Karen Simpkins and Ricardo Vicente
Led by Germany, France, the UK and Italy, the mature medtech market of Western Europe represents more than a quarter of the global medical device market. Market growth drivers include a rising elderly population, epidemiology trends focused on chronic diseases and technology innovation.
Yet despite these opportunities, the economic troubles that continue to plague the eurozone will likely contribute to slow market growth in the region between 2014 and 2019, particularly in Southern Europe. In addition to a more challenging regulatory and operating environment, medical device manufacturers will face distinct threats in the form of cost-containment measures, pricing and reimbursement controls in the coming years. As such, medtech companies in Western Europe need to further consolidate, focus on core competencies and cut operating costs to increase opportunities and remain competitive in the shifting healthcare landscape.
Eurozone Weakness Will Impact Market Growth
The medical device market in Western Europe continues to be constrained by weakness in the eurozone, which is struggling to recover momentum. A substantial improvement in Western Europe’s GDP figures looks increasingly unlikely in the short term, with Business Monitor International (BMI) forecasting that eurozone GDP growth will average just 1.3% over the next five years compared with global economic growth of 3.2%. This financial uncertainty is negatively impacting the Western European medical device market as fiscal deficits ramp up the pressure to implement further cost-containment measures.
With a medical device market valued at US$88 billion in 2014, Western Europe continues to account for slightly more than a quarter of the global medical device market. However, market growth in Western Europe is undeniably the slowest of the world’s major regions, with the medical device market projected to grow at a 2014 to 2019 CAGR of 3.7%, according to BMI’s latest medical device market forecasts. This is only around half the global CAGR of 6.6%, meaning that the region’s share of the global market is forecast to drop to 22.6% over the next five years. Growth rates expressed in U.S. dollars in eurozone markets are forecast to dip in 2015 and 2016, owing to further depreciation of the euro against the U.S. dollar. A return to higher growth towards the end of the forecast period is expected, however.
Northern Europe Will Record Higher Medical Device Market Growth
Northern Europe, which accounted for 21.3% of the Western European market in 2014, is set to experience the highest growth during the next five years at a CAGR of 5.1%. The UK is expected to record the highest growth rate, followed by Norway, Finland, Denmark, Ireland and Sweden. Northern Europe only has two euro economies, which might partially explain the higher market growth in U.S. dollar terms, although the Swedish market is projected to see the lowest growth, attributed to a forecast depreciation of the krona against the U.S. dollar.
Central Europe, which represents the bulk of the Western European market—equal to 61.2% in 2014—is forecast to record the second-highest growth in the region during the next five years at a CAGR of 3.8%. Switzerland, the only non-euro economy, will see the highest growth, followed by Germany, Belgium, the Netherlands, France and Austria. Germany continues to be the fastest-growing eurozone market and, despite a deteriorating economic outlook, the German health sector continues to demonstrate its resilience with the statutory health insurance (SHI) system in surplus since 2010, in contrast to the ongoing deficits in the French healthcare system.
Southern Europe, which accounts for the remaining 17.5% of the Western European market, is expected to register the lowest growth over the next five years, with a CAGR of 1.7%. As a result, its share of the Western European market will decline slightly over the period. Portugal is expected to see the highest growth rate, followed by Italy and Spain. These three peripheral eurozone countries were hit particularly hard by the recession and forced to contend with austerity measures, further price controls and enhanced technology assessment implemented in the healthcare sector. Small and medium-sized medical device companies have been affected the most due to the debts owed to them by the national healthcare systems.
Demographics, Epidemiology and Technology Will Drive Market Growth
Sectors such as orthopaedics and prosthetics, patient aids and consumables—which together account for nearly a half of the Western European market—are forecast to see above-average growth. But even within the relatively dynamic market of orthopaedics and prosthetics, there has been a noticeable slowdown in growth rates in some areas caused by pricing pressures, lower product differentiation and safety concerns over implantable products. Within consumables, companies are moving into higher-value products.
