Roundtable:Market Challenges for 2008 4401

BUSINESS PLANNING & TECHNOLOGY DEVELOPMENT

In 2007, a number of market trends influenced the business and market planning of medical device manufacturers—some in positive ways, others not so much.

The cardiology sector, for in­stance, continued to be hit by concerns over the safety and efficacy of its devices, limiting growth in both the heart rhythm management and interventional cardiology segments. Meanwhile, most of the large companies in the orthopedics sector found themselves paying hefty fines to the U.S. Department of Justice over their physician marketing practices. And the in vitro diagnostics sector underwent significant mergers and acquisitions, changing the ownership of the field and bringing renewed vitality and revenue growth.

MX recently called on a panel of industry experts to get their views about how current and future trends are likely to affect the medical technology marketplace (see sidebar).

Hindsight and Foresight

MX: During 2007, what unanticipated market challenges affected the medtech sectors and companies you follow most closely? What kinds of effects will these challenges continue to have in 2008?

Nadim M. Daher: Despite devoted last-chance efforts, the Deficit Reduction Act of 2005 (DRA), including its sections aimed at containing spending on the provision of imaging procedures, went into effect on January 1, 2007. Some of the post-DRA effects were unanticipated, as outpatient providers went on revising their projections or seeking strategic alternatives, as if facing the survival of the fittest. This feeling of uncertainty froze spending on imaging technology in a market that normally accounts for 20–25% of opportunities.

Shara Rosen: In the IVD sector, it was anticipated that FDA would continue to allow new molecular and genetic tests to come to market as test services. But as more and more companies began to take the test-services route to market, both FDA and the Centers for Medicare and Medicaid Services (CMS) took notice. Now, there is a very distinct possibility that test services and in-lab developed tests will be regulated by FDA.

James X. Laskaris: There are multiple unlike technologies that will compete against each other. One example would be blood tests versus imaging technologies for cancer screening and diagnosis. Companies will no longer necessarily be competing against like competitors.

Patients are also more informed and have a greater say in how their dollars are being spent. Because of this, companies will have to market their products to a broader base.

John Viscogliosi: In many ways, the most significant unanticipated change at the large orthopedic and spine companies is the recent change in leadership at virtually all of the major competitors. These executives are in the process of putting their own stamp on the companies they are now leading.

Roger Zickfeld: One unanticipated challenge we've seen is the effect on home oxygen therapy revenues from the new CMS policies and reimbursement schedules introduced in 2007. Lower reimbursement rates and a protracted competitive bidding process have made it difficult for companies to forecast revenues effectively.

Venkat Rajan: One of the biggest issues causing a buzz was the release of information surrounding the Clinical Outcomes Utilizing Revascularization and Aggressive Drug Evaluation (COURAGE) trial. The study itself was not groundbreaking, and concluded that, when added on top of an optimal drug program, percutaneous coronary intervention (PCI) reduces neither mortality nor heart attack in patients with chronic stable angina.

However, when compounded upon other studies in Europe questioning the cost-efficiency and safety of drug-eluting stents with respect to thrombosis, it had a disastrous effect on one of the largest markets in the medical device industry. The industry may never enjoy growth rates like it did between 2003 and 2005. But as clinicians get a clearer understanding of the trial results and the value of PCI, the market is expected to stabilize.

Richard S. Cohen: The entire area of invasive implantables is under the microscope now. This includes both defibrillators and stents, which are a huge part of the cardiovascular and general medical device market.

Boston Scientific recently reported that it will be laying off 2300 employees and trying to reduce expenses next year by half a billion dollars. This was mostly due to problems related to its acquisition of Guidant, but also defibrillator and lead-wire recalls and the challenges related to implanting devices in patients generally.

Bill Martineau: Companies must be able to respond quickly to negative publicity challenging product efficacy. A slightly elevated risk of causing life-threatening complications in off-label indications led to a $1 billion decline in the demand for drug-eluting stents between mid-2006 and mid-2007.

In 2008, the key challenge for producers of implants and other advanced medical devices will remain in quickly resolving product defects (such as the recent implantable cardioverter-defibrillator lead-fracture problem), and preventing sales erosion resulting from market overreaction to adverse product publicity.

