New Insights On Med Device Market Consolidation

By Doug Roe, Chief Editor

Considering the increasing cost pressures on med device manufacturers and the changing purchasing model at healthcare providers, is consolidation the right choice for you?

In a recent report from McKinsey & Company, the M&A landscape was evaluated with respect to total return to shareholders. The findings were surprising: In almost 400 medical device transactions over the last 15 years, only a small portion of acquisitions have led to improved bottom-line performance in the two to five years following the acquisition. To explain this phenomenon, the report cited the lack of redundancies (employee and infrastructure) in the merging companies. Many of these deals moved the acquiring company into new markets where it had few adjacencies or synergies to its core business. Without these overlaps, it is difficult to improve organization-wide efficiencies and to reduce costs.

Why should you care? If your company is considering M&A as a solution to the med device market pressures, you need to understand the challenges ahead. I sat down recently with Steve Cottrell, the new president of Maetrics Life Sciences Consulting, to discuss his thoughts on the issue.

Prior to taking the helm at Maetrics — which supports pharmaceutical, bio-pharmaceutical, and medical device firms with enterprise compliance, performance improvement, risk management, information technology, and organizational change management initiatives — Mr. Cottrell served as the company's VP and GM of U.S. sales. Additionally, he has experience as global VP of business development for both DOCS and i3 Research. 

Med Device Online (MDO): What do you think is the biggest challenge facing medical device manufacturers today?

Steve Cottrell: Well, as I am sure you are seeing, it is market consolidation/M&A. When you look at the acquisition dollar values historically, the Medtronic and Covidien deal trumps them all by significant factors. I think the current conditions are both a challenge and an opportunity. They are forcing organizations to try to compete in a different way. The market pressures on all med device firms are pressing them to deal with how to improve their bottom lines and how to do more with less.

MDO: What are the key factors driving market consolidation?

Cottrell: I think you have to look at the changing compensation model. It is all about reimbursement. These economic factors are forcing companies to reevaluate how they compete in the marketplace and negotiate with payers and hospital chains.  You also have to figure out how to manage that reimbursement in an effective way. All of the provider networks are asking for products at a lower cost, so they can continue to deliver quality service to their patients in an environment where, especially in the U.S., the reimbursement isn’t going up.

MDO: If you were a device maker, how would you react to these pressures?  Would you target improving efficiencies, reducing cost, making acquisitions, or something else?

Cottrell: I think it has to be a blend of all of the above. You can’t just focus on one area. You have to be balanced in your approach. You have to look at whether or not it makes sense to be proactive in certain areas. One way to react would be to make tuck-in or bolt-on acquisitions in order to enhance the quality of your product line, or to round out an improved outcome to your existing product line. The addition or combination of a certain technology or an IT enhancement, in combination with your current hardware structure, also can allow you to achieve a better outcome.

MDO: Could these cost pressures driving consolidation stifle innovation?

Cottrell: Yes, but again, the industry still needs innovation. You saw what happened in the pharmaceutical market where, all of a sudden, the pharma companies decided to just generate the next me-too product. Now, you can’t do it. The FDA is saying they are not going to approve the fifteenth product in a specific therapy. The med device industry is not going to be able to do that. You have to show innovation on a new or improved solution, and you will be rewarded. Innovation always is going to be the engine, and I don’t think it will be reduced as much as some are suggesting.

MDO: What are OEMs struggling with, related to M&A?

Cottrell: First, they need to focus on systems integration, integrating not only the vast networks they have in each company’s discipline, but also managing the additional network of suppliers. That puts a significant amount of pressure on the various departments. The groups we work with are in the areas of quality compliance, risk management, and supply chain. They all are looking for ways they can manage to a high-quality outcome in a new environment where they were just getting comfortable with their own systems. Now, they have 10 or 15 new international sites. They have to manage all that while making sure they still can deliver a high-quality product at a reasonable cost. At the same time, they must adhere to every policy of all of the various government and regulatory bodies. It is a difficult challenge.

MDO: There has been some movement in global regulatory harmonization, but how do the complexities and differences in international regulations add to the challenge?

Cottrell: The European Union (EU) just came out with revised guidelines associated with med devices. With the changing regulatory environment in Europe and some of the emerging markets, I think a lot of countries are just now starting to wonder if they should follow all or some of the established regulations, or if they are going to require something customized or additional in their region. They each have unique dynamics. An example would be counterfeiting. There are a variety of challenges in those markets, whether in South Africa or certain portions of Asia. Without going into each individual country, I think the overall regulatory challenges will continue to increase. I think these are real expense considerations that must be addressed before choosing to enter a market through acquisition.

MDO: What else should companies be thinking about if they are considering M&A?

Cottrell: If I am on the acquiring side, I’m ensuring that I have a clear understanding of what I am getting into and performing the proper due diligence. Adopt a quality-and-risk assessment perspective, not only in the physical plants, but also with the personnel, processes, and procedures. Don’t forget the supplier networks. This area is a significant focus for the FDA and other regulatory bodies. You have to make sure you understand what you are inheriting. Many companies are incurring millions of dollars in expense to remediate issues with acquired assets.

Additionally, it all has to come back to reimbursement. What is going to be covered? What is not? You have to be ready if you are going to bring a product to market. The reimbursement strategy has to be addressed up front. You need to take a proactive approach to ensure the product will provide a demonstrable positive outcome and a return on investment. Then, weigh that in your acquisition strategy and determine whether or not it still makes sense.      

MDO: What does the future hold for consolidation related to med devices?

Cottrell: Frankly, I believe med device appears to be just a bit behind other industries, partially because its regulated environment has lagged behind other industries. As you saw in the commercial and consumer industries, cost pressures drive change. That change will come from the acquisition or the internal development of new technology and solutions.

Still, I think the med device arena is catching up. Some of its advancements may trounce historical trends and create dramatic jumps in technology. The use of 3D printing, new polymers and chemicals, and the partnering of devices along with pharma will lead the way.  How will these advancements affect actual consolidation and how people align? That, I think, is to be determined. It doesn’t seem as though the acquisition strategy is going to lighten up any time soon.