The future of the medical devices industry

© Shutterstock
© Shutterstock

It is widely defined that the medical device sector is a well-established market. With a positive annual growth and high margins, applying the common business models was never put in question. But this market is undergoing continuous challenges and unprecedented changes because of different factors like: aging population, healthcare economic concerns, and new technologies. In a continuously changing world with disruptive technology underway, foundations can erode and established industries can change rapidly


In a report published in November 2014, AT Kearney showed that margins in the medical device industry may decline by 8 points between 2015 and 2020 (Fig. 1), and identified 5 major disruptors that are threatening companies pursuing the traditional industry business models:


The future of the medical devices industry

Margin erosion in the medical device field will accelerate in the near term Source: Medical devices equipped for the future – AT Kearney (November 2014)


1. Power shift to payers and providers

In an aging society with an increasing need for a better and more efficient, but less expensive healthcare, Evidence-based care is the new criteria in clinicians’ preferences. Healthcare systems are witnessing a power shift from prescribers to payers and providers. In the U.S.A., under the “Affordable Care Act”, doctors and/or hospitals should track the compliance and rehabilitation of patients, and if the latter return within a year with no improvement, the hospital owes money to the government. In France, with the ARS (decentralised regional health agencies), decisions are based on local needs.


2. Heightened regulatory scrutiny

Each year, the number of recalled, corrected or removed medical devices is increasing. As a response, regulators (FDA – Food and Drug Administration – in the U.S.A. and EMA – European Medicines Agency – in Europe) are tightening the existing regulations, and adding new ones with increased transparency requirements. In the U.S.A. FDA audits have increased by 40% in 2014, and in the European Union the new 2007/47/EC medical device directive (that was implemented in 2014), demands more clinical data proving the safety and efficacy of the medical devices. All these measures are increasing the manufacturer costs and prolonging regulatory approval times.


3. Unclear sources of innovation

The number of pre-market approval submissions is in continuous decline (reduction of 30% in 2013). On the other hand, submissions for changing in the safety/effectiveness of existing devices are increasing by 10% yearly, in average. In the last 2 years the innovation pipeline in medical devices is experiencing a major shift from innovation to extensions and incremental changes. Such trend is partially related to the increasingly regulatory landscape (see paragraph 2), but also to reimbursement policies in the U.S.A. and EU. While it is easy to access to reimbursements on incremental changes in mature devices, for a novel product to be considered in the reimbursable list, payers demand proof of its superiority over established therapies. As a result of this policy, the value generated by each dollar spent in R&D dropped from 39$ in 2005 to 25$ in 2012.


4. New healthcare delivery models

In an increasingly connected world and powerful analytical tools, patients’ pathways are being modified in order to become faster, more efficient, and less costing. A continuously increasing number of examinations and routinely performed tests are now being done in ambulatory centres, at the primary-care physician’s office, or even at home. These modifications are affecting all the stakeholders including manufacturers who will need to innovate and propose devices with new delivery models as well as end-to-end solutions/services.


5. Need to serve lower socioeconomic classes

In the last 6 years, the medical device market grew by 10% (yearly average), in the emerging developing world (Asia and Latin America), which may lead to the conclusion that the future of medical devices would be in emerging countries. Such an assumption is not totally true. Although Europe and North America are witnessing 2% and 5% lower growth rates, they are still the dominant markets. With the “Affordable Care Act” in the U.S.A, and by examining the healthcare expenditure in states with the lowest per-capita income, a potential latent growth of 10% can be calculated.


The impact of the above mentioned 5 disruptors are not the same in the different medical device sectors, and effective strategies tend to be company specific. Out of adversity comes opportunity, and executives should urgently evaluate the impact of disruptors and build new tailored business models.