Survey: Global medtech industry needs to better differentiate products
Despite ongoing commercial challenges in 2013, the global medtech industry's financial performance held steady at the relatively low levels of growth that have become common in recent years. But even as the industry grapples with these market and regulatory pressures, it faces a potential growing challenge—the threat of commoditization, according to new findings outlined in Ernst & Young's annual medical technology report, Pulseof the industry: differentiating differently.
To understand how commoditization is playing out now and in the future, EY surveyed U.S. and European healthcare buyers for the report in four major medtech markets: the U.S., the U.K., Germany and Spain. Results from this latest survey, which interviewed 162 respondents, indicate that many medtech products could be judged primarily on price unless they are better able to demonstrate their ability to improve outcomes and/or lower healthcare costs.
Glen Giovannetti, an EY global life sciences leader, said, "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. 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."
This year's report also discusses annual financial performance, financing and deal making trends and their potential impact on medtech business models, including reducing the challenge of commoditization.
Respondents of the survey highlight overwhelmingly that price remains the top factor in medical technology purchasing decisions, with 77% selecting it as a top concern today and in the near future. However, over the next three years, respondents expect simple cost-cutting measures to become relatively less important, and instead anticipate health care reform initiatives focused on value and outcomes to become more important. Among six pressure points provided to respondents, such value and outcomes measures saw the largest percentage increase, jumping 13% between today and three years from now.
Meanwhile, practicing physicians are expected to become significantly less influential when it comes to purchasing decisions over the next three years, on par with other functions such as finance and procurement departments. When asked to select the three most important factors in medical device purchasing decisions today compared to three years from now, the percentage of respondents who selected "Physician preference for a specific device" dropped from 55% today to 27% in the future, while "User-friendly design" dropped from 32% to 22%.
Conversely, measures that target value and outcomes will become significantly more important influencers of purchasing decisions. "Data demonstrating clinical outcomes" was selected as a top purchasing decision factor by 51% of respondents today and by 62% in three years' time. Risk-sharing agreements jumped from 6% to 25% over the three-year period.
Taking advantage of healthcare's warming financial climate and a pronounced uptick in market capitalization, medtech companies in the 12 months ending June charted modest revenue growth while strengthening their cash positions and using M&A to deepen their product and service portfolios.
Key financial results highlighted in the report include:
- Revenue ticks up: Revenue for public medtech companies in the U.S. and Europe totaled $336.2 billion in 2013, a 4% increase from the prior year, yet still well below pre-crisis growth rates.
- IPOs soar: The industry experienced one of its strongest IPO windows in recent years during the 12-month period ending June. A total of 31 companies went public in the U.S. and Europe during this time, raising a total of $1.5 billion, a 600% increase from the previous time period.
- Financing remains strong: Medtechs raised $27.3 billion between July 2013 and June 2014, with 71% of the annual financing coming from debt transactions. While this is a 14% decrease from the prior year, it nevertheless represented the second-highest capital raise since 2008. U.S.-based companies raised the lion's share of the total financing, which equaled $22.2 billion. Venture investment held steady at $4.4 billion compared to $4.2 billion during the same period the prior year, thanks partly to increased investment from corporate VCs and strategic investors.
- Deal activity heats up: For the 12-month period ending June, the total value of M&A for U.S. and European medtechs jumped 135% to $85.6 billion. Excluding "megadeals," defined as transactions greater than $10 billion, M&A for this time period still increased 28% to $29.3 billion. Medtechs were most interested in acquisitions that increased their scope in a disease area or geography, especially emerging markets.
- Cash returned to shareholders: Medtech companies returned 57% of their net cash generated through their operations to shareholders, totaling $16.7 billion, a 7% increase over 2012.
Patrick Flochel, an EY European life sciences leader and global pharmaceutical sector leader, said, "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. 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."
Except as otherwise noted, medical technology (medtech) companies are defined for this report as companies that primarily design and manufacture medical technology equipment and supplies and are headquartered within the U.S. or Europe. Israel's data and analysis was placed within the European market, and any grouping of the U.S. and Europe has been referred to as "global."
The definition includes medical device, diagnostic, drug delivery and analytical/life science tool companies, but excludes distributors and service providers such as CRO or contract manufacturing organizations.
The survey, conducted in August, was taken by 162 respondents in total—71 in the U.S., 33 in each of the U.K. and Germany and 25 in Spain. Of those, 85 occupied clinical roles (chief of cardiology, department head, etc.) and 77 were in administrative or managerial roles (purchasing, supply chain, etc.).