Creating a Winning Medtech Business Model for a Post-Reform World

Article preview from IN VIVO - July, 2010

Together, the global financial crisis and health care reform could combine to dramatically alter the device industry's traditional business model. The result could be a variety of different models arising from shifting relationships with physicians and hospitals, with the winners being companies that adapt most effectively to this changing environment.

Creating a Winning Medtech Business Model for a Post-Reform World

Article preview from IN VIVO - July, 2010

• The medical technology business has traditionally had attractive historic financial performance driven by the role of physicians in product creation and decision-making processes, along with regulatory requirements that act as entry barriers.

• The second-order impacts of the global financial crisis along with health care reform will slow medical technology market growth, put pressure on profit margins and change requirements for competitive success driven by new regulations and changing customer decision processes.

• From a single dominant business model, multiple future winning business models will emerge, and leadership in the selected new business models will become increasingly important.

• While pilots and experimentation will be critical parts of creating future winning business models, these efforts need to be directed at transforming the business model versus just being incremental adjustments to the historic model.

Although medical technology has never held greater potential to create new diagnostics and therapies to cost effectively address a multitude of important clinical unmet needs, changing regulatory and health care customer paradigms catalyzed by the global financial crisis and health care reforms will require fundamental changes in the current medical technology business model for future success.

Over the last decade the medical technology industry has surpassed the pharmaceutical industry in growth, profitability, and shareholder value creation. While over the last decade major pharmaceutical companies have seen their average growth slow to 5%, operating income (OI) fall to 23% (from almost 30%), and stock prices fall by 20%, the major medical device companies have seen growth average 10%, OI expand to 27% (from just over 20%), and stock prices grow 100%. During this period, the major pharmaceutical companies have been challenged with reduced productivity in creating new drugs, patent expirations and competition from generics, and the shift of decision making from primary care physicians to payers. Medical technology companies, on the other hand, have continued to be supported over this period by strong specialty physician engagement and preference, which have fueled the adoption of a continuous stream of incremental and additive innovations within existing franchises at price premiums with focused high-return sales forces and R&D investments. But that may be about to change.

by James Gilbert

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