Repairing the disconnect in medical technology

Powerful external forces are disrupting the traditional strategies of medical technology leaders as companies face greater economic pressures, a reformed health care system, new hospital and physician alignments, and new technological challenges. The disconnect between product innovation and financial performance is widening. Medical technology companies need to act now to address this paradigm shift. Doug Mowen discusses.

The medical technology industry has a rich heritage of creating life-enhancing, life-extending products while realising above average returns and rewarding investors in the process. Racing from the invention of the stethoscope, to human blood transfers and now wearables has made it one of the most lucrative fields. This connection between innovation and profitability has become a foundational driver in the C-suites and boardrooms of many medical device, diagnostics and equipment companies.

Pillars to profitability include strong development engines, broad technology expertise, smart merger and acquisition decisions, and a clear focus on clinical outcomes. Many manufacturers also made big bets on companies and technologies they hoped will produce market breakthroughs.

“The disconnect between technology, product innovation, and financial performance seems to be widening”

The impressive reputations of medical technology companies created a halo effect with clinicians — the manufacturers’ traditional customer base. The marketplace appreciated the value that Medical technology organisations and their sales reps create. This symbiotic relationship further accelerated companies’ growth and financial success.

Interestingly, our latest High Performance Business analysis shows that the business landscape is changing. Although Enterprise Value1 is recovering from pre-recessionary levels, overall industry growth is decelerating. Only four of the 19 “pure play” medical technology companies, those with more than 75 percent of revenue derived from medical technology products which we analyzed, were also deemed to be High Performers (learn more on what it takes to be a High Performing company).

Some companies traditionally thought of as top innovators and aggressive acquirers of innovative technologies fared poorly on our consolidated scale of financial performance. Even more significantly, the disconnect between technology, product innovation, and financial performance seems to be widening.

There are a variety of reasons for this widening gap:

• An evolving buyer-customer who now emphasizes value and positive health outcomes

• Ongoing cost pressures

• Increasing regulatory scrutiny

• Changing patient populations

Medical technology companies will have to revise their strategies and operations. But there are re-directional opportunities for quick moving medical technology companies to redefine and elevate their customer relationships.

Companies must partner with their customers to deliver comprehensive cost-effective solutions that increase quality of care and meet their information needs. For best results, we recommend a three-pronged approach.

1. Innovate your business model:

R&D investments and M&A strategies are being held to higher standards. Customers want more robust clinical data and will move more hesitantly to adopt new technologies. Investors need more assurances and higher, more-rapid returns.

As product innovation becomes less valued, medical technology companies will need to innovate their business models. Companies can add value by helping their customers develop standardisation programmes, rationalising inventories, improving utilisation levels and procuring more cost effectively. Another option can be creative pricing models that feature risk-sharing and outcome-based pricing. Electronic medical product companies could transform therapies using device connectivity to make care more flexible in alternative, lower-cost locations, such as nursing homes. These types of new technologies can help a company’s products and services stand out among competitors.

“Companies that overspend on R&D and M&A could incur as much risk as those that do not spend enough”

In today’s reality, companies that overspend on R&D and M&A could incur as much risk as those that do not spend enough. It’s an aggressive market with high customer and investor expectations. Medical technology organisations’ spend and activity levels must be appropriately scaled to and aligned with targeted clinical opportunities.

2. Connect with the New Customer:

As economic pressures reshape health care delivery and customer business models, medical technology suppliers need to understand how those shifts alter buyer perceptions. Even truly innovative technologies will have to quickly show bottom-line value. Companies will have to craft different kinds of offerings, including adjunct services and information-based packages that help customers deal with economic pressures. Companies will also need to clearly articulate the value of these offerings to a wider variety of stakeholders: not just physicians and nurses, but buyers, such as administrators, payers, providers and patients.

More product decisions are being made by in-hospital purchasing and value-analysis committees than by physicians, requiring companies to establish new sales and marketing models. Some suppliers might partner with hospitals and other channel partners on marketing campaigns. Marketing strategies will also have to consider the role of patients and consumers — both as customers in their own right and as key members of the overall hospital-physician customer base. Product device benefits that appeal directly to hospitals and their patients will become important value propositions.

Sales reps will now need to be trained with a deeper understanding of hospitals’ operational realities. The effectiveness of reps will focus less on physician relationships and more on the ability to partner with economically-driven stakeholders to help ensure better care at a lower cost.

“To achieve profitability goals, medical technology firms will need to scrutinise every process for its value to customers and ability to increase efficiency”

3. Excel at Operational Excellence:

Suppliers whose sole focus is to bring to market technology with a strong clinical value will be forced to make salient cost-benefit arguments for their products. The pressure for economic justification will be even greater for companies in lower-tech, slower-moving spaces.

Medical technology companies will be increasingly unable to overcome the liabilities associated with inefficient back office functions: from R&D and supply management to HR, finance, and IT. To achieve profitability goals, they will need to scrutinise every process for its value to customers and ability to increase efficiency. Companies need to become more agile to respond to inevitable future marketplace changes.

Powerful external forces are disrupting the traditional corporate strategies of medical technology leaders. Companies face greater economic pressures, a reformed health care system, new hospital and physician alignments, and new technological challenges. Our High Performance Business research indicates that the disconnect between product innovation and financial performance is quickly widening. Medical technology companies must prove their market value in driving positive financial outcomes, and maintain their commitments to improve patients’ lives.

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1. Enterprise Value (EV) is the sum of market capitalisation and net debt, totalled across a pure play peer set of 19 companies focused primarily on medical technology products and measured at constant US dollar exchange rates from 2005 to 2013.


About the author:

Doug Mowen is the managing director for Accenture’s Medical Technology Practice. With 25 years of experience and 15 years serving the Life Sciences industry, Doug has worked broadly across the medical technology industry, serving med-tech clients around customer strategy and segmentation, quality, safety, and promotional compliance. He has insight into cardiovascular, orthopedic, and diversified medical technology companies.

Follow Doug on Twitter.

Have your say: how can medical technology companies best respond to the new environment?