Report: Medtech Firms Must Evolve Their Business Model to Survive

It took several years, but the medical technology industry finally is accepting its “new normal.”

Battered by a “perfect storm” of tougher regulations, funding constraints and a shift to value-based healthcare, the industry is finding solace—and some success—in business models that differentiate their offerings through expanded healthcare services, delivery options and funding channels. New innovative strategies are essential if medtech companies are to survive and grow, according to a state-of-the-industry report released by global advisory services firm Ernst & Young at AdvaMed 2013: The Medtech Conference.

“…with the old model, you developed a new product and showed it to physicians. They liked it, and it went from there,” invendo medical Inc. CEO Berthold Hackl told the report’s authors. “Those days are over. With new devices and technologies, you have to look at the environment in which they will be used. [At invendo], we talk with insurers, hospital boards, physicians, nurses, even patients.”

Medtech’s traditional product- and treatment-focused growth model has lost its potency in recent years as venture capital dwindled, pricing pressures increased and government bureaucracy multiplied, the report notes. To recapture pre-recession growth, device companies must develop products that focus more on prevention and maintenance than acute care or long-term disease treatment.

Building new business models

The shift to value-based healthcare is making patients and payers more influential, prompting medtech firms to experiment with business models that reflect the needs of new customers in three ways:

• Beyond the product: Services and solutions to improve outcomes or lower costs (e.g., Philips’ 15-year agreement to provide Georgia Regents Medical Center with consulting services and technology).
• Beyond treatment: Prevention, remote monitoring, to more efficiently improve outcomes (e.g., Medtronic Inc.’s $200 million purchase of developer, manufacturer and clinical telehealth solutions provider Cardiocom LLC).
• Beyond the hospital: Enabling patients to manage their conditions at home, without frequent and costly clinical interventions (e.g., Covidien plc’s Sandman pro-gram, which treats sleep disorders through training, education and patient encouragement).

To succeed at business model innovation, device firms must develop new capabilities that change stale mindsets and fill gaps in their current lineup of skills. Companies can accomplish such a task by focusing on capital efficiency to use scarce resources wisely; initiating ecosystem-wide scanning to better understand the evolving healthcare environment; fostering collaborative cultures to tap the strengths of diverse players; becoming open data enterprises to pool data and develop insights; adopting disease/value pathways to identify and fix “value leakages”; and using scalable processes with appropriate metrics for robust business model innovation.

“The medtech industry faces significant challenges, but for companies that can deliver differentiated health outcomes in cost-efficient ways, there are strong opportunities for growth,” Ernst & Young Global Pharmaceutical Sector Leader Patrick Flochel said. “Clearly, firms need new capabilities, but they can also redeploy existing strengths which will be very useful in the new healthcare environment: customer-centric design, the ability to identify and fill gaps for customers, and medtech’s core strength in engineering new solutions for complex challenges. In doing so, they will do much to restore the trust of customers and investors, which will make business model innovation easier in the future.”

Restoring investor trust is essential for fostering the kind of innovation that engages patients, payers and physicians alike. Ernst & Young’s “Pulse of the Industry” report found that venture capital investments fell 21 percent to $3.5 billion in the period ending June 30, the lowest level in more than a decade. Innovation capital—funds available for the vast majority of pre-commercial companies—declined by 11 percent to the lowest level in at least seven years.

Other key findings described in the report include:

• Slow revenue growth: Revenue for public medical technology companies in both the United States and Europe totaled $339.6 billion in 2012, a 2 percent increase compared with the previous year and well below pre-crisis growth rates.
• Steady capital: While it remained relatively stable at $29.5 billion, most of the capital funding raised in 2012 went to a few large companies. Debt represented the vast majority of total funding, with debt offerings by a handful of commercial leaders contributing 82 percent of the industry’s total financing. The majority of new debt issuances were used to refinance existing debt.
• Solid deal-making: The value of mergers and acquisitions involving U.S. and European medtech companies increased 23 percent to $47 billion last year. But after adjusting for a $15.8 billion mega-deal, the value of M&A fell 19 percent to $31.2 billion.

“While the industry’s 2012 financial results were better than 2011 on a normalized basis, looking at the longer term reveals a more troubling picture. The industry’s financial growth is significantly below levels before the financial crisis, when medtech routinely delivered double-digit increases in revenue and robust net margins,” the report concluded. “As companies grapple with increasing pressure from market forces, payers and regulators, they will need to take action not to merely sustain their recent performance but rather to return to the top-line growth and bottom-line profitability they enjoyed before the financial crisis. And meeting that challenge will require revisiting how they innovate both their medtech products and their business models for medtech’s new normal.”