Pulse of the industryMedical technology report 2010
To our clients and friends,                   Medtech innovation has often been driven by iterative changes to existing te...
Contents           Global perspectives           1         The value of innovation                     Introduction       ...
Asia-Pacific73    One size doesn’t fit all      Roundtable on China      • Dave DeMarco, PhD, Ernst & Young LLP      • Imm...
Global perspectives
IntroductionThe value of innovationThe medical technology industry faces an unprecedented                      Sustaining ...
Indeed — as shown in the accompanying chart — while                      Medtech’s long-standing “cycle of innovation”…bio...
ability to raise funds from limited partners. With exits relatively          hurdles, are now also being forced to deploy ...
devices and diagnostics has been a less attractive proposition.                                                           ...
A closer look                       Reduced margins and increased creativity:                       health care reform’s i...
These trends are likely to accelerate because of the financial crisis,    unique nature of medtech innovation that was dis...
This system has come under increasing fire in the last couple of             to an environment where the pace of 510(k) cl...
Consumers will be at the center of this new ecosystem, as IT — the  “It would intuitively seem that the                   ...
There is certainly evidence that firms are moving in this direction.        Fueling growthEven as medtech firms are lookin...
difference in delivering health outcomes — in other words, segments                                                       ...
In January 2010, Stryker completed its acquisition of Ascent                This sort of thinking — applying medtech’s cre...
Of particular concern, though, is the outlook for innovation. The                                                         ...
1950s, and over time, the devices have become progressively                       the appropriate value measures (possibly...
• “Trickle up” innovation — The experience of medtech and              will involve dealing with different innovation mode...
James V. Mazzo                    Advanced Medical                    Technology Association                    Chairman  ...
Europe industry perspective                     Andre-Michel                     Ballester                    Qualified re...
Asia-Pacific industry perspective                    Kazuaki Kitabatake                    Terumo Americas                ...
Pulse Of The Industry Report 2010
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Pulse Of The Industry Report 2010

  1. 1. Pulse of the industryMedical technology report 2010
  2. 2. To our clients and friends, Medtech innovation has often been driven by iterative changes to existing technologies. As a result, the industry’s business model has traditionally relied on venture financing, predictable regulatory and reimbursement pathways, regular physician interaction and a symbiotic M&A environment between emerging and established companies. Today, the convergence of several trends and sweeping reforms is placing tremendous strain on medtech’s long-standing business model and will ultimately force the industry to innovate the way it conducts business. Ernst & Young’s third annual Pulse of the industry report focuses on these challenges. In two roundtables — one on innovation and the other on financing and M&As — as well as a series of guest articles, industry veterans discuss the most important issues facing the industry. Our introductory article provides a detailed overview of the key trends and implications, as well as some guiding principles for companies in dealing with these challenges. As always, our report contains extensive data on the financial, financing and transaction activity of the US and European industry, but this year the scope has been broadened to include insights on several key Asia-Pacific markets through an overview article and a roundtable on China. Many of the seemingly disparate trends now looming before the medtech industry — from comparative effectiveness research to the consolidation of hospital purchasing decisions and changes on the regulatory and reimbursement fronts — are in fact symptomatic of a more fundamental shift: the emergence of a “health outcomes ecosystem.” This is a world in which firms will no longer be rewarded based on how many units of a product they sell, but rather on their ability to deliver health outcomes — i.e., improve patient health and access — while decreasing cost to the system. While this will undoubtedly bring challenges, the health outcomes ecosystem — which is being enabled by the intersection of health care and information technology — is, intuitively, in medtech’s sweet spot. Companies in several existing medtech segments could see tremendous growth opportunities because of their ability to improve health outcomes — from enabling personalized medicine to making drug delivery more targeted and effective. Even more exciting, we are likely to see entirely new product and service offerings emerge that use medical technology in creative ways to empower patients and address the needs of payors and providers. But to unleash this potential, companies will need to innovate the process of innovation — experimenting with pilot programs and partnering with non-traditional players. Ernst & Young’s worldwide organization stands ready to help you as you navigate your way forward. — Ernst & Young, Global Life Sciences Center
  3. 3. Contents Global perspectives 1 The value of innovation Introduction 5 US hospitals: dealing with health care reform A closer look Venson Wallin, Ernst & Young LLP 15 Life-changing innovation James V. Mazzo, Advanced Medical Technology Association; Abbott Medical Optics 16 Qualified resilience and new challenges Andre-Michel Ballester, Sorin Group 17 Looking to Asia-Pacific for growth Kazuaki Kitabatake, Terumo Americas Holdings 18 Innovating innovation Roundtable on innovation • Stephen Oesterle, MD, Medtronic, Inc. • Rafael Torres, GE Equity • Don Jones, Qualcomm Incorporated • David Hochman, Orchestra Medical Ventures 25 Preparing for comparative effectiveness research Wendy Everett, ScD, New England Healthcare Institute Industry performance 29 A diverse industry Industry segmentation 31 Stock market performance 33 The (medtech) world is flat Financial results 40 The uncertain incidence of the medical device excise tax A closer look Chris Ohmes, Ernst & Young LLP 45 Reality sets in Financing 56 Dealing with challenges Roundtable on financing and M&As • John Kehl, Edwards Lifesciences, LLC • Josh Makower, MD, ExploraMed Development, LLC • Michael Neuberger, BMO Capital Markets Corporation 62 A buyers’ market Mergers and acquisitionsiii Pulse of the industry Medical technology report 2010
  4. 4. Asia-Pacific73 One size doesn’t fit all Roundtable on China • Dave DeMarco, PhD, Ernst & Young LLP • Immanuel Thangaraj, Essex Woodlands Health Ventures • John Barrett, Medtronic, Inc. • Richard Mao, Johnson & Johnson Medical Asia Pacific78 Increased focus and reforms across Asia-Pacific’s medtech markets87 Scope of this report88 Acknowledgements89 Data exhibit index91 Global contacts iv
  5. 5. Global perspectives
  6. 6. IntroductionThe value of innovationThe medical technology industry faces an unprecedented Sustaining innovationconfluence of challenges that promise to test many basic elementsof the industry’s long-standing business model: funding sources, While medtech is typically classified as part of the life sciencesinnovation mechanisms, deal structures, regulatory regimes industry, it is in many ways quite different from other life sciencesand payor expectations. The implications for the industry will segments, such as pharmaceuticals and biotechnology. The mannerbe significant. In the years ahead, firms will need to revisit key in which medtech firms innovate new products, for instance, oftenelements of their business models — from how they raise capital to has more in common with innovation in information technologyhow they innovate and even to the basic question of what they sell. (IT) than in drug development. That distinction is particularly relevant today, as the sector’s innovation model comes underIn this article, we discuss these issues by grouping them into three unprecedented strain from trends in the capital markets, in thebasic challenges: deal space and on the regulatory front. To appreciate the potential1. Sustaining innovation impact of these trends, it is important to view them in the context of the unique innovation model that has long existed in this sector.2. Delivering value and outcomes Some characteristics of this innovation model include:3. Fueling growth • Short development cycles based on engineering. TheIt should be noted at the outset that this is, almost inescapably, development of many medtech products primarily involvesa discussion of average trends and challenges. Even though we addressing mechanical