on assessing risk associated with product portfolio (whether some products need to be pulled out from the market and what effect it would have on future revenue) or looking for acquisition partners. Based on these decisions, the medical device market topography in EU is expected to see some major changes in the coming years – small companies looking for partners to get acquired or for new partnership with a service provider (specializing in regulations compliance). This will also result in organizational restructuring, revamping design processes, and systems implementation.

Companies have to make crucial decisions around the product portfolio. For some of the already existing products, if reclassified, the cost of compliance could be much higher than actual market returns. In such cases, manufacturers may be compelled to pull away such products from the market resulting in high healthcare costs and ultimately burdening the patients, who (theoretically) form the center point of the MDR. Though this is unlikely to happen at a large scale, since there are always alternative products available, it cannot be denied that this may be a major loophole in MDR requiring immediate attention.

Since SMEs drive the EU medical device market, as an immediate consequence, MDR is not likely to have any positive effect on these players other than distorting their business operations. However, it can only be anticipated that, with time, MDR may adapt and amend to offer some relaxation in provisions especially for small and medium-sized players. Nonetheless, MDR also brings an opportunity for such players to audit their current offerings and come out with an enhanced product portfolio, which could be an opportunity to be capitalized on in the distant future.

Modifications being made in the functioning of NBs are also likely to have an impact on the device manufacturers. For high risk devices, manufacturers may expect deeper scrutiny of design records and data files leading to providing more credentials, in case any query arises. This, along with long wait time for product review (due to reduction in the number of designated NBs) and limited availability of resources (again on account of NBs), could lead to unknown delays for obtaining product re-certification. Thus, companies need to chalk out their market strategies very effectively and be prepared to address any concern that rises during product reviews.

The aim of implementing new regulations is to bring a transparent and robust regulatory framework for medical devices. However, there is no assurance that the new regulations are completely accurate and will apply seamlessly to live case scenarios. Therefore, once implemented, there is a possibility that MDR may see revisions in the initial months of coming into action.

These changes, though certainly positive from a healthcare point of view, are enormous. Transitioning to meet the new standards within the stipulated time frame is challenging for manufacturers. Not adapting to the changes is not a choice for manufacturers as non-compliance could result in losing license to operate in the EU market. And for players fearing stringent scrutiny in the future, operating in the European healthcare market will not be easy once the new regulations come into force.

Sharing Economy
by EOS Intelligence EOS Intelligence No Comments

Sharing Economy in the GCC: A Success Story Waiting to Happen

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The current landscape in the Gulf countries is believed to show solid scope for sharing economy platforms’ growth. On the other hand, the region still lacks consumer engagement as well as updated and adequate regulations, which may cause these platforms to stumble and fall on their way to growth.

The concept of sharing economy has been spreading with great velocity worldwide with the advent of new technologies and connectedness. It emerged as a recognized concept around 2008-2010 with the arrival of successful players such as Uber and Airbnb offering P2P platforms that allowed financially strapped consumers to earn extra income. Global sharing economy was valued at US$15 billion in 2014 and is expected to reach US$335 billion by 2025.

GCC’s good foundations and latent potential

In 2016 alone, PwC estimated that consumers in the Gulf Cooperation Council (GCC) spent US$10.7 billion within five sectors of the sharing economy platforms – household services, accommodation, business services, transportation, and financial services.

The spending in sharing economy was of course lower than spending on similar services acquired through traditional avenues – for instance, in 2016, hotel revenues were expected to hit US$24.9 billion in the GCC, a considerably higher sum than accommodation revenues in the sharing economy that totaled to US$1.29 billion in that same year. This indicates latent potential, and with part of the traditional service revenue possibly taken over by sharing economy, the scope for growth is very promising, underpinned by favorable characteristics of the GCC countries.

Young and technologically-participative population

Sharing economy platforms do not hire employees directly but work with self-employed service providers instead. The essence of these platforms is to enable people – mainly young, dynamic, and technologically-participative – to use them as a way to exchange goods or services for money.

The appeal of the GCC for sharing economy platforms is exactly that – the diversity and demographic profile of the region’s population allows sharing economy platforms to reach a large pool of young, tech-savvy consumers and service providers. In 2018, 60% of the GCC population was under the age of 30 – considered key demographic to interact and use sharing economy services on both the demand and supply side.

Large immigrant pool willing to engage

Another market growth driver that is somewhat unique to the region is the large percentage of non-nationals living and working in the GCC. Between 2016 and 2017, 51% of the Gulf region total population were non-citizens, who, according to a 2016 PwC survey, were active users of the sharing economy services, largely due to relatively low incomes and limited (if any) access to other ways of improving their financial standing. The region’s large volume of immigrants has always been a steady trait that is very unlikely to change in the future. Due to this, high numbers of expatriates participating in the sharing economy platforms on a daily basis is likely to ensure a long-term steady growth of these platforms in the region.

(Slowly) growing women’s economic inclusion

Another appealing aspect of the GCC market is that all six countries have been changing (alas, slowly) their attitude towards women’s economic inclusion, fueled by shifting cultural norms that traditionally imposed limitations on women’s ability to work and earn.

This change is likely to allow them to participate more actively in the workforce, and a ride-hailing app company could be a good option to provide transportation to and from work to female workers, since in some GCC countries they are not allowed to drive by themselves, while in others they customarily do not often do it. With women representing around 40% of the GCC population, higher financial independence places them in the group of potential consumers of sharing economy goods and services for their transportation as well as household services needs.

Eagerly-consumed fast connectivity

Regardless of the gender participation mix at both supply and demand side, the sharing economy players are certainly set to benefit from fast adoption of technology by local consumers in the GCC. In 2017, 64% of the population owned a smartphone and, by 2018, 77% of the GCC population were mobile network subscribers. Such rates seem to give strong foundation for sharing economy platforms to grow.

Moreover, the GCC highly tech-savvy youth seeks new technologies and faster mobile connections. In response, the Gulf countries aim to become global leaders of 5G deployment (all markets planning to launch 5G by 2020), a major contributing driver to the sharing economies growth in the region. High-speed mobile connections plus a growing pool of eager-tech young adults willing to engage in P2P platforms are likely to become a major driver for their growth.

Sharing Economy in the GCC A Success Story Waiting to Happen

Nonetheless, despite these favorable foundations, there may be roadblocks representing a threat for the success of sharing economy platforms in the Gulf region.

Large immigrant pool refrained from joining the platforms

One of the key obstacles is the cultural-legal environment prevalent in the region. While the region has long been characterized by large share of immigrants in local populations, their way of working is controlled by Kafala, an outdated sponsorship system carried out by the GCC. This system allows immigrants to work in the region only for their sponsor, who is legally responsible for them during the time of his or her stay.

Kafala system does not allow for self-employment, nor does it allow for second employment beyond the job given by the sponsor. Since sharing economy companies interact mainly with freelance service providers, there is a large portion of expatriates working in the GCC who will find it difficult to be able to freely join the platforms as service providers.

Explore our other Perspectives on sharing economy

Lack of legislation and consumer protection

Lack of a dedicated government entity to oversee sharing economy services in the Gulf countries may cause consumers to be wary of using these platforms, ultimately hindering market growth.

According to a 2016 survey conducted by PwC, GCC users put considerable emphasis on trust and transparency when dealing with online providers, two factors that can influence their purchasing decisions.

In sharing economy, users need to be able to trust platforms’ screening process for providers before they deal with them. As a result, if the states do not establish bodies and laws governing sharing economy services, the platforms could witness weak demand from both consumers and services suppliers who are cautious about protecting themselves.

Limited awareness and lack of need

Lack of consumer awareness and simply lack of need for the sharing economy services is also an issue for the market growth since not all GCC nationals seem to be aware about the existence of the sharing economy platforms.

According to the same PwC survey, an average of 21-35% of respondents were not familiar with the sharing economy concept. This could be attributed to the fact that many households in GCC countries have traditionally enjoyed high income levels, a fact that resulted in no need for shared services and allowed them to afford services of expatriate workers hired directly and for long term (e.g. employing a household driver or cleaner, rather than using external providers as needed).

