Facing the challenges: The need of a new business model for the medical device industry

© Shutterstock
© Shutterstock
The medical device industry will have to look for new business models in order to face the economic challenges in the future. Even though the market is growing, the operation margin is gradually decreasing and this is not a good sign. Five disruptive forces have been identified as key factors contributing to this decline. The forecasted operating margin could be avoided by taking appropriate actions by the companies. The solutions should be focused on company-specific strategies and distinctive business models.

Lower operating margins

The business model that sustained the medical device field is now wearing out. In fact, several factors will need to be integrated along with innovation in order to design a new one.

For years, the medical device industry players have been able to compete by using conventional business models and without much need of differentiating. However, this should change in order for the industry to survive.

Historically, the operating margins were high for the medical device industry (between 23% and 25%). However, during the last few years, even if the market is growing, this has changed dramatically. From 2006 to 2009, the operating margins were positive (around 3%). In 2010, they started to become negative due to price erosion (-1%) but this was somehow counteracted by the Opex cost reductions. In the future, margins will drop below -6% (by 2020).

The five disruptive forces

There are several factors that contribute negatively to the economy of all medical device companies which follow the traditional business model.

For a long time, doctor’s opinion has prevailed. But lately, the power of decision has changed from doctors to payers and providers, who evaluate medical devices. Evidence-based care is not the main decisive factor anymore and the medical devices are evaluated on terms of safety, procedural efficacy and cost. This is understandable given the economical landscape and the increasing pricing pressure. Nevertheless, the physician decision shouldn’t be neglected.

Secondly, the tightening regulation imposed by the FDA in the US and the EMA (European Medicines Agency) The new Medical Device Directive that applies to all the European Union, demands more clinical data to demonstrate safety and efficiency, higher transparency, higher supervision on manufacturing and design…

Furthermore, the innovation pipeline is narrow. Innovative products can entail higher costs and they are not often included on the list of reimbursable products. This is why the medical device industry players prefer to implement extensions of the already existing devices, which can be easily included in this list. In addition, products in the most implanted areas such as cardiology and ophthalmology already fulfill both patients and physicians expectations.

The new business model should exploit the niches that could constitute an opportunity even if they are not the most established areas.

The fourth disruption force is the model of care provision. Increasingly, the tendency is to shift the care out of the hospital on to cheaper platforms (example: from the physician’s office to the patient’s home). Home care is much less expensive (1-10 $ per day) than institutional care (10-10000 $ per day). New delivery models should be developed. In other words, this new environment requires a new set of competences, from design to marketing and distribution, among others.

Finally, emerging countries and segments with a lower socioeconomic level represent an interesting target for the medical device industry. Between 2008 and 2013, the medical device market has grown 10% in Asia and 9% in Latin America and Africa.

So far, only traditional markets, and not emerging ones, will constitute a priority for the device companies in the future. Nevertheless, growth segments (lower socioeconomic classes) at developed countries will be targeted. For this purpose, a new business model needs to be set up.

Conclusion

To sum up, the medical device industry is facing an economical situation that will be become more acute on time if the five factors cited on this article are not offset. To do so, new strategies and business models need to be implemented in order for the different players to be more competitive in the future.

BY: LUCÍA BLANCO GARCÍA

 

SOURCES
-Medical Devices, Equipped for the future? (ATKearney), 2014
- http://www.investopedia.com/terms/o/operatingmargin.asp
-http://www.boston.com/businessupdates/2012/10/02/study-the-business-model-for-the-medical-device-industry-unsustainable/EcPAKP60AuSESmNK9YoryN/story.html