and electrical engineering challenges.frequently refer to it in the singular — as the medtech industry — This is quite different from drug development, which requiresmedtech is of course an extraordinarily diverse set of technologies understanding — and successfully intervening in — human biology.and products, ranging from contact lenses to implantable devices As a result, medtech development is often seen as less risky andand CAT scan machines. Individual medtech segments have less complex than drug development. This, in turn, means thatdifferent capital requirements. Their products represent different product development cycles for many medtech products arelevels of complexity and patient risk, with different innovation closer to the 18-month cycles seen in the world of IT than thecycles and different customers. The trends we discuss here — like decade-or-longer drug-development time horizons common insweeping changes in any industry — will inevitably produce winners biotech and pharma. The ability to bring innovations to marketand losers. They will create new risks but also new opportunities. in a short time frame has also historically been supported by aThe challenge for medtech companies in different segments will be short and predictable regulatory process.to position themselves to seize these emerging opportunities, evenas they seek to navigate the new challenges and risks. The paths • Collaborative and iterative innovation. Unlike innovation intaken will need to be as creative and variable as the industry itself. pharma and biotech, medtech innovation has typically been conducted in collaboration with customers. The physicians who use medtech products are a valuable source of feedback on product effectiveness and design. It is quite common for a medtech sales rep or product manager to be present in an “In the years ahead, firms will need to operating theater to educate physicians on optimal use while also gathering real-time user data to inform the design of future- revisit key elements of their business generation products. While most innovation in drug development models — from how they raise capital occurs only prior to marketing approval, medtech innovation is to how they innovate and even to the typically iterative and continues well after marketing approval has been secured for the first generation of a product — mirroring basic question of what they sell.” the innovative processes commonly seen in IT, where companies typically bring out new generations of slightly improved products every 18–24 months.1 Pulse of the industry Medical technology report 2010
  7. 7. Indeed — as shown in the accompanying chart — while Medtech’s long-standing “cycle of innovation”…biopharmaceutical innovation is typically represented in a linear“funnel chart,” medtech innovation is better illustrated as a cyclical Physiciansand iterative process. The ideas for most new innovations comefrom physicians. In some cases, the idea forms the basis for a new Idea Coverageiteration of an existing product at a large medtech company. Inother cases, the innovator may seek to commercialize the ideathrough a new venture-backed start-up. VCs PayorsWhile venture funding in medtech shares some features with thefunding of biotech start-ups, the VC model is in many ways closer to Funding Idea Commercializationthe model for funding IT companies. For one, the typical investmentis much smaller (reflecting the shorter product development cycle)and somewhat less risky than a comparable investment in biotech.The preferred exit has been to sell the company to a large medtech Start-up Big medtechbuyer once the technology has received marketing approval(in biotech, by contrast, exits often occur once a product hasdemonstrated proof-of-concept in clinical trials). R&D Acquisition ApprovedCommercializing products has typically been the domain of large technologymedtech companies, which have the requisite infrastructure, Source: Ernst & Youngscale and resources. And, as already mentioned, the process ofinnovation continues through feedback from physicians that leadsto new generations of products. In the span of more than two … now faces new challenges at every stagedecades, for instance, medtech innovations to treat coronary arterydisease have progressed from balloon angioplasty to stents to drug- Physicianseluting stents and, most recently, to bio-absorbable stents. Idea CERThe medtech industry’s innovation model is now underunprecedented strain, as it faces new challenges at almost everystep of the innovation cycle: VCs Payors• Venture funding. The global financial crisis has taken a toll on the funding environment for medtech companies. While Capital crunch Increased transparency Pricing pressures the overall funding numbers have held up reasonably well in requirements the face of the crisis, the distribution of venture capital has become more skewed than at any time in the last decade. As the availability of capital has tightened across capital markets, Start-up Big medtech there has been a corresponding decline in venture capitalists’ Device tax, regulatory hurdles Buying later Approved technology Source: Ernst & Young 2
  8. 8. ability to raise funds from limited partners. With exits relatively hurdles, are now also being forced to deploy precious capital to scarce and considerably more challenging, VCs are having to commercialize products before they can attract a buyer. This not carry their portfolio companies further, which means they have only puts these firms under increased financial strain, but also proportionally less money available for new investments. is a sub-optimal use of resources. It is not ideal for most small companies with no prior product-commercialization experience• Research and development. With many emerging medtech to develop sales and marketing infrastructure that will ultimately companies having less access to capital, they are having to do be regarded as redundant by a buyer anyway. And the timing more with these diminished means. Firms are having to deploy could not be worse. Requiring small firms to build commercial capital more efficiently and are seeking operating efficiencies infrastructure is an inefficient use of capital at precisely the through measures such as restructuring and outsourcing. moment when the industry needs greater capital efficiency. Beyond the immediate impact of capital constraints, the process of obtaining marketing approval for products is itself becoming • Iterative innovation with physicians. Many in the industry more challenging, with the looming prospect of restrictions on are also worried about new strains on the connection between the long-standing 510(k) process for clearing products in the US physicians and medtech firms — a vital link in the iterative cycle (discussed in greater detail on pages 6 and 7). The industry is of innovation. The US Sunshine Act, in particular, will place also concerned about the newly imposed “device tax” under the greater scrutiny on payments to physicians. But this is not by far US health care reform legislation, which is anticipated to have a the only example. The trend toward increased transparency in disproportionate impact on smaller, pre-profitable companies. interactions with physicians is visible in many key markets. The US law, it should be noted, does nothing to ban payments — it• Exits through acquisition. As discussed earlier, acquisitions merely requires companies to monitor and report them — but have traditionally provided the vast majority of exits for investors the threshold for physician payments is very low, and as David in emerging medtech firms. In the past, the buyout of a small Hochman points out in the Roundtable on innovation article, company usually occurred once it had received marketing there are fears that some hospitals may overreact by placing new clearance — a logical transition point since it is more efficient restrictions on contacts between doctors and medtech firms. for large firms, with their resources and economies of scale, to commercialize newly approved products. In the current environment, however, strategic buyers have become much more risk averse and are increasingly interested in buying assets that have already gained market acceptance and demonstrated growth potential. In the US, the “sweet spot” for attracting buyers now appears to be US$40 million–US$100 million in sales and a clear path to profitability. “... while biopharmaceutical innovation This may make perfect sense from the perspective of a large is typically represented in a linear buyer — and represent a reasonable response to an increasingly uncertain reimbursement environment — but its implications “funnel chart,” medtech innovation for innovation in the current climate are worrisome. Small is better illustrated as a cyclical and companies, already squeezed by capital constraints and iterative process.“ girding for the prospect of a device tax and higher regulatory3 Pulse of the industry Medical technology report 2010
