By Jim Welch and John Babitt, EY
From global inflation and geopolitical unrest to supply chain disruptions, medtech organizations today face a myriad of external pressures. Additionally, new therapeutics like GLP-1s have emerged as an overhang on the medtech sector. However, the rise of generative artificial intelligence (gen AI) presents a new opportunity for medtech leaders to rapidly assess and integrate emerging technologies into new product offerings.
But from our vantage point, the industry’s legacy of innovation and adaptability leaves it well positioned to not only navigate these challenges but to thrive amidst uncertainty. In this article, we will summarize our perspectives on the future of medtech, including digitalization across the value chain, focusing on gen AI, improving supply chains and other business models, and unpacking the geopolitical puzzle to improve operations. Our thinking is informed by recent panels and conversations at AdvaMed — The Medtech Conference, with medtech leaders across the industry, and by our most recent analysis of the sector’s current state.
The convergence of technological advances and the demand for personalized care paves the way for the intelligent health ecosystem (IHE) — a new vision for the future of healthcare.
Medtech Performance In The Past Year
Despite the shifting landscape, the performance of medtech has mostly returned to pre-pandemic levels, marking a year of reset and key considerations to explore.
As detailed in the report, medtech experienced a slowdown in 2022 to reach its lowest revenue growth level since 2015. Total revenue reached $573 billion, as growth fell from a post-pandemic high of 16% in 2021 to just 3.5% in 2022. Consequently, public valuations fell in parallel with top-line growth. Stock prices for medtech, as with broader indexes, peaked toward the end of 2021. But by midyear 2022, roughly half of the medtech stock price gains made during the pandemic had been wiped out and remained flat through midyear 2023.
However, in 2022, medtechs rewarded their investors with $27.8 billion in dividends and buybacks and continued to grow investments in R&D consistent with previous years. M&A expenditure, on the other hand, fell 44%, a steep decline in inorganic growth investment.
4 Key Trends To Consider
1. Smart Connectivity
The IHE of tomorrow will take healthcare beyond being digitalized to become a true smart system. The challenge that healthcare faces is not a lack of data, it’s that the health industry needs to design a comprehensive ecosystem that can connect data to clinicians and patients to enable a more personalized, comprehensive, and real-time detection, prediction, and intervention system.
Our report details how, for example, in the future state “… a smart inhaler would become an integrated component in an IHE that would also bring together sensors that track both environmental and personal data to monitor respiratory risk to the patient and trigger timely action. Ultimately, in a closed loop system, this action may be delivered without need for manual intervention from the patient, with implanted bioelectronic sensors that detect signals of inflammation and disarming neurological triggers.”
COVID-19 and the regulatory response drove new telehealth access. With the pandemic crisis largely in the rearview mirror, the direction medtechs need to take is a continued adaptation to the changes in the care channels, not return to legacy ones.
Shifts to hybrid care, a combination of in-person and virtual care, are still occurring and further progress will require reassessments and redesign of workplace roles, payment incentives, and thought around how digital command centers will allow clinicians to monitor data and coordinate care at home.
If the roadblocks can be overcome, hybrid care could improve costs and patient outcomes while opening hospital beds and staff. Evolving care models, approaching design with the consumer and clinicians in mind, and partnering with a variety of stakeholders, such as health organizations, retailers, governments, community organizations, and even ambulatory surgical centers (ASCs), will enable increased scale and more outpatient settings.
3. Home Diagnostics
According to our report another major area of DTC focus is the home diagnostics market, which gained significant traction during the pandemic. Large medtechs, including Abbott, Becton Dickinson, Labcorp, and Siemens Healthineers, are all active in the in-home diagnostics space, with offerings ranging from COVID-19, flu, and RSV diagnostics to cancer, fertility, and diabetes testing. Moreover, Quest Diagnostics has stated that DTC testing will become a $2 billion breakout business by 2025, helping medtechs move closer to patients and away from the constrictions of traditional care delivery models.
Medtechs, like companies in every industry, have found themselves at a crossroads between the possibilities and the repercussions of various large language models (LLMs).
