Device Development: Investing in the Long-TermDevice Development: Investing in the Long-Term

Originally Published MDDI August 2003

FROM THE EDITORS

Mergers and acquisitions can be used to gain market share quickly. But for the device industry, the focus should remain on acquiring R&D potential.

There have been two dominant models for mergers and acquisitions (M&A) in the healthcare industry. In one, acquisitions are driven by the need to maintain double-digit growth to satisfy investors. In the other, acquisitions represent long-term investments in new product development. For the most part, the device industry has followed the second strategy with great success. But will pressure from investors change this?

There is evidence that the pharmaceutical industry has already succumbed. So suggests a white paper published last year by IBM. In it, author Jeffrey Jung noted that M&A activity in the drug sector has been focused largely on “boosting sagging earnings,” and that strategies have targeted “short-term gains instead of long-term cures.” 

Under pressure to fill product gaps and gain instant market share, these companies have favored mergers with established firms that offer immediate returns rather than those with many new products in the pipeline. The end result of this approach is that companies end up suffering from bloat while struggling to reach growth rates that are difficult to sustain. 

Jung's view is buttressed by a recent report from Datamonitor suggesting that “the pharmaceutical sector's prevalent business model is flawed with strategies focusing on growth.” The report asserts that drug firms will “continue to sacrifice return on investment to hit investors' growth targets, although this is an unsustainable strategy.”

In the device industry, by contrast, acquisition strategies more often have looked beyond short-term gains. Their M&A efforts are, in essence, long-term investments in R&D. 

This link between R&D and M&A in the device sector is noted in a recent report from Irving Levin Associates. In 2001 and 2002, device-industry M&A increased by 45%, versus a 20% decline in the overall M&A market. Of the top five deals of 2002, three involved acquisitions of firms with strong R&D programs. 

This relationship between acquisition and product development is reflected in this issue's R&D Roundtable, beginning on p. 52. In it, several of the participants emphasize the importance of smaller firms to the R&D efforts of larger ones. 

As Battelle's Gary Smith observes, the larger OEMs often invest in small startups, essentially seeding innovation, motivated by the potential for eventual ownership. For the start-up device company, the OEM offers a potential source of vital capital as well as the promise of considerable gain if its research is successful. 

The OEM, on the other hand, can benefit from such R&D investment by strengthening its ability to extend product lines, deepen market penetration, control development risks, and reduce costs by eliminating resource duplication.

The perennial strength of the device industry has been its commitment to R&D. In the minds of many, it is a market sector defined by a steady stream of breakthrough technologies. Thanks to this perception, analysts and the public have generally viewed the device industry as an R&D juggernaut. 

More often than not, larger device companies have looked beyond acquisition for short-term gains. Instead, they have focused on investing in product development, not just through internal R&D efforts, but through acquisition as well. 

It is in the interests of the device industry to resist the types of pressures that have affected mergers and acquisitions in the pharmaceutical industry. New product development is the engine that drives the long-term success of this industry. Slowing that engine down will, in the long run, benefit no one. 

The Editors

Copyright ©2003 Medical Device & Diagnostic Industry