Consequently, local consumers may not see the need to use an online platform dampening the success of sharing economy platforms. This might change, as households’ incomes growth stagnates and sharing economy could help stretch that income.

EOS Perspective

The GCC countries could be a promising landscape for sharing economy platforms to dock successfully. The region offers growing population, continues to be characterized by a solid base of young, tech-savvy users, as well as females and non-citizens available to participate in the sharing economy market.

However, despite the current growth, these platforms could nosedive unless local authorities deal with regulatory deficiencies. A dedicated supervisory entity is required to allow local authorities to regulate sharing economy companies, which will also provide support to consumers through consumer protection and better screening processes of services providers. Local customers clearly manifest their need for such a protection, and the lack of it is likely to dampen the demand and thus market growth.

The update of labor policies such as the Kafala system is also required for sharing economy platforms to witness a continuous growth. This growth can only happen through allowing a good share of the readily-available pool of expatriates to work under a more flexible scheme these platforms require. This is something for GCC states to consider, as there region is increasingly facing the requirement for economic diversification and stimulation of its sluggish economies. Creating labor policies that allow people to work for sharing economy platforms legally (at least as a secondary employment, as it is increasingly allowed in Dubai) is likely to create employment opportunities across the region, spurring consumer spending and generating tax revenues.

While there also are other obstacles in the GCC sharing economy market, it is the lack of appropriate regulation and supervision of the industry, as well as the current form of the Kafala system that are the two key challenges to the market’s accelerated growth. Considering the nature of these challenges, it seems that the potential of this market is unlikely to be realized without active facilitation by the local governments. However, it is uncertain to what extent the governments will try to understand the potential economic benefits of fully embracing sharing economy, and change the deeply-rooted, long-standing, archaic labor laws.

by EOS Intelligence EOS Intelligence No Comments

The Smoke around Legal Cannabis

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Till date, 31 countries and 41 states in the USA either legalized cannabis in various forms, including making it legal for medical or recreational use, or decriminalized it while still maintaining its illegal status. Few countries are preparing to legalize or decriminalize the use of marijuana for all purposes while many countries are still debating over the legalization of this plant only for medical and not for recreational use. With the rise in education about cannabis and its benefits for humans, economies, and culture, chances of positive changes in laws around cannabis are growing across the world. As legalizing cannabis is still a topic of debate with variety of business, political, and cultural views involved, we are looking at how the legalization of cannabis might impact the economy and businesses in the countries taking the step towards less restrictive approach to handling the issue.

Cannabis – a controversial medicinal plant

Cannabis or marijuana plant and its alleged benefits and risks for human body have been a difficult topic of debate amongst law makers, medical professionals, researchers, economists, politicians, and (of course) cannabis users. In many parts of the world, it still has negative connotations with a narcotic drug, due to presence of psychoactive substance tetrahydrocannabinol (THC) which brings an intoxicating effect to human mind.

In many countries, cannabis has been treated similarly to other chemical drugs, such as cocaine, heroin, etc., in terms of its legal status, by banning from legal cultivation, purchase, or selling for any purpose. However, there has been a continuous development in spreading awareness by the medical professionals, researchers, and scientists on the benefits of using cannabis for medical purposes. This has been followed by voices being raised on people’s right to legalized cannabis also for recreational purposes, comparing it with alcohol and tobacco, which are claimed to have far worse impact on human health, yet are enjoying legal status in many countries.

In addition to this, many economists too are coming forward in favor of legalizing cannabis to bring a boost to economies. As a result of such strong petitions, more and more countries are considering legalization of cannabis and the future might see countries such as USA (including all 50 states), Mexico, New Zealand, The Netherlands, Columbia, France, Spain, Italy, Czech Republic, Jamaica, and Portugal legalizing the plant for all purposes, along with legalization of personal cultivation of cannabis with an aim of bringing cure or relief to several diseases, helping to control healthcare costs, curbing illegal drug businesses, and stimulating country’s economy through adding another taxable business activity.

The Smoke around Legal Cannabis

Countries signal green light for marijuana

The league of countries with full legalization of cannabis for all purposes is still a small, two-member club, which was most recently entered by Canada (in October 2018) with more than 100 legal cannabis retail stores running across the country. After Uruguay that started this league in December 2013, Canada is the second country in the world to completely legalize cannabis, and it does not seem that the club will expand any time soon.

The USA are considering to gradually legalize cannabis for recreational use along with medical use. As of November 2018, The District of Columbia and 10 states including Alaska, California, Colorado, Maine, Massachusetts, Michigan, Nevada, Oregon, Vermont, and Washington have legalized the recreational use of cannabis. An addition of 30 states along with US territories of Puerto Rico and Guam allow the use of cannabis only for medical purposes.

Amongst the European countries, none of them has legalized smoking cannabis or using it for recreational purposes yet, but there are several countries which have legalized the medical use of cannabis under a treatment process, while also decriminalizing the use of cannabis for recreational purposes. Malta, Greece, Luxemburg, and Denmark are amongst the European countries that legalized medical cannabis in 2018 adding to the group of other European countries such as Italy, Norway, Poland, The Netherlands, France, Spain, Slovenia, to name a few.

Some Asian countries are also moving towards legalizing cannabis but exclusively for medical purposes and that too with strict policies. Recently, in November 2018, Thailand legalized medical marijuana, but with very stringent rules to get access to marijuana plants. Also, in November 2018, South Korea became the second Asian country to legalize medical cannabis, while Malaysia is expected to be the third nation to fall into this group. Interestingly though, India, known to be the origin of cannabis sativa plant, has not legalized the use of cannabis for any purpose yet, although the country runs a huge illegal trade of marijuana as well as hashish (a drug made of cannabis resin). There are many petitions already submitted by various Indian economists and politicians in favor of legalizing cannabis for use in cancer patients and even hemp cultivation for horticulture use, but due to changing political environment in India, the petitions are still pending to be considered by the relevant law-making bodies.

Cannabis business – boom in economies

According to a report published in 2018 by Brightfield Group, with the on-going trend of countries moving towards legalizing cannabis, the global legal cannabis market is expected to reach US$ 31.4 billion by the end of 2021, owing to the growing adoption of medical cannabis in treatment or relief in a range of diseases and ailments, such as cancer, mental disorders, chronic pains, and others.

Apart from medical applications, the recreational use of cannabis too has led to a continuous rise in sales of cannabis for direct and indirect use, thus giving a push to retail businesses as well as tourism sector in countries that moved towards legalization. As a result of the rise in sales, governments of these countries and states have registered increased tax revenues and a boost to local economies. For instance, California that legalized cannabis for recreational use in January 2018, generated US$74.2 million of tax revenue during second quarter, with a rise of 22% over the first quarter. In another, more hypothetical example, according to a report by Canada’s Parliamentary Budget Officer, Canada could generate US$463.74 million in tax revenue by 2021 if the projections of nearly 734 metric tons of legal cannabis to be consumed by that year are correct.

Similarly, according to a study by New Frontier Data, if cannabis was legalized in all American states, it would generate a combined US$131.8 billion in federal tax revenue between 2017 and 2025, considering 15% retail sales tax, payroll deductions, and business tax revenue. In fact, according to a research study by Ameri Research Inc. in 2017, in the USA, tax revenues from legal cannabis are now comparable with revenues from other products, such as draft beer and e-cigarettes, a fact highlighting the recent growth of sales in legal cannabis market in the USA.

Apart from tax revenue generation, creating new business opportunities is also one of the reasons for countries to seriously consider legalization of cannabis. States such as Colorado, for example, have registered some 431,997 new business entities between 2014 and 2017. In 2017, it also experienced a 17.7% rise in employment over 2016 with 17,281 full-time equivalent jobs. Also, in 2017, across the USA, there were 9,397 active licenses with slightly more than 3,000 licenses active in Colorado. These licenses were made active for cannabis businesses dealing with cultivation, manufacturing, retailing, distributing, delivering, and even lab testing that generated 121,000 jobs in 2017 across the District of Columbia plus 10 US states. This number is expected to reach 1.1 million jobs by 2025, if cannabis is legalized in all 50 states, across all ends of cannabis industry supply chain, from farmers to transporters to sellers.

