Why Medtech Needs to Change or Die

Smaller firms may fare better than conglomerates in a changing marketplace, according to Ernst & Young's annual medical device industry report.

Nancy Crotti

Dinosaur MedtechMedtech companies that don't embrace consumer empowerment and smart technology may be left behind the rest of an evolving sector.

That's the word from "Pulse of the Industry," Ernst & Young's annual sizing up of the medtech business. Making an effective device alone just won't cut it without the added value of data or connectivity, the report says. 

A few other indicators of where things are headed in the sector:

  • U.S. non-commercial investment in medtech generally outpaced that in Europe, but both regions shared  what the report termed "a startling increase" in companies with less than two years' cash on hand.                                                      
  • Total U.S. and European medtech financing during the 12 months ended June 30 plummeted 60% to $20.4 billion, the lowest level since 2010-11. Keep in mind, however, that the $51 billion raised in 2014-15 was inflated by nearly $42 billion in debt financing raised mostly to pay for a small handful of megadeals.
  • On a more positive note, early stage venture funding rebounded in 2015-16, growing by more than 10% to nearly $5.6 billion. Still small in comparison to other industries, the total is still the greatest medtech has raised since at least 2004.

Medtech capitalization outperformed that of broader markets in general and biotech in particular as a result of sector rotation and medtech's expansion into health services.

"These mixed metrics indicate that medtech is an industry in transition, adapting to fundamental shifts in reimbursement, consumer empowerment, digital enablement, and the competitive landscape," the report says. (Read more about the hottest medical device industry trends.

Discover the connected medical device tools you need to survive this new age of medtech at BIOMEDevice San Jose, December 7-8, 2016.

Another mixed message: top management of established medtech appears to be focusing on short-term allocation of capital, turning $13 billion over to shareholders in 2015 rather than reinvesting it in their companies. But there's also strategic and long-term investing afoot as startups pursue tools for biopharmaceutical innovation, such as genetic sequencing for diagnostic purposes and precision medicine.

The past year also saw the emergence of partnerships among medtech and high tech companies, such as Johnson & Johnson and Google's sister company Verily Life Sciences to create Verb Surgical, and Medtronic with IBM Watson to work on improving diabetes treatments.

Another sign of medtech investing outside of its own industry boundaries can be found in Europe. The report highlights the work of Vifor Fresenius Medical Care Renal Pharma, which testing an algorithm that would predict severe anemia in dialysis patients and allow for early intervention. Commercial pilots are planned for European countries in  2017 for this algorithm, which is considered a Class I medical device, according to the report.

"There is a clear demand for therapeutic focus and real-world data collection as the health care market shifts from volume to value," the report says. "How medtechs adapt their business models in response varies tremendously. What is clear: traditional medtechs that don't adapt sufficiently to the new environment risk being edged out by companies that do."

The big companies continue to combine to boost scale and strength in their core markets. Abbott Laboratories was responsible for nearly half the years disclosed M&A value, with its pending acquisitions of St. Jude Medical ($25 billion) and Alere ($6 billion). Preceded by St. Jude's acquisition of Thoratec, the deals bolster Abbott's cardiovascular and diagnostics  capabilities. (Though, the Abbott-Alere deal has turned into a legal dispute.) Abbott also announced it will shed its eye surgery business, Abbott Medical Optics, with plans to sell it to J&J for $4.3 billion.

Of necessity, medtech is also shifting toward stronger collaborations with payers as the Center for Medicare and Medicaid Services continues rolling out its bundled payment programs, particularly in the joint care arena. For example, Medtronic sacrificed some pricing power to land its spot as sole provider of insulin pumps to United Healthcare.

"Growth-by-acquisition was the medtech industry's go-to-strategy over the last year and is likely to remain so as companies continue to focus on their strategic priorities," said John Babitt, EY Americas Medtech Leader, in a statement. "In this environment, companies must invest more in partnerships, M&A and research and development, rather than continuing a status quo that relies heavily on returning cash to shareholders."

Nancy Crotti is a contributor to Qmed.

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