Rather than seeing a single industry-wide pivot in 2020, one participant described a more stop-and-start situation, where the market is sometimes standing still and sometimes speeding up out of control.
The value of culture in a crisis
One participant suggested that this ongoing uncertainty has required companies not only to be agile and nimble but also to keep the focus tight on long-term growth drivers. Narrowing the focus has been the key to success and to identifying where a company’s core value lies. The participant urged that while companies plan for all eventualities, they should also be focusing on just a few core specifics and making sure that this focus permeates through the organization, giving people a clear sense of “why are we here.”
This question of purpose speaks to the broader issue of company culture. Participants acknowledged that it’s a difficult time to be the sort of leader who controls all aspects of a company’s strategy, culture and thinking, because these leaders have inevitably lost control of the total situation with the ongoing disruption. Where a strong culture exists throughout the organization, however, it can act as a powerful force for cohesion during the crisis.
As one participant noted: ‘the biggest lesson is that culture is everything … you don’t know how important it is until you have a pandemic: then you see the importance of a brand you can touch and feel. Culture kept us together.’
At present, this participant hosts live-from-HQ sessions every week to keep employees abreast of the latest thinking. The senior team members “make five calls randomly within the organization every day to make sure people feel connected and know what the priorities are.” Another participant agreed with this emphasis on internal transparency, noting that while leaders may not necessarily share all the details around company runway or burn rates with all employees, they nevertheless need to ensure everyone knows that this is a pivotal moment.
How medtech’s customer base is coping with disruption
While companies struggle to maintain and grow their own operations, they also recognize that their customer base is “reeling” from the crisis. The industry can’t be blind to the fact its customers are struggling: clinicians, for example, are itching to get back to productivity and trying desperately to build revenues, while simultaneously waiting for the next wave and anticipating being shut down again. Companies therefore need to be considering different aspects of their customers’ situation, from hospital economics and how these are impacting hospitals’ ability to make investments, to access and trust.
One participant described their company’s efforts around access: how can the company become the COVID-19 solution? One value proposition it has identified is its potential to save clinicians from going into operating rooms and reduce personal protective equipment utilization. The company has developed semiautonomous robots as virtual educators, launching these into five hospital systems. In general, participants agree that the demand is there from hospitals for better patient data and tools for remote management of patients, with companies in the discussion also believing that they have tech platforms that can meet hospitals’ requirements.
These efforts to address the issues from the customer’s side have led to increased interactions with hospitals’ leadership teams. One participant described how their company has been connecting with hospital C-suites daily, indicating the high level of trust there is at present. In EY discussions, hospital administrators have mentioned that they expect to rely increasingly on vendors to help them innovate going forward, a great example of how doors that have historically been closed are now beginning to open. As one participant notes, this is an industry built on partnership, and at a time when companies could become very introspective, the industry should instead maintain sight of the wider picture. Hospitals are hurting, physicians and the wider economy are under pressure, and the industry should focus on asking “how can we help?”
One participant noted that their company has received a tremendous amount of gratitude because its team has remained on-site amid the pandemic and has aided anti-COVID-19 efforts, such as the logistical assistance it lent to a big Silicon Valley donor lacking a distribution system for the face shields it was aiming to donate. Though it doesn’t have the resources to give away, the company offered this assistance nonetheless. Companies can use their strong cultures and personal relationships to assist their partners across the ecosystem.
In general, participants agree that the demand is there from hospitals for better patient data and tools for remote management of patients, with companies in the discussion also believing that they have tech platforms that can meet hospitals’ requirements.
The need to balance COVID-19 efforts with core business focus
As companies look ahead from the embattled present situation, their forthcoming challenge will be how to balance their core business operations with the COVID-19 focus. Of course, the effect of COVID-19 will continue to be felt in all industry subsectors; one participant noted that there is limited “pattern recognition for launching” in the current era, with few historical precedents of comparable systematic downturn from which to learn leading practices. If all stakeholders are trying to tighten their belts in the wake of COVID-19’s economic effects, what impact will this have on “regular” product launches?
