Despite Steady Growth, Medtech Must Reinvent

@font-face { font-family: “Times”; }@font-face { font-family: “Cambria”; }p.MsoNormal, li.MsoNormal, div.MsoNormal { margin: 0in 0in 0.0001pt; font-size: 12pt; font-family: “Times New Roman”; }span.xn-location { }div.Section1 { page: Section1; }ol { margin-bottom: 0in; }ul { margin-bottom: 0in; }

According to a report due out Sept. 27 from Ernst & Young, publicly traded medtech companies in the United States and Europe were solid performers in 2010, outpacing 2009 growth rates in each of the major financial indicators—providing evidence that the impact of the global recession on the industry may be lessening.

Persistent funding challenges for many companies, however, combined with regulatory and pricing pressures and fundamental changes in global healthcare will require companies to find new ways to sustain innovation in the future.

These findings will be highlighted in “Pulse of the Industry: Medical Technology Report 2011.” Additional results will be discussed when the report is released during AdvaMed 2011.

“The medtech industry delivered an impressive performance in 2010 in the face of continued strong economic headwinds, but a closer look beyond the numbers shows that deep challenges remain for most industry members,” said John Babitt, Ernst & Young’s medtech leader for the Americas. “From increased payer pressure to demonstrate value, heightened regulatory scrutiny, a continued tight funding climate and a rapidly changing customer base, the industry’s ability to innovate is under increasing strain. To respond effectively, companies will need to expand beyond the products they have historically offered to solutions built for an increasingly outcomes-focused system.”

Key findings described in the report include:

• Net income rose sharply. Net income for non-conglomerates in the United States and Europe totaled $17.4 billion, a 43 percent increase compared with 2009. This increase was primarily the result of large, one-time charges in 2009, without which net income growth would have been 9 percent. Revenues for all public medtech companies totaled $315.9 billion, a 4 percent increase.

• Financings surge—for some. Capital raised by U.S. and European companies in 2010 totaled $23.6 billion, a 66 percent increase over 2009. However, this increase was driven by a handful of mature companies that took advantage of historically low interest rates to issue debt. Excluding debt transactions, the amount raised fell by 7.7 percent. This financing environment has continued in the first six months of 2011, with financing totals reaching $10.1 billion.

• Venture financing drops. Venture capital investment fell 13 percent in 2010 compared to the prior year, though the amount raised is still consistent with levels seen in 2005 and 2006—years at the height of the “easy money” era, the report’s authors noted. Venture funding fell by 15 percent in the United States, to $3.5 billion, while in Europe venture investment was up 4.7 percent to $707 million.

• IPOs rebound slightly. After more than two years of sluggishness, initial public offering (IPO) activity picked up in 2010, but at a significantly slower pace than in the years prior to the global recession. A total of nine medtech companies in the United States or Europe completed IPOs in 2010 compared to two in 2009, grossing a total of $568 million.

• Deal making returns. The total value of mergers and acquisitions in the United States and Europe rebounded to $30.6 billion in 2010, up from an historically low $15.7 billion in 2009. The average deals size increased from $175 million to $245 million.

• Investors become more cautious about growth. The reports authors reported a growing disconnect between the performance of the medtech industry and investor perceptions. While the median earnings per share of the largest U.S. non-conglomerates have grown steadily over the last decade, the median price-to-earnings ratio of these companies has declined over that same time.

The report also finds that the industry has become further challenged by the continued lack of sustainability of the global healthcare system, which has led policymakers, payers and regulators to focus not only on reining in costs but to increasingly realign incentives around improvements in health outcomes.

As a result, a company’s success or failure in the medtech industry of the future will not be based simply on how many products they sell but on their ability to demonstrate how they are improving health outcomes. In addition, companies will need to adapt to a fundamental shift currently taking place in healthcare where previously passive patients will become engaged and empowered “super-consumers” to whom companies will increasingly need to target their offerings rather than simply focusing on physicians.

The continued evolution toward this outcomes-focused ecosystem will require medtech companies to fundamentally reinvent core parts of their business model, including what they sell, how they sell it, and how they develop these new offerings. Key challenges and opportunities as part of this business model reinvention highlighted in the report include:

Given the increasing payer demands in the new outcomes-focused ecosystem, companies will need to capitalize on new revenue sources beyond just their products. As a result, more firms may consider expanding from products to solutions and seek new ways to extract value from the information they have. New business models could even involve giving away the product to sell a subscription to an information-based service, according to study authors.

As sales decisions increasingly shift to hospitals and patients, companies will need to revamp the sales and marketing end of their business model.

As certain product segments shift to a less scientifically aware customer base, companies may may need to increase the levels of information and education they provide. As payers become more important as a customer base, companies will need to focus on demonstrating value to these decision makers. Finally, communicating with these stakeholders in new channels such as social media will require meaningful engagement and the ability to provide relevant information at the right time.

Research & Development Impact

Innovation in medtech historically has taken place at the bedside, with physicians providing feedback on how to improve the next generation of products. New sunshine laws limiting physician interaction with medical device companies could potentially curtail the process, and companies will need to capitalize on opportunities to mine new product ideas from more widely distributed information networks that will be part of the healthcare ecosystem.

“Medtech companies have always taken on substantial risk to innovate new products and technologies,” said Glen Giovannetti, Ernst & Young’s global life sciences leader. “However, risk now stems not only from product development, but also from a host of other pressures. To respond, companies will need to innovate new business models. If risk has moved beyond the product, so too must innovation.”

Editor’s note: More details will be provided in the Sept. 28 edition of Medical Product Outsourcing’s “Live From AdvaMed” e-newsletter.