Growth is the general prediction for the medical device industry in 2014, but this all comes with warnings and cautions of the medical industry still being in a state of uncertainty. It is more than just the sweeping changes of the Patient Protection and Affordable Care Act (PPACA). There are changes coming with implementation of the unique device identification (UDI), questions regarding how the U.S. Food and Drug Administration (FDA) will address its slow review process, and where the U.S. economy is headed. We’ve asked our forecast panelists to weigh in with their predictions for the coming year.
How does the overall business environment for the medical device design and manufacturing sector appear for 2014?
Bellini: With the PPACA providing for insurance coverage for millions of more Americans, the volume of medical devices is bound to go up. Even if the healthcare law is still argued and partially implemented, the direction has been set: There will be more people who have access to traditional healthcare services than have had access in the past.
Dawson: You can really distill the issues down into two broad categories. One is regulatory pressure. The regulatory environment inclusive of the PPACA – is growing more and more complex, so more and more transparency is required of participants in all aspects of the industry, including device manufacturers. The second component is the globalization of the industry across a number of conventions. I think we are seeing fairly intense globalization across the supply chain as well as across customers and the market more broadly.
Schorre: In our annual device industry survey fielded in December 2013, about 71% (of 1,000+ respondents) were somewhat positive or very positive about prospects for next year, with only 12% taking a negative view. We asked the same question one year ago and results were 68% positive versus 16% negative.
Teitelbaum: We have entered a challenging business environment for medical devices – longer FDA review times, pricing pressure from the PPACA, the device tax, and a reduced base of venture capital to fund innovation.
What is your take on mergers and acquisitions?
Bellini: I think it will increase; there’s been a shift away from internal new product development in larger companies toward sourcing opportunities for new products from small entrepreneurial companies in the industry. Large companies are interested in products from smaller manufacturers that are patented with FDA approval and reimbursement established.
Teitelbaum: We have already started to see acceleration in medical device M&A toward the end of 2013 and we believe this will extend into 2014. There are many small- to mid-sized medical device companies that are subscale, need marketing and commercialization help, and will need to be part of a larger organization given the current business environment challenges. Large medical device acquirers are flush with cash and their stock valuations are relatively robust; they are actively looking for more acquisitions to enable them to continue to grow.
What are some of the largest challenges in 2014?
Bellini: It will be a year of transformation. Reform will hurt smaller companies in low-end, commodity segments with unbalanced Medicaid exposure and undifferentiated levels of efficiency that will be put under increasing price and profitability pressures by the new law. The PPACA will increase industry consolidation and favor innovative companies. Those companies that focus on personal diagnostic and monitoring, health and medication maintenance, quality control, and effective high-end therapeutic devices, and capital equipment will benefit.
Teitelbaum: I believe the largest challenges will be cumbersome FDA regulations, cost-cutting pressures of the PPACA (lower reimbursement), the potential for a tighter CE regulatory process, the commoditization of certain cardiovascular and orthopedic devices, and even possibly the start of some pricing pressures in new but increasing competitive areas such as transcatheter aortic-valve implantation (TAVI).
Schorre: Many executives told us that new product development is a big challenge. That could be due in part to macroeconomic changes that are affecting sourcing; specifically, rising wages in China are narrowing the cost advantage China enjoys on western manufacturing. This will continue and executives will need to examine the cost/benefit of having engineering and/or manufacturing done in China.
Which medical sectors seem to have the most growth potential?
Bellini: Sectors that have higher correlation with the aging population will grow more. Demand for medical products is expected to rise as the population grows and as the growing share of elderly uses a larger portion of those resources. This number is significant for the medtech industry, because the elderly use a disproportionate amount of health resources.
Schorre: Device companies that focus on making products that can lead to better healthcare outcomes – which reduces costs – will do quite well.
Teitelbaum: At the level of therapeutic sectors, I believe there is great growth potential in brain research, including interventional neurovascular procedures – growing at 30% a year – as well as the treatment of brain tumors, epilepsy, neuropathic pain, Parkinson’s, and essential tremor. The brain has historically been an underserved area; neurosurgeons and interventional neuroradiologists are keen on new technologies and President Obama has mandated the mapping of the brain.
I also believe that other underserved areas for growth include orthopedic extremities (small bones – foot/ankle and hand/wrist), oncology (e.g., bone and liver cancer), urology, scarless general surgery, women’s health (uterine, ovarian, and obstetrics) as well as renal denervation in the cardio space and any space where you can change open surgery into minimally or non-invasive.
Finally, I see home telemedicine and mobile health as growth areas, but it could take until 2015-2016 to see an explosion there once reimbursement occurs.
In your opinion, where should medical device manufacturers focus their efforts for 2014?
Dawson: I believe it should be on a repeatable, methodical, sustainable cost-effective supply network across different medical areas discussed. That’s going to be key for medtech manufacturers in 2014.
