Fixing the Disconnect in Medical Technology

By Doug Mowen.

The medical technology industry has a legacy of creating life-enhancing, life-extending products while rewarding its investors in the process. In fact, this connection between innovation and profitability has been a fundamental driver in the C-suites and boardrooms of many medical device, diagnostics and equipment companies.

But change is underway. Dominating external forces are disrupting the traditional strategies of medical technology leaders. Companies face greater economic pressures, a reformed healthcare system, new hospital and physician alignments, and new technological challenges.

Our High Performance Business research indicates that, for these and other reasons, the disconnect between product innovation and financial performance is growing. Medical technology companies’ commitments to broadly defined, clinically oriented missions are becoming less likely to hit financial success now and in the future. They will have to act immediately to address these paradigm changes in the market place and warrant their profitability.

But this is not to say innovation is out and can’t generate a strong ROI today. In fact, some companies continue to generate strong profits from breakthrough products, even in the face of financial concerns, such as earnings levels that lag research investment. But now more than ever, medical technology companies must work even harder to prove their market value in driving positive financial outcomes.

Innovation and Profitability Hand-In-Hand

For many years, medical device companies developed innovative, clinically oriented technologies and generally enjoyed above average investment returns in exchange for their efforts. Common anchors of profitability included strong corporate development engines, broad technology expertise, smart merger and acquisition decisions, and a clear focus on clinical outcomes.

Many manufacturers also bet on companies and technologies they hoped will produce market breakthroughs. As reported in the media, two examples include Medtronic’s billion dollar-plus play for renal denervation pioneer Ardian, and Johnson & Johnson’s similarly large bet on Acclarent’s novel approach to sinusitis.

The foremost reputations of medical technology companies, and the industry as a whole, have created a halo effect with physicians and clinicians, who are the manufacturers’ traditional market and customer base. Members of this core market appreciate the value that medical technology organizations and their sales representatives generate. They also welcome a steady output of new technologies that help their patients. This harmonious relationship has further accelerated companies’ growth and financial success.

But the High Performance Business analysis shows that this paradigm is changing.

Enterprise Value [1] is recovering from pre-recessionary levels. Yet, overall industry growth is decelerating. For example, R&D spending has been increasing faster than revenue which, in turn, has been increasing faster than earnings. All the while, innovation output, as measured by number of 510(k) approvals, has been flat to declining.

Only four of the 19 “pure play” medical technology companies, those with more than 75% of revenue derived from medical technology products were also deemed to be high performers. In fact, companies usually considered top innovators and aggressive acquirers of new technologies fared poorly on our consolidated scale of financial performance. Even more extraordinary, our analysis concluded the divide between technology, product innovation, and financial performance is growing.

Growth and Profit Challenges

Several shifts in the marketplace are impacting medical technology companies' growth and profits picture. Among them:

• a changing buyer-customer who has developed different priorities — seeking product value and positive health outcomes;
• continuous pressure to reduce costs;
• growing scrutiny from regulatory agencies;
• changing patient population.

For instance, US healthcare reform is increasing the size of the insured population, essentially placing greater pressure on providers. In response, medical technology companies need to consider taking a leadership role in improving care delivery and driving out costs in therapeutic areas where there is existing expertise. They should aim to work with customers to improve utilization levels, while offering a portfolio of solutions, beyond expensive, increasingly unsustainable product options.

In addition, payers and providers are increasingly skeptical about the value of incremental product improvements. For example, companies could develop a solid health economics story and communicate it to customers. Or they might rebrand some products to increase differentiation based on economic benefits. Another option: develop non-product offerings, including as patient service programs and educational initiatives.

As levels of regulatory scrutiny rapidly increase, demands for evidence tighten, and regulatory approval times expand, medical technology companies must appropriate uncompromising attention to improving research and development efforts as well as supply chain and back office operations. The objective should be to offset additional regulatory burdens by increasing operational efficiency.

The issues are requiring medical technology companies to revise their strategies and

operations. But at the same time, these shifts are also creating new opportunities for pioneering companies to redefine and elevate their relationships with their customers.

Repairing the Disconnect

Medical technology companies now have the opportunity to work together with their customers to deliver comprehensive cost-effective solutions that increase quality of care and meet their information needs. For best results, we recommend companies take three courses of action.

1. Innovate Your Business Model

Both customers and investors are increasingly less likely to value product innovation.