It is expected that through legalization of cannabis, several countries, especially Mexico, USA, and Canada, are also expected to witness significant drop in illicit activities related to drugs industry. According to a study by Deloitte in 2018, cannabis users in Canada are willing and in fact looking forward to pay more for legal purchase of cannabis grown and processed under federal laws and sold through legal channels rather than going for illegal drug purchase options. This goes hand in hand with Canadian government’s hopes to crack down on illegal drug trade while also finding new sources of stimulation to the country’s economy.

Impact of legal cannabis market on other business sectors

The emergence of legal cannabis market has raised many business opportunities in various sectors such as retail, food and beverages, real estate, and even tobacco and alcohol industry.

Amongst these sectors, real estate has been developing strongly in many countries allowing for legal cannabis for medical as well as recreational use. Properties and facilities that are well-suited for cannabis-related operations are experiencing rise in industrial rents and sales price premiums owing to the rise in demand for warehouses, industrial and storage facilities, agricultural, and other properties.

In Canada, legalization of growing and sales of recreational cannabis has fueled a six-fold surge in plant-growing facilities to 8.7 million square feet in 2018 according to data from Altus Group, Canadian real estate company. Aurora Cannabis, one of Canada’s leading cannabis companies, has already started its project for cultivation of cannabis in a new 8 million square feet facility in 2018. Canopy Growth, market leader in cannabis industry of Canada, has announced plans in October 2018 to develop 3 million square feet of greenhouse space in British Columbia through October 2019, which will be more than double its production surface as of 2018. With the legalization of cannabis, the demand is also rising for commercial real estate thus giving an opportunity for struggling retailers to make a move into a new market. Alberta, where cannabis industry is fully private, has experienced a sharp surge in demand for 1,200 to 3,000 square feet retail real estate to set up cannabis shops and dispensaries in malls and street-front locations.

Similarly, within the USA, Colorado, experienced a rise in real estate sector through increase in housing values by about 6% owing to increasing development in retail sector through legal cannabis pharmacies, dispensaries, cafés, and retail shops. Going beyond real estate, the retail industry is also likely to receive a push thanks to opportunities in auxiliary businesses such as accessory shops, cannabis cafés, weed gardening products stores, bakeries, and candy shops, contributing to rising demand for retail locations.

The impact of cannabis legalization is visible also in food and beverage industry thanks to new products such as cannabis-infused edibles such as cakes, candies, and drinks. In 2017, California reported sales of US$180 million of edibles, whereas Colorado has seen about a 60% rise in edibles sales volume (with 11.1 million edibles unites been sold in the same year). The future of food and beverage industry with cannabis-infused edibles is projected to be promising due to the benefits of cannabis plant for using it in food products. According to a food and beverage industry expert, Sylvian Charlebois, cannabis offers good nutrients (proteins, vitamin E and C, to name a few), hence for food products manufacturers looking for new avenues of growth, cannabis could be deemed the next ‘superfood’.

On the other hand, the legalization of cannabis has affected alcohol industry due to the emerging inclination of people towards choosing the “green high” over alcoholic drinks.

According to a study by Deloitte in 2018, in Canada, cannabis is likely to be increasingly perceived as a substitute to beer, spirits, and wine which could negatively impact the alcoholic beverages-related revenues for governments, liquor companies, and retailers. This is already observed in the USA, where a joint recent research study of 10 years conducted by two US-based universities, namely University of Connecticut, Storrs and Georgia University, Atlanta in cooperation with Universidad del Pacifico in Peru, has suggested that the counties located in medical marijuana states showed almost a 15% decline in monthly alcohol sales between 2006 and 2015.

At the same time, some industry experts believe that since it is part of American and European food culture to drink alcoholic drinks such as beer and wine with food, the legalization of cannabis is not going to affect the demand for such food-complementing alcoholic drinks. In fact, cannabis legalization is also coming out to be a stepping stone for large alcohol brands to enter the cannabis industry with cannabis-infused alcoholic beverages, mostly through mergers and acquisitions with leading cannabis growing companies. In August 2018, New-York based Constellation Brands acquired more that 50% stake of Ontario-based Canopy Growth for US$4.0 billion, the largest investment registered in cannabis industry so far. The received investment is believed to help Canopy Growth strengthen and expand its leadership position in Canada and other countries with legalized cannabis. It is expected that in the future, other alcohol industry leaders will also consider getting involved in cannabis industry in order to expand through cannabis-infused drinks, creating a new segment of products with combination of alcohol and cannabis.

EOS Perspective

The benefits of cannabis on human body in diseases such as cancer, acute and chronic pains, or neurological and mental illness, have resulted in a growing count of countries legalizing use of cannabis. On the other hand, the legalizing of cannabis for recreational purpose is still receiving mixed views by industry experts and public opinions in several countries. The only way to make this experiment work, is to follow the steps of those countries that have legalized recreational cannabis and are simultaneously focusing on implementing a completely regulated system to scrutinize the whole supply chain in order to curb illegal drug activities and over-dose of cannabis by the users.

For this purpose, the leaders – Uruguay and Canada – have created systems of registration cards with a specific limit to purchase a quantity of cannabis for recreational use per month. As a result of this, the situation is expected to be under control and authorities believe that this will help in curbing illegal trade activities while keeping check on personal consumption of cannabis.

It is also recommended to consider the fact that legalization of cannabis for recreational and medical purposes is likely to reduce the use of other, more harmful and addictive drugs, as well as curb (at least to some extent) the over-consumption of alcohol that is associated with serious health hazards and many deaths, generating huge social burden and healthcare costs in many countries.

Considering all these factors, the success of legalizing cannabis for all purposes in any country depends on how the processes across cultivation, distribution, retail, all the way to the end buyer is regulated and scrutinized by the law makers and law enforcers of the country. There surely are both pros and cons of legalizing cannabis but with solid work towards improved awareness, and, more importantly, a regulated system with proper (enforced) laws, it can give the countries a boost to their economies along with rise in employment, better medical treatments, and decline in illegal drug activities.

Healthcare fraud
by EOS Intelligence EOS Intelligence No Comments

A Ripple Effect of Healthcare Fraud in the USA

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In June 2018, the US Department of Justice held nearly 600 individuals, including doctors, responsible for the largest healthcare fraud in the US history resulting in losses of over US$2 billion. Each year, the American healthcare system loses tens of millions of dollars to fraudulent claims not only overloading the healthcare system but also affecting the security and identity of patients and other citizens. To combat the ill effects of healthcare fraud, the government is laying strict measures to monitor such incidents and is using artificial intelligence (AI) to identify threats before they actually occur.

Out of the country’s total health expenditure, estimated to have to crossed US$3.5 trillion mark in 2018, as much as 10% is lost annually due to healthcare fraud (examples include billing for services not provided, providing services not medically needed, and reporting patients as having a more severe illness in order to obtain higher reimbursement), bleeding not only taxpayers’ money but also billions of dollars from the healthcare system.

Over the past decade, reduction in the number of fraud cases in healthcare programs has emerged as a significant priority for the US government and other federal agencies – US Department of Health & Human Services, Office of Inspector General (HHS OIG), the Centers for Medicare & Medicaid Services (CMS), and the US Department of Justice (DOJ). These agencies make laws, use anti-fraud tools, and also partner with private sector to help protect consumers against healthcare fraud.