In addition, I think you can distill this into three primary best practices. One is working for a better flow of information in the company with regard to compliance. The company has to ask: What are we doing and what do we have to do from a compliance perspective? What information do we have? What data is available and how do we get that data? These are the topics that need to come into the conversation and into the discussion.
The second process is initiating a management alerts program so the appropriate instruments stick with us and deliver real-time access to regulatory information updates and changes. The reality is that we are all consumers of information. Even at an individual level, there’s no shortage of information. So, how do we sort through that amount of information that flows across our desk every single day and pull out the information that is relevant to the business and the environment in which we work? Utilization of real-time access to relevant information is critical.
I think the last practice is for individuals to understand that compliance has to start at the top. The power is there across the organization to take an active role and make compliance a daily practice – something that is embedded within the normal operations of the company and not just an afterthought.
Schorre: Get aggressive. Step outside your comfort level and look to emerging markets to supplement flat U.S. and European sales, especially if you have good technology. Asia, the Middle East, and some parts of South America have many fast growing markets, and some are reasonably easy to enter.
Teitelbaum: Manufacturers should focus on minimally invasive and non-invasive devices; disposable/consumable devices, as opposed to costly capital equipment; products and solutions that cut costs for providers and payers; and conduct trials proving econometric value and improved outcomes in order to justify higher reimbursement levels.
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An attorney’s point of view Ray Zemlin is a partner in Goodwin Procter’s business law department, and focuses primarily on securities law, mergers and acquisitions, and corporate finance matters. Here’s Zemlin’s take on medtech in 2014: The device industry in general, and our clients, is forecasting moderate growth for 2014. No one expects it to be back in the heyday of 2003-2007; however everyone is optimistic, expecting growth to be consistent with 2013 levels. Regarding mergers & acquisitions (M&A) We saw M&A decrease in 2013, and we expect this trend to continue into 2014. That said, because the IPO window is uncertain at best, many companies see M&A as the more likely exit. Certainly, for our clients who are acquirers, they’re out beating the bushes trying to find attractive acquisition opportunities. However, there’s still an issue of valuation. Sellers think their companies are worth more than buyers do, and it’s sometimes hard to bridge that gap. That said, some of the uncertainty in medtech may be clearing up, so the number of exits overall may increase. Regarding challenges People looking at medtech have tremendous concerns about regulatory issues. From a regulatory perspective, I don’t think any of our clients expect the FDA to get any easier in 2014; however, they also don’t expect it to get worse. Unfortunately, a new regulatory challenge is developing in Europe. The CE mark has been historically easier to obtain in the sense that you need less clinical data and support to justify the CE mark. The proposals over in Europe are to reverse that and to require more clinical support. If that happens, it will slow down the approvals. Europe has often been an early source of revenue for U.S. companies, with many launching their products in Europe 12 to 18 months before a U.S. launch. If there are more restrictions on the CE mark, this will have a negative impact on the industry. Impact of PPACA One of the biggest challenges to the industry, not surprisingly, is the medical device tax. Because it’s an excise tax, it can be a significant imposition on companies who are pre-profit. The tax bill money comes from areas that may otherwise benefit from the cash to fuel future growth. Companies are forced to conserve cash elsewhere, and this could mean outsourcing manufacturing, reducing R&D, or otherwise making cuts. Regarding economies As the U.S. economy grows, hopefully, people will have more jobs, ability, and willingness to pay medical insurance premiums, related deductibles, and copays. A rising tide from more people accessing medical services will help to lift device companies. Globally, it’s a more interesting question because there is tremendous opportunity abroad. Look at Asia, for example, particularly China, India, and other key emerging markets where there are populations that certainly need medical devices. As those economies grow and mature, the population will become accustomed to cutting-edge medical technology. There is a large opportunity there. However, this change will come more slowly, throughout the next decade or more.
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What percentage of growth do you see for the medtech market in 2014?
Bellini: In the sectors we operate – pulmonary function testing, cardiopulmonary exercise testing, nutritional analysis and body composition assessment – we expect double-digit growth.
Schorre: I think we will see similar growth to what we had in 2013. The industry is running quite lean after significant belt tightening between 2009-2012 and the rate of growth in U.S. healthcare spending has been slowing in recent years. The government is mostly focused on driving down costs in healthcare delivery. Hospitals and physicians still account for more than 50% of healthcare spending in the U.S.
Teitelbaum: Overall, I see the growth to be about 5% to 6%. Within that, different therapeutic areas and types of products (therapeutics versus diagnostics, disposables/consumables versus capital equipment, implants versus instruments, etc.) will have very different growth rates. For example, interventional neurovascular devices might continue to grow at 30% while coronary stents might be in the low single-digit percentages or close to flat, while hip and knee implants might actually decline. In addition, I could see overall higher growth in outsourced/contract manufacturing versus proprietary manufacturing by the OEMs.
About the author: Elizabeth Engler Modic is the editor of TMD and can be reached at emodic@gie.net or 330.523.5344.
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