  9. 9. devices and diagnostics has been a less attractive proposition. Measurement is another issue — unlike drugs, which are simple “Requiring small firms to build to administer, the efficacy of devices depends at least in part commercial infrastructure is an on the skill of the user, which can generate noise in outcomes inefficient use of capital at precisely data. In addition, the short product-innovation cycles in medtech have made CER considerably more challenging — by the time a the moment when the industry needs comparative effectiveness study focusing on a particular product greater capital efficiency. “ is completed, it could easily be dated by the arrival of the next- generation product.Delivering value and outcomes But change is coming. The Obama Administration’s stimulus- spending package, passed in February 2009, allocatedEven as medtech companies grapple with the challenge of US$1.1 billion for CER. And it is clear that much of that budgetsustaining and funding innovation, they face a future in which the will be applied to medtech products. Indeed, when the Institute offruits of that innovation will be under more scrutiny than ever Medicine (IOM) released its list of 100 initial priority topics for CERbefore. This challenge is being driven by three trends: in June, the list included a number of medtech-specific items, from imaging technologies to stenting to robotic-assistance surgery.1. Comparative effectiveness research Given the challenges in conducting CER at the individual-productComparative effectiveness is not a new concept in the life sciences. level in an industry with such short innovation cycles, it is notFrom health technology assessments to the “fourth hurdle,” surprising that the IOM list focuses instead on comparing entirethe principle of comparing medical interventions to determine medtech regimens to alternative medical interventions. (For morehow relatively effective they are has been around in various on the impact of CER on the medtech industry, refer to “Preparingforms. These ideas have been gathering steam in recent years, for comparative effectiveness research,” by Wendy Everett.)as governments and payors try to rein in escalating health carecosts. In the UK, for instance, the National Institute for Clinical and 2. Hospital consolidationHealth Excellence (NICE) has been conducting cost-utility analysis While CER on medtech products may largely be conducted onfor about a decade to inform coverage decisions by the country’s entire classes of products, companies will also be subject to cross-National Health Service. product scrutiny because of another trend: the consolidation of purchasing decisions at hospitals. Historically, doctors at mostSo far, medtech has been largely exempt from this trend. While hospitals in the US have had relative freedom to use the productsmany medtech companies are used to conducting clinical trials they most preferred. In recent years, however, many hospitals havefor regulatory submissions and to help set pricing, comparative started reducing the number of options in any product class andeffectiveness research (CER) conducted by third parties to requiring physicians to choose from a smaller menu of options.determine whether a product should be given coverage is notwidespread. To some extent, this is because drugs have simply Hospitals are focusing like never before on developing robustbeen more amenable to CER approaches. Drugs account for a procurement functions, which are charged with squeezing costs outlarger share of health care spending than devices and diagnostics, of the system. These procurement offices are much more inclinedand blockbuster drugs and high-priced cancer biologics have to look at medtech suppliers holistically — wanting, in other words,been tempting targets for payors. Since medtech markets are to manage the relationship with an entire enterprise as opposed tooften smaller and more fragmented, applying CER techniques to different product groups or member companies. 4
  10. 10. A closer look Reduced margins and increased creativity: health care reform’s impact on US hospitals Venson Wallin Ernst & Young, LLPThe recently passed US health care reform hospital employees in the years ahead, and the subsequent marketing of the devicelegislation has ambitious and laudable more of them will be affected by this trend. may be shared by the health system andgoals: improving quality, lowering costs the medtech firm. Medtech firms selling big- These financial trends may also limitand increasing access. However, the law ticket equipment will also need to identify hospitals’ ability to access debt markets —will squeeze hospitals’ margins, which potential financing alternatives for buyers. traditionally an important source of fundingwill in turn increase the pressure on their for large equipment purchases. Capital The legislation also mandates manymedtech suppliers. To stay competitive, markets require that borrowers have stable quality and compliance measures that willmedtech firms will need creative pricing and operations and can project a strong margin. have to be reported. Hospitals will havepartnering approaches. Since the details of health care reform financial incentives to comply, and theThe new law mandates reductions in implementation will depend on rules to be federal government will also utilize theMedicare and Medicaid reimbursement, and issued over the next few years, this could data to post comparative measures on webmany believe that commercial insurers will create uncertainty in lenders’ minds about sites for consumers. This is a significantlikely follow suit. Hospital margins — already the stability of the health care industry. opportunity for medtech firms to developa razor-thin 2% to 3% — will be squeezed Meanwhile, the tightening of hospitals’ innovative means of monitoring a patient’seven further by increased costs from new margins discussed above will further episode of care and providing the hospitalquality and compliance requirements and constrain hospitals’ ability to raise capital for with the measurement and documentationhigher patient volumes. large purchases — forcing many to make do methodology for complying with the with existing equipment. regulations.As hospitals try to protect their margins,medtech firms can expect challenging As a result, we could see increased sharingnegotiations over proposed price increases, of equipment such as CAT scans acrossfor example to pass on the medical device hospitals. Some providers have alreadytax contained in reform law. Hospitals formed joint ventures to share technologywill also look to limit the variety of within a region, and such arrangements willmedtech products they carry. Whereas become increasingly common. Critically,they previously often stocked several this is also an opportunity for medtechsimilar products to suit individual doctors’ firms to develop creative partnershipspreferences, this has been changing in with providers to facilitate the use of theirrecent years, and the shift will likely gain technology. For example, a health systemincreased momentum with mounting margin may work with a medtech firm in developingpressures. And, as many doctors become a new device through research and testing,5 Pulse of the industry Medical technology report 2010
  11. 11. These trends are likely to accelerate because of the financial crisis, unique nature of medtech innovation that was discussed above.which has increased the pressure on hospitals’ operating margins. Specifically, the fact that much of medtech innovation consistsIn addition, the reform of health care is expected to add to the of iterative improvements to existing products has meant thatpressure on margins in many markets as reimbursement levels regulators have developed distinct mechanisms for grantingare lowered and costs raised due to new quality and compliance marketing clearance for such products. And the tremendousrequirements. (For more on this trend, refer to “A closer look,” by diversity of medtech products and technologies has resulted in aVenson Wallin, on the previous page.) system where different mechanisms are used to regulate productsThese trends could also increase the visibility of third parties that carrying different levels of patient risk.can help providers manage such challenges. Access MediQuip, for In the US, for instance, where the approval of medtech productsinstance, offers a device management platform that promises to has only been regulated by the FDA since 1976 (as compared to theprocure implantable devices and assume the financial responsibility approval of drugs, which the agency has regulated since the 1930s),and risk of obtaining reimbursement while allowing hospitals to medtech products are grouped into three classes according to theoffer their doctors flexibility in choosing from a broad range of extent of oversight needed to ensure product safety and efficacy:implantable devices. • Class I — products that have a low risk of injury or illness andAs hospitals look to carry a smaller number of products in each do not support or sustain human life (e.g., elastic bandages,class, it