A Ripple Effect of US Healthcare Fraud on Consumers and Healthcare System

Anti-Fraud Laws

The need to curb the exploitation of healthcare system by healthcare providers for illegal gains has led to the formation of laws that fight fraudsters, ensuring better quality and more equal medical care to all. These laws assist physicians, if they comply by them, to easily identify the red flags with regards to their relation with payers, other physicians and healthcare providers, and vendors. These are:

  • False Claims Act (FCA) – enacted in 1863, this civil law prohibits the submission of false claims to the government

  • Anti-Kickback Statute (AKS) – this criminal law, enacted in 1972 and enforced in the mid-1980’s, prohibits willfully offering, paying, soliciting, or receiving any remuneration directly or indirectly for referrals of federal healthcare program

  • Physician Self-Referral Law (Stark Law) – introduced in 1988, this law limits physician referrals in case of a financial relationship with the entity

  • Criminal Healthcare Fraud Statute – As part of the US Code (18 U.S.C. § 1347), this statute prohibits willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program or obtain any money under any healthcare benefit program

  • Civil Monetary Penalties Law (CMPL) – As part of the US Code (42 USC § 1320a-7a), it prohibits willfully executing of a scheme or use false statements to obtain funds held by a federal healthcare program

  • Exclusions – legally excludes participation of healthcare providers and suppliers in all healthcare programs if convicted of criminal offenses

Policymakers have established these laws to minimize, or at least reduce, healthcare fraud. The laws have contributed, for instance, to the US government being successful in finding parties responsible for healthcare fraud, mainly due to FCA, especially in the form of information coming from whistleblowers. Under the act, there are financial incentives for whistleblowers, who bring healthcare fraud to the attention of the government, receiving 15% to 30% amount of the total recovery. Incentivizing whistleblowers has been successful – through aid from private individuals and units or individuals serving as whistleblowers, the government has been able to recover more than US$31 billion of taxpayers’ funds over the past thirty years.

Anti-Fraud Partnerships

The government is also focusing on strategic partnerships with other private agencies to fight fraud, which include:

  • Healthcare Fraud Prevention Partnership (HFPP) – A public/private partnership between the federal government, state agencies, law enforcement, private health insurance providers, employer organizations, and healthcare anti-fraud associations with the purpose of exchanging data, building competence and proficiency to fight fraud. Since its inception in 2012 till the end 2017, the number of public, private, and state partner organizations as participants of the partnership reached 85

  • Healthcare Fraud Prevention and Enforcement Action Team (HEAT) – established as a conjoint effort between DOJ, OIG, and HHS in 2009. The purpose of this partnership is to invest in new resources and technology to prevent fraud, reduce healthcare costs and improve the quality of care, and highlight best practices by providers and public sector employees

  • Medicare Fraud Strike Force – launched in 2007, resources from federal, state, and local law enforcement entities come together to prevent and combat healthcare fraud by harnessing data analytics and exploratory intelligence

  • Centers for Medicare & Medicaid Services (CMS) – a federal agency, established in 1965, administers and oversees medical programs by partnering with individuals, contractors, entities, and law enforcement agencies

  • Office of Inspector General (OIG) – founded in 1976, its purpose is to protect the integrity of HHS programs as well as the welfare of the beneficiaries of those programs

  • Center for Program Integrity (CPI) – established in 2006, it promotes the integrity of health programs by monitoring and identifying program vulnerabilities through audits and policy reviews

  • General Services Administration (GSA) – an independent agency of the US government formed in 1949 that maintains the Excluded Parties List System (EPLS) that includes information on entities suspended, disqualified, and/or excluded from receiving contract, financial assistance, and other benefits

Such partnerships and agencies help prevent healthcare fraud on a national scale, to a certain extent, as they take substantive actions to stop fraudulent payments thus improving the overall process of monitoring fraud.

In efforts to combat fraud committed against all health plans, both public and private, the Healthcare Fraud and Abuse Control (HCFAC) Program was established in 1997, under the Health Insurance Portability and Accountability Act of 1996 (HIPAA). The program was designed to coordinate federal, state, and local law enforcement activities with respect to healthcare fraud and abuse. Under the program, each year, funds are allotted to the various offices of HHS and DOJ to support the effective and smooth functioning of the programs and partnerships directed towards identifying and fighting fraud in healthcare sector. In 2017, a little above US$1 billion was allocated and over US$2.4 billion was recovered in healthcare fraud judgments and settlements and around US$2.6 billion (including amount assimilated from preceding years) was returned to the government or paid to private persons. The program yielded an ROI of US$4.2 for every dollar spent for the period 2015-2017.

Senior Medicare Patrols (SMPs)

Senior Medicare Patrols (SMPs) are grant-funded projects of the federal US Department of Health and Human Services (HHS), US Administration for Community Living (ACL), Administration on Aging (AoA) – an agency providing leadership and expertise on programs, advocacy, and initiatives affecting older adults and their caregivers and families. These grants are supported by SMP National Resource Center, created in 1997 as a demonstration project in 12 regions moved on to become a nationwide program in 2003 and now includes 54 SMP programs across all the 50 states, the District of Columbia, Guam, Puerto Rico, and the Virgin Islands.

ACL issues a new request for proposals for the program every three years, and then awards grants to a selected project across all regions (each US state, the District of Columbia, Guam, Puerto Rico, and the Virgin Islands). Since 2016, SMP grants are funded as discretionary projects by HHS operating division, ACL, through the Healthcare Fraud and Abuse Control Program (HCFAC) – a program designed to coordinate federal, state, and local law enforcement activities with respect to healthcare fraud and abuse. The resource center, through these projects, reaches out to approximately two million beneficiaries each year via 5,000 volunteers associated with the SMP program.

These projects, through trained volunteer workforce, provide education and assistance to Medicare beneficiaries, their families, and caregivers to identify, prevent, and report healthcare fraud. These groups also help protect elderly persons’ health records, financials, and medical identity. Moreover, they provide assistance, when issues are identified, about whether or not fraud is suspected by referring to the appropriate authorities for further investigation.

Data Analytic Tools

An effective way to prevent fraud in healthcare system is to identify it before claims are paid, and data examination capabilities such as data analysis, predictive analytics, trend evaluation, and data modeling approaches can be utilized to analyze and examine fraud patterns.

Data analytic tools can identify fraud patterns by developing a certain set of rules. One can set up a ‘rule’ or an ‘alarm’ for identifying fraud related to medical expertise – a healthcare provider claiming for a procedure outside his area of expertise or when the claim crosses a certain amount for a particular test or treatment. These tools use AI, continuously mine data, and identify patterns thus enabling the user to set new rules or alarms.

Up to 30% of total healthcare expenditures in the USA are estimated to be related to fraud, waste, abuse, and errors – a key contributor to soaring healthcare costs in the country. Analytic tools, by tracking fraudulent payments have helped in cutting down costs related to fraud and abuse. In 2014, CMS prevented more than US$210.7 million in healthcare fraud using predictive analytics. In addition, the tool also enables CMS to assign risk scores to specific claims or providers, spot claim irregularities or errors that were earlier hard to detect, and identify inconsistent billing patterns thus eliminating future potential fraud.

Government authorities are not the only entities to use data analysis for monitoring and tracking purposes. Insurance companies are also using similar tools to reap benefits and reduce fraudulent payouts. For instance, United Healthcare, a US-based healthcare and benefits services provider that manages more than one million claims every day, transitioned to a predictive modeling environment based on Hadoop big data platform. The company claims to have spawned a 2,200% return on their investment in big data technology.

EOS Perspective

The healthcare system in the USA is considered unstable with no sufficient policies in place to regulate the healthcare pricing. In addition to exorbitant prices, over the years, increasing cases of fraud have not only overburdened the healthcare system but also consumers, contributing to large number of personal bankruptcies due to healthcare treatments being disproportionately expensive. Moreover, as the spending on healthcare is projected to rise rapidly in the coming years – CMS projected healthcare spending to reach nearly US$5.5 trillion by 2025, the cost of healthcare fraud is likely to follow suit, resulting in weighing down the consumers even more as they bear the costs of fraud, topped with an existing unaffordable exorbitant healthcare, thus worsening the situation altogether.

Healthcare fraud is a grave problem and affects the entire healthcare system including patients, government, and insurance companies. The foremost effect of fraud perpetrated by healthcare providers is experienced by consumers as this drains the taxpayers’ pockets in the form of higher insurance premiums, reduced benefits, and overall coverage.