This is particularly the case when technology enhancements only incrementally improve patient clinical outcomes. Moreover, they will hold R&D investments and M&A strategies to higher standards. Customers will now want to see more robust clinical data and they may hesitate to adopt new technologies. Investors, on the other hand, will demand more assurances and higher, more-rapid returns.

Innovation of the business model will be required as product innovation becomes less valued. Some companies may continue their focus on disruptive, breakthrough technologies that significantly alter the future of patient outcomes. But their go-to-market strategies will need to demonstrate an ability to achieve a level of consistent product value to economic buyers and payers. For most companies, those whose offerings are often incremental enhancements, economic benefit will be an increasingly essential justification for adoption.

Innovating the corporate business model can also involve streamlining the process of healthcare delivery and lowering its cost. In this manner, medical technology companies can help their customers develop standardization programs, rationalize inventories, improve utilization levels, and procure more cost effectively. In addition, innovative pricing models can offer novel concepts, such as risk-sharing and outcome-based pricing.

Companies that market electronic medical products can also seek opportunities to transform therapies by using device connectivity. Advanced connectivity can enable more flexible care in alternative, lower-cost locations, such as acute-care facilities. Technology can also significantly help differentiate a company's products and services from competitors in the medical industry.

Depending on the spaces in which they play, companies that overspend on R&D and M&A activity may incur as much risk as those that do not spend enough. Medical technology organizations must be sure their spend and activity levels are appropriately scaled to and aligned with targeted clinical opportunities, as well as match broader corporate goals and strategic missions.

2. Connect with the New Customer

As economic pressures reshape healthcare delivery and customer business models,

medical technology suppliers will need to understand how those shifts alter buyer

perceptions of products. Product features and benefits are becoming less significant, and industry value propositions have to change. Even truly innovative technologies will have to exhibit strong value. To address the interests of new customers, companies must market different kinds of offerings, including adjunct services and information-based packages that help customers deal with economic pressures.

Companies will also need to emphasize the value of those offerings to a wider variety of stakeholders — beyond physicians and nurses to economic buyers, such as administrators, payers, providers and patients. If companies do not do this, their customers may define their products for them.

As the power of the economic buyer rises, medical technology companies may need to incorporate new sales and marketing models. More product decisions are being made by in-hospital purchasing and value-analyzing committees. The influence of these committees is likely to go on rising while sales rep access to physicians continues to fall.

To address this issue, companies should look to realign their sales and marketing efforts to address the changes in decision making. One option can be for suppliers, especially those with novel product technologies, to partner with hospitals and other channel partners on marketing campaigns.

Marketing strategies will also have to take into consideration the role of patients and consumers, as customers in their own right and as key members of the overall hospital and physician customer base. Device and technology benefits that appeal directly to hospitals and their patient customers will become an important part of the med tech value proposition.

Additionally, there will likely be a need to implement new approaches to hiring and training sales reps in order for them to obtain a more complete understand of a hospitals’ operational realities and how devices align with these entities’ larger missions. Sales rep effectiveness is becoming less about physician relationships and product knowledge, and more about the ability to partner with a broad set of economically-driven stakeholders to help ensure better care at a lower cost.

3. Excel at Operational Excellence

As pressures to reduce costs continue to reshape healthcare delivery systems, medical technology companies will no longer be able to rely primarily on innovation to ensure top-line revenue growth and profitability. Some suppliers, whose sole focus is clinically meaningful technology, could face scrutiny about their products’ affordability. They will

be forced to make significant cost-benefit arguments for their novel technologies and products. For companies playing in lower-tech spaces, the pressure for economic justification will be even greater.

In addition to justifying product affordability, 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. They must pursue operational excellence and address issues that many other industries have already faced: the need to dissect every process for its value to customers and for ways to increase efficiency. The result can only be positive: an increased agility to respond to inevitable future marketplace changes.

Powerful external forces are disrupting the traditional strategies of medical technology leaders. Companies face greater economic pressures industry-wide, a reformed healthcare system, new hospital and physician alignments, and new technological challenges. Our research confirmed that this disconnect between product innovation and financial performance is expanding.

Medical technology companies need to act now to address this issue. Their focus in innovating their business models, connecting with the customer, operational excellence are core areas to target. Approaching the repair work for the disconnect in this way will help companies prove their economic value by driving positive financial outcomes and while at the same time continuing to offer products that improve patients’ lives.

About the Author
Doug Mowen is Managing Director, Medical Technology, Accenture Life Sciences.

For additional research findings, please visit: The MedTech Disconnect: Realigning Innovation to Succeed

Connect with Doug Mowen: @DougMowen