Medical technology report 2017: Pulse of the industry

Medtechs take the inside track

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Year in review

  • The medtech industry delivered strong results even as it continued to adapt to rapid technological change, rising reimbursement, regulatory and legislative uncertainty, and increasing customer expectations
  • Business models continue to shift, as product-centric innovations and services are combined to create holistic platforms that increase shareholder value by enhancing the customer experience.
  • To access the necessary skills to create relevant care platforms, medtechs must collaborate with a range of stakeholders, including digital entrants, technology companies, payers and providers.
  • Platforms that combine individual medtech products and services into holistic care solutions underpin this transformation, what EY terms the Life Sciences 4.0 business model.

I. Understanding the key financial indicators

After a disappointing 2015, the overall medtech industry generated more than US$360 billion in revenue in 2016 and its best year-on-year growth since the global financial crisis of 2008. In aggregate, medtechs in the US and Europe expanded their top-line 5% in 2016 and grew their total bottom-line 17%.

What strategies should medtechs adopt for peak performance as the pace of change accelerates?

This uptick in revenue growth was driven almost entirely by acquisitions. For the past several years, device makers have been under pressure to deploy capital more efficiently which has resulted in increased inorganic activity. Notably, 8 of the industry’s 61 commercial leaders each bolstered its top line by more than US$500 million and 6 of those 8 did so via M&A.

We also see a continued emphasis on portfolio optimization. Divestitures and spin-outs allow medtechs to capture additional value by improving capital efficiency, reducing operational complexity and reallocating capital to higher-growth businesses.

The medtech industry continues to be an industry of “haves” and “have nots,” especially in terms of access to capital. In both the US and Europe, the number of public medtechs with less than two years of cash continues to swell. Meanwhile, the market for initial public offerings receded with only 21 US and European medtech companies going public in 2016–17.  Investors have become more stringent in their criteria and whether they will lower their expectations, to help reinvigorate the IPO market, remains to be seen.

The uneven capital distribution also played out on the private side. Privately held medtechs raised nearly US$8 billion in venture capital in 2016–17, a new record and an important catalyst for future innovation. However, more than 25% of that total went to just three medtechs. The good news, though, is that this capital pool is expanding globally as Asia-based investors look to finance US and European medtechs, as well as innovative companies in their home markets. However, a recent decision by the Chinese government to preserve liquidity in China may restrict capital outflow in the future.

EY - Capital raised by leading regions excluding debt, July 2016-June 2017

II. Enabling innovation

As technology transforms medtech, which innovations provide a lasting edge?

Medtech innovation continues to evolve and drive growth. In 2016, the U.S. Food & Drug Administration approved 39 new class III medical devices via its pre-market approval (PMA) pathway. As of 31 July 2017, there were 26 PMA approvals, putting the industry on track to nearly rival the approval numbers last achieved in 2004. The uptick in approvals that began in 2015 suggests that medtechs are beginning to adapt to higher regulatory and reimbursement thresholds and are investing proactively in safety and efficacy studies to better demonstrate the utility of their devices.

Technological advances in sensors, coupled with advances in artificial intelligence (AI), are also broadening the definition of medtech to include digital products and data-driven services. Given this continued march of technology, industry convergence will continue to accelerate, lowering barriers to entry for new entrants, especially those that specialize in software-based or other customer-focused services. To thrive in this era of rapid and continual change, medtechs must build flexible business models that balance investments in internal R&D and external innovation.

EY - Number of PMA approvals for medical devices

III. Partnering with new entrants

More and more, product-centric medtech innovations will be bundled with services and solutions, enabling real-time patient engagement, remote monitoring and more targeted care delivery to create new commercial models. These new capabilities will require collaborating with other organizations, particularly digital health players and new technology entrants, which are well capitalized. (Based on data from the venture capital firm Rock Health, digital health companies raised an estimated US$3.5 billion in 188 deals in the first six months of 2017.)

As industries converge, does your next partner even exist yet?

In the future, medtechs may look to create holistic care platforms that evolve from a disease- or technology-specific focus to managing complicated patients across the care continuum. Such platforms of care could assist providers and payers with one of their most pressing issues: the efficient delivery of high-quality, high-touch care across populations with multiple co-morbidities.

