State of the Medical Device Industry

Ernst & Young has issued an excellent report on the worldwide medical device industry.   (EY Report) This industry has historically flourished in the United States and has generated substantial shareholder returns, many well-paying, high quality jobs and innovations that benefit patients.  Its products, however, tend to be relatively expensive and have added much to cost, which has increased scrutiny of their value.  The industry faces regulatory, reimbursement and capital-raising challenges.

The medical device industry has built itself around continual innovation which delivered new products that could demand a premium price.  This model may be in jeopardy, in large part because the funding that new companies need for product development has become harder to find, and at the same time, the cost of development has gone up, both because of enhanced regulatory requirements and because of payers wanting to see evidence of health and cost outcomes.  Reimbursement and regulatory uncertainty has made liquidity exits for investors more unclear as well, which raises their return demands on the front end.

Comparative effectiveness research may create further hurdles for medical device companies, slowing market adoption and potentially creating winners and losers.  Hospitals purchase much of the medical device output and will increasingly look to negotiate lower prices and may take control of device selection away from physicians utilizing the hospital’s inpatient and outpatient facilities.  On the positive side, there are basic scientific developments occurring which will ultimately feed the pipeline for new devices.  While the industry does have challenges, it likely will continue to have significant opportunities to positively affect patient care and therefore to earn good returns for investors.