- Physicians are becoming less important influencers of purchasing decisions for medical technology
- Revenues of public medtech companies in the US and Europe totaled US$336.2b in the year ending June 2014
- Total value of M&A for US and European medtechs jumped 125% to US$85.6b during the same period
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 recently.
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% 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.
Financial performance: holding steady
Taking advantage of health care’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 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 US and Europe totaled US$336.2b 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 2014. A total of 31 companies went public in the US and Europe during this time, raising a total of US$1.5b, a 600% increase from the previous time period.
- Financing remains strong: Medtechs raised US$27.3b 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. US-based companies raised the lion's share of the total financing, which equaled US$22.2b. Venture investment held steady at US$4.4b compared to US$4.2b 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 mergers and acquisitions (M&A) for US and European medtechs jumped 135% to US$85.6b. Excluding “megadeals,” defined as transactions greater than US$10b, M&A for this time period still increased 28% to US$29.3b. 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 US$16.7b, a 7% 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.”
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About the report and survey
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 United States or Europe. For the purposes of this report, we have placed Israel’s data and analysis within the European market, and any grouping of the US and Europe has been referred to as “global.” This wide-ranging definition includes medical device, diagnostic, drug delivery and analytical/life science tool companies, but excludes distributors and service providers such as contract research organizations or contract manufacturing organizations. All publicly traded medtech companies were classified as belonging to one of five broad product groups: Imaging, Non-imaging diagnostics, Research and other equipment, Therapeutic devices and, Other.
The survey, conducted in August 2014, was taken by 162 respondents in total — 71 in the US, 33 in each of the UK 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.).
How EY’s Global Life Sciences Center can help your business
Life sciences companies — from emerging startups to multinational enterprises — face new challenges in a rapidly changing health care ecosystem. Payers and regulators are increasing scrutiny and accelerating the transition to value and outcomes. Big data and patient-empowering technologies are driving new approaches and enabling transparency and consumerism. Players from other sectors are entering health care, making collaborations increasingly complex.
These trends challenge every aspect of the life sciences business model, from R&D to marketing. Our Global Life Sciences Center brings together a worldwide network — more than 7,000 sector-focused assurance, tax, transaction and advisory professionals — to anticipate trends, identify implications and develop points of view on responding to critical issues. We can help you navigate your way forward and achieve success in the new ecosystem. For more information, visit http://www.ey.com/GL/en/Industries/Life-Sciences.