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The Old Medtech Business Model Is Unsustainable. Now What?

Since 2007 to present, much of the world has faced financial turmoil. At the same time, medical costs throughout much of the world have continued to soar. The med device space, which several years ago, was often referred to as "recession proof," has proven to be anything but. In 2012 alone, the industry has been hit with waves of layoffs and, in the last few years, the sector has seen dwindling venture capital investment.

Over a person's lifetime, Medicare benefits paid out by the system greatly exceed the money paid into it, according to a study by the Urban Institute.  

In the United States, the uncertainty around healthcare reform has been a sizable concern. But the underlying fact remains: the business model behind most medical device products is not nearly as attractive as it was even a decade ago, when venture investments in the broader lifesciences sector outperformed the tech industry.

It's no surprise then that cost pressures are growing. "We hear every day that we can't afford what we are doing [in healthcare]," said AliveCor founder David Albert, MD to an audience of cardiovascular device industry professionals at the inaugral MedTech Cardio conference. "There may be no agreement on how we deal with it, save that we are going to spend less."

In the future, however, it is practically certain that there will be more emphasis placed on personal responsibility in healthcare--personally and financially. Money will be the driver of this trend while technology enables it.

In particular, mobile technology will be a key driver of this trend. "Absolutely there is hype [surrounding the mobile health (mHealth) field] but hype usually precedes real change," Albert said, pointing to the recent spate of articles on the subject and conferences dedicated to the mHealth field.

In many ways, this trend is already underway. Consider how common it has become for patients to read up on health-related topics using sites like Wikipedia. "The fact is that people are getting more engaged. Cardiovascular technology is not going to be immune to that. So sit back and figure out how crowd-sourced product vigilance-hundreds of millions of people around the world will impact our monitoring of devices."

What happens when Quantified Self adherents become patients? "I mean, these people monitor their bowel movements. They monitor their sleep. They monitor everything," Albert said. "And they believe that n=1 is science. But they are the beginning of a movement."

So who is responsible for the consumer-driven revolution in healthcare? Albert asked. "[Steve Jobs] is is the guy you need to blame," he joked. "As he said: the iPhone changed everything. And the most conservative views I've seen are that by 2020, there won't be dumb phones. Every phone will be a smart phone," he said. "These are cloud-connected programmable 1990s supercomputers."

The debut of the iPhone, and the generations of ever-more-powerful mobile devices following it, have changed consumers' expectations--for consumer and healthcare technology. 

To offer a sense of scale, Albert explained that Apple Computer could buy every cardiovascular medtech company with the cash they have in the bank," he said. "They made $8 billion profit in a disappointing quarter."

Mobile device functionality will only continue to increase in years to come. "The number of sensors in smartphones will go up dramatically in the next five years," Albert said. "Maybe, [one day, smartphones] will listen to our coronary arteries. Maybe as Eric Topol talks about, these will be ultrasound machines. Maybe patients at home will do their own scans," he added. "That is not science fiction. That is just slightly beyond where we are today. That is really engaging the consumer."

As payors pressure consumers to become more responsible for their healthcare, the medical device industry's margins will shrink. In many areas, they are already shrinking. Look at the cardiac stent space, for instance.

Mobile cardiac telemetry is another example where this is already happened. Consider that CardioNet had a $47-million IPO in 2007. In the following year, the company's stock went up to higher than $30 per share. In November 2012, the stock is worth about $2.

Similar companies such as LifeWatch and eCardio have seen similar drops in their valuation.

The broader trend of thinning margins is leading investors, as well as industry insiders, to question the basic business models of the cardiovascular device space--and the life science industry at large.  The old notion of losing money on every study and making it up with volume has become an unsustainable business model.

What are cardiovascular device and other medtech companies to do? Consider consumer business models. "The free my data [movement in healthcare] does not mean make my data free," Albert said. "Many of today's mHealth solutions require subscriptions."

"Consumerization will grow markets. Margins are going to go down. The only thing you can [reply on is]: margin times number equals revenue and profit," Albert said. "My notion is: we must expand our markets. And we must discover new applications."

"Consumerization is early but it is coming to cardiovascular healthcare. Technologies like smart phones, cloud computing, are enablers but the changing economics and increased personal responsibility are the drivers of this," Albert said. People like Hugo Campos, Eric Topol, Leslie Saxon, and the Quantified Self movement are the vanguard," he added. "Change creates opportunity. I admonish those attending and the companies they work for to embrace it."

Brian Buntz is the editor-at-large at UBM Canon's medical group. Follow him on Twitter at @brian_buntz.

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