Thomas J. Gunderson: On the regulatory front, I believe the requirements of postapproval clinical trials and data monitoring will increase. For big companies this is just another layer of bureaucracy. But for smaller companies, the cost, the delay or reduction in profits, and the need to reallocate scarce resources results in a financial burden that dilutes their efforts to develop new technologies.

On the reimbursement front, I am seeing a greater focus on the mortality benefit of a particular product. The best example is the result of the COURAGE trial, which showed that medical therapy and angioplasty with stent usage had no statistical benefit in prolonging life—for a subset of stable heart patients in a limited-time trial. In the six months since the COURAGE trial released its predictable results, the volume of patients being referred to cath labs has fallen 10–12%. The media did not focus on the study's conclusions about chest pain. There was a statistically significant difference in freedom from angina during most of the trial's follow-up period—in favor of angioplasty.

In this realm of unanticipated events during 2007, were any of you surprised by the M&A activity that's been taking place in the IVD sector?

Manfred Scholz: In diagnostics—including both imaging and in vitro—one of the biggest surprises of 2007 was that GE Healthcare's announced acquisition of Abbott Diagnostics did not come to fruition. Among the many reasons, FDA trouble and rational valuations were the dominant issues.

Despite the failure of that GE acquisition attempt, the 12-month sum of M&A transactions reached a historic high of $30 billion when Siemens announced its intent to acquire Dade Behring for $7 billion. Now in vitro diagnostic leadership is down to Roche and Siemens. In 2008, the second tier will have to find a way to organize itself.

Similarly, the imaging leaders are GE Healthcare and Siemens, leaving little room for followers.

Cohen: The diagnostics area has been overshadowed by other sectors for many years. But now, there is a major trend for diagnostics to identify healthcare problems at an earlier stage than we've been doing, to the point of predicting problems based on genetic markers and other predispositions. This area is called personalized medicine and is a new frontier.
In the future, diagnostics will be more in the forefront, as the federal dollar is better spent on wellness, and as genomic diagnostics make it possible to predict and prevent disease.

Sector Cycles

Emerging medical device companies tend to go through cyclical patterns of funding, growth, maturation, and exit through IPO or acquisition. For the sectors and companies you follow, where do you expect the majority of company activities will be relative to this business cycle during the coming year? What business or technology factors (e.g., investor impatience, completion of clinical trials) will drive companies to take particular actions?

Laskaris: For the past several years, emerging medical device companies have had to compete for investment capital with the defense and homeland security industry. This has driven them to get their technology into the market for whatever intended use is easiest, just in order to start a cash flow. Once the technologies are in place, companies are pursuing additional approvals to widen their applications.

Martineau: Most companies in the medical device segment will focus on bringing improved versions of existing products to market and will streamline long-term efforts to advance medical technologies.

This trend will reflect both investor impatience and the shortcomings of existing products on the market. For example, the introduction of drug-eluting stents with thinner struts will resolve most of the recent safety controversy with the devices, and promote a gradual rebounding of sales and growth opportunities.

Gunderson: I am a believer that the lack of revenue growth at larger companies, and their need for large cash generation, will add up to an acceleration in the rate of medtech mergers and acquisitions over the next 12–18 months. Companies with unique products or market caps over $1 billion will be the most likely acquisition candidates—as they have the best potential to bring about a near-term reversal in the revenue growth rates of the larger companies.

Rajan: The healthcare industry in general, and increasingly the medical device industry, is becoming a top-heavy market. Fewer and fewer start-up ventures have been able to take their products to market. As a result of the stringent regulatory process, most companies are never able to cross their technology over into full market clearance. Oftentimes they are forced to alter their focus or even their product in midstream in order to meet the changing clinical environment. This lengthy process, and the high level of losses incurred before any revenues can be generated, can lead to impatience on the side of investors, resulting in sale of the company or even simply shutting down.

Rosen: The IVD industry is entering another cycle of intense consolidation. Large companies are in dire need of new tests and technologies. For the most part, such tests have been developed by smaller and start-up companies. But small and start-up companies rarely have the resources necessary to engage in the long-term cost-benefit studies that are needed to persuade payer groups to recognize their tests. The result will be an increase in the number of collaborations and acquisitions that will continue for at least the next 3–5 years.

