ey-pulse-of-the-industry-report

Pulse of
the industry
Differentiating differently
Medical technology
report 2014

In the last three issues, we have described
how the drive to value in health care,
combined with the growing power of
patients, is transforming the sector. This
year, our opening article, “Differentiating
differently,” focuses on an additional risk
that has emerged: the commoditization
of many medtech product segments.
For medtech developers, the specter of
commoditization upends their business
models and creates a scenario in which
competition is no longer based on
historical value drivers — brand, quality and
design — but on a single element, price.
To understand how commoditization is
playing out now and in the future, we
surveyed medtech companies’ main
customers in four major markets: the US,
the UK, Germany and Spain. Through
interviews and case studies, we also
explored the various strategies medtech
companies can adopt to differentiate
their products in an increasingly difficult
health care market.
Not all of the strategies we outline in
this report will apply to every company;
nor are any of these strategies mutually
exclusive. What we can say is that the
old ways of differentiating products
appear less valuable to customers. This
means that medtechs must transition to
differentiating differently, placing greater
emphasis on mechanisms that allow them
to distinguish products based on value
and outcomes.
We recognize that differentiating
differently will require changes to
medtech business models and can only
be accomplished in conjunction with
other strategic financial objectives. With
that in mind, we have drawn linkages,
where applicable, to noteworthy financial
performance, financing and M&A trends
that surfaced over the past 12 months.
As ever, we are grateful for the insights,
opinions and perspectives of some of the
industry’s leading insiders in helping us
develop this year’s Pulse of the industry.
We hope this report offers plenty of food
for thought and discussion. We look
forward to continuing the conversation
with you in one-on-one discussions and
via social media. Please visit our blog
(lifesciencesblog.ey.com) and our Twitter
feed (@EY_LifeSciences) for more.
— EY Global Life Sciences Sector
To our clients and friends,
Welcome to the 2014 edition of Pulse of the
industry, EY’s annual report on the medical
technology industry.
Connect with us
@EY_LifeSciences lifesciencesblog.ey.com

Contents
Perspectives
Appendix
Industry performance
05 Point of view: Differentiating differently
11 To improve medtech R&D, take a system-wide approach
Dr. Olaf Schermeier, Fresenius Medical Care
14 Building a better model for health care
Brent Shafer, Philips North America
Dr. James V. Rawson, Georgia Regents Medical Center
18 Collaborative contracting
Mark West, SharedClarity
20 Sea change in China’s medtech industry
21 Why medtech should embrace commoditization
Rob ten Hoedt, Eucomed and Medtronic
22 Taking a new approach
José Almeida, AdvaMed and Covidien
23 Strength, resilience and energy
John J. Greisch, Hill-Rom
24 Charting a new course
Joseph M. DeVivo, AngioDynamics
70 Scope of this report: defining medical technology
71 Acknowledgments
72 Data exhibit index
74 Contacts
26 Financial performance | Holding steady
41 Financing | Financing the future
56 Mergers and acquisitions | Seeking scale
68 Medtronic/Covidien: Emblematic of what medtech is buying now

Perspectives
Part 1
Part1|Perspectives

As a result of these two trends, patients
and payers are more influential, and
companies must respond with new
approaches and business models to
succeed. At a minimum, companies
must now measure health outcomes and
demonstrate the value of their products
to payers and providers. To accomplish
this, they may also have to expand their
traditional offerings by moving beyond
the product (expanding into services and
solutions), beyond the hospital (enabling
care delivery wherever patients happen
to be) and beyond treatment (providing
prevention, remote monitoring and more).
But medtech companies’ strategies will
also need to account for an additional risk
emerging from this confluence of trends:
the threat of commoditization in many
product segments. How to address this
challenge is a central theme of this year’s
Pulse report.
Commoditization
Commoditization is the process by which
products become undifferentiated and
therefore interchangeable in customers’
perceptions. For manufacturers, this
process fundamentally changes the
nature of competition in a business
segment. Instead of competing on
attributes such as brand, quality and
design, products in a commoditized
industry compete largely along just one
dimension: price. Generally speaking,
the journey to commoditization and price
competition takes place in three steps:
(1) a shift in customer perception; (2)
lowered barriers to market entry; and
(3) full-on price competition.
This process is beginning to play out in
medtech, in several ways.
A shift in customer perception
The first step to commoditization is for
products to become undifferentiated
in the eyes of consumers. This can
result when products are functionally
identical — for instance, high octane and
low octane gasoline. But commoditization
can also occur when products still have
distinguishing attributes, but customers
become unwilling to pay a premium
price for these features. This happened
in the 1990s with desktop personal
computers. Until the mid-1980s, IBM
computers commanded a premium price
because of Big Blue’s reputation and its
long history in computing. Over time,
the features distinguishing one PC from
another became less and less important
to customers, and the market was driven
by narrow margins and aggressive price
competition. By 2004, the industry
had become so commoditized that
IBM sold its PC division to the Chinese
manufacturer Lenovo.
To evaluate the extent to which this
dynamic is playing out in medtech, we
conducted a survey of US and European
health care buyers in four major
markets: the US, the UK, Germany and
Spain. In particular, we focused on two
constituencies within these organizations:
practicing physicians and procurement
officers.1
Providers, of course, have
traditionally been the main buyers of
medical devices. This remains true even
in an outcomes-driven world where
payers have more influence and the
physicians themselves have become
the salaried employees of health care
systems. To get a sense of the direction
and momentum of change, we asked
these respondents questions about
buying patterns today as well as their
perceptions of how buying decisions will
be made three years from now.
The survey reveals some clear attitudinal
shifts, with potential implications for the
nature of competition and how customers’
perceptions of medtech products will
change. When asked about the biggest
pressures on their institutions, for
instance, respondents indicated that
simple cost-cutting issues will become
relatively less important over the next
three years. Instead, they expect a
significant increase in the importance of
health care reform initiatives focused on
value and outcomes (e.g., value-based
purchasing and pay-for-performance).
1 The survey, conducted in August 2014, was
taken by 162 respondents in total — 71 in the
US, 33 each in the UK and Germany and 25
in Spain. Of those, 85 occupied clinical roles
(chief of cardiology, department head, etc.) and
77 were in administrative or managerial roles
(purchasing, supply chain, etc.).
Differentiating differently
For several years, we have written about two trends in health care that are transforming the medical
technology business. The first of these — an increasing emphasis on value and the concomitant need
to demonstrate improved outcomes — was something we explored in our 2011 Pulse of the industry
report. The following year, we discussed the second transformative trend: patient-empowering,
information-leveraging technologies (PI technologies) such as connected devices, smartphone apps,
sensor-embedded objects and social media platforms.
Perspectives
5Medical technology report 2014

As shown in Chart 1, 34% of respondents
expect these measures to be among the
three factors placing the most pressure
on hospitals in three years’ time (up from
21% today). Meanwhile, respondents
expect a relative decline in the focus on
cost-cutting (down from 44% today to 37%
in three years), imaging costs (22% today,
12% in three years) and other such issues.
Respondents also see a clear shift in the
most important influencers of purchasing
decisions over the next three years. As
shown in Chart 2, physicians are expected
to become significantly less influential,
while the influence of hospital managers
and administrators (e.g., the CFO/finance
department or procurement/purchasing
department) is expected to rise. Insurers
and other payers are expected to see the
most significant increase in influence,
albeit from a low base — this constituency
is the least influential category by far,
and this will remain the case in three
years. Meanwhile, as indicated in Chart 3,
procurement decisions are becoming
more centralized in many major markets.
These shifts have clear implications for
the ways in which medtech companies
market their wares and how customers
perceive their products. If individual
physicians become less influential,
and purchasing decisions are instead
increasingly made by managers and
administrators — whose prime focus is on
measuring and rewarding value — then it
seems likely that companies will need to
demonstrate the value of their devices in
terms of measurable improved outcomes
for patients and lower total system costs
if they are to make the cut.
Indeed, this is exactly what we see in
Chart 4 and Chart 5 on page 8. As we
have discussed in past issues of Pulse,
medtech companies have traditionally
“innovated at the bedside,” working
in close conjunction with practicing
Perspectives
Higher scores indicate influencers who are more influential — today or in three years’ time — in hospitals’
purchasing decisions.
Source: EY Pulse Hospital Survey.
2.5
2.0
1.5
1.0
0.5
0
Physicians
2.4
1.9
1.7
1.9
CFO, finance
department
0.2
0.5
Payers,
insurers
1.6
1.7
Procurement,
purchasing department
Chart 2. Physicians are becoming less important
influencers of purchasing decisions
Today In three years
Declining:
Simple cost-cutting
1
e.g., Value-based purchasing, pay-for-performance
Numbers show percentage of respondents who selected each factor in response to the following question:
“Please select the three factors that place the most pressure on your institution today, and the three factors that
you anticipate will place the most pressure on your institution three years from now.”
50%
40%
30%
20%
10%
0%
21%
34%
Cost-
cutting
44%
37%
Increasing:
Value/outcomes
41% 40%
Cost of
upgrading or
maintaining IT
systems
Health care
reform
initiatives1
22%
12%
Imaging
costs
33%
27%
Rising
drug costs
38%37%
High-end medical
technology costs
(non-imaging)
Chart 1. Hospitals’ pressures are shifting from simple cost-cutting to value
Ranking
6 EY | Pulse of the industry