In the USA, insurance fraud accounts for approximately $30 billion in lost revenue for the insurance industry and fraud related to healthcare is the second most common form of fraud after vehicle theft. While it is almost impossible to determine how much health insurers lose every year to fraud cases, as low as 5%, or even less, of these losses are recovered annually. The downside is that the heightened cost of fraud and errors are borne by the customers as the companies translate this loss into higher premiums. This deters many individuals from purchasing insurance policies, which makes them unprotected in case of serious diseases and injuries due to reduced medical coverage (or complete lack of it).

Healthcare fraud is a financial gutter in the healthcare system that not only strips individuals of health benefits and insurance companies of money but also results in higher taxes and budgetary nuisances for the government.

Besides increasing the economic costs, such fraud cases extensively affect an individual’s medical identity. In 2017, of total identity thefts reported in US, nearly 3% were related to medical theft standing at a number of 134,260 cases; the overall tally, however, is anticipated to be much higher as the count of incidents unaccounted for remains unknown. Cases of medical identity theft result in misuse of an individual’s medical information that can cause dire consequences.

Each individual is issued a Medicare number, a unique identification number, as part of the national health insurance program. As these Medicare numbers are distinctive and cannot be changed, unless issued a new one, once compromised, such fraud cases put the person’s healthcare and future benefits at a huge risk. The victim could end up receiving wrong medical treatment or, in some cases, even die due to altered or misrepresented medical records as a case of identity fraud. In addition, medical identity theft also impacts an individual financial stability related to medical concerns – the fraudster ends up claiming the treatment amount in medical bills from insurance company, when the victim actually approaches the insurance company to file a legitimate claim, he is informed that he has already reaped the benefits, thus orphaning the victim of his right to medical care. As an extreme repercussion, victims may also have to deal with legal authorities over false allegations of procuring and possessing illegal drugs.

Given the impact on individuals, medical system, and economy, it is clear that healthcare fraud is a costly problem and a critical threat to the US economy as it not only increases healthcare costs for everyone but also affects common people leaving them incapacitated and vulnerable. While the government has achieved some triumph, over the last few years, in detecting fraud cases and punishing the wrong-doers, the success rate of detecting such frauds is always questionable.

At this stage, though immense efforts are being bestowed in formulating laws and technological investments being made to identify impostors, it is very difficult to ascertain what the government has accomplished, as fraud related to healthcare cannot only be measured in terms of monetary loss. The measure should also include the extent of safeguarding the interest and identity of the citizens, and the degree to which this has been achieved is debatable. It must be noted, however, that in the current scenario, where the key focus is on reducing the rate of fraud in the healthcare sector, while keeping the overall healthcare costs in check, the task in hand for the American government is of mammoth scale.

by EOS Intelligence EOS Intelligence No Comments

Dual Quality of Food Products Questions EU’s Single Market Strategy

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Several countries in Central and Eastern Europe (CEE) allege that some multinational brands and supermarkets’ private-label food products sold in Western Europe are of superior quality than those available under the same brand name and packaging in their home markets. Food producers contend that they often change composition or characteristics of food products in different countries to adapt to local taste preferences. However, this practice has led to resentment among the CEE consumers who feel that food producers deliberately offer inferior quality products in CEE to save on costs. Taking into consideration the results of comparative tests (conducted by few CEE member states) indicating dual quality of food products to be a fact, European Commission has come out in support of countries complaining about double standards of food products. As European Commission is working out an approach to tackle the issue of dual quality of food products, the packaged food industry must prepare for possible impact.

Slovakia, Hungary, Czech Republic, Croatia, Bulgaria, Poland, Slovenia, Estonia, and Romania are among the countries that have voiced their concerns over dual quality of food products. These countries claim that some of the packaged food products sold in their home markets differ in composition and ingredients when compared to same brands’ food products sold in western markets, for instance, some products contain lower quality of the primary ingredient (e.g. less fish in fish fingers) or contain ingredients considered as less healthy (e.g. sweeteners instead of sugar in beverages). Some countries also complain about the difference in sensory characteristics such as taste, texture, or color.

Investigations by national institutions of few CEE countries revealed that, despite being marketed under identical packaging, many packaged food products differ in composition and characteristics across European Union (EU) member states. In many cases, food products available in CEE markets were less healthy as compared to same brand products available in western markets such as Austria, France, or Germany. In 2015, the Prague University of Chemistry and Technology tested 23 products marketed under the same brand name in Czech Republic and Germany and uncovered differences in eight products. Slovak Agriculture Ministry and the State Veterinary and Food Administration (ŠVPS) conducted a similar study in 2016 and found discrepancies in nearly 50% of the products tested. In 2017, NEBIH, Hungary’s food safety authority, compared 96 products in Hungary, Austria, and Italy. The study included multinational brands, supermarkets brands, as well as some products with similar composition but not the same brand. While 25 of these products were found to be identical, 8 products were different in composition and 30 products exhibited difference in sensory characteristics, whereas 33 products indicated differences in both.

Multinational companies contend that this is a common business practice to change the composition of the branded products as per the local preferences and demand, difference in purchasing power, local sourcing requirements, variation in production lines, etc. EU legislation requires companies to properly label ingredients, but it does not mandate sale of the same recipe under the same brand name across the EU markets. However, it is difficult for consumers to identify the difference in quality of products based solely on information presented on the label. Consumers generally expect that products of the same brands with identical packaging and appearance are the same and thus the purchase decision is often based on brand image and reputation.

The frustration and dissatisfaction is building up among consumers in these markets as they feel as if they are being unfairly treated as second-class consumers. The dual food quality issue has now come under the political radar as the concerned countries have joined forces compelling the European Commission to take necessary actions to eliminate double standards in the quality of food products sold across EU.

EU-Dual Quality of Food Products

After years of perseverant diplomatic efforts, in 2017, European Commission finally acknowledged the issue of dual quality in food products and pledged necessary action against such practices as they may lead to single market fragmentation. In September 2017, the European Commission offered a grant of EUR 1 million (~US$1.2 million) to the Joint Research Centre (European Commission’s science and knowledge service) to develop a common methodology which can be used across the EU market for comparison of products. Additional EUR 1 million (~US$1.2 million) will be offered to member states for conducting further tests and to take actions to ensure compliance.

Alongside, European Commission also released guidelines highlighting application of the existing EU food and consumer protection legislation to determine whether a brand is acting in breach of these laws when selling products of dual quality in different countries. Unfair Commercial Practices Directive (UCPD) prohibit “a misleading commercial practice if in any way it deceives or is likely to deceive the average consumer, even if the information is factually correct, in relation to the main characteristics of the product”. National authorities are directed to determine on case-by-case basis whether consumers would still buy a product of a particular brand if they were aware that its main characteristics differ from those of the product sold under the same brand name and packaging in most EU member states – if they would not, then the company can be considered acting in violation of UCPD (though such a determination will undoubtedly be challenging with regards to maintaining objectivity and common fixed criteria). European Commission, along with the help of industry stakeholders, is also preparing a new code of conduct that will include standards to improve transparency and thereby avoiding the dual quality issue.

EOS Perspective

Dual quality of food products has been proven to be a fact and is perceived as an unfair distortion of EU single market. European Commission advocates to strengthen enforcement of existing consumer protection laws, however, some of the EU member states’ representatives are demanding legislative amendments as they believe that the current laws are inadequate to tackle the issue of dual food quality. CEE countries demand that the multinational brands must standardize their food products across the EU market to put an end to the discriminatory practice. However, this would require revision of EU food legislation, a proposal relished by neither the European Commission nor the industry.

In May 2017, Hungary submitted a draft legislation to European Commission to introduce a labelling obligation to include distinctive warning on dual quality food products. However, food law experts contest that such an obligation will restrict the food producers to distribute their products freely in Hungary, unless they bear an additional cost for labelling. This conflicts with article 34 of EU’s treaty that guarantees free circulation of goods within EU. However, if a similar proposal is considered for EU, it would force the food producers to include a warning on the labels, and this could be perceived as a mark of a potentially negative marketing.

