Medtech Companies Need to be Fast and Bold to Grow in Today’s Healthcare Market

According to new research from The Boston Consulting Group (BCG) released during the AdvaMed 2013 meeting in Washington, D.C., medical technology companies are making progress in adapting to changes in the healthcare environment, but “a faster pace and bolder moves” are needed, according to BCG analysts.

The challenges facing medtech companies are well known: pricing pressures driven by the emergence of more sophisticated economic buyers, the rise of new types of accountable-care organizations, declining productivity of the “old” research and development (R&D) model, volume growth evolving toward developing markets, higher regulatory and market-access barriers, and new competitors with advantaged cost structures. Although executives are setting their companies’ agendas to address these issues, BCG research shows that despite initial progress companies are losing ground and should move both more swiftly to modify their business models to the changing environment.

“Most medtech companies have changed their management agenda over the last two years to adapt to the pressures they see in the market,” said Colm Foley, BCG partner and the firm’s global medtech leader. “So the stage is set. However, given the pace of change, firms need to reposition fundamentally and more rapidly with customers, in markets, and internally. To put it in clinical terms: the diagnosis has been made, but the doctor is pursuing ‘watchful waiting’ rather than an aggressive therapy.”

The Future of Medtech
Based on its research and analysis, BCG analyst recommend more rapid and bolder moves in four specific areas:

1. Change the go-to-market model. The BCG report “Fixing the Medtech Commercial Model: Still Deploying Milkmen in a Megastore World?” (released at AdvaMed in 2012) outlined the need to change the commercial model and upgrade core commercial capabilities. Many medtech firms are now taking initial steps in some or all of the six recommendations outlined in the report, but most firms remain inwardly focused and have yet to take major steps to become “customer centric.”

Medtech companies need to get in tune with what drives the success of their customers—particularly the consolidated hospital systems that act and make decisions about devices centrally. Although medtech companies traditionally have seen their customers as the clinicians working in the 5,000-plus hospitals in the United States or in private practice, BCG analysts say 200 hospital systems have emerged as the true customers.

“To win with this ‘new customer’ you really need to understand its strategy,” says Barry Rosenberg, a former clinician and BCG partner who has led multiple research efforts on the economics and changing strategies of U.S. hospitals. “Our research has identified the critical strategies that hospital CEOs are pursing as the market evolves, concentrates, and centralizes. We have found that medtech firms have yet to take the necessary leap to truly understand what drives their customers’ success and to become ‘customer centric’ in how they serve customers.”

2. Reinvent the portfolio and product engine. Notably, in 2012, the U.S. Food and Drug Administration industry cleared and approved roughly the same number of 510(k)s and premarket approvals (PMAs) as in 2004. However, the industry spent nearly 75 percent more on R&D last year than in 2004.

“On top of this, average selling prices are not rising in the market as they were a decade ago,” states Christophe Durand, BCG’s lead partner for medtech innovation. “It is simple math: The return on R&D investment is dramatically lower than it used to be. And as we have seen in the pharmaceutical industry, where internal rates of return dropped to cost-of-capital levels a decade ago, the firms that pursued piecemeal steps in response have struggled to reignite revenue growth.”

In 2010, BCG published a study on medtech R&D investment patterns. The report also called for trimming projects that are focused on incremental product improvement, identifying opportunities to fund more breakthrough innovation, and being more aggressive in looking externally for innovation to commercialize.

“Since 2010, the industry has made much progress,” Durand said. “We’ve seen a strong increase in the number of PMAs since it bottomed out in 2010, and we’ve also seen sensible, though modest, increases in both licensing and acquisition deals for new technologies. These are all great signs that executives are responding to the tougher market. But they still represent small steps relative to the reality that a dollar spent on R&D today produces half the new products in the market that a dollar did a decade ago.”

Medtech executives face much tougher tradeoff decisions than in the past, analysts noted. On end of the spectrum they need to fund projects to keep existing products fresh and distinct from those of old competitors and new low-cost competitors. Failing to do this will put short-term market share and price realization at risk. Analysts also said that medical device executives also need to take on bigger investments to produce more truly differentiated products to drive midterm and long-term revenue and margins. And if that isn’t enough, executives also are confronted by investment decisions on product lines for emerging markets or “value” segments. At the same time, few executives believe they can significantly increase the percentage of sales spent on R&D to cover all these projects, given that investors are increasingly wary of the return on investment (ROI) on medtech R&D. This creates many tough tradeoff decisions centering on whether to sacrifice the short term to fund the long term or vice versa.

“Our view is that running faster—trying to make the old approach work better—is not an effective way of solving this new set of tradeoffs,” Durand said. “Leading-edge companies must revisit their innovation strategy, footprint and infrastructure, leadership and talent processes, decision-making models, partnership approaches, and other aspects of the old model.”

3. To position globally, be first selective and then aggressive. “It is tough for executives to admit, but it’s nearly impossible to win in the long run in all your global markets,” said Foley. “We see this already in China, for example, where local players have taken almost all the share in certain product categories or customer segments but have low share in others.

“Think of the world in three dimensions: countries, product categories and customer segments,” Foley continued. “Find the pieces of that cube where you can win in the long run and skew investment to them. Avoid ‘spreading the peanut butter.’ Taking a hard look in this way may produce some surprising results. For example, you may find the ROI in certain underpenetrated categories or segments is higher in a developed market such as Japan than in an emerging market, despite lower growth.”

Foley also noted that though company by have an advantage in certain categories in developed markets, they can’t win in them in emerging markets because of different clinical standards of care or price points.

“Further, you may actually find different adjacencies in emerging markets than in developed markets, where you can leverage your core capabilities to be a share leader,” he said. “This approach will require making some tough tradeoffs, but the ROI from being first selective, and only then aggressive, will be much higher.”

4. Become a “lean operator.” Although medtech companies clearly have some distinct customer and regulatory needs on which to deliver, many functions operate similarly to those in other industrial-goods or high-tech industries.

“Not surprisingly, we’re advising medtech companies to begin looking at operations benchmarks in other industries rather than just looking at medtech peers,” according to Michele Brocca, BCG partner and medtech operation lead. “Looking at these other industries for operational benchmarks is quite revealing and helpful in setting midterm and long-term targets for becoming a lean operator.”
Medtech companies may compare favorably to peers on metrics such as inventory level, asset turnover and cash conversion cycle, but they are in the bottom half when compared to industrial goods or high-tech companies.

“For many medtech companies the best goal isn’t cost reduction in itself,” Brocca said. “It’s freeing up cash to increase investment in newly required commercial or innovation capabilities. Given the careful eye investors have on hitting earnings-per-share targets these days, executives need to find how to reallocate dollars internally. One of the best ways of doing that is to become more efficient in operations so you can fund growth drivers elsewhere.”

“Medtech is still a growth industry and will continue to be one of the most attractive sectors for investment for a long time to come,” added Foley. “In the U.S. market in particular, we think employment should go up—way up—given the industry’s advantage relative to global competitors. It is important not to lose sight of that. But the industry must transform to make that happen. Transform commercially. Transform the product engine. Think selectively but aggressively about global markets. And transform operationally.”