physicians and surgeons to develop new
variants of products that met the specific
needs and preferences of these end
users. But as individual doctors become
less influential over the next three years,
survey respondents expect that features
targeted at these buyers will become less
important in purchasing decisions. As
shown in Chart 4, “physician preference
for specific device,” “user-friendly
design” and “training in use” are all
expected to become less important
in purchasing decisions.
Instead, respondents expect that
measures that target value and
outcomes (e.g., “data demonstrating
clinical outcomes,” “data demonstrating
value,” “beyond-the-product services,”
“risk-sharing agreements”) will become
significantly more important influencers
of purchasing decisions.
And, as we show in Chart 5, when
medtech purchasers were asked about
the economic outcomes they see as
most important when differentiating
new products, the leading metric was
“reduced total costs of care.” Indeed,
purchasers ranked this as much more
important than other factors, including
reduced hospital stays or increased
surgical efficiency.
For medtech companies, the
repercussions are clear: to succeed,
firms will need to design and market
their products to appeal not just to the
preferences of physicians in the field, but
also to the value-driven considerations
that are becoming top-of-mind for
administrators and managers.
Perspectives
Chart 3. The reimbursement landscape
Country
Procurement of medical
devices carried out at
the national level
Availability of national list of
approved medical devices for
procurement or reimbursement
Remarks
UK Yes No
NHS trusts can purchase products through one of five main routes:
1. Directly from suppliers using National Framework Contracts
2. From the NHS Supply Chain which provides end-to-end supply chain services
incorporating procurement, logistics, e-commerce, and customer and
supplier support
3. Collaborative Procurement Hubs/Confederations (regional multi-trust
purchasing)
4. Local contracts managed by individual trusts
5. Pan-government National Framework Contracts
France No Yes
The French Government is promoting the formation of regional procurement
collectives, as a cost-cutting measure. Ten such collectives are currently in operation
in France. The RESAH-IDF network, one of the largest procurement collectives in
France, is in the process of establishing a European collective procurement platform
known as Healthy Ageing in Public Procurement Innovation (HAPPI), through which
more than €3 billion of purchases may be made annually.
Germany N/A N/A
Procurement hubs are common in Germany. They have been consolidating in recent
years: there are around 35 hubs, down from 100 in the early 2000s.
Spain No Yes Procurement is being centralized at the provincial level (for several hospitals).
Italy No Yes
Procurement is being rationalized in Italy. Four procurement regions are planned
(North-East, North-West, Central and South), which will replace several agencies at
local and regional levels.
US No No
Purchasing decision-making is shifting from individual clinicians to central
purchasing staff focused on economic cost/benefits. Hospitals are also seeking
preferred provider contracts and/or deploying standardized purchasing initiatives.
Group purchasing organizations continue to negotiate contracts with suppliers.
China Yes Yes
The National Health and Family Planning Commission is responsible for procurement
of medical equipment at the provincial level, including overseeing the bidding and
tendering process for medical devices sold to state-run hospitals. High-value medical
devices are increasingly purchased through a centralized purchasing system.
Japan No Yes
Private hospitals dominate the market and make their own purchasing decisions.
Public hospitals procure equipment through invitations to tender using an
approved list system. Hospitals are increasingly collaborating to raise procurement
efficiencies by forming group purchasing organizations.
Source: EY.

However, this will not always be easy to
pull off, for a couple of reasons.
• Iterative innovation. In the search
for value, payers and providers are
most interested in highly differentiated
medtech products that represent
a significant improvement over the
standard of care. The reality, however,
is that such breakthroughs are rare.
Innovation in this sector is often an
iterative process that yields relatively
small improvements over existing
products. So far, this approach has
worked for medtech companies as
long as the physicians for whom
new iterations were designed valued
these improvements.
Demonstrating the value of these
products to payers and procurement
departments may not be as easy. While
the process of iterative innovation has
often generated huge improvement
in health outcomes over time, any
one iteration may not be enough of
an advance to be valued by buyers.
In many cases, purchasers will prefer
a “good enough” product with fewer
features at a lower price point.
• Different product segments. In our
2014 report Progressions: navigating
the payer landscape, we warned that
companies ought not regard payers
as monolithic in their approaches.
As medtechs seek to understand the
changing purchaser landscape, they will
find that buyers may have very different
attitudes to products depending on the
deployment of those technologies in
the care spectrum. Differentiation will
be more difficult depending on where
medtechs aim their products.
Perspectives
1
e.g., patient support
Numbers show percentage of respondents who selected each factor in response to the following
question: “Please select the three most important factors in your medical device purchasing decisions
today, and three factors you anticipate will be most important three years from now.”
Respondents were asked to rank the three economic outcomes that are most important in differentiating
new medical devices. The lower the score, the more important the economic outcome in differentiating a
medtech product.
Source: EY 2014 Pulse Hospital Survey.
100%
80%
60%
40%
2.5
2.0
1.5
1.0
0.5
0
20%
0%
77% 77%
Price of
device
55%
27%
Physician
preference
for
specific
device
32%
22%
User-
friendly
design
31%
35%
“Beyond
the
product”
services1
22%
18%
Training
in use
6%
25%
Risk-
sharing
agreements
51%
62%
Data
demonstrating
clinical
outcomes
27%
35%
Data
demonstrating
value
Price
remains the
top factor
Old ways of differentiation
are less relevant
Differentiation will have to be
based on data and value
Chart 4. Differentiate differently — or become commoditized?
Chart 5. Health care purchasers prioritize
devices that reduce the total cost of care
Reduced
total costs
of care
Reduced
hospital
stay
Improved
surgical
efficiency
Reduced
pharmaceutical
utilization
Reduced
readmission
rates
1.6
2.0
2.1
2.4 2.4
Ranking

The reality, therefore, is that many
products may find themselves caught
in no man’s land. The features medtech
companies have traditionally emphasized
in order to differentiate their products
may no longer be valued by customers,
and in many segments, it may not be easy
to make the transition to “differentiating
differently” — distinguishing products
based on value and outcomes. In these
situations, products will be left with only
one variable on which to compete: price.
Low barriers to market entry
The pressure on price becomes even
greater when the barriers to market
entry are low. To return to the example
of the personal computer industry in the
1990s, for instance, the move to price
competition was accelerated by the ease
with which other manufacturers were
able to reverse-engineer the IBM PC and
develop computers that were functionally
equivalent. The same process has repeated
itself with various information technology
products, from semiconductors to hard
drives to tablet computers.
This is relevant for medtech because
medical devices are also engineered
products with shorter product cycles.
Western manufacturers who decide to
compete on price will be in a business with
razor-thin margins. Some might decide to
apply “reverse innovation” — developing
relatively inexpensive, stripped-down
products for emerging markets and then
deploying them in the West as well. But
companies should also prepare for the
possibility of an additional challenge —
competition from new entrants with the
ability to deliver products at far lower
price points. China’s medtech industry, for
instance, is in a relatively early stage of
development, but there is no reason why
such manufacturers would not be able to
learn quickly, improve quality to meet global
regulatory standards and create products
that would meet the needs of most patients
at much lower price points than in the
West. Chinese firms in other engineering
and manufacturing-based industries have
already followed precisely this path, and
there is little reason to think that medtech
will be much different. (For more, see “Sea
change in China’s medtech industry” on
page 20.)
Full-on price competition
Once a segment has been commoditized,
a company must choose one of three
directions:
1. Move downstream into the lower-
margin, price competition space
and compete aggressively on price.
Strategies to remain competitive could
include partnering with companies in
emerging markets, reverse innovation
or acquiring scale to gain bargaining
power and economies of scale.
2. Move upstream into a higher-value
segment, innovating within existing
product lines or adding new products.
This is the preferred approach for
companies with products that are
already well differentiated and that
want to continue to demonstrate that
their products add value and merit
premium pricing.
3. Create stickiness. Explore other
ways to create customer loyalty and
differentiate your offering. This could
include expanding into services,
solutions and complementary
product categories.

New bases of competition
If the old ways of differentiation are
becoming less relevant, companies
must develop strategies for competition
on these new bases of differentiation.
Broadly speaking, these tactics fall into
one of four categories:
1. Achieve superior outcomes via
technological advances
2. Increase scope through services
and solutions
3. Increase scope by adding product
offerings (within a disease area or
across multiple disease areas)
4. Take costs out of the health
care system
Of course, these strategies will not apply
equally to every medtech company.
Whether they apply will depend on
a range of factors, including the
company’s therapeutic focus and stage of
development. Moreover, to be successful,
companies may find it beneficial to
develop a strategic plan that incorporates
multiple differentiation mechanisms.
As medtechs consider which tactics to
prioritize, one commonality is how each
helps address the needs of its customers.
Meeting those needs will require medtech
firms to engage with health care buyers
on the buyers’ terms, spending time
on-site to understand concerns such as
workflow efficiency or the ways in which
current devices are used to deliver care.
This is the path Fresenius Medical
Care took when it restructured its
R&D operations in 2013. As Dr. Olaf
Schermeier, the company’s Chief Officer
for Global Research and Development,
explains on page 11, Fresenius mandated
that every one of the company’s
engineers spend a minimum of two days
annually in the clinic, working alongside
medical teams to gain a first-hand
understanding of how to optimize the
care delivery for renal patients.
As they reconsider their strategic priorities
to adopt one or more of the new bases
for competition, companies are likely to
consider reallocating their R&D spending.
Philips Healthcare, for example, which
has embarked on a 15-year project with
Georgia Regents Medical Center aimed at
improving clinical outcomes, has already
done so. Brent Shafer, Chief Executive
Officer of Philips North America, explains
that tackling initiatives such as improving
patient experience requires redistributing
resources. “In the past, Philips might spend
about 8% of our total health care sales on
product research and development,” he
says. “Now, it might be 5%, with 3% going
toward R&D for commercial innovation,
working with our customers to develop
better solutions that they can implement
in their protocols for delivering care.” (See
“Building a better model for health care”
on page 14.)
1. Achieve superior outcomes
via technological advances
In certain therapeutic areas, it has
become difficult to improve upon existing
devices — at least in ways that buyers care
most strongly about. That said, there are
green field areas where new product R&D
can catalyze a new standard of care.
Second Sight Medical Products’ Argus
II retinal prosthesis system is a case in
point. The device — a retinal implant
accompanied by a wireless processing
unit, glasses and a video camera — can
partially restore vision to people blinded
by the rare genetic condition retinitis
pigmentosa (RP). The device was
approved for use in Europe in 2011, and in
February 2013, it won approval from the
U.S. Food and Drug Administration (FDA).
Sophisticated devices such as Argus II,
which represent a technological step-
change, don’t come cheaply. As the
company’s Vice-President of Business
Development, Brian Mech, told Reuters
in February, getting Argus II to the
market took 14 years, US$200 million
and “intestinal fortitude.” Second
Sight is now working with insurers, the
US Centers for Medicare & Medicaid
Services and governments in Europe to
underwrite the device’s US$100,000
price tag. In August, the French Ministry
of Health approved financial support
for the system, which is also available in
Germany, the Netherlands, Switzerland,
Italy, Saudi Arabia and the UK.
Perspectives
To be successful, companies may
find it beneficial to develop a
strategic plan that incorporates
multiple differentiation mechanisms.

