Disruptive technology means it’s sink or swim time for device sector

With the digital healthcare revolution emerging across the healthcare landscape, A.T. Kearney warns that the medical device sector needs to evolve to keep pace – and do it fast.

The medical device industry has enjoyed stability, strong growth, healthy margins and above average price-to-earnings ratios over the last 20 years. However, disruptive change is already underway and the future of the industry will be different. Companies will need to look at new segments and end-to-end solutions that are focused on differentiated sources of value, customer productivity, and total patient disease management.

These findings were reported in a study released by A.T. Kearney titled "Medical Devices: Equipped for the Future?"

Dave Powell, A.T. Kearney partner and study co-author said: “While the future contours of the medical device industry remain to be defined, radical change is inevitable, and the companies who embrace it will both shape the industry and profit from it.”

A.T. Kearney interviewed more than 30 global medical device industry executives from 20 of the world's leading medical device manufacturers. These companies collectively represent $80 billion in revenues and span the range of sectors, geographies, and company sizes. These interviews combined with A.T. Kearney experience and research, led to the identification of five major disruptors that will negatively impact the economics of the industry if not addressed. The five disruptive forces shaping the medical device industry are:

Evidence-based decisions and the funding channels are increasingly challenging the traditional business model of clinician choice. Payers and providers are evaluating medical devices based on safety and procedural efficacy as well as cost and value.

In recent years there have been recalls that are high-profile and damaging. Regulators have been tightening up existing regulations and adding new ones. FDA audits have increased by 40 percent in the past 12 months and the number of warning letters has risen by 24 percent over the past two years.

Because of regulatory and reimbursement issues, medical device companies are focusing their R&D efforts on improving already approved devices rather than developing truly innovative new products. New products that affect the way standardized procedures are conducted are often reluctantly included on the list of reimbursable products. Additionally, startups and small companies are finding it difficult to find capital to fund the increasing cost to bring new innovations to market.

As payers' resource constraints intensify, and powerful analytical tools make it easier to evaluate large volumes of data, patient pathways are being modified to obtain better outcomes for less money. For example, increasingly the emphasis is to shift care out of hospitals and into the community.

Medical device companies seeking growth will need to target less affluent segments that can offer significant absolute profit potential with the right solutions.  Accessing growth segments, even in traditional markets, will require new business models, lower price points, and more value-based product offerings than those of today.

Tim Durst, A.T. Kearney partner and study co-author said: "Even within sectors, each company experiences a different set of headwinds and opportunities, depending on where it competes and the specific environment it faces. The most appropriate responses will therefore be company specific."

The study provides recommendations for medical device industry executives to address disruptive change. Executive teams across the sector should be actively considering the importance of each one of the five disruptors, and questioning how well their current operations are dealing with these issues.

Bill Tribe, A.T. Kearney principal and co-author of the study said: “The question for executive teams is how they can navigate the disruptors and define their unique path, recognising that the industry is changing now, and the industry leaders of the future are already defining how and where they expect to compete.”