Facing the Long-Term Challenges of Economic Recovery

You’ve heard it over and over. It’s been a tough couple of years, even for the historically ­recession-resistant medtech industry. And, according to a newly released report, although the medical technology industry in both the United States and Europe struggled in 2009 to sustain its historic rates of revenue growth, it managed to improve overall net income by nearly 11%.

Sherrie Conroy

October 28, 2010

3 Min Read
Facing the Long-Term Challenges of Economic Recovery

This finding is the conclusion of Ernst & Young’s “Pulse of the Industry: Medical Technology Report 2010.” The annual report on the industry’s performance says that the industry’s net income improved because  “companies realigned to achieve improved financial discipline.” So what’s next?

Realignment was implemented swiftly across the industry. Companies reported downsizing staffs, closing facilities, streamlining approved vendor lists, and allowing inventories to deplete. Companies with cash reserves fared best. But, as the report points out, even though the medtech industry performed better than many industries, “new challenges will put increasing strain on the industry’s long-standing business model.”

The report focuses on the effects of these issues as medtech companies forge strategies for the future. Throughout the past year, I’ve touched on some of these challenges in my editorials. Ernst & Young points to the continued tightening of capital markets, the implementation of comparative effectiveness research (CER), increasing regulatory approval costs and hurdles in many markets, and the impending device tax as the greatest challenges. In particular, the firm notes that the device tax could disproportionately impact smaller, preprofitable companies.

“The medtech industry showed impressive discipline last year by improving bottom-line performance even as revenues remained flat, but even bigger challenges lie ahead,” says John Babitt, Ernst & Young’s medtech leader for the Americas. “With the financing model under enormous strain, the industry will need new ways to fund innovation. As hospitals consolidate purchasing decisions and payors look to CER, companies will need to demonstrate value as never before.” 

The report finds that many of the medtech industry’s long-standing business model are being challenged in ways not seen in the past. That’s not surprising. But, the report goes on to say that these challenges raise concerns as to whether “important elements of this model will need to be revisited.” The report suggests that three key areas will need to be addressed differently going forward: sustaining innovation, delivering values and outcomes, and fueling growth.

Sustaining innovation may become more difficult, says Ernst & Young, as the traditional 510(k) pathway comes under scrutiny. “Each step along this cycle may result in a lengthier approval process.” The report notes that the proposed measures to increase transparency in physician interactions will affect the ability of medtech companies to use their insights to achieve postapproval product ­improvements.

CER will rise to a much higher level of importance as medtech companies must deliver value and outcomes greater than ever before. “Companies are finding the value proposition of their products under increasing scrutiny by payors, regulators, and customers,” says the report. “Trends expected to exacerbate this challenge include the adoption of CER.”

Fueling growth may be the toughest challenge of all. The report says that identifying a path for long-term growth will be an ongoing test for the industry. It says that companies “will need to emphasize diversification in all aspects of their business, from diversification into new product lines better aligned with delivering improved health outcomes, expansion into nonproduct offerings such as consulting services and solutions, and geographic expansion into emerging markets.”

 “Seizing the opportunity will require demonstrating the value of their products before someone else establishes their value for them,” says Heinrich Christen, Ernst & Young’s medtech leader for Europe, Middle East, India, and Africa.

Sherrie Conroy
[email protected]

Editor’s Note: With this editorial, I wish you all a fond farewell. After more than 15 years, I am leaving MD+DI to pursue a new opportunity in the medtech industry.

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