Fresenius Medical Care’s success is based on great inventions.
Polysulfone fiber, for example, was key to creating the first truly
effective dialyzer. This kind of innovation was driven by creative
engineers, many of whom are still with the company, and this is
still one of our biggest assets.
of the overall treatment, not just the cost
of a specific product. Thus, reducing
the overall cost of therapy must be one
of our key innovation targets. Vertical
integration — from a complete renal
product portfolio to owning the dialysis
center network — has been a clear benefit
for Fresenius Medical Care, not only in
developing new products but also for the
overall economies of scale.
A key differentiator for Fresenius Medical
Care is the way that R&D interacts
with the clinical part of the business.
Our 3,200 dialysis centers not only
provide an incredible data pool, they
also offer an opportunity for our R&D
engineers to visit a clinic, where they
can get an in-depth understanding of the
optimization potential that can then be
addressed in the technology and in the
development process. In fact, every one
of our engineers worldwide is required
to spend a minimum of two days per
year in a clinic, observing therapies and
processes and discussing them with clinic
staff and patients. This enables them
to get an in-depth understanding of the
optimization potential they can address in
new technology developments.
Our clinics treat around 280,000 ESRD
patients worldwide, three times per
week, and we conduct regular surveys to
learn how we can help to improve their
quality of life. On questions of care, the
patients play an increasingly important
role in the overall decision-making
process. Therefore, it is crucial for us to
understand their needs. Home patients,
for example, are unwilling to use bulky
and complex clinical machines. We have
to understand that we cannot simply take
a clinical system, adapt it slightly and
assume the patient will be happy to have
it in his or her home. What is the impact
on patients’ flexibility? Can they use the
system when they travel? How simple
is the user interface? These are huge
decision points for all home patients,
and our engineers have to incorporate
this kind of thinking in the product
development process.
The renal care space is still growing,
but the logical question is, where to go
from here? Many of our patients have
comorbidities: more than 40% of dialysis
patients have diabetes, 70% have high
blood pressure, and nearly all have some
kind of cardiovascular disease.
For us, this is clearly an opportunity
to expand our services into chronic
care coordination, by incorporating
elements of general practice, cardiology,
diabetology and even psychology to
improve our overall patient care. This
makes sense not only from a service
perspective, by making use of our clinical
infrastructure, but also from a product
and technology perspective.
Guest article
To improve medtech R&D,
take a system-wide approachDr. Olaf Schermeier
CEO Global R&D, Member of the
Management Board, Fresenius Medical Care
As engineers, we have long been
accustomed to innovating by looking
at individual products — the best-in-
class dialyzer, for example. But we now
understand that even more value is
created when we try to improve a specific
therapeutic system in its entirety, by
taking a more holistic view of a therapy.
We now ask: What is the outcome for
patients? What is the reimbursement
structure? What kind of therapy can I
apply, and how can I make it as cost-
effective as possible?
This approach goes beyond individual
products. It clearly represents the biggest
innovation potential in dialysis.
The various elements of Fresenius
Medical Care’s portfolio — dialysis
machines, disposables, drugs, dialyzers
and IT solutions — all interact with each
other to create value and improved
therapies for end-stage renal disease
(ESRD). A good example is our Online
hemodiafiltration (HDF) therapy. HDF
is based on the ultrafiltration of large
amounts of plasma across the dialyzer
membrane. The removed volume is
then replaced by ultra-pure substitution
fluid. Developed by engineers working
very closely with medical doctors,
Online HDF therapy is a big advance in
care that provides clear advantages to
patients. As a result, many countries
have increased their reimbursement for
this specific therapy.
When it comes to reimbursement, the key
decision-makers are increasingly basing
their decisions on the cost-effectiveness
Perspectives
Key decision-makers
are increasingly
basing their
decisions on the cost-
effectiveness of the
overall treatment,
not just the cost of a
specific product.

Second Sight’s highly specialized
technology represents innovation as
medtech has typically defined it: a new
therapeutic device to help solve an
important unmet medical need. Another
kind of technological advance is embodied
by AliveCor, a much different kind of
company. In 2012, the privately-held
San Francisco company introduced a
smartphone case that doubles as an
electrocardiogram (ECG) for people
suffering from heart disease. Sensors on
the case turn electrical impulses in the
user’s body into ultrasound signals, which
are then recorded via an app and allow
real-time monitoring.
Since early 2013, AliveCor has collected
anonymous ECG data, building a database
of more than 1 million recordings, with
more data being gathered each month.
Using these data, the company has
developed an algorithm, approved by the
FDA in August 2014, to detect in real time
atrial fibrillation, the most common form
of cardiac arrhythmia. The algorithm
moves AliveCor’s product beyond
monitoring to facilitating intervention, so
that providers can take action before a
patient suffers a more serious and costly
event, such as a stroke.
It’s hardly surprising that these
innovations came out of smaller, venture-
backed endeavors. Rob ten Hoedt,
Chairman of Eucomed and President
EMEA & Canada at Medtronic, notes,
“Innovation in medtech will continue to
be driven primarily by small to medium-
sized enterprises (SMEs) and start-ups.”
That said, these companies aren’t immune
to the challenges of commoditization
affecting larger medtechs. “SMEs
need to be extremely careful to remain
competitive and to differentiate their
products from those of larger companies,”
says ten Hoedt. Put another way, SMEs
need to make sure they have a solution
that not only addresses a need in the
marketplace but can easily be tucked into
a larger entity.
2. Increase scope through
services and solutions
As bundled payments become one of the
leading strategies for reducing health
care costs, an increasingly obvious tactic
for medical technology companies is to
try to “own” more of the bundle. Medtech
companies have, for some time, offered
additional services alongside their
products as an incentive to purchasers.
That’s a problem, according to Dr. James
Rawson, Chair of Radiology at Georgia
Regents Medical Center in Atlanta. “Many
of the services developed by vendors
are focused on transactions, rather than
relationships and partnerships,” he says.
“The endpoint of the relationship between
a medtech company and a care provider
is no longer a sale. The endpoint is an
improved patient outcome. That’s where
the industry has to go.”
Proving his point, Georgia Regents last
year embarked upon a 15-year, US$300
million agreement with Philips Healthcare
in which Philips is paid for supplying and
maintaining equipment — including that
of rival firms — as well as for improving
patient care. (See “Building a better model
for health care” on page 14.) Philips has
embarked on a similar agreement with the
Karolinska University Hospital, in Sweden.
As part of that 14-year agreement, which
Philips won in May 2014 after a Europe-
wide tender, the conglomerate will invest
in R&D and a provider education program,
while also overseeing the procurement,
installation and maintenance of the
imaging equipment at the Karolinska’s new
site in Solna.
As Philips’ collaborations with Georgia
Regents and the Karolinska suggest,
beyond-the-product services must serve
a clear purpose, for instance addressing
operational efficiencies, if they are to
succeed. Medtechs also need to be willing
to manage and support the service well
beyond the life of an individual product,
while being agnostic about where the
technology originated.

To date, the companies that have
embarked on the most ambitious
attempts to own more of the bundle are
the largest medtechs. The big imaging
specialists such as Philips and GE
Healthcare led the way, in part because
they had to. They were among the first to
come under pressure from cost-conscious
hospital systems given the centralization
of big capital equipment purchases.
Therapeutic device companies are
now moving in this direction as well. In
December 2013, Stryker bought Patient
Safety Technologies for US$120 million
in order to gain access to traceability
software and hardware that reduce the
possibility of post-surgery complications
caused by medical errors.
Meanwhile, Medtronic’s US$200 million
acquisition in 2013 of Cardiocom, a
telehealth company that provides home
monitoring, shows how Medtronic is
expanding its cardiovascular franchise
beyond implantable devices to the
provision of services. Just a month after
the acquisition, Medtronic established
a new business unit, Medtronic Hospital
Solutions, to partner directly with
hospitals to increase the quality and
efficiency of service delivery. And in
August this year, the company pushed
further into the hospital sector when
it acquired NGC Medical, an Italian
company that offers services such
as hospital infrastructure design and
equipment management.
3. Increase scope by
adding product offerings
The move from volume to value means
medical technology firms that offer health
care buyers an end-to-end solution in a
given disease area may have a competitive
edge. By having a suite of offerings
designed to address the continuum of care
in a given disease area, medtechs provide
their customers additional value in two
related ways. First, by providing a full range
of clinically tested products, medtechs
assist in ensuring provider groups can
meet important care metrics that are
now a necessary precursor for their own
reimbursement. Second, by offering a
spectrum of solutions in a given disease
area, medtechs with the right portfolio of
offerings can help simplify the contracting
complexity health care buyers face.
Surveys of health care payers and
purchasers we conducted in 2014 suggest
that they have so many strategic priorities
to accomplish in the near term that they
don’t have the bandwidth to engage with
multiple medical technology makers in
meaningful conversations about value —
especially if that value won’t be realized
within the current budgetary cycle. By
establishing relationships with fewer
suppliers, these health care buyers can
begin to address the issue, negotiating
new payment contracts that provide
their organizations with improved pricing
around the total cost of care.
The deeper a medtech supplier is in a
therapeutic area, the more development,
regulatory and marketing costs it can
leverage across its various departments.
Further out, one can imagine how these
deep relationships might shift, such
that a medtech developer contracts to
provide devices for a fixed fee, whether
the device is a simpler hip joint or a more
complicated total hip replacement. Such
innovative contracts are, for now, just
talk, but senior medtech executives should
start to understand how owning a disease
could enable their companies to move
away from unit-based pricing to a payment
system that enables market access.
In many ways, the service-plus
relationships struck by Philips Healthcare
and Fresenius illustrate how increasing
product scope (broadly defined) might
facilitate new commercial models
that are less transactional at the unit
level and more relationship-driven.
The question is how such a model will
be applied in the therapeutic device
category, especially implants.
Medical technology firms that offer
health care buyers an end-to-end
solution in a given disease area may
have a competitive edge.

