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Home » 5 factors affecting the future of medtech

5 factors affecting the future of medtech

October 20, 2014 By Brad Perriello

Five disruptive factors playing out for the medical device industry will shape its course going forward, according to a report from consulting firm A.T. Kearney.

The report was culled from interviews with more than 30 executives from 20 companies spanning the medical device space, according to a press release.

The medical device industry enjoyed average annual growth of 5% from 2005 to 2012, operating margins between 23% and 25% and price-to-earnings ratios that typically outperformed the Standard & Poor’s 500 index, according to the report. But decades of relative stability are threatened by margin erosion that could reach an 8-point decline by 2020, A.T. Kearney said.

"Companies will no longer be able to earn premium margins by simply selling clinical features and new devices into established market spaces. Rather, they will need to look at new segments and, particularly, new end-to-end solutions to secure additional revenue and maintain margins. Furthermore, the commercial model will change, as call points and contract decisions become centralized and purchases are increasingly predicated on comparative value and evidence of efficacy," according to the report.

According to the report, the 5 disruptors medtech executives must prepare for are:

  1. "Power shift to payers and providers – Evidence-based decisions and the funding channels are increasingly challenging the traditional business model of clinician choice. Payers and providers are evaluating medical devices based on safety and procedural efficacy as well as cost and value.
  2. Heightened regulatory scrutiny – In recent years there have been recalls that are high-profile and damaging. Regulators have been tightening up existing regulations and adding new ones. FDA audits have increased by 40% in the past 12 months and the number of warning letters has risen by 24% over the past two years.
  3. Unclear sources of innovation – Because of regulatory and reimbursement issues, medical device companies are focusing their R&D efforts on improving already approved devices rather than developing truly innovative new products. New products that affect the way standardized procedures are conducted are often reluctantly included on the list of reimbursable products. Additionally, startups and small companies are finding it difficult to find capital to fund the increasing cost to bring new innovations to market.
  4. New healthcare delivery models – As payers’ resource constraints intensify, and powerful analytical tools make it easier to evaluate large volumes of data, patient pathways are being modified to obtain better outcomes for less money. For example, increasingly the emphasis is to shift care out of hospitals and into the community.
  5. Need to serve lower socioeconomic classes – Medical device companies seeking growth will need to target less affluent segments that can offer significant absolute profit potential with the right solutions. Accessing growth segments, even in traditional markets, will require new business models, lower price points, and more value-based product offerings than those of today."

"Even within sectors, each company experiences a different set of headwinds and opportunities, depending on where it competes and the specific environment it faces. The most appropriate responses will therefore be company specific," A.T. Kearney partner & co-author Tim Durst said in prepared remarks.

"The question for executive teams is how they can navigate the disruptors and define their unique path, recognizing that the industry is changing now, and the industry leaders of the future are already defining how and where they expect to compete," added principal & co-author Bill Tribe.

Filed Under: News Well, Wall Street Beat Tagged With: A T Kearney

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