will become critical for companies to focus on the value examination gloves and bedpans)proposition of their product offerings compared to those of theircompetitors. Meanwhile, succeeding with procurement offices • Class II — products that carry a higher risk than Class I productsthat are interested in dealing with suppliers holistically will require and are usually non-invasive (e.g., X-ray machines, infusioncompanies to align processes, incentives and performance pumps and dialysis catheters)measures to prevent turf battles. • Class III — products that are life-supporting, life-sustaining or3. Marketing approval carry a high risk of illness or injury (e.g., implantableThe process by which medtech products are given marketing pacemakers and heart valves).approval or clearance is substantively different from the way inwhich drugs are approved. This is, in large part, a reflection of the Class I and Class II products go through a relatively short clearance process — premarket notification, more commonly known as 510(k). This subjects manufacturers to general controls (e.g., manufacturer registration with the FDA, compliance with good manufacturing practice standards, proper branding and labeling) and, in the case of Class II devices, special controls (e.g., labeling requirements, mandatory performance standards and post- marketing surveillance). On the other hand, Class III products — for which there is insufficient information to assure safety and efficacy using only general and special controls — require a premarket approval (PMA), a more extensive process that includes clinical trials. 6
  12. 12. This system has come under increasing fire in the last couple of to an environment where the pace of 510(k) clearances has alreadyyears as a growing chorus of voices has argued that the 510(k) slowed considerably and companies are increasingly concerned aboutsystem needs to be reformed. Critics have cited anecdotes of the uncertainty and opaqueness of the process. Companies are alsoa product that was marketed without being either approved or uneasy about the FDA’s “corrective fix” pilot recall program, undercleared by the FDA and another for which the FDA allowed the which they can be required to recall older models of products aftercompany to determine whether a 510(k) filing was necessary. new versions have been introduced, even when there are no consumerIn October 2008, several scientists from the Center for Devices complaints about the old versions.and Radiological Health (CDRH, the branch of the FDA that Regulating medical products has always involved striking a fineregulates medical devices) wrote a letter to Congress calling for balance between being too lax (failing to protect patients from unsafelegislation to “modernize” the 510(k) process and alleging that products) and being too restrictive (failing to let potentially beneficialsenior management at the FDA was improperly interfering in the products reach patients in a timely manner). Striking that balanceapproval or clearance of products. In January 2009, a study by the for medtech products is not easy, given the tremendous diversity ofUS Government Accountability Office (GAO) found that a number products and technologies and the rapid, iterative nature of innovationof Class III devices were being cleared using the 510(k) process in this industry. The various stakeholders will continue to debate theseinstead of the required PMA process. In September 2009, the issues in the months ahead, but it seems clear that some tighteningFDA responded to these concerns by asking the IOM to conduct of the clearance process is likely. In the US, the 510(k) process willa review of the 510(k) process. Meanwhile, the FDA has been still account for the majority of product approvals, but the dataproceeding with its own 510(k) review. Its 510(k) Working Group requirements are likely to increase, and a greater portion of devicesheld a public workshop in February 2010 and released preliminary are likely to follow the PMA route in the future.recommendations in August. The health outcomes ecosystemAmong other things, the preliminary recommendations call for the These three trends — comparative effectiveness research, increasedcreation of a new class of medical device — Class IIb. These devices, scrutiny and pressure from hospitals, and a higher marketing-which may include implantable or life-sustaining/life-supportingproducts, would typically require clinical and manufacturing datain the 510(k) notice. They would also be subject to additional post- “... health care is no longer justmarketing requirements, such as “condition-of-clearance” studies.The recommendations also called for clarifying the conditions for health care companies. Non-under which multiple predicates can be used in determining traditional entrants — IT firms, retailwhether a device is substantially equivalent to an existing device, giants, insurers, food companies,and potentially disallowing the practice of “split predicates” (when telecommunications providers, globalone predicate is referenced for intended use and another fortechnological characteristics). conglomerates and many others — areThe industry has expressed concerns about restricting the 510(k) already entering the fray, sensingprocess, arguing that the existing system provides regulators with new opportunities in the business offlexibility and has a strong track record of ensuring patient safety delivering health outcomes.“without hampering innovation. The potential restrictions would add7 Pulse of the industry Medical technology report 2010
  13. 13. Consumers will be at the center of this new ecosystem, as IT — the “It would intuitively seem that the great leveler that has already democratized countless industries, from journalism to retail trade — empowers patients as never health outcomes ecosystem — which before. Social media networks — from PatientsLikeMe to Sermo is being enabled, after all, by the and Medscape Physician Connect — are making data on outcomes intersection of health care and and efficacy more transparent and freeing it from the control of information technology — should lie medtech and health delivery companies. Mobile phones are enabling patients to monitor their own health in a myriad of new ways — using in medtech’s sweet spot.“ everything from apps for the latest smartphones to SMS-message platforms that can expand access for patients in rural areas andapproval bar from regulators — are more than a coincidence. On emerging markets.the contrary, they are symptomatic of a fundamental shift — theemergence of a new health outcomes ecosystem. We are moving And health care is no longer just for health care companies.toward a future in which all companies in the health care arena — not Non-traditional entrants — IT firms, retail giants, insurers, foodjust medtech firms, but also drug companies, providers and others — companies, telecommunications providers, global conglomerateswill increasingly find themselves in the business of delivering health and many others — are already entering the fray, sensing newoutcomes. They will, in other words, be rewarded not based on how opportunities in the business of delivering health outcomes.many units of a product they sell, but rather on how effective those These trends are discussed in considerable detail in the 2010 editionproducts are in improving the health of patients. of Ernst & Young’s annual report on the pharmaceutical industry,We are being propelled toward this future by several trends. The Progressions. In that report, we call the health outcomes ecosystemwidespread adoption and meaningful use of electronic health records “Pharma 3.0,” reflecting that the pharmaceutical business has(EHRs) — being heavily encouraged in the US by incentives in the already been through a couple of rounds of reinvention. TheGovernment’s economic stimulus package — will vastly increase daunting challenges associated with pharma’s patent cliff have, inthe volume of data that can be mined to compare the efficacy of other words, driven firms to replace Pharma 1.0 (the blockbusterdifferent treatments. Large systems, such as Kaiser Permanente model in which companies were organized for top-line growth) withand Intermountain Health, have already been doing this, and new Pharma 2.0 (in which companies manage for the bottom line, withentrants in the EHR business such as Google Health and Microsoft specialized products and an emphasis on efficiency).HealthVault could take “value mining” to an entirely new level.Health care reform measures — not just in the US or Europe but Medtech, of course, has never had the equivalent of a 2.0 businessalso in China and other major markets — are basically about the model, because it has never faced as urgent a driver for changedrive to increase equitable access to quality health care while as pharma’s patent cliff. To some extent, therefore, the challengesimultaneously lowering costs, which only heightens the pressure confronting medtech companies is even greater — they muston payors and governments to do more with less. To increase simultaneously adapt to the equivalent of both 2.0 (managing forefficiency across the system, payors will focus more than ever on the bottom line) and 3.0 (restructuring themselves for the healththe value products deliver relative to their cost. outcomes business). 8