Guest article
We’ve partnered with many hospitals
around the world, but those partnerships
have been based more on managed
equipment services. This is different. It has
a managed services component, but it is
also tied in with a very strategic risk-sharing
component and other financial factors.
Under the terms of our relationship, the
first thing Georgia Regents was able to
do was reduce their cost of procurement.
They didn’t have to bid for equipment
with three different vendors; they didn’t
have to schedule on-site visits. And we
manage all the equipment, whether
it’s our equipment or a competitor’s.
We guarantee certain performance
metrics, but at the core of the risk-
sharing component of the relationship,
our common goals are improved patient
outcomes, shorter length of stay and
greater patient satisfaction.
Our contract is for 15 years. There
are three areas of focus tied to patient
satisfaction. The first is based on
patients’ experience once they get to the
institution. Second, we are partnering
with Cerner to integrate electronic medical
records. And third, we will work on our
hospital-to-home strategy, developing and
deploying remote monitoring capabilities
and other solutions for home care.
Philips is in a good position to tackle these
initiatives. It’s just a matter of how we
want to use our resources. In the past,
Philips might spend about 8% of our total
health care sales on product research
and development. Now, it might be 5%,
with 3% going toward R&D for commercial
innovation, working with our customers
to develop better solutions that they
can implement in their protocols for
delivering care.
We want to establish many more of these
partnerships, but they won’t necessarily
work everywhere. We have to look at what
is in the best interests of the customer and
in the best interests of Philips, and at what
strengths we hope to achieve through a
partnership. Our relationship with Georgia
Regents means that we can do what we
do best — innovate, deliver and manage
equipment capable of gauging, diagnosing
and recording everything from a patient’s
vitals to remarkably detailed images, giving
the clinicians more time to deliver expert
one-on-one care for each patient.
We expect this type of model to become
very attractive to hospitals across the
world. Each hospital is going to have
different needs, but this is a model from
which we can build.
Building a better
model for health care
Brent Shafer
Chief Executive Officer
Philips North America
In 2013, Philips Healthcare and Georgia Regents Medical Center entered into a 15-year, US$300
million agreement to improve outcomes and deliver care more efficiently to patients. Here, Brent
Shafer, Chief Executive Officer of Philips North America, and Dr. James Rawson, Chair of Radiology
at Georgia Regents, discuss the rationale behind the deal, and its ambitions.
We’ve partnered with many hospitals
around the world, but those partnerships
have been based more on managed
equipment services. This is different.
Philips’ alliance with Georgia Regents
leverages our joint strengths — Philips’
equipment, services and revenue cycle
management and Georgia Regents’
ability to serve patients and provide
better outcomes. With Georgia Regents,
we were looking at a partnership from
a much broader perspective than just
a hospital entity. We were able to bring
Philips’ whole portfolio, from dental care
to lighting, not just to the hospital and the
university, but also to the community.
Perspectives

Guest article
Dr. James Rawson
Professor and Chair of Radiology,
Georgia Regents Medical Center
The relationship between Georgia
Regents and Philips is based on common
values. When we compared our priorities,
we saw an overlap in the areas of
improving patient health, lowering costs
and increasing efficiency. We both wanted
to build a better model for health care.
One challenge we had was in teaching
people that this wasn’t just a big
equipment deal, but something very
different. But it is now part of our day-to-
day operations across the organization,
not the responsibility of a single team.
What Philips saw in us was alignment. In
many hospitals, there is a lack of alignment
between hospital staff and physicians.
In our case, rather than having different
departments fight over types of equipment
to be used, or workflow, our departments
work collaboratively and have done so
for decades. In that type of environment,
Philips doesn’t get stuck in the middle of a
debate between what the doctors want or
what different specialists want.
The success of the partnership, in my
view, is working with a partner on the
good days and the bad days, helping to
move the ball forward to improve health.
It’s no longer about being sold a piece of
equipment or a technology. I no longer
look at projects as being completed; I
look at them as journeys. We installed a
new Philips IntelliSpace PACS system for
storing and viewing and processing image
data six months ago, and we continue to
innovate and improve that process. It is
now hard-wired into our operations. The
time we used to spend on buying and
selling equipment we can now reinvest
into innovation and improving the care
given to each patient.
When we installed the PACS system,
we decided this was not going to be a
radiology project, but an enterprise-wide
project. We thought a great deal about
the methods our physicians would use
to access images in the hospital, in the
clinic and at external locations, and how
easily they needed to be able to interact
with that image data to make patient care
decisions. It was about changing the way
images would move in the entire health
system for everybody.
Because we have Philips and our
patient advisors sitting at the design
table with us, I think we’re able to
make much better decisions.
We’re both learning — from each other,
from our patients and from our staff.
Georgia Regents was an early pioneer in
patient- and family-centered care. We look
at new equipment from an efficiency and
care delivery point of view, but also from
the patient’s perspective. How do we
make getting a scan a good experience
for the patient, and how does that fit into
a larger context of the patient’s overall
experience in our hospital? Because we
have Philips and our patient advisors
sitting at the design table with us, I think
we’re able to make much better decisions.
We went live in January with the first
phase of the PACS project, and we’re
continuing to improve that workflow.
Entering year two, we plan to accelerate
the pace of innovation. As we keep at this
for the remainder of the 15 years, we are
creating a very different model of care
delivery in which innovations are built
on previous learnings. We expect this to
lower costs and to improve outcomes,
efficiency and, most important, the
patient experience.
Perspectives

Creating scope in a
single disease area
Two deals in the 12-month period ending
30 June 2014 showcase how therapeutic
device companies are broadening the
scope of their product offerings.
The first is Zimmer Holdings’ proposed
acquisition of Biomet; the second is the
Medtronic/Covidien megadeal, which is
an even more ambitious effort to create
scale across multiple disease areas.
The US$13.4 billion Zimmer/Biomet deal
creates an orthopedic player with the
critical mass to rival Johnson & Johnson’s
DePuy Synthes. As Pulse went to press,
European regulators were assessing the
anti-trust implications of the Zimmer/
Biomet deal. Assuming it proceeds, the
transaction will combine the number
two orthopedics player by revenue
(Zimmer) with the fourth-ranked firm
to create a new entity with revenues of
nearly US$8 billion. Importantly, the deal
promises to position Zimmer as a leader in
the musculoskeletal sector, with particular
depth in knee and hip implants. Biomet’s
sports medicine products, meantime,
will give Zimmer additional depth in the
trauma market, an area where Johnson &
Johnson currently dominates because of
its 2011 megadeal with Synthes.
The Zimmer/Biomet transaction is
expected to trigger even more deal-
making in the orthopedic space, as
smaller firms seek scale to remain
competitive. Moreover, we may see
similar deals to deepen product offerings
in other therapeutic areas — especially
those with an abundance of competitors.
Indeed, as we were writing Pulse, news
broke that Danaher was to acquire
Nobel Biocare Holding for US$2.2 billion
to create the leading dental-focused
medtech based on sales of consumables
and equipment.
In some cases, the push to add product
scope may turn buyers into sellers. As we
have witnessed in the pharma business,
or with Johnson & Johnson’s divestiture
of its Ortho-Clinical Diagnostics division,
larger companies may realign their
portfolios to create fewer business units
with competitive scale. (See “Seeking
scale” on page 57.)
Creating scope in
multiple disease areas
If the Zimmer/Biomet and Danaher/
Nobel Biocare mergers are motivated by
deepening product scope, Medtronic/
Covidien takes the argument to a new
level. In essence, executives championing
that megamerger argue that depth in
one particular disease area is no longer
sufficient. To change conversations
with hospital purchasers, especially
as vendor consolidation continues,
medtech developers must have breadth
across multiple disease areas. Call it the
über-scope approach.
It’s too soon to say whether the
Medtronic/Covidien transaction will have
a positive impact on the ways in which the
combined entity brokers contracts with
hospital purchasers, or whether scale at
this level is required to achieve greater
leverage with health care buyers. That
said, there is no doubt that Medtronic/
Covidien has already altered the
conversation about the role of medtech
M&A in creating entities that can survive
in today’s tougher health care climate.
As we note on page 68, the US$42.9 billion
merger joins two leading medtech
companies to create a new entity that
will rival Johnson & Johnson’s medtech
division in annual sales. Medtronic and
Covidien offer complementary product
portfolios: Medtronic supplies a range
of devices for the cardiology, neurology
and diabetes markets, while Covidien
specializes in hospital supplies. Together,
the combined entity will be one of the
leading medtech distributers in six of the
top 10 hospital purchasing categories,
according to Medtronic.
“The addition of Covidien broadens our
footprint,” Medtronic Chairman and
CEO Omar Ishrak told an interviewer
after the announcement of the merger.
“The value proposition of Covidien’s
technology is primarily to deliver hospital
efficiency, while Medtronic’s chronic
disease therapies deliver value in post-
acute settings. When these two are
combined, in a world in which integrated
health franchises will be more common,
we become a very attractive partner —
we can deliver value in the hospital, in
a measurable fashion, and value that is
realized outside the hospital.”
In an era when health care buyers are
inundated with must-dos, it may well be
that the scale of a Medtronic/Covidien
makes such entities more attractive
suppliers during contract negotiations.
Indeed, the emergence of a new initiative
in the US, SharedClarity, which is
sponsored by the payer UnitedHealth
Group in conjunction with multiple provider
groups, underscores why medtech
executives see scaling their businesses as
an important strategic priority.
The dearth of comparative data has long
vexed medtech customers who argue the
rate and volume of the research hasn’t
kept pace with the introduction of new
products. SharedClarity was created at
least partially to rectify that situation,
as well as to deliberately correlate
existing research with value claims. As
SharedClarity’s President, Mark West,
explains on page 18, the company recruits
physicians from its member hospitals
to review the published literature and
Perspectives

