Report: Medtech Industry Must Differentiate to Avoid Commoditization

And the cycle continues.

No sooner does the global medtech community tackle one challenge when another takes its place. Regulatory complexity superseded outsourcing (yet some pundits contend the industry has yet to fully embrace the concept); the Great Recession (temporarily?) supplanted bureaucratic barricades; the Affordable Care Act/medical device excise tax replaced the recession; value-based solutions unseated the levy (though that fight is far from over); and patient-centric technologies ousted the value proposition.

Now, as the industry works to clear these hurdles, comes yet another challenge: the threat of commoditization.

“As purchasing decisions become increasingly centralized and influence shifts from physicians to hospital administrators and managers, the historical value drivers for purchasing a device—brand, quality and design—will lessen, leaving price as a main consideration,” Glen Giovannetti, Global Life Sciences leader at EY, said in a statement released with the company’s annual “Pulse of the Industry” medical technology report. “To achieve meaningful differentiation for their offerings, firms will need to design and market their products in ways that demonstrably improve patient outcomes while also lowering costs.”

To better understand the current and potential future impacts of medtech commoditization, EY analysts surveyed 162 healthcare buyers in the United States, United Kingdom, Germany and Spain. Survey results indicate that price remains the top factor in medical purchasing decisions, with 77 percent selecting it as a top concern both now and in the near future. Yet simple cost-cutting measures most likely will take a back seat to value-based solutions over the next three years: 34 percent of respondents expect healthcare reform initiatives (value-based purchasing and pay-for-performance) to be among three factors pressuring hospitals in 2017 (up from 20 percent currently). Consequently, purchasing managers will be less influenced by price reductions (down from 44 percent currently to 37 percent in three years) and imaging costs (22 percent currently vs. 12 percent in 2017). Value and outcomes measures, on the other hand, is expected to surge, jumping 13 percent over the next three years.

Similarly, practicing physicians will have a smaller role in purchasing decisions over the next few years, giving up ground to hospital finance and procurement/ purchasing departments. Future top purchasing decision factors include clinically proven data (62 percent of respondents believe it will be a major influence in 2017, up from 51 percent currently), and risk-sharing agreements (25 percent expect it to play a major role in three years, more than quadrupling from the current 6 percent); physician preference and user-friendly design—once the leading doyens—are projected to slip in prominence, with only 27 percent of purchasers swayed by physicians’ choice (down from 55 percent currently), and 22 percent impacted by user-friendly design (down 10 percent).

“These shifts have clear implications for the ways in which medtech companies market their wares and how customers perceive their products,” states the report, released at AdvaMed 2014: The Medtech Conference in Chicago, Ill (Oct. 6-8). “If individual physicians become less influential, and purchasing decisions are instead increasingly made by managers and administrators—whose prime focus is on measuring and rewarding value—then it seems likely that companies will need to demonstrate the value of their devices in terms of measurable improved outcomes for patients and lower total system costs if they are to make the cut.”

Finances Holding Steady
The headwinds buffeting the planet’s medical technology industry continued to rage in 2013-14, but companies managed to navigate safely through the storm, charting modest revenue growth while strengthening their cash positions and using M&A (mergers and acquisitions) to diversify their product and service portfolios. Key financial results highlighted in EY’s report include:

• Revenue uptick: Revenue for public medtech firms in the United States and Europe rose 4 percent to $336.2 billion, while net income jumped 16 percent to $16.5 billion. Revenue at conglomerates climbed 3 percent to $153.8 billion, and pure-play company proceeds spiked 5 percent ($182.4 billion). Not a bad showing, though revenues remain well below pre-recession levels.
• Soaring IPOs: The industry experienced one of its strongest initial public offering (IPO) windows in recent years (12 months ending June 2014), with 31 companies going public in the United States and Europe. The IPOs raised $1.5 billion, a six-fold increase compared with the 2012-13 timeframe.
• Strong financing: Medtech companies raised $27.3 billion between July 2013 and June 2014, with 71 percent of the annual financing coming from debt transactions. While funding fell 14 percent from the prior year, it nevertheless represented the second-highest amount of capital raised since 2008. U.S.-based firms attracted the lion’s share of total financing, capturing $22.2 billion. Venture investment held steady at $4.4 billion (up slightly from $4.2 billion in 2012-13), thanks partly to increased investment from corporate venture capitalists and strategic investors.
• More deal activity: Total M&A value for U.S. and European medtech companies jumped 135 percent to $85.6 billion in the 12-month period ending June 2014. Excluding “megadeals”—defined as transactions greater than $10 billion—mergers and acquisitions still rose 28 percent to $29.3 billion. Medtech firms were most interested in acquisitions that increased their scope in a disease area or geography, especially emerging markets.
• Happy shareholders: Medtech firms returned 57 percent of their net cash generated through their operations to shareholders, totaling $16.7 billion, a 7 percent increase compared with 2012-13.

“While the medtech industry continues to demonstrate resilience, our findings offer further evidence that the traditional rules of competition are becoming less relevant, requiring companies to implement new strategies to achieve sustainable success,” Patrick Flochel, EY’s European Life Sciences Leader and Global Pharmaceutical Sector leader said. “While each organization’s chosen strategy will differ, every company must find new ways to demonstrate that its products help providers achieve top-quality care metrics and build market share while also taking costs out of the system.”