Karen Simpkins and Ricardo Vicente
The medical device market in Western Europe will remain constrained by weakness in the eurozone, which is struggling to recover momentum, therefore non eurozone markets will record higher 2014-2019 CAGRs, led by the UK. Western European markets will remain highly import dependent, in spite of increasing exports, but will lose market share in global trade, reflecting a shift in manufacturing to lower cost production bases in Eastern Europe and Asia.
Western European Markets Will Contract In 2015 Due To Strong Dollar
We do not anticipate any substantial GDP improvement in Western Europe in the short term. Real GDP growth in eurozone markets will average 1.6% between 2015 and 2019, while growth in non eurozone markets will be slightly higher at 1.8%, which will compare poorly with global economic growth of 3.1%. As a result, cost containment will remain high on the agenda in all Western European markets, with efficiency measures offsetting underlying growth drivers such as the ageing population, the rising incidence of chronic disease, the need to replace medical equipment and investment in new medical technologies.
We forecast that the Western European medical device market will record a 2014-2019 CAGR of 2.7% in US dollar terms, reaching USD101.3bn at manufacturers’ prices in 2019. CAGRs will range from 5.1% for the UK to just 0.8% for Italy. Western Europe will continue to underperform within the global medical device market, although we note that growth rates have started to converge, with many previously fast growing markets seeing their growth rates fall to single-digit figures, bringing the global rate down to under 5.0%.
Market performance will be particularly weak in 2015 due to the strong dollar, with contractions forecast in all Western European markets. Eurozone markets will record the most marked falls due to a 20% depreciation of the euro against the US dollar, which we anticipate will approach parity by the end of 2015. We expect most markets to return to low growth in 2016, with higher growth from 2017; exceptions include Spain and Italy, which will see a further decline in 2016 due to low economic growth, budgetary restrictions and limited investment in medical technology. Despite the relatively modest growth rate, Western Europe will continue to account for around a quarter of the global medical device market and regional per capita spending will remain more than double the global average, rising to USD260 by 2019.
Western European Markets Will Lose Market Share In Global Trade
Western European medical device markets will remain highly import dependent. The market share for imported products will stay at 80% or higher, exceptions being Germany, France and the UK, where the share of imported products will remain at between 70% and 80% due to well developed domestic manufacturing bases.
Medical device imports have grown at a 2009-2014 CAGR of 4.2% in US dollar terms, reaching USD90.4bn. Eurozone markets, which represent 80.1% of the regional imports, have recorded a higher CAGR of 4.6%, while non eurozone markets have registered a slower CAGR of 2.8%. The higher growth for eurozone markets is partly explained by the high re-exporting activity taking place in Belgium and the Netherlands, and to a lesser extent in Ireland due to the activities of US multinationals. The lower CAGR for non eurozone markets reflects negative growth for Sweden due to the closure of St Jude Medical’s pacemaker manufacturing facility in Veddesta, which has significantly reduced both import and export activity.
We anticipate that Western Europe will continue to account for around 40% of global medical device imports over the next five years, which is a market share similar to that recorded in 2014, but is lower that 45% registered in 2009. Germany, the Netherlands, Belgium, France and the UK will continue to be the leading importers.
Medical device exports have grown at a slightly higher 2009-2014 CAGR of 5.4% in US dollar terms, amounting to USD112.7bn. CAGRs have ranged from 12.7% for Portugal to -4.0% for Sweden. Eurozone markets, which account for 80.1% of the regional exports, have recorded a higher CAGR of 6.1%, while non eurozone markets have registered a slower CAGR of 2.7%. This is due to the higher level of re-exporting activity in some eurozone markets and the collapse in pacemaker exports for Sweden.
Germany, the Netherlands, Belgium, Switzerland and Ireland will remain the leading exporters, but the Western European share of global medical device exports will continue to decline steadily, down from 51.6% in 2014 and 54.4% in 2009, reflecting a shift in manufacturing to lower cost production bases in Eastern Europe and Asia, and the drive by many developing economies to reduce their import dependence. We note that Brazil, China, India, Malaysia, Russia and South Korea are among the countries to have launched ambitious investment programmes for their domestic medical device industries.
The regional balance of trade deficit fell to USD22.3bn in 2014. France, Spain, Italy and the UK have a high balance of trade deficit in the medical device sector, surpassing over USD2.0bn. Considering its market size, Spain’s deficit, although it has been contained during the past five years, is too high. Norway and Portugal have smaller deficits, which are relative to their market size. The remaining markets have trade surpluses, led by Germany, Ireland, Switzerland and the Netherlands. Low corporate taxes, strong manufacturing capabilities and regional distribution centres have driven their export strength.