establish which technologies provide
better health outcomes. SharedClarity
then takes the process one step further:
its sourcing group also negotiates
purchasing agreements with product
manufacturers based on the evidence
amassed. In March 2014, SharedClarity
announced the results of its first review
and awarded contracts for drug-eluting
and bare metal stents.
Apart from offering benefits to
purchasers, the SharedClarity model
presents opportunities for medtech
companies. The first is the most
obvious — a stable channel to the market.
The second advantage is validation by
an independent third party. The final
advantage is the goodwill that results
from cooperatively participating in
the negotiation process. Presumably,
a company the size of a combined
Medtronic/Covidien is better positioned to
negotiate those purchasing agreements
because its economies of scale mean it
can be more disciplined about its own
costs, thereby passing along price savings
to customers like SharedClarity while still
maintaining reasonable margins.
Success in one purchasing negotiation is
likely to breed further success, not simply
with the original buyer but with other
purchasing organizations. Thus, medtechs
that have participated, and won contracts,
with groups like SharedClarity develop
relationships as trusted partners, setting
the stage for further positive negotiations.
For medtech companies, achieving this
trust is no small matter. Customers are
increasingly demanding more data before
they commit to a purchase — and are not
necessarily getting it. “I’ve been asking
about clinical outcomes and impact on
the patient with every new technology
I’ve assessed,” says Georgia Regents’
Rawson. “For the most part, vendors have
not had the answers to those questions.”
4. Take costs out of the
health care system
Recognizing that commoditization is a
fait accompli in certain disease areas,
medtechs could also go on the offensive,
devising products or technologies that
provide better value because they remove
costs from the system. There are two
ways to achieve this. First, companies
can reduce their costs of production, for
instance by engineering a simpler, lower-
tech device or by manufacturing the
product more cheaply, and passing the
savings on to the customer.
Perspectives
Customers are increasingly
demanding more data before
they commit to a purchase — and
are not necessarily getting it.

Guest article
The concept stemmed from business
reviews carried out by UnitedHealthcare —
the largest commercial payer in the US —
and Dignity Health. The theme of medical
devices kept coming up, in particular
the lack of independent knowledge of
how these products perform, and their
affordability. I was head of supply chain
at the Cleveland Clinic and was asked
to develop some business models, one
of which is SharedClarity. Over the last
four years, we have taken the concept to
business plan, to investment, to operations,
and now we are achieving results.
The business model is two-fold. One
side of it is understanding how medical
devices perform, and the other is
collaborative contracting within our own
membership, which now includes Baylor
Scott & White Health, Advocate Health
Care and McLaren Health Care, as well as
UnitedHealthcare and Dignity.
On the clinical side, we have identified
30 product families on which to focus —
high-cost, high-technology, high-clinical-
impact products, such as pacemakers,
defibrillators, stents, knees, hips and
urological slings. Together, these 30
product families account for about
US$35 billion a year in the US market.
We assign those products a clinical
review team, and we go through a
structured clinical product review for
each. We also tap into Optum, which is
owned by UnitedHealth, for comparative
effectiveness work. We believe that if you
really want to understand how a product
performs, you have to follow the patient,
and you have to have data that go from
diagnosis to procedure to after-care.
What differentiates us is that we have the
data that follow that longitudinal activity.
We recently completed the clinical review
and contracting process for our first three
products — drug-eluting stents, bare metal
stents and peripheral stents — a process
that took six months. Clinical review
teams first look at existing research on
the product. They survey specialists who
use the product to get input on product
attributes and performance. Then we see
if there’s consensus on how the products
perform. If there isn’t, we ask: why not?
What information and data are lacking?
What holes in our clinical knowledge base
do we need to fill? This could lead us to
more surveys, more reviews of existing
research or a customized study.
Once the clinical review team has done its
work, we go to a collaborative contracting
process on behalf of our members. Here,
our strategy is simple: first, we take the
output from the clinical review teams
and their findings. Second, our members
commit to purchasing a significant portion
of their volume off SharedClarity contracts.
And third, we use the findings of our
clinical review team to help us to rationalize
the number of products that we use.
The clinical review and contracting
process went very well for our first three
products. Every one of our members
achieved double-digit cost savings on the
contracts — it was the type of quantum
leap of improved affordability that we
were hoping for.
Our credibility with device manufacturers
is based on the fact that the physicians
are engaged not only in the process
of evaluating the product, but also in
its implementation. We don’t charge
administration fees, and we are not
structured like a group purchasing
organization. And we have a committed
model. When our supplier for drug-eluting
stents signed the contract, they notified us
it was the largest committed contract in the
United States that they remember signing.
Something I didn’t expect is that we are a
change management company, too. We
are changing the processes and culture —
administrative and physician engagement,
joint decision-making — within our health
system members and the medical device
community.
Suppliers are in the process of trying to
figure out the model of the future, and who
they should partner with. Their relationship
with physicians has changed. They realize
that payers play an important new role, and
they are working out how to engage with
them. That is one reason why we have built
a process that engages not only the payers
but the providers, and creates an easy
entry for them that way. They have been
very receptive to what we’re doing, and we
see ourselves as their future partners.
Our growth opportunities are global.
UnitedHealthcare bought Amil [Brazil’s
largest insurer and hospital operator]. This
represents a fascinating opportunity —
Amil is using some products that aren’t
approved for the US. It’s good to gain
some intelligence on those products,
and to have an opportunity to do global
contracts for medical devices. I think we’ll
see more globalization of products, and
the more options and competition we
have, the better it is for patients.
Collaborative
contracting Mark West
President, SharedClarity
The advent of SharedClarity is a very clear indication of the push
that we’ve seen for some time now toward outcomes and value
within health systems.
Perspectives

The second way is predicated on taking
costs out of the system. In this scenario,
how the actual medical technology is
priced isn’t the main focus; what matters
most is whether the product results in
credible cost offsets that reduce the total
cost of care.
This is the bar Johnson & Johnson’s
Ethicon division is hoping to clear with
Sedasys, its computer-assisted anesthetic
delivery system for colon cancer and
upper gastrointestinal screenings.
Given the sophisticated automation
underpinning Sedasys, the instrument can
be used to deliver the anesthetic propofol
in the absence of an anesthesiologist.
(The gastroenterologist conducting the
exam would oversee the drug’s delivery.)
Johnson & Johnson estimates this will
allow health care groups to cut colon
cancer screening costs significantly,
from an estimated US$600-US$2,000
to around US$150. Uptake of Sedasys,
which launched in early 2014, has
been modest, in part because Ethicon
has deliberately chosen to make sure
physicians are properly trained in how and
when the device should be used before
rolling it out more broadly.
Creating a new device like Sedasys
requires companies assume significant
manufacturing, engineering and R&D
costs — it took over a decade to develop
the instrument. But medtechs can also
either refine their engineering processes
to create simpler products that can be
sold more cheaply, or shift manufacturing
to markets where labor costs are lower.
In fact, such cost-saving strategies are
already in evidence in India and China,
where both domestic and multinational
medtechs are devising lower-cost,
affordable products to treat the new
and rapidly growing middle class in each
country. (See “Sea change in China’s
medtech industry” on page 20.) “The fact
that the Chinese Government wants to
create a socialized health care system for
1.5 billion people is the largest opportunity
in the world for medtech firms,” says Rob
ten Hoedt of Eucomed and Medtronic.
As companies redesign and adapt
their portfolios to develop products
for emerging markets, they may take
advantage of this “reverse product flow”
to build no-frills, lower-cost products for
use in developed markets. That’s what
Smith & Nephew is doing via Syncera, an
orthopedics-focused pilot that reduces
the need for on-site technicians and other
services associated with two key hip and
knee replacement products. As a result of
these changes, Smith & Nephew believes
it can reduce implant costs by as much
as 50%. The company first introduced
the Syncera pilot in emerging markets;
in August 2014, it launched a similar
experiment in the US.
At the time of the US launch, CEO Olivier
Bohuon told investors that the ultimate
idea behind Syncera was to maintain
margins by reducing prices on its
orthopedic products in tandem with less
intensive marketing, a process that was
expected to play out over at least a year.
So far, health care buyers are responding
positively to the experiment: Bohuon
noted that several customers were poised
to sign multi-year Syncera contracts,
despite its relative newness. “If you take
a hospital that has 700 implants a year,
over the three-year contract this hospital
will enjoy net cash flow benefit of well
over US$4 million,” he said.
The shape of
things to come
In an effort to stave off commoditization,
companies must also rethink their
branding strategies. They will need to
move beyond product-specific branding
to developing messages that emphasize
their customer-centricity, reliability and
partnering capabilities. In essence, this
beyond-the-product style of branding
is a natural evolutionary step in an
environment where the differences
between individual products are
perceived to be small or non-existent.
Moving forward, it will be interesting to
see how — or if — medtechs will position
themselves as brand builders. In other
words, can the medtechs, via their
products and services, help providers
achieve top-quality care metrics that allow
these care teams to attract more patients
and build share in their own respective
markets? By directly empowering care
providers, medtechs that enhance the
bottom lines of their customers give those
buyers a very compelling reason to be
loyal to specific medtech brands.
When it comes to charting a new course
to differentiation, medtech companies
have a range of options to consider, and
a growing number of peers to emulate.
Whatever strategies for differentiating
differently companies ultimately adopt,
they need to give themselves time to
assess and analyze not just the nature of
changing purchasing habits in their core
markets, but the implications of those
changes for their products.
The strategies we have set out here
offer a good starting point for medtech
companies as they consider the next steps
they should take to grow their markets.
If their products already demonstrate
superior outcomes, for example, there is
less pressure to embark on strategies that
increase scope, whether that is through
additional products or services. Note that
superior outcomes alone may no longer
be enough to sway buyers — especially
if the innovation does not also fulfil a
purchaser’s key objective to take costs
out of the system.
Perspectives