It is about time that multinational brands offering dual quality products acknowledge the intensity of the allegations. Companies must prepare an acceptable justification for the difference in quality of their products, more specifically, if their products in certain markets are of inferior quality. Companies may consider reformulating their products in CEE markets to standardize their product offering across the EU bloc. For instance, in September 2017, HiPPs, a German baby food producer, announced that it would reformulate one of its Croatia-sold products to match with the German recipe.

Rebranding is another option that the companies could explore. Products with significant difference in composition could be launched under a new brand name exclusively for that local market. Companies for whom rebranding and reformulating is not deemed feasible, should consider relabeling and repackaging their products to clearly differentiate the products across markets. For instance, Tulip is considering changing the packaging of canned luncheon meat in the Czech Republic to differentiate it from the similar product available in Germany. An unquestionable fact here is that whichever approach companies take to address the dual quality issue, it will result in additional costs, which might affect the products’ prices and make them less accessible, especially for consumers from low-income sections of the CEE population.

For the multinational brands offering identical products across EU, the dual quality issue can be seen as an opportunity. Such companies could consider multilingual labelling informing consumers that same product is sold across markets, and this approach would also help standardize the packaging and labelling across the region. Further, these companies could also benefit from a positive PR and marketing campaigns to reinforce the fact that they consider all their customers equal across EU single market.

Packaged food producers who have presence only in Western Europe are presented with a unique opportunity to expand in CEE markets. As the general perception in CEE is that packaged food products made in western EU countries are often of superior quality, the western-recipe version of a given product may be well received by the CEE consumer.

Local e-tailers as well as retailers in border cities can also be at gain. For instance, Czech e-tailers such as Rohlik.cz and Košík.cz have added special sections on their websites offering German products; likewise, supermarkets in German towns such as Altenberg and Heidenau have put up sign in two languages, due to increasing footfall from Czech cities across the border.

As the debate on dual quality of food products is gaining heat, multinational brands such as HiPPs and Tulip are already considering changing product composition or packaging to reflect the differentiation of their products across member states. Though food producers are not required to offer standard products across the EU countries, they will need to justify the difference in their products, and failure to do so may lead to legal action. The recent guidelines announced by European Commission are more of a soft warning to food producers. If the issue remains unresolved, then European Commission may consider more extreme measures. European Commission warned that if the situation does not improve, it will make the name of brands that are involved in the practice of dual quality publicly available. This might severely impact the brand image of these multinational brands in consumer’s view. Revision of packaging and labelling law is also one of the recommended alternatives that might be explored as a last resort.

by EOS Intelligence EOS Intelligence No Comments

China Bike-Sharing Market Moving towards Consolidation

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Though several bike-sharing start-ups in China flourished in past two years, mainly due to backing from venture capital funding, many are finding it difficult to keep up the momentum as the investment dries up in absence of sustainable business profitability model. Small players in particular are struggling to comply with recently introduced regulatory standards for the industry. In our article titled ‘Bikes Are Back: China Gaining Pedal Power’, published in April 2017, we discussed the outlook for the bike-sharing app-based businesses in China, and now we are taking a look again into the current market dynamics in view of new regulatory framework that can reshape the competitive landscape.

The bike-sharing industry in China has noted a steep growth in a short span of time. As per estimate of Ministry of Transport, there were about 70 bike-sharing companies operating in China by July 2017 (as compared to 17 in January 2017). However, the market is skewed towards the duopoly of MoBike and Ofo. According to Sootoo (an online service platform providing analysis for internet and e-commerce industry in China), as of March 2017, MoBike and Ofo accounted for 56% and 30% market share, respectively. Other companies face cut-throat competition to carve up the remaining 14% of the market.

The summer of 2017 was particularly harsh on several small players unable to bear the heat of increasing competition and financial crunch. Chongqing-based Wukong, which shut down its operations in June 2017, is believed to be the first bike-sharing company to collapse. Subsequently, several other small companies, including 3vBike, Xiao Ming Bike, Cool Qi Bike Ding Ding Bike, Kala Bike, and Kuqi Bike, also wound up their businesses citing issues such as lack of investment, cash flow crisis, mismanagement, competition, losses due to theft and vandalism, etc.

Intense competition, especially among the second-tier companies, is driving the market towards consolidation. In October, Youon, a Shanghai-listed company operating in 220 cities and owing 800,000 bikes, acquired 100% stake in Hellobike (a Shanghai-based company with presence in 90 cities across China). In November 2017, Bluegogo, owning fleet of 700,000 bikes and 20 million registered users, announced that the company was facing financial troubles and hence the business was sold to another Chinese start-up, Green Bike-Transit. This acquisition trend is likely to continue, as the capital intensive and cash-burning bike-sharing businesses has come under the purview of strict regulatory framework.

In August 2017, Ministry of Transport and nine other ministries jointly issued the first set of guidelines with the aim to better regulate and standardize the emerging bike-sharing market in China. State governments developed their own standards and regulations based on the guidelines.

Some of these regulations are in favor of bike-sharing companies. For instance, central government directed state authorities to step up their efforts in providing protection to bike-sharing companies against vandalism, theft, and illegal parking issues. The users are required to register with the bike-sharing operators using their real name. This will allow the security forces to easily identify and penalize the offenders. This may bring some respite to small players such as 3Vbike, a Beijing-based company with a fleet of over 1,000 bikes, which shut down its operations in July 2017 after most of its bikes were stolen. Moreover, local authorities need to work with bike-sharing operators to develop dedicated parking spaces near high-demand locations such as shopping areas, office blocks, public transportation stations, etc. This is likely to ease up chaos and nuisance caused by illegal parking.

On the other hand, some of the regulations call for bike-sharing companies to bear additional expenses. As per the new regulations, all bike-sharing operators are required to provide accident insurance to their users, a practice which was earlier followed only by the market leader, MoBike. The companies are also required to set-up support mechanisms to manage customer complaints. In the guidelines, central government also advised state governments to develop local standards for regular maintenance of bikes. Accordingly, the government of Shanghai and Tianjin instructed bike-sharing operators to appoint one maintenance personnel per 200 bikes and the bikes need to be discarded after three years in operation. Such standards are certainly necessary to enhance user experience and safety, but it will put additional strain on already financially-stressed companies.

As per the new guidelines, companies are encouraged not to charge security deposits at all. If security deposit is collected, the company must clearly distinguish security deposit fund from other funds and ensure timely refund of the deposits. The bike-sharing companies typically charge CNY 99 – CNY 299 (~US$15 – US$45) as one-time refundable security deposit and then a rental fee of CNY 0.5 – CNY 1 (US$0.08 – US$0.15) is charged for every half-hour to one-hour ride. Since the firms need to refrain from using the deposits, and given that the rental fees are likely to remain significantly low due to intense competition, the companies might struggle to manage day-to-day operations. Investor money will dry out eventually, hence the companies are in dire need of developing new revenue streams. Besides in-app advertising, companies are also exploring the use of their bikes as an advertising space. For instance, Ofo customized number of bikes with Minions characters to generate revenue from advertising the release of ‘Despicable Me 3’ movie in China.

The new guidelines also allow the local authorities to limit the number of bikes to check over-supply and traffic congestion. Following the announcement of this new guideline, Beijing, Shanghai, Guangzhou, Wuhan, Shenzhen, and eight other cities reportedly banned deployment of additional bikes. As a result, the prime markets are now off-limits for new entrants.

china bike sharing

EOS Perspective

App-based bike-sharing start-ups have revived the biking culture in China. By July 2017, the bike-sharing companies, claiming 130 million registered users in total, flooded the streets of China with 16 million bikes. The bike-sharing boom is certainly more than a fad, however, a shift in market composition is expected in the near future.