The more capital-intensive diagnostic imaging sector, which represents nearly 20% of the Western European market, is forecast to see much lower growth. This is explained by the nature of the mature market, cost-containment measures leading to further rationalisation of resources, conversion to digital technology and the greater emphasis diagnostic imaging companies are placing on service revenues to supplement equipment revenues. Other sectors such as dental products will also have lower growth as market penetration is high.
A More Challenging Regulatory Environment Will Increase Costs
The operating environment for medical device companies is primed to become more challenging—but transparent—as a result of new legislation that will overhaul the EU medical device directives.
In response to increasing safety concerns, the legislative changes envisage stricter and more detailed monitoring and enforcement requirements for both Notified Bodies and national Competent Authorities. More stringent approval procedures with additional clinical evidence requirements for high-risk devices will also increase the regulatory burden on manufacturers. Longer and more costly approval procedures threaten to undermine the competitiveness of the European medical device industry, which comprises largely small and medium-sized companies.
The EU Parliamentary elections in May 2014 interrupted negotiations. But the legislative process is expected to gain momentum over the coming months, although the German industry association Spectaris does not expect the new law to go into effect prior to 2018. The industry may have been heartened by a recent statement from EU Commission President-Elect Jean-Claude Juncker that cautioned against hindering the ability of companies to innovate by overregulation. Nevertheless, companies are already facing a draft of regulatory measures to improve patient safety, including the new patient implant card, which will be mandatory in Germany by October 2015.
Manufacturers Will Need to Provide Better Value to Customers
Whilst Western Europe will continue to see steady demand for medical devices, healthcare providers will be forced to seek better value for their money, thereby creating a more challenging operating environment and further squeezing profit margins.
In response to these challenges, the industry is experiencing a period of consolidation to provide economy of scale to healthcare providers or pay lower corporate taxes. Recent mergers among major players include deals between Baxter and Gambro, Zimmer and Biomet, and Medtronic and Covidien. Other notable developments include Danaher’s acquisition of Nobel Biocare and Smith & Nephew’s acquisition of Arthocare.
Large multinationals are also seeking to improve their competitive edge by rationalising operations to focus on core strategic areas. In September 2014, for example, the Dutch electronics powerhouse Philips announced its plans to split into two companies, one of them focused on healthcare and technology. Likewise, Siemens recently divested two non-core businesses and is seeking to sell off its hearing aids business as part of its Vision 2020 strategy. GE Healthcare similarly sold its Swedish unit, Breas Medical AB, a manufacturer of respiratory equipment acquired in 2008.
In a move to further cut operating costs, multinationals are increasingly moving production of high-volume products to lower-cost manufacturing bases in Eastern Europe or the quickly expanding Asia-Pacific region. The consequence of this trend is that Western European markets are likely to become more reliant on imported products at a time when other countries such as China, Russia and Brazil are seeking to reduce their dependence on imports.
Germany: A Resilient Healthcare Sector Open To Innovation
The German medical device market is currently valued at US$26.8 billion, which is 30.5% of the Western European market and 7.9% of the world market. Despite an increasingly challenging operating environment, Germany remains one of the most attractive medical device markets in Western Europe—a testament to the underlying strength of the German economy and its commitment to maintaining high-quality healthcare service.
Whilst austerity measures in the healthcare sector have hit the pharmaceutical industry harder than the medical device industry, measures to restrict spending on hospital and ambulatory services are inevitably increasing pricing pressures, particularly as many public hospitals are continuing to operate at a loss. However, the announcement in April 2013 of additional financial support for hospitals from the federal government in the form of EUR1.1 billion during 2013 and 2014 has been a positive development, as is the support for medical technology and innovation, in general, expressed in the coalition agreement of the new federal government.
Germany has implemented a series of major healthcare reforms, including a new Healthcare Provision act that took effect in early 2012. The legislation seeks to achieve a more efficient use of resources by offering patients treatment as close to home as possible, thereby reducing the burden on hospitals. Further legislation was passed in June 2014 that seeks to ensure the long-term financial sustainability of the current statutory health insurance system and to safeguard its high quality through the creation of the Quality Institute.
