With US$131b in "lost" revenues and diminished venture capital, medtech companies need to invest scarce resources creatively in new services

A move to value-based health care, tougher regulations and a lack of resources are challenging medtech companies to be more creative when developing new products and services, and to experiment with new business models. New innovative strategies are now essential if medtech companies are to survive and grow, according to the findings outlined in Pulse of the industry: medical technology report 2013, EY's annual report on the industry's performance, released today at AdvaMed 2013.

Glen Giovannetti, EY's Global Life Sciences Leader comments: "Innovative technology is no longer enough to secure reimbursement; it has to be linked with demonstrable, cost-efficient improvements in health outcomes."

"The good news is that medtech companies are experimenting as never before with new approaches to create and deliver value in creative ways."

Medtech "Lost" Revenues of US$131 Billion in Four Years
EY highlights that payer and regulatory uncertainty have slowed revenue growth, leading to "lost" revenues of an estimated US$131 billion for medtech commercial leaders between 2008 and 2012. Meanwhile, funding for emerging companies has declined — particularly for early-stage ventures.

Industry performance highlights in 2012:

  • Revenue growth remains slow: Revenue for public medtech companies in the US and Europe totaled US$339.6b in 2012, a 2% increase and well below pre-crisis growth rates.
  • Venture financing drops: Venture capital was down 21% in the period ending 30 June 2013 to US$3.5b, the lowest level in more than a decade. Innovation capital — the funds available for the vast majority of pre-commercial companies — declined by 11% to the lowest level in at least seven years.
  • Financing: Capital raised remained relatively steady at US$29.5b, but most of the funding went to a few large companies. Debt represents the vast majority of total funding, with debt offerings by a handful of commercial leaders contributing 82% of the industry's total financing. The majority of new debt issuances were used to refinance existing debt.
  • Deal making holds steady. The value of mergers and acquisitions involving US and European medtech companies increased 23% to US$47b. However, after adjusting for a US$15.8b mega-deal, the value of M&A in 2012 fell 19% to US$31.2b.

Building New Business Models
Continues Glen: "The move to value-based health care is making patients and payers more influential, and medtech companies now find that their business models need to take these new customers into account. However, the need to invest heavily in business model innovation comes at precisely the time when companies' resources are increasingly constrained."

Companies are beginning to experiment with business models that reflect the needs of new customers in three ways: 

  1. Beyond the product: Services and solutions to improve outcomes or lower costs (e.g., a 15-year agreement to provide a US academic medical center with consulting services as well as technology).
  2. Beyond treatment: Prevention, remote monitoring, to more efficiently improve outcomes (e.g., a major device company's US$200 million acquisition last month of a telehealth firm focused on remote chronic disease management.) 
  3. Beyond the hospital: Enabling patients to manage their conditions at home, without frequent and costly clinical interventions (e.g., a leading medtech company's new program to treat sleep disorders through education and encouragement.)

Building New Capabilities
To succeed at business model innovation, companies will need to build new capabilities, including:

  • Focusing on capital efficiency to use scarce resources wisely.
  • Initiating ecosystem-wide scanning to better understand a changing health care environment.
  • Fostering collaborative cultures to tap the strengths of diverse players.
  • Becoming open data enterprises to pool data and develop insights.
  • Adopting disease/value pathways to identify and fix "value leakages."
  • Using scalable processes with appropriate metrics for robust business model innovation.

Patrick Flochel, EY's Global Pharmaceutical Sector Leader concludes: "The medtech industry faces significant challenges, but for companies that can deliver differentiated health outcomes in cost-efficient ways, there are strong opportunities for growth.

Clearly, firms need new capabilities, but they can also redeploy existing strengths which will be very useful in the new health care environment: customer-centric design, the ability to identify and fill gaps for customers, and medtech's core strength in engineering new solutions for complex challenges. In doing so, they will do much to restore the trust of customers and investors, which will make business model innovation easier in future."