The new regulations have paved the way for development of higher industry standards aimed at better user experience and safety. However, compliance with these regulations is likely to put an additional financial burden on small players. Moreover, small players are finding it difficult to challenge the duopoly of MoBike and Ofo (together accounting for 86% of the market share as of March 2017). The consolidation among second-tier companies might ease the competition, however, this might not be enough to level with the market leaders. To survive the competition, small companies will need to either innovate or capitalize on niche markets and opportunities. Most of the companies operating in the market today have similar service model. Technological innovation or distinguished service model can enable the company to stand out from their competition. Furthermore, with rising level of competition and market saturation in major cities, small companies need to shift focus on underserved third and fourth-tier cities. For instance, in May 2017, Shanghai-based Mingbike announced its plan to gradually move out of Shanghai and Beijing in a strategy shift towards smaller cities. In these smaller cities, the companies can also explore niche business opportunities such as gaining exclusive contract for operating around local attractions.

Speculation about the merger of two dominant players MoBike and Ofo surfaced in October 2017. The two bike-sharing giants are under investor pressure to consolidate and put an end to the competitive pricing war. For now, both the companies have clearly stated that they are not interested in merger at this point. However, industry experts are hopeful of a merger in the future given the history of the investors – Tencent (backing MoBike) and Alibaba (backing Ofo), who separately invested in taxi-haling rival companies that eventually merged to become a single dominant player in China. Didi Chuxing, a taxi-hailing service company, was formed with merger of Tencent backed Didi Dache and Alibaba backed Kuaidi Dache in 2015. In 2016, Uber merged its China operations with Didi Chuxing, while retaining a minority stake. Travis Kalanick, co-founder of Uber, acknowledged that both the companies were making huge investments in China but unable to retrieve profits and the merger was aimed to build a sustainable and profitable business in China. Bike-sharing industry in China is also at a similar juncture. Since both MoBike and Ofo have not achieved profitability yet and they largely depend on investments, they might give in to the interest of the investors. Hence, one can expect that the bike-sharing industry in China might eventually move towards monopoly.

by EOS Intelligence EOS Intelligence No Comments

Indian Nutraceuticals – Potentially Rich Market Momentarily Disrupted by Frail Policies

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Over the past few years, consumption of diet supplements and functional foods and beverages has seen a rise in India, fueled by an increasing health awareness and a slow shift towards preventative health care. India’s nutraceutical sector offers tremendous opportunities, a fact that has led to the emergence of various players offering wide range of nutritional products. Other than nutraceutical companies, a mass of pharmaceutical and FMCG companies has entered the market leading the dietary supplement and the functional food and beverage category. India’s future in nutraceuticals industry looks promising, however, there is an immediate need for regulatory clarity and cost efficiency to streamline the otherwise progressing sector.

Currently, the USA, Japan, and Europe account for more than 90% of the total global nutraceutical market. But with these markets attaining maturity, the focus of nutraceutical players is shifting towards developing economies, especially those across Asia Pacific, including India. Indian market holds only a 2% market share of the global nutraceutical market and its estimated valuation stands at around US$4 billion as of 2017. It is expected to reach US$10 billion by 2022, increasing at a CAGR of 21% over the period of five years. The high potential of the Indian nutraceutical sector is propelled by the growing awareness of healthy lifestyle and the benefits of a balanced and nutritious diet in Indian population (especially in its urban section). India’s promise to remain a growing market, at least in the near time, also lies in the increasing income of the country’s vast middle class.

It’s not all nice and easy

While India may seem to be a favorable location for nutraceutical players to enter because of the rising urban income and increasing health consciousness, setting up new business here is not easy. Nutraceutical companies have the opportunity to develop and offer wide range of nutritive products for the populace but face challenges in broadening their reach in the local market.

The lack of consistent regulation and standardization of nutraceutical products is one of the key challenges faced by nutraceuticals producers in India. Product cycle in the nutraceutical industry is regulated by strict guidelines through each phase of product development, from the selection of raw materials to the packaging stage. FSSAI (Food Safety and Standards Authority of India) issues regulations on licensing and registration of business, packing and labelling, food products standard, additives, etc. However, irregularities in laid guidelines for registration of nutraceuticals, permitted additives, and packaging often create problems for companies to get product approval quickly leading to costly delays. The most common concern that nutraceutical manufacturers face is the lack of clear differentiation between raw materials, additives, or colors categorized as permitted to use in a pharma drug or a nutraceutical product. What is more, some colors and additives commonly used in food do not find place in the list of permitted additives for nutraceuticals under the regulations. Similarly, any product packaged and marketed in the form of a gelatin capsule is considered as a drug and not necessarily a nutraceutical or dietary product, regardless of its function and indication. Thus, it is necessary to have regulations for permitted additives, product registration, product approval, and pricing specifically for nutraceuticals. In the light of the rapid growth of this segment in India, it is imperative to treat this segment as a separate entity and have clear product definitions and production guidelines.

Another challenge for producers is to arrive at the right pricing for their products in the local market. Though the demand for nutraceuticals is expected to rise considerably, the high prices of nutraceuticals limit their adoption in the Indian market. Nutraceutical producers try to recover their R&D costs in a short span of time by putting a high price tag on their products, but in a price-sensitive market such as India, high costs associated with producing nutraceuticals (or putting high margins on products) is a major restraining factor. Also, affording health products, which cost much more than some of the basic food items, is a key concern for majority of Indian population.

Moreover, with the introduction of GST (Goods & Services Tax) in July 2016 (we talked about it in our article GST Likely to Become India’s Biggest Tax Reform in August 2016), nutraceuticals and other health supplements are subject to 18% tax (with few categories even taxed at 28%), making these products considerably more expensive than before (when they were taxed at 12%). High taxes associated with nutraceutical products could also affect the entry of new players in the market as these new players would be pressed to launch their products at lower prices in order to get a slice of the market. This could only be achieved by either lowering the cost of production or accepting a lower margin, and both of these options might make the new players apprehensive about entering the market now.

Nutraceuticals in India

Evolving competitive landscape

Pharmaceutical and FMCG companies dominate the nutraceutical market with very few pure play nutraceutical companies. Key players in the Indian market consist of both domestic and multinational players. While MNCs such as Amway, GSK, Abbott, and Danone are focusing more on regional penetration, domestic players such as ITC, Dabur, Himalaya, and Patanjali are launching new products to reach out to newer segments. The range of dietary supplements that accounts for about a third of the nutraceuticals market in India is captured by pharmaceutical companies. Meanwhile, there has also been a compelling change in consumer preferences towards functional foods and beverages. These consumables have nutritional and disease preventing qualities and are mainly catered to by the companies in the FMCG domain. The market for functional products is most likely to see a higher growth than the dietary supplements owing to the increasing number of people being affected by lifestyle diseases.

EOS Perspective

FSSAI is keen to introduce amendments to the existing regulations pertaining to nutraceuticals and dietary supplements, so much so that a set of new and (allegedly) consistent regulations and standardization procedures for nutraceutical products are to be implemented in January 2018. This raises hopes that the nutraceutical companies will be able to produce, distribute, and sell products within a clearer framework pertaining to permissible ingredients, labeling, etc., in nutraceutical products. The regulations also include an exhaustive list of ingredients, which are permissible in nutraceutical products, enabling players to introduce new products in the Indian market.

Apart from restructuring the regulations, there is also an urgent need to reduce the price of these products to make them accessible to consumers across many income levels, across the country. Currently, the penetration of nutraceuticals in urban India is 22.5% but this rate stands only at 6.3% in rural parts of the country. Urban consumers, though are aware of the benefits of nutraceuticals and often have higher disposable income, are somewhat reluctant to add these products in their monthly budgets on a regular basis, unless required, due to exorbitant prices. Making these products available at more competitive prices could enable players to capture a good share of urban Indian market over a short span of time.