The German medical technology industry has experienced steady growth in recent years due to an increasing reliance on exports. However, the industry is starting to see weaker revenue growth as profit margins on the domestic market continue to be hit by sustained downward pressure on prices, particularly from cooperative purchasing and tenders, whilst companies struggle to maintain their competitiveness in export markets. Medical device exports only grew by 1.0% in 2013, the lowest rate since 2009, which was instrumental in the industry achieving revenue growth of just 2.1% in 2013.
France: An Increasingly Demanding Market Environment Characterised By Cost Containment
The French medical device market is currently valued at US$15.0 billion, equal to 17.1% of the Western European market and 4.4% of the world market. Although France continues to rank among the top five largest medical device markets in the world, growth rates are modest by global standards.
The continuing drive to keep costs down coupled with the more restrictive measures being implemented to regulate medical device expenditure will continue to constrain spending on medical devices. Rationalisation of medical services is a key theme in France, where the volume of consultations, diagnostic procedures and prescriptions is relatively high. The government aims to increase efficiency in the healthcare system by reducing in-patient capacity, particularly in short-stay units, and by increasing the level of treatment provided on an ambulatory basis or at home.
The market environment for reimbursable devices is becoming increasingly demanding as a result of stricter criteria regarding eligibility for reimbursement and government initiatives to control spending levels in high-volume or high-growth areas. The number of products subject to maximum purchase prices above the official reimbursement tariff is steadily expanding.
In the hospital sector, medical device companies are also facing increasing pricing pressures in response to the rise of hospital purchasing groups, such as UniHA and Unicancer, and the government PHARE hospital responsible purchasing programme, phase three of which was launched in September 2013. Previous phases of the PHARE programme have identified potential savings of more than EUR2 billion to date, including EUR221 million for medical devices. Phase three will target purchasing in a number of hospital sectors, including implantable medical devices.
UK: One Of The Strongest Performing Markets in the Region
Currently valued at US$11.3 billion in 2014, the UK medical device market makes up 12.8% of the Western European market and 3.3% of the world market. The UK market continues to be one of the strongest performers in the region, with growth of around 6.8% per annum forecast to 2018.
This growth could be tempered slightly, however, if the Department of Health's efficiency programme is successfully implemented. The programme aims to radically change the pricing, supply chain and procurement of medical devices in the National Health Service (NHS) with the introduction of bar coding and a single price-comparison mechanism throughout the country amongst the initiatives on the cards. Among the latest developments is the NHS Procurement Atlas of Variation, an online tool launched in July 201 that is designed to show differences in the amount hospitals pay for everyday items, including catheters, gloves and needles.
The UK market is dominated by the NHS, which accounts for more than 80% of expenditure. The private sector remains small—if well equipped—and largely based in England. The reorganisation of the NHS under the Health & Social Care Act 2012 has already seen a structural shift; Primary Care Trusts have been abolished and replaced by Clinical Commissioning Groups, giving general practitioners a greater role in budgeting and, therefore, spending. In addition, NHS England was established in April 2013.
In turn, industry players will need to alter the way they do business with the NHS because of the different supply chains that emerge along with the focus on efficiency savings under initiatives such as the Quality, Innovation, Productivity and Prevention (QIPP) programme. Meanwhile, the National Institute for Health and Care Excellence (NICE) is set to play an increasingly important role in influencing the type and kind of medical devices and supplies that are bought by the NHS.
Italy: A Low Growth Market Constrained By Spending Caps and Payment Delays
The Italian medical device market ranks fourth in Western Europe and seventh in the world, and is currently valued at US$9.4 billion. Despite its sizeable local manufacturing industry, the market remains dependent on imported products in many sectors. Per capita medical device expenditure ranks 13th in Western Europe, for instance, ahead of only Spain and Portugal, and 18th in the world.
