At least in the medical device sector.
As the year draws quickly to a close, industry pundits, consultants and journalists indubitably will offer their respective thoughts on the past year in medtech. The spate of forthcoming retrospects surely will discuss the seismic shift that has taken place in the market as OEMs and other larger players have pursued scale through bolt-on acquisitions. The movers and shakers guaranteed a mention include Medtronic plc, for its $50 billion purchase of Covidien; Zimmer Holdings Inc., for its $14 billion merger with Biomet Inc.; Danaher Corporation, for its $13.8 billion acquisition of Pall Corporation; and Becton Dickinson and Company, for its $12.2 billion marriage to CareFusion. The market’s consolidation extended well beyond those four “megadeals” —total M&A value, in fact, could reach $100 billion this year for the first time in medtech history—but that particular quartet is perhaps the most poignant for its impact on both industry rankings and the medical device supply chain.
Bryan W. Hughes, director of medical technology for Chicago, Ill.-based P&M Corporate Finance LLC, claims the recent spate of M&A activity is triggering a consolidation among suppliers as well. In the latest installment of Financial News (page 20), he draws parallels between the shrinking contract manufacturing market and Boeing’s efforts to trim its bloated supply chain in the early 2000s.
Hughes expects the consolidation to continue, predicting that some OEM mergers could result either in the shuttering or sale of manufacturing plants and the outsourcing of services. He also foresees the continuation of private equity investment on market structure. “Private equity investors have had, and will have, a meaningful impact on the structure of the market,” he told a crowded conference session earlier this fall. “Six of the 16 largest finished goods players are currently owned by such firms. This will only continue over the next several years as larger funds get involved, driving larger deals.”
And, ultimately, more supply chain consolidation.
Only time will tell, of course, whether Hughes’ predictions are accurate. If the past (Boeing) is any indication, though, his prognosis might be spot-on.
Such effective forecasting skills are relatively common among medtech industry professionals. As the sector slowly recovered from the Great Recession, for example, many pundits predicted a surge in large-scale mergers and acquisitions, with PricewaterhouseCoopers deals director James Woods discussing early last year the potential for transformative deals.
Woods’ PwC colleagues and others in the industry also have regularly been envisioning a shift in power to healthcare payers and providers.
In their 2011 state-of-the-industry report, Ernst & Young’s medical device gurus warned of the need for medtech firms to change their innovation models. A plethora of familiar risks—from regulatory constraints to healthcare policy uncertainty, shrinking reimbursement rates and pricing pressures—is creating a consumer- and payer-centric future where proven clinical outcomes will be paramount, they said. This “new normal” would require companies to revamp their business models and re-evaluate their product development, manufacturing and marketing practices. “The companies best positioned for success will be those that develop the new offerings and solutions most relevant to this changing ecosystem,” the 2011 report stated. “Medtech companies have always taken on risk to innovate new products and technologies. Going forward, one of the biggest risks may be the failure to innovate beyond the product and develop new offerings in new ways.”
Those words certainly are ringing true, as more device manufacturers are changing their business strategies to reflect the greater role being played by nurse practitioners, pharmacists, therapists, and social workers. Companies also are offering more complete, bundled, end-to-end solutions and services that go beyond the medical device itself. Operating in this new environment requires a whole new set of capabilities, from product design and manufacturing to marketing, sales, distribution, service bundling, partnership management, and analytics.
Without the benefit of a crystal ball, it’s virtually impossible to determine whether the industry is headed in the right direction. But assessing past failures certainly could help ensure its future success.