  14. 14. There is certainly evidence that firms are moving in this direction. Fueling growthEven as medtech firms are looking for growth in emergingmarkets and greater efficiencies to protect margins (distinctly 2.0 While medtech has fared better than most industries in the currentinitiatives), they are introducing new technologies that empower economic downturn, it has been far from immune to the downturn’spatients and providers with real-time data on outcomes. In just effects. After growing at a brisk pace for several years, theone disease category, diabetes, Lifescan (a Johnson & Johnson revenues of the US- and Europe-based industries were essentiallycompany) has developed an app for Apple’s iPhone that allows flat in 2010 compared to 2009. And with overall economic growthpatients to upload and store glucometer data on their phones and stagnating in the West — and economists debating whether we areshare them with providers. The company has also collaborated heading for a dreaded “double-dip” recession — the industry’s short-with t+ Medical, a UK-based supplier of telemedicine solutions, to term growth prospects are uncertain.develop a coordinated system that transmits data from glucometers The real challenge for medtech companies, however, will be fuelingto a central database. Patients can then receive simplified growth in the long term. Medtech firms — long accustomed to beinginformation on their mobile phones. Meanwhile, Medtronic has treated as growth stocks — are already finding themselves tradinglaunched a new device, Paradigm Veo, which alerts patients when down from the handsome multiples they commanded not tootheir blood glucose levels fall. Bayer Diabetes Care has launched long ago. Investors, wary of higher regulatory and reimbursementDIDGET, a blood glucose meter for children with diabetes, that hurdles, are giving firms little credit for their R&D spending, andconnects directly to Nintendo gaming systems. even acquisitions are often insufficient to move the needle on a company’s valuation.It would intuitively seem that the health outcomes ecosystem —which is being enabled, after all, by the intersection of health care So where will growth come from?and information technology — should lie in medtech’s sweet spot. While each company will need to evaluate its own circumstances,That would suggest that there are opportunities for many more strengths and vulnerabilities when identifying drivers of growth, weapplications than we have seen so far — which has mostly been in believe that much of the answer can be boiled down to one word:the area of mobile/wireless devices. The currency of the health diversification.outcomes ecosystem is information, and harnessing the power ofinformation — capturing, measuring, sharing and monetizing it — Product diversificationwill require innovative new technologies. As we stated at the outset, medtech is an extraordinarily diverse industry. So it is somewhat paradoxical that, despite theBut to capitalize on these opportunities, firms will also need newways of doing business and executing transactions. The realopportunities may be to experiment through pilots and to partner —including with non-traditional players. This is an industry where the “Medtech firms — long accustomed todeal space has traditionally been dominated by M&As, but firms will being treated as growth stocks — arehave to increase the number of strategic alliances in the mix. already finding themselves trading. down from the handsome multiples they commanded not too long ago.”9 Pulse of the industry Medical technology report 2010
  15. 15. difference in delivering health outcomes — in other words, segments that can have the biggest impact on boosting effectiveness or “... as the industry faces tremendous new lowering costs. For instance, as drugs are increasingly pitted risks in the future, it may make sense against each other by comparative effectiveness, innovative drug delivery technologies could help tip the balance in favor of a for companies to look at diversification therapy by helping it to target more specifically, thereby increasing not just as a way of tapping synergies its efficacy and reducing side effects. Wireless and remote patient and lowering costs, but also as a means monitoring technologies could similarly see strong growth because of aging populations and the uptick in chronic diseases. of diversifying risk and expanding into different revenue streams.” As pricing pressures from payors ramp up, companies may also want to consider segments that could be relatively immune to these trends. For instance, the focus on outcomes will increase the impetus for personalized-medicine approaches, and many research-tremendous breadth of activities across the industry, individual tools companies — particularly those building the sequencers andmedtech companies have often been fairly narrow in their focus. other specialized equipment used in identifying biomarkers — willEven some of the largest firms in the sector derive the vast likely see strong demand for their products. The attractiveness ofmajority of their revenues from one therapeutic focus, such this segment is further enhanced by the fact that these productsas cardiovascular devices in the case of Boston Scientific or are typically sold to other companies or to academic institutionsorthopedic devices for Stryker. for research purposes, which means they are often not subject toIronically, this lack of diversity at the company level is at least partly reimbursement and, therefore, unlikely to face pricing pressuresdriven by the tremendous diversity at the industry level. The wide from payors.variance in medtech’s product types and areas of therapeutic focus Offer diversificationmeans that there is often little overlap between different segments. Beyond diversifying into other products, companies could alsoConsequently, two medtech segments may have little in common consider diversifying beyond products altogether, by expandingin terms of R&D capabilities, sales and marketing approaches or into services and solutions. Once again, this mirrors moves seenregulatory requirements, such that the potential synergies to in the world of IT, where computer manufacturers respondedbe gained from combining them — the textbook justification for to commoditization and shrinking margins by getting into themergers — are weak at best. higher-margin business of affiliated services. Examples includeBut as the industry faces tremendous new risks in the future, it may Dell Computer, which acquired Perot Systems in 2009 to expandmake sense for companies to look at diversification not just as a into IT services, and IBM, which sold its PC division to Lenovo andway of tapping synergies and lowering costs, but also as a means of reinvented itself as a services company.diversifying risk and expanding into different revenue streams. The DePuy Healthcare Solutions Group offers a suite of consultingOne approach would be to diversify into the areas within medtech services to help hospitals improve the performance of theirthat are best positioned to benefit in the new ecosystem. If every orthopedic services. The services focus on reducing length of stay,risk or challenge also contains the seeds of opportunity, then increasing capacity and improving staff and patient satisfaction,part of the answer may be in segments that could really make a while reducing the overall cost of the episode of care. 10