The public sector, which accounts for around 70% of the market, is notorious for the amount of red tape and payment delays with which manufacturers must content. Consequently, these barriers have threatened the sustainability of small medical device companies in the region. However, the adoption of the latest European Directive on delayed payments (Decree 192/2012) resulted in a reduction in the level of debt during 2013; medical device industry members of the Italian biomedical association Assobiomedica were owed US$4.9 billion in 2013.
As the public sector struggles to cope with rising costs, the Italian government has implemented a number of laws in recent years that will affect public health expenditure, including capping public medical device expenditure in 2014. Private hospitals, many of which are run by religious organisations, tend to be contracted to provide services within the National Health Service (SSN - Servizio Sanitario Nazionale), with only a small number exclusively relying on out-of-pocket payments. Both public and private hospitals are usually reimbursed according to Diagnosis Related Groups (DRG)-based tariffs set by the central government with different tariff levels, although some regions set their own tariffs.
Spain: Bleak Market Outlook Caused by Cost Containment and High Debts
Currently valued at US$5 billion, the Spanish medical device market ranks fifth in Western Europe and 12th in the world. In absolute terms, the market is only half the size of the UK, but is one-quarter larger than the Netherlands. Medical device imports represent more than three-quarters of the market; however, Spain has a relatively strong medical device manufacturing sector based around Madrid and Barcelona. Per capita medical device expenditure ranks outside the top 20 worldwide and is low by Western European standards, lagging behind Germany, France, the UK and Italy.
Most of the market is accountable to the public sector, which has been particularly affected by cost-containment measures by the Spanish National Health System (SNS) since the implementation of Royal Decree Law No. 16/2012. Although the market outlook is bleak and many companies have been affected by large SNS debts, valued at US$3.2 billion in 2013, the market size continues to be attractive for multinationals. Medium-sized local producers are concentrating efforts in export markets; exports reached US$1.9 billion in the 12 months prior to May 2014.
Switzerland: High Per Capita Medical Device Expenditure Driven by Technology
The Swiss medical device market is currently valued at US$3.2 billion, making it the sixth-largest market in Western Europe. The wealthy region is receptive to new technology, enabling the Swiss population to have the highest medical device expenditure per capita in the world. Although the propensity for new technology remains, companies are required to demonstrate to health insurance companies that new products offer a major clinical benefit before products will be reimbursed.
During the last 15 years, the Swiss medical technology sector has grown faster than almost any other sector in the country. Government-backed technology development programmes, favourable tax rates, quality staff and innovative research have all contributed the growth.
According to industry association FASMED, the medical device sector employs more than 50,000 people in Switzerland, and more than 500 people are directly involved in commercial enterprises. Commercial enterprises generate estimated sales of more than CHF6 billion annually, up to 17% of which is reinvested in R&D. Key expertise lies in the areas of orthopaedics, prosthetics and dental equipment.
Although not a member of the EU, medical device regulations were officially aligned with European law in March 2010 and the proposed revision of the medical device directive could adversely affect the domestic industry, which is highly innovative. In 2013, 44% of the product portfolios of Swiss medical technology companies were less than five years old, compared with 59% in 2012.
Western Europe continues to account for a sizeable portion of the global medical device market. Growth will be spurred by underlying demographic and epidemiological trends in addition to technological innovation. Continuing weakness in the eurozone will impact market growth, however, and pave the way for the UK, Norway and Switzerland to experience the most significant growth in the region. Companies within the region face an increasingly challenging market environment due to cost-containment pressures, pricing and reimbursement controls and tighter regulation. These factors are driving consolidation and rationalisation within the medtech industry as companies seek to achieve economies of scale whilst focusing on core strategic areas to maximise returns within the new healthcare paradigm.
Karen Simpkins is a Medical Devices Markets Analyst at Business Monitor International (BMI). Ricardo Vicente is Head of Medical Devices Markets, Business Monitor International