Sept. 24 (Bloomberg) -- Slower growth in the medical device industry, tougher regulatory standards and reluctant investors will force companies into new areas for expansion, according to EY’s annual report.
Medical technology companies used to drive growth with innovative products that were easier for doctors to use and could improve lives, according to the Pulse of the Industry report from EY, formerly known as Ernst & Young. Power has shifted away from doctors, who can no longer insist on their favorite brands, to hospitals looking for lower prices and proof that treatment leads to reduced costs and better results.
A study released yesterday by the industry group Advanced Medical Technology Association showed that prices paid in the U.S. for the most widely used medical devices such as heart stents and hip implants plunged as much as one-third since 2007. The largest medical device companies are already starting to find new business by offering services and home monitoring, with Medtronic Inc., for example, winning contracts in England to run heart catheterization laboratories.
“Value-based health care is putting on pressure as everyone tries to slow health-care costs,” Glen Giovannetti, leader of EY’s Global Life Sciences group, said in a telephone interview. “There is real pressure on both utilization and price. Companies are beginning to, and we think they need to, adjust their business models in light of this.”
Health-care services are among the major new areas of growth as companies such as Medtronic, the world’s largest maker of heart rhythm devices, and Abbott Laboratories roll out programs that enhance the benefits of their medical devices, he said. Call services, for example, assist patients with their devices and other programs identify people who may benefit from novel products, the report found. Consulting services can lower costs or increase productivity.
The changing environment has caused concern among investors, who realize the device industry is in a period of slower growth and uncertainty, Giovannetti said. The number of medtech initial public offerings in 2012 fell by half from 2007.
Device companies will need to create a new business model that focuses on an array of health-care solutions, rather than discrete pieces of technology that move through a standardized approval process, according to the report.
“Solving big health-care challenges, in a highly regulated industry with numerous parties and conflicting interests, is likely to take much longer than the relatively straightforward task of building a new product,” the report’s authors wrote. “Investors, company management and even strategic buyers will grapple with the question of how far investors should be expected to carry early innovation before a buyout.”
Device companies have the opportunity to make money from new businesses by improving efficiency within the broader health-care arena and capturing some of those savings, said Gautam Jaggi, a co-managing editor of the EY report.
“The very business of medical technology is changing, and that will inevitably lead to new ways to capture value,” Jaggi said. “There is a whole pallet of new ways of making money as the business model opens up. There may be higher margins in a new solution that can move the needle on health-care costs.”
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