By Venkat Rajan, Frost & Sullivan
Medical device companies are being forced to rethink their business models and strategies, thanks to a changing landscape and the looming 2.3% excise tax currently slated to be levied on devices beginning in January 2013. In light of this dramatically shifting marketplace, Frost & Sullivan has evaluated some of the current strengths, weaknesses, opportunities, and threats to the medical device industry.
Because of the impending impact of this tax, a lot of companies have undergone a great deal of restructuring; we’ve seen spinoffs of late, management changes at big medical device companies, layoffs, rethinking of strategies, and even a lot of M&A activity. Medical device companies are opting to shed certain business units that are identified as slow growth with limited opportunities, for example. On the other side of the coin, manufacturers are also making aggressive moves to ensure that they’re well positioned in more-desirable market segments. As a result, there has been significant market fluctuation recently in M&A and divestitures, coupled with marginalization of more-declining and slow-growth market opportunities.
But it’s not all bad news for the medical device industry. There is a strong patient demand to support the market—thanks, in particular, to the baby boomer population. However, this patient segment’s needs and preferences in terms of medical device technology differ significantly from those of its predecessors. The baby boomer generation of patients is actively seeking quality-of-life enhancement. It’s no longer enough to cure or effectively treat these patients suffering from a certain disease or condition; it’s imperative that they are able to return to a sustainable quality of life where they can remain independent, or at least more so than was the case with previous generations.
In addition to the strength of the baby boomer base, there are also a lot of initiatives within the healthcare reform bill that identify the need for new types of treatments, greater impact from these new devices, more preventative technologies, and increased homecare. And, of course, there is an undeniably strong demand coming out of emerging markets.
As for the weaknesses, the medical device industry often faces a very long time to market for products, a complex purchasing environment, pricing caps, and government influence. All of these factors affect how investors view and put money into this market.
Opportunities, on the other hand, are present as a result of these new payment business models. Moving from a pay-for-procedure reimbursement approach, folks are now looking more for a pay-for-performance system. The emphasis is shifting from addressing an issue each time a patient comes in to managing the disease state from initial diagnosis throughout the course of the disease and treatment. These new business models also create new opportunities for medical device companies that have felt they’ve been boxed out of the market by established relationships and products. However, there is always resistance to new business models in the hospital setting, of course.
Threats to the medical device industry encompass such areas as mounting recalls, a consolidating purchase base, legislative winds, and the increasing cost of materials and manufacturing. As part of creating a sustainable business model in the face of these threats and the changing landscape, it is imperative that companies proactively identify which markets they want to play in, and evaluate their product portfolios and solutions offerings accordingly. If an opportunity presents itself, medical device manufacturers need to act quickly and steer clear of just putting out a ‘me-too’ product. Fast-follower mentalities and simply offering a comparable product at a slightly lower price typically don’t support a strong long-term business model; the market ends up just nose diving.
Ultimately, it’s important for medical device manufacturers to track end-to-end healthcare dollar flow and these cost value models. Doing so will allow companies to remain competitive by pitching services and demonstrating how their technologies can help bring costs down, rather than just concentrating on the clinical value of a product. Medical device companies should stress to the payer how a given medical device or technology will reduce costs based on its reliability, reduced likelihood of patient error or complications, or ability to expedite procedure time, for example. After all, in today’s changing healthcare landscape, the cost equation is so much more important than other aspects of clinical performance. Simply put: Medical device companies will either adapt or fade away in the new landscape. Make sure that your company is not a casualty of change.
Venkat Rajan is the industry manager, medical devices, at Frost & Sullivan. The majority of this piece is adapted from a recent keynote address titled, “The New Medical Device Landscape: Adapt or Fade Away,” that Rajan delivered at the recent UBM Canon virtual event, “Trends in Medical Device Outsourcing.” The keynote address and other, related sessions, are available for free on-demand viewing.