Determining the Size of a Medical Device Market

Medical Device & Diagnostic Industry Magazine
MDDI Article Index

An MD&DI  December 1997 Column

A vice president at the health-care investment banking firm BT Alex. Brown (Boston) and a member of MD&DI’s readers board, explains how to calculate market size for a new medical device.

Some colleagues and I have developed an idea for a medical device company. How do we determine the size of a market for a particular device?

This is a key question for a start-up company because it helps determine the feasibility of product development. If the target market is too small, the effort may not be worthwhile. Market size also affects how easy it will be to raise capital as well as the eventual disposition of the company as public or private. A large market can support a public company, whereas smaller markets may not. Many small markets can still support a healthy private company, which could be an attractive acquisition target.

Preexisting Markets. Published market indicators already exist for a variety of devices, such as pacemakers, balloon catheters, and monitoring equipment. U.S. market data on these and other products are available from IMS Global Services and consulting firms such as Frost & Sullivan (see sidebar). Other sources include equity research reports published by investment banking firms, information from trade associations such as the Health Industry Manufacturers Association, and even annual reports from companies within the industry.

Information on international market size is a bit more difficult to obtain. Many products are sold through local distributors, and many international markets are small and fragmented. The rule of thumb has been to assume international markets for a device, in aggregate, are equal in size to that of the U.S. market. This could be a conservative estimate because the international market for medical technology is growing as Asia and Latin America invest heavily in health care.

When evaluating an international market, one should also consider cultural and pricing variations among countries. For example, Japan may have a cultural bias against transplants, but reimbursement for medical devices in Japan can be several times higher than that provided in the United States.

Potential Markets. For a device still in the conceptual stages, one can estimate unit demand and then multiply by the expected unit price to obtain a potential dollar market size. To estimate market size for capital equipment, use the number of facilities as a starting point and then estimate the number of equipment placements per site.

If the device will be used with a specific surgical procedure, the number of procedures carried out annually, multiplied by the number of devices per procedure, can be used for an initial estimate of demand. Procedure statistics can be obtained from professional organizations or published resources such as the Universal Healthcare Almanac. In addition, patient populations are frequently tracked by fund-raising organizations, such as the American Heart Association and the American Diabetes Association. Almost every disease has an advocacy group that can provide statistical data on affected populations.

Imagine developing a new electrophysiology ablation catheter device for treating the debilitating condition of atrial fibrillation. The number of patients affected by atrial fibrillation can be obtained from sources such as the American Heart Association. About 2 million people are affected by this condition, and 140,000 new diagnoses are made each year in the United States alone. If two of the new catheter devices are used in each treatment, there is a potential preexisting market of 4 million devices and an ongoing market for 280,000 new catheters each year. Assuming a unit price of $500 each, this device could represent a $2 billion market opportunity in the United States today. The market outside the United States could be equally as large. This is clearly a significant business opportunity, and a number of companies are actively pursuing it.

Market assessment projects such as this are ideal part-time assignments for MBA students. Many such students have prior consulting or industry experience, so one can often draw upon a strong pool of skills for a relatively low cost—and, perhaps, also discover a few talented new employees.

MARKET STUDY PUBLISHERS

Financial Times
14 E. 60th St., Ste. 1206, Penthouse
New York, NY 10022
212/888-3469

FIND/SVP
625 Avenue of the Americas, Dept. FNF
New York, NY 10011
800/346-3787

The Freedonia Group, Inc.
3570 Warrensville Center Rd., Ste. 201
Cleveland, OH 44122-5226
216/921-6800

Frost & Sullivan
2525 Charleston Rd.
Mountain View, CA 94043
415/961-9000

IMS Global Services
660 W. Germantown Pike
Plymouth Meeting, PA 19462
610/834-5000

Medical Data International, Inc.
2 Park Plaza, Ste. 1200
Irvine, CA 92614
800/826-5759

Theta Reports
1775 Broadway, Ste. 511
New York, NY 10019
212/262-8230

"Help Desk" solicits questions about the design, manufacture, regulation, and sale of medical products and refers them to appropriate experts in the field. A list of topics previously covered can be found in our Help Desk Archives. Send questions to Help Desk, MD&DI, 11444 W. Olympic Blvd., Ste. 900, Los Angeles, CA 90064, fax 310/445-4299, e-mail [email protected]. You can also use our on-line query form.

Although every effort is made to ensure the accuracy of this column, neither the experts nor the editors can guarantee the accuracy of the solutions offered. They also cannot ensure that the proposed answers will work in every situation.

Readers are also encouraged to send comments on the published questions and answers.

Copyright ©1997 Medical Device & Diagnostic Industry