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The Medical Device Industry

By December 15, 2014Commentary

We often tend to focus on the health service aspect of the very large health care industry, but drugs, devices and equipment make up the significant “product” side of health care.  These are typically high-margin businesses, but they have faced their share of changes and challenges in recent years.  An Ernst & Young report looks at the current status of the medical device market.  (EY Report)  The extensive report both review current performance of the industry and highlights challenges and trends which it must confront.  In terms of performance, for public companies in the US and Europe revenue grew 4% in 2013 compared to 2012, while adjusted net income fell by 2.6%.  R & D investment rose 7% and headcount 5%.  The fastest growing categories by revenue were gastrointestinal, hematology/renal and women’s health.  Cash balances generally increased, which provides support for future product development efforts and M & A activity.  And more cash is being returned to shareholders in the form of dividends and stock buybacks.  From July 2013 to June 2014, medical device companies raised over $27 billion in capital, two-thirds of which was debt.  This total was down from over $31 billion in the earlier 12 month period, and medical device’s share of venture capital funding continues to decline, largely due to perceived regulatory and reimbursement headwinds.  Merger and acquisition activity was very strong in this 12 month period, at over $85 billion in announced deal value and over 160 transactions.

The challenges for the industry include ongoing regulatory reform that has lengthened product approval times and development costs; as well as continuing reimbursement difficulties as payers demand more cost-effective medicine and proof of value in the form of improved health outcomes.  E & Y adds a new challenge this year–commodization of products, which occurs when customers and payers can’t see a meaningful difference between offerings and therefore buy largely on the basis of price.  E & Y conducted a survey of buyers in the US, the UK, Germany and Spain and learned that value-based purchasing demands on these buyers mean that they in turn expect more from medical device vendors.  Physicians are expected to become less influential in purchasing decisions while hospital administrators and third-party payers have more say in what gets bought.  The highest concern of buyers for differentiating products was their ability to reduce the total cost of care, while they also want to see new products that represent a significant improvement over current standards of care, not just a me-too capability.  The report outlines several ways medical device companies could respond to the increased importance of product differentiation.  New types of relationships in which manufacturers collaborate with providers and payers to create better outcomes, and to share risk for achieving those outcomes, are likely to proliferate.  This is an outstanding report which gives real insight into the medical device world.

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