Tripping Over Tomorrow

Another year draws to a close. It’s time to take inventory of the events of the last 12 months, weigh their impact and prepare for the year ahead based on a heady mix of experience, common sense and educated guessing. That’s part of what the November/December issue of Orthopedic Design & Technology attempts to tackle—an examination of the forces at work in the medical device sector over the past year and what industry experts are predicting will shape 2015 and beyond.

According to a new report titled “Medical Devices: Equipped for the Future?” from Chicago, Ill.-based consulting firm A. T. Kearney, despite 20 years of stability, strong growth, healthy margins and above-average price-to-earnings ratios, “disruptive change” already is underway in the medical device industry. Companies will need to look at new segments and end-to-end solutions that are focused on differentiated sources of value, customer productivity, and total patient disease management, study authors suggested. Dave Powell, A.T.Kearney partner and study co-author, said, “While the future contours of the medical device industry remain to be defined, radical change is inevitable, and the companies who embrace it will both shape the industry and profit from it.”

Early in the year, Kearney consultants interviewed more than 30 global medical device industry executives from 20 of the world’s leading medical device manufacturers. The companies collectively represent $80 billion in revenues and span the range of sectors, geographies and company sizes. The interviews led to the identification of five major “disruptors” that will negatively impact the economics of the industry if not addressed. The five disruptive forces shaping the medical device industry, based on the firm’s research, are:

Power shift to payers and providers. Evidence-based decisions and the funding channels increasingly are challenging the traditional business model of clinician choice. Payers and providers are evaluating medical devices based on safety and procedural efficacy as well as cost and value.

Heightened regulatory scrutiny. In recent years, there have been damaging, high-profile recalls. Regulators have tightened existing regulations and added new ones. FDA audits have increased by 40 percent in the past 12 months and the number of warning letters has risen by 24 percent in the past two years.

Unclear sources of innovation. Because of regulatory and reimbursement issues, medical device companies are focusing their research and development efforts on improving already-approved devices rather than developing truly innovative new products. New products that affect the way standardized procedures are conducted often reluctantly are included on the list of reimbursable products. Additionally, startups and small companies find it difficult to obtain capital to fund the increasing cost to bring new innovations to market.

New healthcare delivery models. As payers’ resource constraints intensify and powerful analytical tools make it easier to evaluate large volumes of data, patient pathways are being modified to obtain better outcomes for less money. For example, increasingly, the emphasis is to shift care out of hospitals and into the community.

Need to serve lower socioeconomic classes. Medical device companies seeking growth will need to target less-affluent segments that can offer significant absolute profit potential with the right solutions, analysts wrote. Accessing growth segments, even in traditional markets, will require new business models, lower price points, and more value-based product offerings.

Executive teams actively should consider the importance of the five disruptors and question how well their current operations are dealing with these issues, study authors suggested. Bill Tribe, company principal and co-author of the study, said, “The question for executive teams is how they can navigate the disruptors and define their unique path, recognizing that the industry is changing now, and the industry leaders of the future are already defining how and where they expect to compete.” Not to do so could change the industry’s profit picture considerably. If companies take appropriate measures, analysts said, revenue could continue to grow between 2 and 4 percent annually through 2020, and the operating margin decline could be offset. “This would result in an additional operating profit of $24 billion across the medical device industry,” study authors wrote. “Together with additional cash potential of $10 billion from working capital reductions, we estimate the cash value generation potential for the industry to be $34 billion by 2020.

This annual exercise of retrospection and the subsequent bracing for what’s to come is easier when it’s buoyed by optimism rather than dread. That’s often easier said than done. But despite some headwinds, the new year in medtech perhaps isn’t something to fear or compare to the “good ol’ days” as much as it is a matter of preparedness.

Christopher Delporte
Editorial Director, Medical Devices