Case study
A sea change is occurring in China’s
medtech industry. Since 2008, the
Chinese market for medical devices has
nearly doubled in size, and at US$16.1
billion is now second only to the US.
Double-digit growth rates for medtech
sales have put China at the forefront
of multinational medtech companies’
strategies. But their enthusiasm comes
with a note of caution: an evolving
regulatory environment and government
policies aimed at boosting the domestic
industry mean that the path to market —
already complicated — is not likely to
become simpler. Meanwhile, many
Chinese medtech companies have
stepped up their investment in innovation,
with an eye on the global market.
High-end in vitro diagnostics specialist
Mindray Medical International, for
instance, invests around 10% of its
revenues in R&D. Time Medical Systems,
meantime, is a pioneer in the development
of high-temperature superconducting
(HTS) coil technology for use in clinical
MRI scanners, while MicroPort is
developing its own drug-eluting stents.
These companies, and a growing number
of others, offer stiff competition for
multinational companies’ products
in China — and not just in terms of
product sales. They are actively seeking
M&A opportunities, both at home and
internationally, in order to boost the
quality of their product lines. In June
2013, Mindray acquired California
company Zonare Medical Systems, an
ultrasound technology specialist in the
high-end radiology segment with sales
teams in the US, Canada, Scandinavia and
Germany. In the same month, MicroPort
Scientific acquired OrthoRecon, the hip
and knee implant business of Tennessee-
based Wright Medical Group, and
announced that it would base its global
orthopedic business in Tennessee.
Dr. Olaf Schermeier, Chief Officer for
Global R&D at Fresenius Medical Care,
understands the potential risks to his
business model. “We are one of the
largest renal care product providers
in China, but competition will certainly
come,” he says. “We should never
underestimate local [Chinese] engineers.”
But equally, the skills learned by
multinational companies in developing
low-cost products for the Chinese
market — and the agility they have had
to maintain in keeping up with policy
changes — will also add value in their
home markets, where health reform and
commoditization are now facts of life.
Sea change in China’s medtech industry
Perspectives

Why medtech
should embrace
commoditization
Rob ten Hoedt
Chairman, Eucomed
Executive Vice President & President EMEA & Canada, Medtronic
Guest article Perspectives
Western Europe currently spends
€110 billion on health care. It has become
clear that growth in health care spending
cannot continue to outpace the growth
of gross national product. If we don’t find
a way to provide care in a completely
innovative way, fewer people will have
access to adequate care.
The drive to value in health care is behind
the commoditization of medtech. And
while only a small portion of spending
currently goes to medical devices, the
medtech industry will soon have a major
role to play in care delivery if the drive
to value transforms care in the way it
should. There is massive potential in
remote patient management, using
smart IT and decision-making platforms
to allow patients to live a healthy life at
home. There are opportunities in data
management and analysis to improve
the consistency and quality of care.
There are opportunities to incorporate
robotics and nanotechnology. We can
now deliver technologies and drug‑device
combinations at very small levels to
precisely the places they are needed.
A healthy environment for medtech is
crucial for these developments.
We need to provide technologies that
have clear health benefits, but we also
have to prove that they have clear
economic benefits. There is growing
awareness that medical technology can
offer value across the health system, but
health care systems themselves have
difficulty dealing with that. A product
may be shown to decrease the cost of
care after a patient is discharged, but it
may not be accepted because it slightly
increases the cost of care in the hospital.
Clearly, debate and discussion need to
happen between the medtech industry
and health care providers to make sure
that we are all focused on the total cost of
care. As an industry, we can’t expect care
providers to simply pay for the technology
and then figure out themselves where
the benefits will fall. If we are convinced
of the benefits of our technologies, we
may have to guarantee those benefits up
front with a risk-sharing agreement. That
will dramatically change our traditional
business model, but it will also open up
a much larger portion of the market and
improve patients’ access to therapies.
We’re an engineering-driven industry,
and that spirit needs to stay alive. If you
only take economic values into account,
you will never end up with something
truly innovative. But the moment that
technologies are created, all companies —
whether they are small, medium or
large medtech firms — need to initiate
discussions about value.
If we in medtech are to genuinely improve
delivery of care, we need to move beyond
the transactional model and take more
responsibility for patient outcomes.
We should get paid when the desired
outcome is achieved. The device is only
part of the total solution for the patient. In
diabetes, for example, patients may need
an insulin pump, insulin, exercise and a
healthy diet in order to get well. We need
to do more than just supply the insulin
pump. We need to become more active
in the delivery of care so that we can
guarantee that those other activities are
done properly and the maximum benefit
of our technology is realized. Not only do
we need to collect and share data, but
we must also find ways to ensure that the
appropriate care is delivered.
We can only achieve this if there is
complete trust in what we do, among
policy makers, payers, providers and
patients. It is important for Eucomed to
work with the European Commission to
make sure that regulations for medtech
optimize the quality of the technologies
that come to market, but don’t stifle
innovation, which would be equally
devastating for patients.
As people start to pay more out of
their own pockets for health care,
they will demand more in return, at
higher quality. Although we believe
that patients should have a bigger say,
medtech industry business models
are predominantly focused on care
providers, payers and regulators. One of
our objectives at Eucomed is to create
a dialog with patients so that we can
build relationships, understand patients’
expectations and understand the
language that we as an industry should
start to use to communicate with patients.
Commoditization is a natural trend in any technology-based industry.
But the medtech industry should not regard it as a threat. I would
rather ask: How will medtech benefit from the opportunities this
trend is creating?
We need to provide
technologies that
have clear health
benefits, but we
also have to prove
that they have clear
economic benefits.

Taking a new
approach
José E. Almeida
Chairman, AdvaMed
Chairman, President and Chief Executive Officer, Covidien
Guest articlePerspectives
While innovating to save and improve lives
will always be a central focus, economic
pressures on providers, payers and other
stakeholders are increasing, and the
medical technology industry must find
ways to reach beyond its core strengths
of developing next-generation treatments
and cures if it is to continue thriving.
Change has been rapid and sweeping.
The Patient Protection and Affordable
Care Act, growing pressures of cost
containment, provider consolidation
and other market forces are working
to fundamentally alter the landscape.
Changing incentives are prompting payers
and providers to explore new payment
mechanisms such as accountable care
organizations, bundling and pay-for-
performance that place a premium on
delivering high-quality patient care with
greater efficiency and lower costs. No
less important, today’s patients — armed
with the latest online intelligence and
demanding the best modern care has to
offer — are taking a more proactive role in
their health care decision-making.
To meet these many challenges, medical
technology companies need to take a new
approach. Other than working to secure
positive coverage policies, our industry
has not traditionally engaged deeply with
payers. Yet, we are uniquely positioned to
partner with both payers and health care
systems to redesign care, eliminate waste
and improve patient outcomes. I believe
our industry has both the ability and
foresight to leverage its strengths in new
ways to partner with payers and provide
value in a wider sense.
At Covidien, for example, we are piloting
several new approaches to help health care
systems meet the challenges of today’s
highly dynamic health care environment.
One is our Project CARES (Covidien
Analytics to Reduce Episode Spend) pilot
program, which leverages the analytics
expertise of our medical affairs team to
help hospitals better understand why
health care providers spend different
amounts of money to care for patients
with the same disease. Most hospitals do
not have the data analysis infrastructure
and specialized capabilities to identify
and address this cost variation or the
reasons behind it. By providing detailed
analysis of a hospital’s end-to-end cost
of care, Project CARES helps institutions
identify opportunities to capture value
through improving episode performance;
benchmark how they are performing
relative to their peers; and pinpoint areas
with the largest potential for improvement.
Covidien is also looking at ways to help
identify unnecessary variation in resource
utilization. For example, in a pilot program
conducted with Fairview Health Services
in Minneapolis, we were able to develop
appropriate standards and best practices
for utilization of our products. Through
this program, we have been able to help
Fairview save a projected US$100,000
to US$200,000 per year through a
shared‑savings arrangement whereby
our sales reps for select product areas
serve as utilization managers. Under this
program, payment for our offerings is
based on appropriate utilization, not just
on the amount sold.
These approaches recognize the shifting
challenges facing providers today, and
the results are positive for all parties. For
such partnerships to work, however, all
stakeholders must be willing to look beyond
their traditional roles and experiment with
new ways of collaborating. In addition to
finding new ways to use the information
we get from our day-to-day interaction
with providers, there is an opportunity for
medical technology players to create value
by helping patients make better-informed
care decisions. Covidien is partnering
with United Healthcare on a pilot initiative
to help patients in our workforce better
understand the advantages of minimally
invasive surgical approaches. We aim to
see if this information incents patients to
choose providers who have proven results
in these approaches, which often have
better outcomes at lower costs.
These programs and others that are
beginning to emerge are just a start,
but they show what might be possible.
The challenge ahead will be to think of
innovation in a way that looks beyond the
next breakthrough product to additional
ways that medical technology companies
can partner with all stakeholders —
patients, physicians, health care systems
and payers — to develop solutions that will
enhance care while benefiting the overall
health care system.
Innovation has long been a hallmark of the medical technology
industry. The groundbreaking products created by entrepreneurial
device and diagnostics companies have led to remarkable
improvements in patient outcomes over the last several decades.
Fueled by research and development budgets that are more than twice
the average for other US industries, the device industry continues to
frequently bring new and improved iterations of products to market.