If structured correctly, these emerging platforms will enhance the patient experience and create new revenue opportunities for medtech. For instance, by linking big data capabilities with new knowledge from precision medicine, it will be possible to create precision health offerings that promote preventive interventions before symptoms of disease manifest. Such responsive platforms will not only be valuable to individual patient consumers -- they will also be valuable to providers and health systems that are reimbursed according to the value and quality of the care they deliver.

Selected examples of digital deals, 2016–17

Partners involved

Analysis

Royal Philips

PathAI

Solution improves the precision and accuracy of routine diagnosis of cancer and other diseases using artificial intelligence

Stryker

Microsoft

Augmented reality-based system integrates multiple types of data to create the operating room of the future

Medtronic

IBM-Watson Health

Next-generation predictive diabetes app that proactively alerts patients at risk of hypoglycemia of an attack hours before it actually happens

Agfa Healthcare

IBM-Watson Health

Cognitive technologies to improve the accuracy of imaging in multiple disease areas

Ethicon

Touch Surgery

Simulated surgical training program distributed via an app for doctors in remote areas of the world

Sanofi

Verily

Launched Onduo, a joint venture to develop a comprehensive diabetes management platform

J&J

Verily

Joint venture Verb Surgical combines robotics, visualization, data analytics and connectivity to create a digital surgery

Source: EY and company reports

IV. Demonstrating value

As pressure grows to contain health care costs, payers and providers are embracing value-based care that prioritizes outcomes over throughput. Not only do medtechs need to demonstrate the value of their products to a diverse group of stakeholders, they must also satisfy very different — and sometimes conflicting — definitions of worth.

How can we create a global platform to solve health care's biggest challenges?

Enter value frameworks, tools that are intended to be used from the very beginning of the product development process to objectively compare the efficacy, side effects and costs of different products.

Even with value frameworks, defining the value of medical products is no easy task, requiring medtechs to collaborate with payers and providers to capture relevant, real-world data.

These collaborations come in several varieties. Some are broad, multi-year partnerships designed to help providers and payers solve fundamental challenges. This includes creating cloud-based services that aggregate disparate medical and clinical data for real-time access or management systems that support treatment of complicated high-risk patients. Others are more product-centric but significantly alter how medtechs get paid, linking reimbursement to demonstrated outcomes.

Selected medtech-payer collaborations, 2016–17

Medtech company

Payer

Summary

J&J (Animas division)

Aetna

Value-based agreement for the OneTouch Vibe and Ping insulin pumps that ties payments to A1c outcomes

Medtronic

Aetna

Value-based agreement partially ties Medtronic’s reimbursement to successfully meeting clinical improvement thresholds

Myriad Genetics

UnitedHealthcare

Collaboration establishes pricing for diagnostic tests in multiple therapeutic areas including breast cancer, prostate cancer, rheumatoid arthritis and neuropsychiatry.

Source: EY and company reports

V. Managing risks

Beyond how to shift successfully from product-centric business models to ones built on customer-centricity and value, three other business risks represent ongoing challenges for medtech management teams:

As regulatory burdens increase, bow can you stay
  • New European medical device regulations. In May 2017, the European Union released final versions of both the Medical Device Regulation (MDR) and the In Vitro Diagnostic Regulation (IVDR). These regulations, which go into effect in 2020 and 2022 respectively, will significantly reshape how medtech companies develop and market their products in Europe.
  • US Medical Device Excise Tax (MDET). The MDET has faced widespread criticism and calls for repeal since its creation as part of the Affordable Care Act. Although reinstatement appears unlikely — ongoing discussions mean MDET repeal could be bundled with larger tax reform legislation, for instance — medtech companies need to make sure they are adequately prepared for its return.
  • Increasing cybersecurity threats. The 2017 worldwide WannaCry ransomware attack was a stark reminder that while smart devices provide significant benefits to patient care, their connectivity exposes manufacturers, health care providers and consumers to cyber threats. Security flaws in devices such as defibrillators, pacemakers and insulin pumps, for instance, make it possible for hackers to take control of these products. Although no devices have yet suffered this kind of attack, the potential damage to patients — and companies’ reputations — means medtechs are spending more time and money monitoring potential threats. Regulators and policymakers are increasing their focus as well.

Conclusion

The aggregate medtech industry is thriving in 2017, even as competition intensifies and customers grow more demanding. In the future, medical technology companies appear well-placed to play a prominent role in this increasingly digital, customer-centric health care ecosystem.