There are also considerable opportunities beyond the urban segment, as population in rural parts of the country represents a huge untapped potential for nutraceuticals sales. Financial capabilities of rural consumers are surely much lower than of their urban counterparts, but this does not mean that the rural market should be ignored altogether, as this segment can offer considerable sales volume, especially that the incidence of undernutrition in rural population is higher than in urban areas. This market, however, should be approached with a different tactic. Players should consider expanding their reach in this segment with simpler, lower-priced, generic products and with products on which they can afford cutting their margins the most. It is important that they also broaden their distribution reach to make their products available in local dispensaries in rural areas, and work with local healthcare providers to drive awareness and demand for nutraceutical supplementation. But in order to really get a firm grip on the rural segment, the pricing should be much more attractive, and this could be potentially achieved by working with the government, local authorities, and healthcare organizations to launch initiatives in the form of subsidies, tax rebates, or other co-payment forms to allow to bring the product price significantly down. Obviously, this might be difficult to achieve in the near term, as public entities are unlikely to see this as a priority in assigning funds. So till this changes, it appears that a refurbishment of the regulatory framework is going to be the only turning point in the growth route that the nutraceutical players can hope for.

by EOS Intelligence EOS Intelligence No Comments

China’s Cross-Border E-Commerce Sector Enjoying Government Support – But for How Long?

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It is a well-known fact that China, today, is the largest and fastest growing e-commerce market globally. Accounting for close to half of the global e-commerce sales, China’s e-commerce industry is witnessing a double-digit growth, rising by about 26% in 2016. Leading the growth in China’s e-commerce sector is cross-border e-commerce (CBEC), which is currently witnessing close to double the growth compared with the overall industry and is expected to continue to grow robustly over the next five years. The government has not only been charging favorable duty to promote CBEC, but has also created special customs-clearing zones in 13 cities to support cross-border trade. However, in 2016, the government came up with a new set of taxation and a list of items that were allowed to be only imported. Following a significant industry pressure, the government has pushed the implementation of these rules to the end of 2018, and it now remains to be seen whether the industry will continue to receive government support which is instrumental for it to flourish.

Cross-border e-commerce (CBEC) has been creating quite a buzz globally, and leading this global trend is China, one of fastest growing markets with respect to CBEC. A plethora of social factors such as improved standards of living, increased awareness about foreign products through greater international travel as well as access to information online, increased quality consciousness among consumers, limited options available locally (especially in product categories such as infant milk formula and health supplements) have resulted in escalated demand for international products in China. All these factors, along with the ease of buying through e-commerce and the growing tendency of Chinese people to use their mobile phones to shop, have resulted in exponential growth of the CBEC sector in the country.

China’s CBEC Industry – At a Glance

Retail Sales and Growth: The industry was estimated at US$85.8 billion in sales in 2016 and is expected to double up sales to about US$158 by 2020. The number of CBEC customers in China is estimated to rise from about 181 million in 2016 to close to 292 million in 2020.

Trade Partners and Goods: The UK, USA, Australia, France, and Italy are some of China’s largest trading partners with regards to CBEC. Cosmetics, food and healthcare products, mother and child solutions (including infant formula), clothing and footwear are the most shopped categories through CBEC.

Consumer Profile: About 65% of the customers are male and 75% are between the age of 24 and 40. Most of the customers are well-educated, with three-fourth of them having at least a graduate degree. The ticket size for about half of these purchases ranges between US$15 and US$75 (RMB100-500).

Leading Players: Most cross-border online sales are undertaken through third-party online marketplaces such as TMall Global (owned by Alibaba group) and JD Worldwide (owned by JD Group, China’s second largest e-commerce player). Global e-commerce leader, Amazon is also becoming increasingly active in China.

The government has also provided immense support to the CBEC sector, a fact that has been critical to the market growth. As an effort to weed out the illegal grey market imports and to promote e-commerce, China’s government relaxed cross-border e-commerce rules and the applicable custom rates (close to 15 to 60% depending on the item). Moreover, custom duty amounting to less than US$7.5 (RMB50) was exempted. The government also created 13 CBEC zones across the country in order to expedite custom clearing of foreign items ordered online. These zones house large warehouses where foreign brands and retailers stock items, which, upon being ordered, are put through custom clearance (under relaxed rules). This way the consumer receives foreign goods within few days of ordering it.

While this has been greatly benefiting the Chinese consumers who now have an access to a range of products that were once seemingly out of reach for the public at large, it is also revolutionizing how foreign players are operating in China. Traditionally, foreign companies (brands) required to have a legal entity in China (subsidiary, partner, or own manufacturer) to import goods through the general trade channels. These legal entities had the task to clear import customs and pay duties on goods imported into the country. However, under the CBEC channel, these foreign players are freed from the requirement of establishing a local entity before selling their goods in the Chinese market. This also relieves companies from several compliance procedures that they were required to follow in case they were entering the market through offline trade channels. Therefore, several players, who shied away from China in the past (owing to cumbersome product registration and approval process), are looking at this as their entry strategy in the market. Simpler compliance checks and reduced import taxes have also made it easy for companies to experiment and launch a host of products (on a hit and miss basis) in the Chinese market without much investment.

However, while CBEC has greatly supported the cause of promoting e-commerce and aiding international companies in accessing the Chinese markets, it has seriously hampered the business of several domestic players (especially in the cosmetics and health supplements industry) who have been protected from foreign competition in the past owing to strict import rules. Moreover, it has resulted in a major disadvantage for conventional retailers with a brick and mortar setup as goods sold through the CBEC route are levied with a lower number of taxes compared with similar goods sold through traditional trade channels in China.

Owing to these factors, in April 2016, the government revised the taxation rates for CBEC goods resulting in a marginal increase in taxes for few categories. Under the new rules, products would be temporarily levied with 0% import tariff but would be taxed at 70% of the applicable VAT and consumption tax rate, which changes based on the product category. For instance, cosmetics worth RMB500 (US$75) ordered through CBEC would be taxed 0% import tariff + VAT at 11.9% (i.e. 70% of applicable VAT rate for cosmetics – 17%) + consumption tax at 21% (i.e. 70% of applicable consumption tax for cosmetics – 30%), thereby, making the total amount equal to RMB664.5 (US$100). In addition to the changes in taxation, the government removed the waiver of custom duty of up to US$7.5 (RMB50) and set a limit of US$302 (RMB2,000) on a single transaction and of US$3,020 (RMB20,000) on purchase by a single person per year. It also released a list (termed as a ‘positive list’) of 1,293 products that were allowed to enter the Chinese market through CBEC. While the goods under the ‘positive list’ are exempted from submitting an import license to customs, few products from this list that come under China Food and Drug Administration (CFDA), such as cosmetics, infant formula, medical devices, health supplements, etc., require registration before import. This entails the same tedious registration or filing requirements required for products imported through the traditional trade channels. This greatly limits the inherent benefits of the CBEC model for these products.

While the government had initially intended and aimed for immediate implementation of these new regulations, protests and pressure from Chinese e-commerce companies and the ultimate objective of promoting the country’s e-commerce sector resulted in the government agreeing to a one-year transitional phase for these rules (which was to end in 2017). However, in September 2017, the government decided to extend the transitional period until the end of 2018 and to set up new trade zones for CBEC, reinforcing its support for the cross-border e-commerce sector. While changes in the regulation do seem to be a certainty in the future, the timeline for their introduction remains ambiguous as several industry analysts anticipate that they may get pushed off again.

Cross Border e-com in China

EOS Perspective

The cross-border e-commerce sector in China has been witnessing exponential growth and despite the looming new regulations, is expected to continue to grow at least over the next five years. While leading e-commerce companies in China (such as Alibaba group and JD group) have acted swiftly to benefit from this growing space, the greatest benefit has been for the foreign players who now have an easy access to Chinese consumers without the need of setting up a shop in the country. However, these benefits may be short-lived considering the new set of regulations. Few product categories such as infant formula, cosmetics, and health supplements (which have in actuality been the most popular categories for CBEC) will be subject to registration and filing requirements, thereby their so-called ‘honeymoon phase’ in the country is likely to end. Although a lot of products do not have to comply with registration/filing requirements and are only subject to a marginal increase in taxes (as per the new rules), this does not guarantee that future regulations will not impact their presence and sales in China. Therefore, while CBEC may be the smartest way for companies to test their products with limited investment in China, they may need a back-up plan in case the government further regularizes the industry to create a level-playing field for the traditional retail.

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