  16. 16. In January 2010, Stryker completed its acquisition of Ascent This sort of thinking — applying medtech’s creativity and innovativeHealthcare Solutions, a leading provider of medical device strengths not just to developing new products but, indeed, to thereprocessing and remanufacturing services. Through the acquisition, innovation process itself — will be needed in spades in the yearsStryker expands into a service — helping hospitals recycle medical ahead. As medtech’s innovation model comes under unprecedentedproducts such as blood pressure cuffs that would otherwise be strain, and as companies are called upon to do more with less whilethrown away — which should be in demand in the increasingly cost- defending the value of their products, we are likely to see creativeconscious, efficiency-driven health outcomes ecosystem. new approaches to innovation. The next section describes some of what we might see, and identifies principles that firms should keepGeographic diversification in mind as they navigate the challenges ahead.If one answer to the challenge of sustaining growth is to considerdiversifying into other technologies or services, another answermay be to diversify geographically. This is an approach that manyfirms have been gravitating toward by increasing their focus on Outlook: the value of innovationemerging markets. As growth in mature markets slows, and as In last year’s Pulse of the industry, our introductory article was titledtheir products face intense pricing pressure and increased scrutiny “The certainty of innovation.” As companies faced an environmentin these locations, the rapid advancement of emerging markets of endemic uncertainty, we argued that the one thing they could beis looking increasingly attractive. Health care reform in China certain about was that truly innovative products would always beand growing middle classes with increased access to medical needed and the market would find ways to pay for them.care across several emerging markets promise to create rapidlyexpanding pools of new customers for medtech firms. As discussed A year later, some of that uncertainty is being removed and thein the Asia-Pacific section, the medtech industries in most of these picture is becoming clearer. Health care reform has become the laweconomies continued to grow briskly last year. It is hardly surprising of the land in the US. China is implementing reforms, and similarthat an emerging-market strategy has effectively become a must- reform measures are under way in many other markets. The UShave component of any mature medtech company’s planning. market has also seen passage of the device tax and the release of preliminary recommendations on 510(k) reform. The specter ofBut to unlock the potential that is latent in these geographies, comparative effectiveness remains real, and the IOM’s release of amedtech firms will need to approach innovation in emerging list of top 100 priorities has helped identify the technologies mostmarkets very differently. With lower income levels and a shortage likely to be targeted. But the relative reduction of uncertainty isof health insurance, many patients in these locations will be unableto afford Western companies’ products for the foreseeable future. Ifthe majority of patients in emerging markets cannot afford Western “Of particular concern, though, is theproducts at Western prices, companies will need instead to offerlocally targeted products at locally relevant prices. Indeed, many outlook for innovation. The innovationfirms are already pursuing this approach, as highlighted by several model has now developed a chasmpanelists in our “Roundtable on innovation” article. Medtech between what buyers and regulatorscompanies are developing stripped-down versions of their productsfor emerging markets that do not have all the features of their require and what investors andlatest-generation offerings but still provide effective results at a emerging companies can provide.”lower price point.11 Pulse of the industry Medical technology report 2010
  17. 17. Of particular concern, though, is the outlook for innovation. The innovation model described in this article has now developed a “Today, the danger is that we may chasm between what buyers and regulators require and what be moving to a system that will not investors and emerging companies can provide. The regulatory adequately value each incremental changes discussed above will inevitably increase the time to approval and cost of development of many products. Partly as a innovation — and in the process, we response to these trends, strategic buyers are requiring companies may deny patients the tremendous to commercialize their products before considering a takeout. The potential benefit from the sum of obvious implication for start-ups and their investors is that it will take more time and money to reach an exit. those iterations. ” In theory, this would not be an issue if VCs simply started investing larger amounts for longer periods of time — something they alreadynot necessarily bringing good news — the picture that is emerging, do when they invest in biotech companies. The problem, however,unfortunately, is one where medtech companies will face greater is that this would create a fundamental mismatch between the riskscrutiny and significant new challenges. and reward of medtech investments. Investors take bigger risks in biotech because of the larger potential rewards — a successfulThe road ahead drug can command a relatively high price tag and enjoy manyIt is clear that the pressures identified above will only increase with years of patent protection. But in medtech, the potential payoffstime. Health care reform measures are poised to increase coverage, are smaller, because competitors can often engineer around IP,inevitably raising the pressure on costs. As CER is conducted, most and a product’s life may be measured in months rather than years.industry insiders expect that it will be used in some way to make Meanwhile, other trends, such as the downward pressure on pricesdeterminations about coverage — regardless of what legislative and margins, are expected to further lower potential payoffsprohibitions may say today. Weak growth in the US economy —the prediction of most economists — will bring no quick relief for and exacerbate the growing mismatch between risk and reward.medtech companies. Investors are familiar with “high-risk/high-reward” and “low-risk/ low-reward.” But they may rightfully balk at being squeezed into aWe expect the number of companies to shrink. Venture capitalists high-risk/low-reward model.will probably fund fewer new firms in the foreseeable future. Theconstraints in global capital markets are unlikely to be eased and revert Beyond the strains on the funding of innovation lies a moreto pre-recession levels anytime soon. As they face longer paths to fundamental issue: whether these trends could disrupt the iterativeexits, VCs will need more funding per portfolio company, while firms cycle of medtech innovation, and what we stand to lose if thatlooking for venture capital will continue to face a higher bar. happens. The fact is that while many medtech innovations are relatively small, their cumulative impact over time can be enormous.Meanwhile, financial pressures will drive consolidation. The higher Consider pacemakers, which have been around for well over halfcost of development (particularly for companies that find they now a century. The earliest pacemakers were powered by alternatingneed to conduct clinical trials) will require scale economies and lead current and had to be plugged in to electrical outlets — with obvioussome firms to consolidate. implications for patient mobility and for morbidity in the event of a power failure. Implantable pacemakers were invented in the late 12
  18. 18. 1950s, and over time, the devices have become progressively the appropriate value measures (possibly in collaboration withsmaller, less invasive, longer lasting and more powerful. Whereas payors) and then build the processes and systems to capture theimplanting a pacemaker once required opening the patient’s chest, relevant data.they can now be attached to the chambers of the heart through Meanwhile, as hospitals look to winnow down the number ofa vein — sometimes even as an outpatient procedure under local products purchased in each category, they will increasinglyanesthesia. Unlike the inflexible devices of years past that paced compare individual products within each class. Companies willthe heart at one fixed rhythm regardless of the patient’s needs, need to be proactive in identifying the products most at risk andtoday’s pacemakers can sense intrinsic heart rhythms and pace the then exploring ways of increasing their attractiveness through,heart only when needed (to encourage heart activity and better for example, new pricing models or offering different price/quality of health). They offer a large number of parameters that feature combinations.can be programmed via telemetry to suit a patient’s needs. Allof this has brought tremendous benefits to patients. But none of 2. Innovate innovation. Innovation is no longer just aboutit happened overnight. It took countless iterations by numerous conducting product R&D. It is also about bringing creative newcompetitors over several decades to develop today’s minimally approaches to the R&D process itself — innovating innovation.invasive, maximally flexible devices. Yet any single iteration along Some possible approaches include:the way may have provided only a small incremental benefit. Today, • “Whittle down” innovation — As discussed earlier, manythe danger is that we may be moving to a system that will not medtech firms are developing and selling “whittled down”adequately value each incremental innovation — and in the process, versions of their products in emerging markets — productswe may deny patients the tremendous potential benefit from the that offer a good deal of functionality at a more attractivesum of those iterations. price point. It may make sense for Western companies toRules of the road partner with local firms, which are often able to betterHow will companies need to proceed? Again, each firm’s answer understand local market needs, as well as how to engineer products that best suit those requirements. Indeed, therewill need to be based on individual facts and circumstances, but we are numerous examples from other industries of local firmsoffer some guiding principles below. developing popular products for local conditions. A few1. Demonstrate value proactively. The changes described years back, India’s Tata Group developed a US$2,500 car above will bring an unprecedented level of scrutiny to medtech for the Indian market, and the Indian Government recently products and prices. To thrive in this environment, companies showcased a tablet device that was widely compared in the will need to be proactive and proceed on several fronts. media to Apple’s iPad — for the astounding price of US$35. It is likely that much of the CER conducted with respect to medtech products will target entire product classes. As such, companies will need to identify the products most at risk (e.g., “... if the industry can be certain that those on the IOM list or items with relatively high price tags). In medtech innovation will produce value, it these categories, firms should consider conducting their own can no longer take for granted that that CER (it may even make sense to collaborate with competitors to defray high costs, since the CER is targeting their products value will be recognized by buyers.” too). Demonstrating value will also require companies to define13 Pulse of the industry Medical technology report 2010