Strength,
resilience
and energyJohn J. Greisch
President and Chief Executive Officer, Hill-Rom
In the Belgium contest, Tim Howard made
a World Cup record-setting 16 saves. His
performance, gritty determination and
commitment to the game — and to his
team — made for great drama. Howard
has a reputation for playing through
pain; his resilience, strength and energy
serve as a metaphor for what it will take
for medical technology companies to
succeed in the future.
The environment for medical technology
companies continues to be challenging.
The uneasy global economy and volatile
health care market mean our customers
face unprecedented pressure.
In our more mature markets, hospitals
everywhere are looking for ways to
reduce costs. More than ever before,
hospitals are being thoughtful about the
level of service they want to provide,
deciding what is essential and what isn’t;
they are looking for what truly will make
a difference in outcomes, and discarding
what will be merely incremental. In
developing markets, the circumstances
are different, but governments and
payers are asking the same question: How
can they deliver optimal care to the most
people for the least cost?
To be successful in the coming years,
the medical technology industry must
be laser-focused and bring the strength,
resilience and energy Tim Howard
embodies to the health care arena. In
particular, we must:
Retain strong focus on what’s best
for patients and caregivers. Intense
business and regulatory pressures can
sometimes divert our attentions from
the premier reason we exist — to improve
the lives of patients and caregivers
through our innovative technologies. If
we keep our focus where it should be,
the associated metrics on cost, quality
(including patient engagement and patient
satisfaction) and outcomes are likely to
be more easily addressed. For example,
numerous studies show that encouraging
patient mobility not only helps improve
patient outcomes, but also has a positive
effect on a hospital’s bottom line. At
Hill-Rom, we’ve designed a progressive
mobility program to help make it easier
for hospitals to get ICU patients moving
as quickly as possible. The program is
built on the most recent clinical evidence,
checked by national thought leaders, and
provides the practical tools necessary to
improve patient mobility.
Empathize with the customer. The
reimbursement landscape has changed
fundamentally. Hospitals and clinicians
everywhere resonate with the mantra of
“doing more with less.” In more developed
markets, the payment incentive structure
emphasizes quality, access and choice —
but generally not volume. This paradigm
shift is taking place where the difference
between “victory and defeat” is a margin
of 2% or less, so workflow efficiency
is a key area of strategic focus. Today,
more than ever, medtech partners
will distinguish themselves by fully
appreciating, articulating and responding
to their customers’ needs. One big need:
reducing hospital-acquired infections,
which in the US are estimated to cost
up to US$45 billion annually. To help
hospitals, Hill-Rom has created a software
program using locating technology to help
providers track and record hand washing
opportunities and measure compliance
based on existing hygiene protocols.
The data can be viewed in real time at
the individual, unit or hospital level to
facilitate infection control.
Exhibit leadership. In this challenging
landscape, leadership and management
will separate successful medtech
companies from the pack. The voices
speaking about health care are many and
varied, and all have important messages.
As an industry, we must redouble our
commitment to aggressively and distinctly
speak to the important contributions
medtechs make, not only for patients,
but also as engines for economic growth.
We must continue to work toward an
environment that promotes investment in
innovation and job creation.
In short, inspired by this summer’s
performance by Tim Howard and his
team, we’ll need to play through a bit of
pain. The medtech industry will need to
call upon similar strength, resilience and
energy to successfully navigate today’s
health care environment. In particular, we
need to focus on patients and caregivers,
respond to our customers and lead — to
the last whistle.
In 2014, goalie Tim Howard and the US Men’s Soccer Team captured
the hearts of Americans — and soccer fans around the globe — in an
exciting bid for the World Cup. Here in Chicago, the 1 July 2014 game
with Belgium drew 28,000 fans to a viewing event at Soldier Field!
Governments and
payers are asking
the same question:
How can they deliver
optimal care to the
most people for the
least cost?
Guest article Perspectives

Charting
a new course
Joseph M. DeVivo
President & Chief Executive Officer,
AngioDynamics
Guest articlePerspectives
I believe this activity illustrates the
industry’s attempt to rebalance the
bargaining power payers and providers
have gained during the last decade.
Previous unions have been driven by
cost savings and call-point synergies, but
the megadeal activity over the past year
seems to signal that product line breadth
and market leverage are the strengths
executives seek in today’s market.
Will this activity mark the nascent stages
of a mass consolidation similar to what
happened in the pharmaceutical industry
in the early 1990s, resulting in a few
“ultra-scale” companies? If so, how will
these ultra-scale companies leverage
their breadth to bundle diverse products?
Will we witness the re-emergence of
anticompetitive practices that were
challenged by the Senate Judiciary
Committee — or will new business
models emerge in which medtechs
combine products, services and analytic
capabilities along the continuum of care
to help providers deliver better results?
Given the breadth and scope, the latter is
a very good possibility.
The answers to these questions, though,
have enormous implications for medical
device companies — now and in the future.
Whatever the outcome, we need to be
prepared for a new paradigm. Do we align
with other like companies to provide new
bundles? Do we consider smaller-scale
service models to help our customers
take out cost? Do we ignore the trend
altogether and go about our business?
Do we pretty ourselves up for sale to be a
part of an ultra-scale world?
In the face of this change, I believe mid-
sized companies like AngioDynamics must
identify how they thrive in this emerging
paradigm. If we are moving down the
path of Big MedTech, I believe mid-sized
companies are presented with an even
greater opportunity to drive disruptive
innovation into the marketplace, because
often, the casualty of scale is focus.
Within our targeted segments, we must
leverage our focus to develop disruptive
technologies that meet customers’ needs
while simultaneously reducing overall
health care costs and improving patient
outcomes. More than ever, we need
effective clinical and economic trials
that clearly demonstrate that our new
technologies achieve these results within
the current budget cycle. If we accomplish
this within our focused segments, we will
always have a vital role to play regardless
of the model that emerges.
While our industry has arrived at a
crossroads, our customers’ values have
not changed. I believe the market has
proven it demands technologies that
both improve outcomes and reduce
costs. Strategies to expand market share
are important, but ultimately, for our
industry to advance, we must also invest
in innovation.
It is time to focus our considerable energy
and knowledge on those innovations that
bring clinical and economic improvements
to the health care system. That is
medtech’s winning one-two punch.
This year, one of the largest medical device deals in history, Zimmer/Biomet, was followed by the largest-
ever medical device deal, Medtronic/Covidien. While the industry has seen megadeals before, I believe recent
deals like these are signposts of the medical technology industry’s future, potentially charting a new course in
medical device M&A.
While our industry has arrived at a crossroads, our customers’
values have not changed. I believe the market has proven it demands
technologies that both improve outcomes and reduce costs.

Industry
performance
Part 2
Part2|Industryperformance

1 | Financial performance
Industry performance

Taking advantage of health care’s warming
financial climate and a pronounced
uptick in market capitalization, medtech
companies strengthened their cash
positions and charted modest revenue
growth. Even so, in the wake of a years-
long period of financial restrictions,
most medtech players were reluctant
to invest their cash in activities that
set the stage for future growth. Thus,
while R&D investment and headcount
expanded 7% and 5%, respectively, from
2012 to 2013, these increases were
unexceptional compared to the additional
cash companies added to their balance
sheets or the money they returned to
shareholders during the same period.
Context is also critical when evaluating
the 16% year-on-year increase in net
income. On the surface, the double-digit
percentage growth in net income is a
welcome change from the 24% decrease
in net income that took place from 2011
to 2012. However, the picture changes
when one realizes 2013’s net income
growth was boosted by a series of
charges incurred by Boston Scientific in
2012. Normalizing for these charges, net
income actually fell by 2.6%.
The global numbers only tell part of
the story. Grasping the full picture
requires parsing the data to understand
which companies — and this year, which
types of medtech companies — drove
the overall trends, as well as how
currency fluctuations impacted overall
financial performance. Once again, the
strengthening dollar had a material
Holding steady
Public company data 2013 2012 % change
Revenues $336.2 $323.6 4%
Conglomerates $153.8 $149.1 3%
Pure-play companies $182.4 $174.5 5%
R&D expense $13.5 $12.7 7%
SG&A expense $60.6 $57.9 5%
Net income $16.5 $14.2 16%
Cash and cash equivalents and short-term investments $58.1 $46.7 24%
Market capitalization $566.7 $432.9 31%
Number of employees 671,100 641,300 5%
Number of public companies 376 381 –1%
Medical technology at a glance, 2012–13
(US$b, data for pure-plays except where indicated)
Numbers may appear to be inconsistent due to rounding. Data shown for US and European public companies.
Market capitalization data is shown for 31 December 2013 and 31 December 2012.
Source: EY, Capital IQ and company financial statement data.
impact on companies on both sides of
the Atlantic. Based on our analysis of the
top 10 US-based medtechs, currency
shifts dragged down their European
revenues by an average of 1.5% in 2013.
Meantime, those same shifts resulted in
the inflation of European firms’ revenues
by approximately 3%.
A modest uptick
in revenues
After converting all results into US
dollars, the 2013 revenues of US and
European companies increased by
4%, an improvement over 2012, when
the top line grew just 2%. Additional
In the 2013 edition of Pulse, we outlined the storms buffeting the medical technology sector, including
the shift to value-based health care and growing regulatory pressures. Over the course of 2013,
these headwinds didn’t abate. Still, based on the annual financial performance metrics we collect,
the medtech industry, while not pressing full steam ahead, has maintained course amid changeable
commercial seas.
analysis shows which medtech segments
achieved the greatest annual revenue
growth: pure-play businesses (e.g.,
non-conglomerates) in the non-imaging
diagnostics and imaging sectors
performed the best, each posting 7%
revenue growth. The research and other
equipment segment saw its year-over-
year revenues expand 5%. Meantime,
performance of the therapeutic device
class, by far the biggest category in
medtech, was roughly equal to the
revenue growth for the sector.
The slight revenue growth of therapeutic
device medtechs is explained by the
performance of the cardiovascular and
orthopedic players, which reported 3%
and 4% revenue growth, respectively.
Financial performance

Such modest revenue growth is hardly a
new phenomenon, but it does present a
conundrum, given that the disease areas
with the most potential for growth don’t
have the same overall market potential as
the medtech industry’s historic mainstays.
On a percentage basis, 2013 revenue
growth for US and EU therapeutic device
companies was strongest in the following
disease categories: gastrointestinal
(118%), hematology/renal (21%) and
women’s health (16%). If anything, these
numbers highlight why companies and
analysts alike were so excited by the
opportunity in renal denervation for
hypertension — and so devastated when
negative clinical trial data sent companies
such as Medtronic and St. Jude Medical
back to the drawing board in early 2014.
To accelerate top-line growth, industry
players, especially those in the
therapeutic device class, will need to
increase their M&A activities in addition
to improving their organic growth. The
biggest deal announced thus far in
2014 — Medtronic/Covidien — shows how
at least one pure-play medtech believes
Change in US and European therapeutic device companies’
revenue and net income by disease category, 2013 vs. 2012
(US$b)
Data shown for pure-play companies only.
Net incomeRevenue
Oncology Dental Multiple Ophthalmic Orthopedic
Cardiovascular/
vascular
$5
–$1
–$2
$1
$0
$2
$4
$3
it can improve its top line. While Wall
Street analysts and mass media have
focused primarily on the tax advantages
Medtronic will enjoy by moving its
headquarters from the US to Ireland, the
companies’ complementary pipelines will
make the combined entity the leading
device manufacturer in six of the top
10 hospital purchasing categories. (See
“Medtronic/Covidien: emblematic of what
medtech is buying now” on page 68.)
US$b