Scholz: In the IVD sector, investors are relearning the lesson that medical devices are more about markets than technologies. During 2007, market-focused companies achieved the highest value in M&A transactions, and this is affecting early-stage investments.

Casey Crawford Lynch: There continues to be high levels of interest in venture investing for neurodevices. For example, CVRx closed the second-largest device financing in 2007, raising $65 million to develop an implantable neurostimulation treatment for hypertension.

In the past, major medical device makers have been quick to acquire innovative neurodevice companies. But Northstar Neuroscience has proven that the initial public offering (IPO) route can be a lucrative exit as well, and that the public markets have a high tolerance for development-stage neurodevice companies. I think we will be seeing more neurodevice IPOs in early 2008.

Viscogliosi: Within the orthopedic and spine markets of the overall medtech industry, we believe that it has recently become somewhat easier to go public versus selling out. Companies with novel technology and products that address niches with significant potential will always be able to choose between these two options.

We expect increased funding will be directed to firms in the orthopedic and spine markets that focus on unmet needs or conditions that are inadequately treated currently. Today's buyers are not opposed to paying large sums of capital for new technology, but are now requiring more long-term clinical results than in the past.

Landscaping in Progress

In several medtech sectors, the competitive landscape is changing because of new product launches or recent M&A activity. In the sectors you follow, what new competitive forces (or new competitors) are likely to affect the shape of the marketplace? How are existing companies in the market likely to respond?

Daher: Imaging information technology (IT) is rapidly moving into the enterprise. Makers of enterprise picture archiving and communications systems (PACS) have successfully conveyed the concept and goal of providing ‘images and information, anytime, anywhere.'

This confluence of trends is illustrated by the recent wave of consolidation among radiology and cardiology PACS vendors; by the fact that IT vendors are diving further into storage management and healthcare information exchange; and by the new-found dynamics among vendors in the fields of PACS, radiology information systems, IT, advanced visualization, and electronic medical records.

Martineau: The entry of Siemens into the in vitro diagnostic segment and diversification of Abbott Vascular and Medtronic into drug-eluting stents will force existing competitors to focus increased efforts on developing technologically advanced products. Gaining competitive advantages in most medical supply and device segments will become increasingly dependent on developing differentiable products.

Laskaris: One trend for new technologies has been to focus on consumables. This strategy provides the vendor with an ongoing revenue stream. Another strategy is to design technology to perform a procedure in less time. This will help providers to perform a procedure within the limits of capitated reimbursement, while also accounting for the additional costs of the product.

Rajan: There are several rules of thumb for identifying the next hot market sector. Two of those rules are as follows. First, find where big pharma has failed. And second, avoid developing me-too products whenever possible.

An emerging or established company looking to compete in the cardiovascular space might be better served by launching a game-shifting technology six years from now, rather than a me-too product three years from now.

Viscogliosi: Spine market share is concentrated among a limited number of competitors. This is even more true in the largest areas of the orthopedic market (hips and knees). However, numerous small companies have been funded over the past few years and have had an effect on growth rates.

Existing competitors have placed increased focus on developing new products, in-licensing new devices, and acquiring firms in fast-growing niches. It is logical to believe that the recent acceleration of M&A in the spine market will continue as companies move to build out their product lines and enter new, fast-growing niches within this sector.

Scholz: Personalized healthcare and companion diagnostics are in fashion. This fashion has reached the boardrooms' attention. For example, Roche has taken a leadership role through aggressive acquisitions, which have included BioVeris, 454 Life Sciences, and NimbleGen Systems, as well as a bid for Ventana Medical Systems. It will be interesting to see if Roche can resist overspending.

What other forces or new companies are likely to shape the market?

Zickfeld: We've seen some continued consolidation in the healthcare services arena. The impact on incumbent companies is that they will increase their roll-up efforts. We should see continued M&A activity.