  19. 19. • “Trickle up” innovation — The experience of medtech and will involve dealing with different innovation models, corporate other industries offers another insight: whittled-down products cultures, attitudes toward IP and levels of regulatory experience. developed for emerging markets can often gain considerable 4. Preserve the ecosystem. While some industry consolidation traction in mature markets as well. For instance, netbooks — seems inevitable — and could even be a regenerative process — the smaller, more basic versions of laptops that first exploded medtech innovation has relied on a healthy ecosystem of companies into the personal computer market a couple of years ago — of various sizes. With many firms facing a challenging funding have their genesis in the One Laptop Per Child organization’s environment, it is more important than ever that companies pay mission to develop affordable computers for children in attention to preserving the medtech ecosystem. While emerging developing countries. But computer manufacturers soon medtech companies have traditionally relied on venture capital, found that there was also tremendous demand in high-income in the current environment, small companies will need to search countries for inexpensive computers that are “good enough” creatively for other financing options as well. And large firms for most day-to-day needs. Such “trickle up” innovation and public-sector entities could help sustain the future supply of (to borrow the term coined by Wired magazine) may be innovative technologies — while investing in undervalued assets increasingly relevant for medtech in the years ahead as firms — through the establishment of corporate venture arms and are subject to increasing scrutiny from payors and providers incubators. There has certainly been evidence of such activity in in the US and other mature markets. Companies may find that this downturn — recent examples include a new European medical for buyers in these markets, more is not always better. device incubator established by Medtronic and Sofinnova Partners • “Pick your size” innovation — We are already seeing examples and a new cardiovascular-focused incubator on the campus of of “whittle down” and “trickle up” innovation in medtech. But the Cleveland Clinic that was launched with the help of an the industry’s engineering culture suggests that this could US$83 million grant from the state of Ohio. be taken even further through customer customization. Over the years, the innovative technologies and products that Computer makers such as Dell, for instance, have built medtech companies have brought to market have delivered successful business models around allowing customers to tremendous value for countless patients. There are still significant configure products to their liking — giving them a large menu unmet medical needs to be tackled, and medtech innovation certainly of possible features with different price tags. To be sure, has the potential to help address these needs in the years ahead. medtech products may be challenged to offer the same But if the industry can be certain that medtech innovation will degree of flexibility — particularly if each configuration would produce value, it can no longer take for granted that that value will need marketing clearance from the FDA or other regulatory be recognized by buyers. The future for medtech companies is one agencies — but it is certainly feasible that medtech firms may where the value of innovation will have to be demonstrated. allow large customers to “bolt on” the features they consider To position themselves for success, companies will need not most valuable. just to address the challenges in these trends but also to seize the3. Collaborate. While deals have always been a critical part of latent opportunities. the medtech industry, most transactions have either been in acquisitions of smaller companies or mega-mergers among leading players. To succeed in the health outcomes ecosystem, however, companies will need to rely more heavily on strategic alliances than they have in the past. This will require them to develop specialized functional capabilities and skill sets. The challenge will be further heightened by the fact that some of these collaborations will likely be with non-traditional entrants in the ecosystem — and that partnering with dissimilar firms 14
  20. 20. James V. Mazzo Advanced Medical Technology Association Chairman Abbott Medical Optics Senior Vice President Life-changing innovationWe have good reason to feel proud of the economic turmoil. Although not immune to between providing timely access to newrole that the medical technology industry the downturn, the industry’s revenue and medical advancements and ensuring patientplays in advancing patient health and number of employees held steady in 2009, safety. In the US, many in the industry areimproving the quality and efficiency of according to Ernst & Young. concerned that this balance has becomehealth care systems across the world. Every increasingly skewed, with regulators But past performance is no guarantee ofmedtech company — no matter how large growing excessively cautious because of future success. Many stakeholders takeor small or what it produces — supports safety concerns. for granted that medical advancementsthe creation of life-changing innovation. Reimbursement, whether from private will continue indefinitely — just as weWe enable better diagnoses, improved insurers or government-run programs, expect our computers and cell phones totreatment options and enhanced outcomes. needs to provide adequate payment for always improve. But medical innovation —And through our innovations, we touch and the economic and patient benefits it products offering clinical benefit. Asnearly every aspect of care and allow creates — does not just happen. Without major markets move toward comparativepatients to become more independent, supportive public policies and the ability effectiveness approaches, it will be allproductive and fulfilled. for investors and innovators to make the more important for companies toOver the past few decades, medical returns commensurate with the risk they focus on demonstrating the value of theirtechnology has had a significant impact undertake, medtech innovation could well innovation and for payors to supporton patient care. Thanks in large part to be threatened. adequate pricing for products and services that are truly innovative.innovations from our industry and others That caution is particularly relevant today,in the life sciences, overall life expectancy as our industry faces many challenges Tax policies need to encourage R&Din the US is up by more than three years, around the world. In the US, a new excise investment and support start-ups andwhile mortality from heart attacks, strokes, tax will be levied on the industry beginning smaller companies, which compose thebreast cancer and a host of other conditions in 2013 — and the potential burden on vast majority of companies in the medicalhas been cut dramatically. Disability in the smaller, entrepreneurial companies is technology sector.elderly has been reduced by one-quarter. particularly disturbing. The European Intellectual property, which is the lifebloodI am equally proud of the economic Commission is developing legislation that of our industry, needs strong protections.contributions our industry makes in will substantially alter how medical devices At the same time, governments shouldproviding high-paying, high-tech jobs even are regulated in Europe. And Chinese support policies that encourage free tradein these trying economic conditions. As authorities are adding additional clinical and not erect barriers that prevent foreignErnst & Young demonstrates in this report, trial requirements to numerous classes manufacturers from fairly competing withthe medtech industry is a vibrant and of devices before they can be approved local companies. in that country.growing contributor to the US economy, It is our responsibility to make sure that allgenerating US$197 billion in revenue and Now more than ever, we need to preserve stakeholders understand what’s at stake:employing over a half a million workers in an environment that supports medtech without supportive public policies, it is not2009 alone. And these are high-paying innovation. just innovation that suffers but also thejobs: a recent Lewin Group report notes that patients who depend on our life-saving and Regulatory decision-making by the US Foodearnings in the US medtech industry are life-enhancing advancements. and Drug Administration and other global40% higher than the national average. regulatory agencies must be predictableWhile these numbers are impressive, and timely and follow reasonable, risk-basedwhat is perhaps more impressive is how standards of evidence. These agenciesthe industry has weathered the recent need to strike an appropriate balance15 Pulse of the industry Medical technology report 2010