Participants also noted that although COVID-19 has opened opportunities, if companies pivot too far and make their entire business model dependent on COVID-19, they face, as one participant noted, “a better chance than not you’re going to flame out.” This participant noted that their company therefore needs to “keep driving with one foot on each pedal, the gas and the brake.”
Participants suggest that the impact of COVID-19 will last for the next three to five years, considering the vaccine timelines and the need for expanded testing programs for populations outside the US. During this extended period, companies need to maintain their business balance while communicating effectively with Wall Street to maintain credibility in the short and longer term.
The financing environment in 2020
Financing also represents an important issue in terms of the long-term sustainability of these companies’ business models, with several of the companies in this discussion at a pre-revenue stage. One participant noted that their company’s next round of Series B fundraising was predicated on milestones from a halted clinical study. The crisis placed pressure on the company’s limited cash resources. Smaller medtechs in general have had to do “what entrepreneurs do best: plan for uncertainty” — including trying to calculate what level of cash reserves they may need to survive.
Questions of longer-term sustainability are partly dependent on the industry’s levels of investment. The medtech innovation ecosystem depends heavily on venture capital, and the industry needs to monitor the risk of investors losing value on medtech investments. Similarly, medtech has historically been built on acquisitions, and this side of operations has been put on pause. Discussions with bankers illustrate that M&A has been constrained by limitations on companies’ ability to do due diligence, to have customer feedback sessions and to carry out other interactions necessary to the acquisitions process. Carrying out valuations is a significant challenge at present: should companies work off 2019 figures and skip 2020 altogether?
John Babitt, EY Medtech Strategy and Transactions Leader, noted that when the initial outbreak occurred, there was a pivot toward dropping M&A deals that were not far advanced, with large medtechs frankly assessing which companies would struggle to survive the crisis. Nevertheless, capital markets have continued to be available, and large medtechs have so far been able to recapitalize (debt offerings and follow-on offerings being their major focus). While we’ve seen little in the way of megadeals within the industry recently, there has been significant activity in bolt-on acquisitions. If the industry rebuilds a sense of normalcy into the fall, the high level of available capital could trigger an M&A acceleration.
Next and beyond: the lasting impact of COVID-19
One area where the current crisis has, if anything, boosted confidence in the industry for the longer term, is in showcasing the need for cutting-edge technologies that the health care system is presently lacking. Investors, one participant argued, will stay with medtech because it has become a “must-have industry.” Another participant agreed: “we’ve got technology that can change the world; we’re going to come out the other side — people need our tech more than ever.” This includes technologies like AI and remote management, the urgency for which is now becoming more evident. The pace of technological adoption has picked up in 2020, one participant argued, but “these are things that were going to happen anyway; it was always going to happen in five years but instead it happened in five months.”
Other participants agreed that this is an important pivot point and will help determine the role that digital technology for remote management and other functions will play in the future and how it gets embraced and used by hospitals and other customers.
As one participant argued, “tragic as all of this is, it’s given us unique positive opportunities to pivot business to more efficient (and cost-efficient) approaches that wouldn’t have happened for years to come.” Medtech has cause for optimism in the fact that the current situation has “forced us to be really creative about how to innovate pieces of the puzzle” and “do more with less.” This participant described how their company is developing a hybrid model allowing it to work either remotely (for example, in terms of training physicians) or in-person, building greater resilience and efficiency.
Another participant suggested the scale of the present opportunity by saying “this is a moment when some future superstars will emerge, and if we didn’t have this shock to the economy and to the industry, maybe this would never have happened.” Participants agreed that seizing the opportunities of this pivotal moment will definitely involve strengthening relationships with their ecosystem partners: “we need to be there for our customers.” While there has always been rhetoric about partnership in the medtech sector, “this is an opportunity to solidify that partnership we all talk about, this is the chance to make it real. We’ll be talking about 2020 for years: ‘what was your experience? how did they do by you?’… If we do right, they’ll never leave us.”
How EY can help
Achieving sustainability
Health care spending is on an unsustainable trajectory, thanks to demographic shifts and globalization. As a result, health systems are focused on sustainability and value as they strive to balance three fundamental imperatives: expanding access, improving quality and managing costs.
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The first in a series of Medtech CEO roundtables with senior leaders, focusing on the medtech industry’s response to the COVID-19 pandemic.
