Feature | October 10, 2014

Global medtech industry needs to better differentiate products or face commoditization

Survey shows that while revenues stayed up, physician influence on purchasing decisions is declining

October 10, 2014 — 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 EY’s annual medical technology report, Pulse of the industry: differentiating differently, released today. 

To understand how commoditization is playing out now and in the future, EY surveyed US and European health care buyers for the report in four major medtech markets: the US, the UK, 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 health care costs.   

Glen Giovannetti, EY's global life sciences leader, says: “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.   
  
A Changing Customer Base and Evolving Priorities

Respondents of the latest survey highlight overwhelmingly that price remains the top factor in medical technology purchasing decisions, with 77 percent 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 healthcare 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 percent 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 percent today to 27 percent in the future, while “User-friendly design” dropped from 32 percent to 22 percent.   
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 percent of respondents today and by 62 percent in three years' time. Risk-sharing agreements jumped from 6 percent to 25 percent over the three-year period. 

Financial Performance: Holding Steady 
 
Taking advantage of healthcare’s warming financial climate and a pronounced uptick in market capitalization, medtech companies in the twelve months ending June 2014 charted modest revenue growth while strengthening their cash positions and using mergers and acquisitions (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 percent 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 2014. 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 percent increase from the previous time period;
  • Financing remains strong: Medtechs raised $27.3 billion between July 2013 and June 2014, with 71 percent of the annual financing coming from debt transactions. While this is a 14 percent 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 2014, the total value of M&A for U.S. and European medtechs jumped 135 percent to $85.6 billion. Excluding “megadeals,” defined as transactions greater than $10 billion, M&A for this time period still increased 28 percent to $29.3 billion. Medtechs were most interested in acquisitions that increased their scope in a disease area or geography, especially emerging markets; and
  • Cash returned to shareholders: Medtech companies returned 57 percent of their net cash generated through their operations to shareholders, totaling $16.7 billion, a 7 percent increase over 2012.

Patrick Flochel, EY's European life sciences leader and global pharmaceutical sector leader, says: “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.”   

For more information: www.ey.com/GL/en/Industries/Life-Sciences

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