For medtechs, AI should positively impact the operational burden of content creation, such as clinical documentation, paperwork, and clinician-patient interaction notes that would clear the path for more value-added interactions between clinicians and patients. Another area of AI adoption is in commercial operations, where direct-to-patient communication can be tailored more easily. With hospitals experiencing staffing shortfalls and burnout, the benefits could be extraordinary.
In addition to operational efficiencies, AI will be useful in the hospital to generate clinical reports, treatment plans, and guidance or advice to patients, in the form of a more complex and sophisticated digital triage, providing diagnostic and analytical functionality. With this application of AI, the associated risks are higher, and organizations must develop policies and procedures related to governance, risk, and legal ramifications.
Theoretically, AI can develop novel medical device designs, such as Medtronic’s Medicrea spinal implants. From our perspective, given specified inputs, a 3D generative AI model also could create a range of possible design prototypes, perhaps including personalization in accordance with the specific inputs the model receives.
Above all, medtechs should understand that AI is not a stand-alone solution to business challenges but is instead a contributor to the increased effectiveness of other digital offerings, better software for medical devices, and creating training data sets and other machine learning models. Medtechs that can integrate rapidly new technologies will be well positioned for the longer term.
2 Focus Areas For Strategic Action
1. Supply Chain
For medtechs, supply chain improvement is vital. Increasing operational efficiencies and freeing up working capital by utilizing digital technologies and data-driven insights will be key.
During the pandemic, demand surged for certain products and plummeted for others, quickly exposing supply chain shortfalls. Now, the industry faces a new set of operational concerns like rising inflation and interest rates, equipment transportation challenges, fluctuating energy expenses due to geopolitical concern, and increasing costs of labor, raw materials, and semiconductors.
For medtechs, negotiating these and other emerging operational challenges will mean investing strategically in greater supply chain resilience, defined by five criteria detailed in the report: reliability, time to innovate, agility, risk exposure, and efficiency, culminating in reducing cost in the system.
While there is no ready-made solution to improve resilience, the industry is already seeing approaches emerge around proactive supply chain planning and better manufacturing and distribution definitions, as well as improved integration and collaboration among all stakeholders.
2. Market Access: Spotlight On China
China's aging population, increased affluence, and improved healthcare access present a significant market for health companies. With its rapid growth, it is the second-largest market for medical devices after the U.S. However, accessing this market requires tailored strategies due to the unique regulatory environment, prompting manufacturers to be present in China to tap into its 1 billion consumers.
Understanding the complex regulatory system and the driving force behind it is crucial for accessing the Chinese market. China's economic plans, like Made in China 2025, prioritize domestic ability in technology, including medtech. To achieve leadership in areas like robotics and artificial intelligence, the state has implemented regulations influencing those markets. China's State Council has adopted plans to promote high-quality development of locally manufactured pharmaceuticals and medical equipment.
Volume-based procurement (VBP) aims to lower medical costs by awarding large-volume contracts to the company with the lowest price. This approach has reduced drug prices significantly through multiple rounds of national VBP (NVBP). Medical device companies could face market exclusion without access to hospital channels. The NVBP list now includes devices like coronary stents, hip and knee implants, surgical staplers, and intraocular lenses.
In addition, China has expanded its National Encouraged List to attract foreign investment in certain medical device products, including AI-enabled equipment and wearable health devices.
By understanding the regulatory landscape and adapting to market conditions, companies can successfully compete in China's evolving healthcare industry.
About The Authors:
Jim Welch is the EY global medtech leader, working directly with EY teams serving medtech clients in the areas of strategy, growth, operations, technology, risk, transactions, and compliance. He also has led the demand side of EY, serving healthcare providers, payers, pharmaceutical manufacturers, and clinical research organizations. He also co-authors the annual Medtech Pulse of the Industry report and hosts our CEO panel at The MedTech Conference, hosted by AdvaMed, each year. He has a Bachelor of Science from Miami University, Oxford, OH.
John Babitt is a partner at EY with over 30 years of experience, all in the life sciences, medtech, and healthcare industries. He advises clients on various projects, including M&A, supply chain, IT, financial/accounting, and tax considerations and frequently speaks at Medtech Strategist, AdvaMed/The Medtech Conference, and BIO. He holds an MBA from the University of Miami.
The views expressed by the authors are not necessarily those of Ernst & Young LLP or other members of the global EY organization.