Cohen: One other important element of medtech's competitive landscape today is the continuing increase in the number of private equity firm transactions. For most medtech companies, the IPO markets are difficult to access and the glare of public reporting can overshadow the benefits of being public. Consequently, when a small company considers an exit, its decision is largely between strategic players or private equity firms. Because of synergies, strategic players can often afford a higher valuation but will generally be more particular about matching up the target company with its own. Private equity firms are more optimistic, but generally pay less up front, offering up a second bite of the apple when the company is grown and sold again. Private equity firms seem poised to become new masters of the medtech universe.

Policy Projections

Governmental authorities in the United States and elsewhere are already working hard to constrain increasing healthcare costs. What challenges do you foresee with regard to such government policies during 2008? How will the U.S. presidential elections affect this area of policy?

Daher: Annual reductions of 5% or more on reimbursement levels for imaging procedures, across the board, are scheduled for the next few years. While procedure volumes are expected to continue increasing exponentially, the pro­viders of imaging services will have to face mounting pressures on profit margins. This could exacerbate the current price erosion on imaging equipment and further delay the introduction of new technologies.

Imaging will likely be a target in any upcoming healthcare policy reforms, as it constitutes one of the fastest-growing sources of healthcare expenditure in the United States.

Scholz: A lot of waste exists in healthcare management processes, which are less affected by policy changes. Medical device companies lack control of those processes and are therefore better off focusing on clinical trials and reimbursement strategies. The only certainty is that there will be no relief from policy changes, as the fundamental ills remain to be addressed.

Viscogliosi: It is natural to expect that worldwide healthcare budgets will continue to be under increased pressure. We believe that there will be a greater focus on clinical trial outcomes and evidenced-based medicine. Additionally, payers (insurers and governments) may require that manufacturers show greater proof that a new device is better than existing products.

Zickfeld: The big question and determining factor on the impact of governmental policies will be the outcome of the 2008 election. Most candidates have stated healthcare reform to be a goal. The open question is how radical and how disruptive the prescription will be.

Congress is usually very uncomfortable about taking on anything big like this during an election year. Do you see this being a major policy issue for the election, or is everybody going to try to avoid having to deal with it until after new leadership comes in?

Laskaris: Healthcare has always been the third rail, hasn't it? My hope is that Congress will do something. Otherwise, healthcare costs will soon be well past the $1.1 trillion we spend in United States annually at this time.

In the realm of emerging technologies, the question is ‘How can we use technologies to bring these costs down?' And the answers are all in the minds and hands of universities, medtech start-ups, leading-edge technology companies, and organizations such as the National Institutes of Health, that are coming up with such fantastic ideas.

Rosen: It will take more than legislation to control U.S. healthcare costs. Insured Americans are used to a certain level of service that will be hard to curtail. As for improving the lot of the uninsured or underinsured, in the short term this will take an injection of dollars that may see costs increase instead of decrease.

Rajan: Government is definitely shifting reimbursement policy more toward early detection—ensuring that hospitals make the right diagnosis, and putting a lid on spiraling costs by reimbursing only for therapies that are necessary.

People have been talking about the baby boomer generation getting older for at least the past decade. But now it's finally here; baby boomers have started to retire. So it will be interesting to see how government agencies are able to manage the healthcare costs related to this aging generation.

Martineau: The dual government objectives of extending healthcare coverage to uninsured residents, while keeping healthcare spending under control, will increase the importance of developing products that improve patient outcomes and reduce the need for long-term chronic care. An increasingly price-sensitive marketplace will force medical supply and device producers to improve overall operating efficiencies in order to maintain favorable profitability.

Anticipated trends include the expansion of joint marketing and research collaborations among companies, the streamlining of manufacturing operations, and the adoption of more-conservative approaches to product development.

Cohen: The government is still geared toward reimbursing for therapies and treatments rather than for prevention. This is partly because there is no strong lobbying effort in that realm, and maybe also because the benefits of preventive medicine are harder to identify.

But the private sector is picking up the slack to a certain extent. There is already a whole array of disease management and wellness programs that employers are paying for—or even incentivizing their employees to participate in: smoking cessation programs, weight management programs, and diabetes management programs, to name just a few. If government agencies could follow these leads in the areas of health maintenance and disease prevention on a broad nationwide scale, it might be possible to reduce our massive expenditures on the therapeutic side.

Copyright ©2007 MX