Since 2009, the number of medtech
commercial leaders, defined as those
companies with revenues in excess of
US$500 million, has remained constant
thanks to the push and pull of M&A. In
2013, this pool of medtechs expanded
from 56 to 58, as Masimo and Thoratec
joined the leader board for the first time
as a result of organic growth.
Masimo, best known for its pulse
oximetry devices, is a California-based
manufacturer of non-invasive patient
monitoring tools, while Thoratec
specializes in the development of products
to treat patients with advanced heart
failure. Medtronic remained the largest
pure-play medtech, with US$16.6 billion
in revenue, followed by research and
equipment behemoth Thermo Fisher
Scientific (US$13.3 billion). Covidien,
meanwhile, posted US$10.2 billion in
2013 revenues, joining that elite club of
medtechs with annual revenues greater
than US$10 billion.
Net income inequality
Net income performance varied
considerably depending on company size
and type. Commercial leaders, defined
as pure-play medtech companies with
annual sales greater than US$500 million,
saw a 22% yearly gain in net income.
This metric was heavily influenced by
Boston Scientific’s improved financial
performance in 2013 relative to
2012. When the data were normalized
for Boston Scientific’s results, the
commercial leaders’ net income declined
1.5% relative to the year before.
Net income for “other” smaller medtechs
also fell, decreasing 100% from 2012 to
2013. This decline was partially fueled by
the 2013 performance of Wright Medical,
which saw its net income fall US$279
million as a result of charges associated
with its acquisition of BioMimetic
Therapeutics. Four other companies saw
their net incomes drop at least US$50
million from 2012 to 2013.
Of the different medtech categories,
companies in the therapeutic device
segment saw the biggest uptick in net
income (21%), while imaging businesses
reported the largest drop, falling 8%
year-over-year.
US and European commercial leaders, 2009–13
> US$10b
US$5b–US$10b
US$2.5b–US$5b
US$1b–US$2.5b
US$0.5b–US$1b
20112009 2010 2012 2013
60
0
20
10
30
50
40
16 15 13 14 14
26 26 27 25 27
11
8 9 9
9
4
5 6 6 5
2
3 2 2 3
Commercial leaders hold steady
Numberofcompanies

In addition to being influenced by outliers
like Boston Scientific, these numbers are
at least partially explained when one looks
at R&D investment by medtech category.
Increases in R&D spending outpaced net
income growth for imaging, diagnostics
and research and equipment businesses
by 15, nine and two percentage points,
respectively; meantime, the net income
of therapeutic device firms outpaced their
R&D spend by 15 percentage points.
Strengthening
the balance sheet
Whatever the metric, the medtech sector
has always been populated by “haves”
and “have-nots.” That trend continued to
hold true in 2013, particularly in terms of
cash on the books. (See “Financing the
future” on page 42.)
An analysis of the US medtech sector
shows that in 2013, a growing number
of companies populated either end of the
spectrum — e.g., those with more than
five years of cash or those with less than
one year of cash. Indeed, the pool of US
companies with more than five years
of cash expanded 42% year-over-year
to 14%, while one of out of every two
publicly traded medtechs has less than
one year of financing.
In Europe, the opposite was true, as the
number of companies in the middle pools —
those with two to five years of cash — grew
compared to those at either end of the
spectrum. Indeed, 49% of all publicly
traded European medtechs fall into this
category compared to 45% a year ago.
US public medtech cash index, 2011–13
More than 5 years 3–5 years 2–3 years 1–2 years Less than 1 year
2011
10% 8%
14%
8% 9%
11%
11% 10%
7%
24% 23% 17%
48% 49% 51%
2012 2013
100
80
60
40
20
0
European public medtech cash index, 2011–13
Chart excludes companies that are cash flow positive. Numbers may appear to be inconsistent due to rounding.
Chart excludes companies that are cash flow positive. Numbers may appear to be inconsistent due to rounding.
2011
14%
9%
6%
17%
55%
2012
12%
11%
11%
23%
44%
2013
11%
9%
14%
26%
40%
100
80
60
40
20
0
More than 5 years 3–5 years 2–3 years 1–2 years Less than 1 year
PercentagePercentage

Investing for the future
From 2012 to 2013, 60% of US and
European medtechs increased their R&D
spend. That’s similar to 2012, when
61% of companies expanded their R&D
commitments compared to the year
before. The total dollars spent on R&D
grew 7% to US$13.5 billion in 2013.
That’s a significant increase over the 1%
upturn reported from 2011 to 2012. Of
the 58 commercial leaders with annual
sales greater than US$500 million, 43
increased their annual R&D spend during
this period, while 56% of companies in the
“other” category upped their investment
in pipeline development. In contrast to
2012, when no company grew its R&D by
more than US$35 million, five medtechs —
Hologic, Illumina, Medtronic, Stryker and
CR Bard — increased their R&D spend by
more than US$60 million each.
This increase in R&D spend was likely
partly driven by a more challenging
regulatory and pricing environment. Based
on our analysis of regulatory submissions
for premarket approval (PMA) or 510(K)
clearance, there were 43 original device
PMA submissions in 2013 compared to
just 24 in 2012. Meantime, the number of
device applications submitted for 510(K)
clearance fell nearly 8% in the same period
to 2,936. These data suggest medtechs
are spending more to test their devices
via new, more stringent — and more
expensive — clinical trials in the hopes of
differentiating products with provider and
hospital purchasers.
Year-over-year trends in medtech R&D
investment tell only part of the story,
however. To understand the strategic
imperatives at work in the device industry,
it’s also important to track R&D spending
as a percentage of revenue over time.
Based on this metric, R&D investment has
held constant at 7% of the top line since
2008. Thus, even though R&D spending
grew faster than revenue in 2013, it
wasn’t enough to change the overall R&D-
to-revenue ratio. Coming in a year when
medtechs saw significant growth in their
available cash, these data suggest firms
are taking a measured approach to their
R&D investments.
The increase in R&D spend was
likely partly driven by a more
challenging regulatory and
pricing environment.

If medtechs as an industry didn’t double-
down on R&D, how did companies spend
their cash? That question is partly
answered by medtechs’ need to balance
the demands of longer-term growth
with the shorter-term expectations
of shareholders. In 2013, medtech
companies returned 56% of their net cash
generated through operations (US$16.7
billion) to shareholders, an increase of
seven percentage points over 2012. In
dollar terms, that’s US$3.5 billion more
than they invested in R&D during the
same period. Indeed, since 2010, the
dollars returned annually to shareholders
have equaled or exceeded the dollars
spent on R&D.
Moreover, while medtechs are returning
more money to shareholders overall, the
pool of companies doing so has shrunk
since 2008, when 183 device firms either
issued dividends or repurchased stock.
In 2013, 162 companies returned cash
to shareholders in the form of dividends
or stock buybacks. Medtronic was among
the most active, returning more than
US$2.3 billion in cash as it increased its
dividend by 8% and repurchased more
than 30 million shares of common stock.
Other companies that rewarded investors
via stock buybacks or dividends in 2013
included Covidien, St. Jude Medical and
Intuitive Surgical.
There are important implications from
these findings. Note that in the biotech
sector, lengthy and expensive product
development time lines can create tension
with shareholders looking for nearer-term
returns via share repurchases or a dividend.
This tension isn’t as pronounced in the
device sector, where shorter development
times allow medtechs to recoup their R&D
investment dollars more quickly.
That medtech companies are choosing
to return more money to shareholders
than they are investing in R&D therefore
suggests they believe they can create
more value for investors by returning cash
to them than they can by investing it in
R&D or M&A initiatives. In an innovation-
driven industry, that’s quite telling and may
be one more indication of the challenging
regulatory and pricing environment.
A rising tide
lifts all medtechs
Since the beginning of 2012, the share
prices of medtechs, like other health care
companies, outpaced the broader indices
in both the US and Europe. In comparison
to the huge run-up seen in biotech
(driven by the extraordinary revenue and
profit growth of the commercial leading
biotechs), medtech’s performance looks
more modest. Still, even the 31% increase
in market capitalization for EY’s medtech
index could be viewed as extraordinary
given that the medtech industry’s top
line grew modestly and normalized net
income declined.
Since 2010, medtechs are returning more cash to
shareholders than they are investing in R&D
Cash returned to shareholders R&D
$12
$14
$16
$18
$0
$4
$2
$6
$10
$8
US$b
2008 2009 2010 2011 2012 2013
Returning cash to shareholders

What drove the growth?
For starters, investors had extremely
low expectations for the group, given
the potential impact of the US medical
device tax on the bottom line and ongoing
reimbursement pressures. These low
expectations, coupled with positive
financial turnaround stories of players
such as Boston Scientific, helped build
a case for an undervalued medtech
sector in 2013. As the calendar flipped
to 2014, a bolus of late-stage products
fueled optimism that 2014 would result
in an emerging pipeline story that would
drive top-line growth for years to come.
The end result: in the medtech space,
the market capitalizations of US and EU
commercial leaders increased 30% from
2012 to 2013, while smaller players
enjoyed a 34% uptick.
Analyzing the medtech sector by
product type, it’s easier to parse which
companies drove the growth in market
capitalization. Indeed, this growth was
largely driven by companies in the
research and other equipment space;
in the US, share prices for that class
surged 153% from 1 January 2012 to
30 June 2014, increasing from US$34.5
billion to US$94.3 billion. In comparison,
therapeutic device companies generated
returns around 28%, in line with the
Russell 3000 and below the NASDAQ.
0%
–40%
40%
80%
120%
160%
EY US medtech industry
Therapeutic devices (total)
Research and other equipment
Imaging
Non-imaging diagnostics
2012 20142013
US market capitalization by product type, 2012–14
0%
–20%
20%
40%
60%
80%
EY US medtech industry Big pharmaRussell 3000 NASDAQ Composite
US market capitalization relative to leading indices, 2012–14
2012 20142013
Chart includes companies that were active on 30 June 2014.
Source: EY and Capital IQ.
Chart includes companies that were active on 30 June 2014.
Source: EY and Capital IQ.

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