Germany Will Remain Most Attractive Eurozone Market
Within the eurozone, Germany will remain the most attractive medical device market, accounting for around 30% of Western European consumption. The German market will be the only eurozone market to outperform the region. The strength of the German market lies in its well developed healthcare system and the commitment to maintain a high quality service despite pressures on costs. At the end of 2014, the Federal cabinet approved a law to implement changes to the statutory health insurance system guaranteeing easy access to high quality medical care and to address the problem of doctor shortages in rural areas by encouraging innovative forms of healthcare delivery. A new statutory framework to implement reform of the hospital sector, which is scheduled to take effect on January 1 2016, will tackle the problem of chronic hospital underinvestment. Importantly, agreement has now been reached between the federal government and federal states on setting up a EUR500mn (USD602mn) hospital restructuring fund. Nevertheless, profit margins continue to be hit by sustained downward pressure on prices, particularly from co-operative purchasing and tenders.
France Will Implement Additional Efficiency Measures
France will also see above average growth for the eurozone, although growth rates will be more modest compared to Germany. Weak economic growth over the past three years has put further pressure on the healthcare system, which remains in deficit, and this is likely to give further impetus to efforts to improve efficiency. Having implemented measures to curtail spending on reimbursable devices in the ambulatory sector, the authorities have started to pay much greater attention to spending in the hospital sector. Phase 4 of the PHARE hospital responsible purchasing programme was launched in September 2014. The first three phases of the programme have identified potential savings of EUR2.2bn (USD2.7bn), of which EUR400mn (USD482mn) relates to medical devices. In addition, the operating environment for medical device companies is set to become even more challenging following the announcement of a further reduction in the targets for health insurance spending growth over the next three years, which will entail additional efficiency measures. However, we believe that the bulk of the government's cost containment programme will continue to hit pharmaceutical companies harder than medical device companies, which will benefit from measures to support public hospital investment and expand ambulatory care, particularly ambulatory surgery and telemedicine, which should offer opportunities for manufacturers of minimally invasive devices and remote monitoring products.
Southern European Markets Will Have Weakest Performance
We expect a much weaker performance from other markets in the eurozone, particularly in Southern Europe, with Italy, Spain and Portugal set to continue as the slowest growing markets. Despite some improvement, late payments by the public sector to the medical device industry remain a problem in these markets. In Spain, market growth will also be constrained by budgetary pressures and cost-containment measures in the National Health System (SNS - Sistema Nacional de Salud); patchy health investment resulting in regional inequalities; controlled introduction of new medical equipment in spite of increasingly obsolete equipment; and increased taxation on medical devices, effective in 2015. In Italy, while there have been efforts to reduce hospital debt in recent years, financial constraints in the National Health Service (SSN - Servizio Sanitario Nazionale) will continue to hamper market growth. We expect that medical device spending will be squeezed by significant reductions in health service funding under legislation passed in July 2015. Industry association Assiobiomedica has expressed concerns that hospitals will not have the resources to invest in innovative technologies and will be forced to buy low-quality or outdated medical equipment.
UK Market Will See Fastest Growth Boosted By Real Terms Spending Increase
The fastest growing medical device markets will be outside the eurozone, with the UK the star performer. We expect this market to see annual growth rates in sterling terms of between 3.3% and 4.0% over the next five years, with higher growth in US dollar terms from 2016. The Conservative government elected in May 2015 has promised a minimum real terms increase in National Health Service (NHS) funding in England over the next five years to meet the needs of the Five Year Forward Review drawn up in 2014 by NHS England, which identified the need for an extra GBP30bn (USD45.5bn) a year in funding by the end of the decade. Around GBP22bn (USD33.3bn) of this target will come from efficiency savings including GP practices offering some hospital services, such as minor surgeries or scans. In FY 2015-16, NHS England plans to make available an extra GBP2.0bn (USD3.0bn) for frontline services, helping to kick start the investment needed to create new care models and further invest in primary care. The devolved administrations in Scotland, Wales and Northern Ireland will also receive extra funding. Despite the increase in funding, cost containment reminds high on the agenda, although this is presenting new opportunities with the NHS keen to adopt new technologies that maximise stretched resources. Under the latest proposal, NHS staff will able to remotely monitor patients with long term health conditions through high-tech clothing and wearable gadgets linked to medical records. Health experts believe that the digital revolution will free up resources and save the NHS up to GBP5bn (USD7.9bn) over the next decade. The aim is to have doctors and nurses able to access the latest lifesaving data across England for primary, urgent and emergency care services by 2018 and for all other NHS funded services to be accessible by 2020.
Health Service Reforms Will Drive Above Average Growth For Norway
Norway is another medical device market that will see above average growth. The 2014-2019 CAGR in local currency terms is one of the highest in the region at 5.3%, which translates into a US dollar CAGR of 3.9%. Norway already has a high-quality healthcare system with high levels of health expenditure but the underdeveloped private sector has been a constraining factor. The conservative-led coalition government has drawn up a development programme that promises greater patient choice, reduced waiting times and faster medical care. The reforms are expected to open the way for regional health authorities to be allowed to conduct more purchasing from private companies through tenders. Public hospitals will also have increased freedom to treat more patients.
Karen Simpkins is a Medical Device Market Analyst for BMI Research. Ricardo Vicente is Head of Medical Device Markets, BMI Research