  21. 21. Europe industry perspective Andre-Michel Ballester Qualified resilience and new Sorin Group Chief Executive Officer challengesThe global financial and economic crisis has so treatment.” Manufacturers of large clinical experience, are highly valued,far had little impact on most of the European equipment for diagnostics, imaging while the prices of more commoditizedmedtech industry. This statement — which and hospital infrastructure have seen a products are continually eroding. However,could well have been paraphrased from the slowdown in capital investment, particularly other models may be more challenging for2009 annual reports of a number of European in the private sector. The number of orders innovation in countries with centralizedmedtech firms — sounds like good news. But has decreased for some manufacturers decision making (UK) or with significantit also contains two important qualifiers, both while the selling cycle has increased. regional differences (Italy).of which have implications for the sector’s The second qualifier in the openingoutlook in the months and years ahead. sentence is the phrase “so far.” While Meeting new challengesThe first qualifier is the word “most.” there is good news in the fact that large-Indeed, the majority of companies have equipment manufacturers and some Innovation remains critical for successseen little-to-no decline in their business. outpatient care companies are experiencing in this business. But technology andIn Europe, a large proportion of medical a slow but real recovery in the first half innovation alone are no longer enough.devices are sold to private and public of 2010, challenges lie ahead. European European medtech companies need tohospitals and are ultimately paid for by local governments are running severe budget learn new skills that have traditionallysocial security systems, with or without deficits and have all already embarked been the forte of pharmaceutical firms,a fixed reimbursement price. Acute care on aggressive cost-cutting programs. such as conducting health care technologyin particular — including segments such Remarkably, medical devices have so far assessments. They will also need to focusas major surgery or intensive care units — been largely exempt from these cuts. But on making policy-makers aware of thetends to be fairly recession-resistant and generic and branded drugs have already industry’s important contributions — fromhas held up well in the downturn. With been targeted, and medical devices can the European industry’s hundreds ofthe volume of hospital sales relatively expect growing pricing pressure in late thousands of high-skill jobs and billions 2010 and early 2011, when new country in R&D spending to its development ofunchanged and pricing that has been budget targets will be introduced. Some life-saving products and contribution to(somewhat surprisingly) stable, sales growth industry leaders foresee a new market increased health care efficiencies.has not changed from previous years. segmentation, moving from the traditional New challenges tend to create newBut not all segments have escaped three-segment concept (high-, middle- opportunities. For the European medtechunscathed. In particular, companies that and low-end products) to a two-segment industry, seizing the opportunity will requiremanufacture devices for outpatient care concept: a reduced high-end, clinician- that it show policy-makers how its devices(e.g., dental, ophthalmic and cosmetic driven segment where products are clearly and technologies can save and improvesurgery) have experienced mid-to-high differentiated and innovative; and an patients’ lives, and that it can partnersingle-digit drops in sales volume. For enlarged low-end market where product with them to better control total healthinstance, a leading European dental differentiation will matter less and therefore care costs while creating high-wage,company’s 2009 annual report states: price will be of paramount importance. We high-skill jobs.“Throughout the year, a large proportion are already seeing such a shift in a numberof patients postponed elective procedures of European countries (e.g., Germany)while others even interrupted ongoing where new technologies, some with limited 16
  22. 22. Asia-Pacific industry perspective Kazuaki Kitabatake Terumo Americas Holdings Looking to Asia-Pacific President and Chief Executive Officer for growthThe Asia-Pacific region is a strong and initiative, pledging to invest US$123 billion Asia-Pacific’s huge population and its stronggrowing market for medical-technology over 10 years to expand coverage and build economic position on the world stage makemanufacturers due to its huge population and update medical facilities throughout it a medical-device market that will continueand strong economies — the continent the country, which will only increase to grow in importance in the coming years.accounts for 60% of the world’s population opportunities in this sector. China’s medical To take advantage of opportunities in thisand more than 35% of global economic care is quite advanced in major cities — where rapidly growing region, companies will needoutput, nearly as much as the US and the private facilities would rival those in any US to focus on developing offerings that meetEuropean Union combined. While Japan and metropolis — but still rudimentary in rural the needs of patients in these markets.China attract the most attention, private areas, where the Government is focusinghealth care expenditures in countries such as the majority of its efforts. ChallengesAustralia, India and Indonesia are expected include China’s regulatory system (productto experience double-digit growth rates registration and post-market surveillance),during the next few years — significantly which contains duplicative and overlyhigher than predicted growth in the US. burdensome processes. Another challenge is China’s reimbursement system, whichAlthough Japan’s recent economic growth is largely non-existent, with most patientshas been low compared with that of paying out of pocket for major procedures.neighbors such as China and India, it is As the Government looks to develop a morestill the world’s second-largest market for comprehensive reimbursement system, it ismedical devices. The country will remain focusing on cost containment, which somean important market for medical devices manufacturers fear could fail to account forbecause of its wealth, its comprehensive the value of advanced technology.national health insurance system, whichguarantees coverage for its entire India is also a market with tremendouspopulation, and its large and growing potential for our industry. India’s populationnumber of elderly patients. More than 22% of has huge unmet health care needs — theJapan’s population was over the age of 65 in country has a medical technology market about one-third the size of China’s, despite2008 — the highest percentage in the world — having roughly the same number of people.and the Japanese Government projects that India’s population of 1.1 billion is expectedthis number will reach nearly 40% by 2050. to exceed China’s by 2030, and its economicChina’s medical device and diagnostic growth rate of more than 8% is producing amarket is estimated to total US$8 billion and rapidly expanding middle class — from 170is growing 15%–20% per year. Last year, US million people today to more than 400 millionmedical technology exports to China totaled by 2025. Our industry’s challenge will beUS$1.3 billion, an increase of 21% over the to continue to provide high-quality medicalprevious year. China’s Government in 2009 devices and diagnostics that more Indianlaunched an ambitious health care reform patients can afford.17 Pulse of the industry Medical technology report 2010

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