Pulse of the industry - Medical technology report 2011
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10 Octombrie 2011 |
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Innovation and risk - Overview
Medtech is an industry based equally on innovation and risk. Success in this business has always hinged on the ability to innovate — from breakthrough technologies that shift entire paradigms to the steady pace of iterative enhancements that, over time, add up to huge improvements in health outcomes.
To innovate, companies and investors have to take on significant amounts of risk. With every new technology and every generation of product enhancement, companies have inevitably borne product development risk — the possibility that a new offering would not obtain regulatory clearance or would fail to gain market traction. And financing that innovation has required risk capital. From venture capitalists to the public markets, investors have put their funds at risk as they sought the handsome returns that medtech companies have historically delivered.
Today, the industry faces new risks from an increasingly diverse range of sources — not just from the challenge of product development, but also from an uncertain public policy environment, shifting regulatory requirements and growing pricing pressures driven by an increasingly unsustainable health care system — all of which are straining medtech innovation.
To respond, companies will need to innovate in new ways. If risk has moved beyond product development, so too must innovation. The path forward will require companies to apply their inventiveness and creativity not just to developing and improving the products they have long focused on, but to expanding into entirely new kinds of products, complementary services and more.
The new normal: innovation at risk
Since the onset of the global financial crisis in 2008 and the economic downturn that followed, the term "new normal" seems to have become increasingly popular — not just among pundits and prognosticators, but also in the common parlance. The term has been used to describe everything from the deleveraging of capital markets to the changing relationship between emerging and mature markets and even shifting gender roles. And we have used it ourselves in Beyond borders, our sister publication on the biotechnology industry, to refer to the new realities facing that industry.
It is now becoming increasingly clear that medtech faces its own new normal. This is an environment where companies face a confluence of risks and challenges: heightened regulatory scrutiny and payer pressure, a fundamentally different funding climate and a rapidly changing customer base.
Regulatory and pricing pressures. In recent years, the FDA's 510(k) process for clearing certain classes of medtech products has come under considerable scrutiny. Critics have charged that the 510(k) process — which, unlike the premarket approval (PMA) process used for life-sustaining products, does not require clinical trials — needs to be changed. The FDA responded by initiating a review of the 510(k) process and also asking the Institute of Medicine (IOM) to conduct a separate review. (For a fuller discussion of these developments, refer to the Introduction article in Pulse of the industry 2010).
In July 2011, the IOM released its report, "Medical Devices and the Public's Health: The FDA 501(k) Clearance Process at 35 Years." The IOM report's recommendations were certainly bold — rather than proposing reforms to the existing system, the institute recommended scrapping the 510(k) process altogether and replacing it with "an integrated premarket and postmarket regulatory framework that provides a reasonable assurance of safety and effectiveness throughout the device life cycle." The FDA soon announced that it does not intend to implement this proposal, while some policymakers continue to decry the agency for not considering it.
Regardless of how this particular issue plays out, the reality for medtech companies operating in the US and investors in those firms is that the regulatory environment has become clouded with uncertainty. Medtech executives — still adjusting to the coming medical device excise tax and the move toward comparative effectiveness research imposed as part of US health care reform — now face questions about the product approval process and the fallout on Medicare spending from policymakers' attempts to tame the country's expanding public debt. With an increasingly polarized and uncompromising environment on Capitol Hill, clarity on these matters will likely remain elusive for the foreseeable future.
The industry also faces an increasingly challenging reimbursement environment in developed markets. Payers — both public and private — have seen their budgets squeezed and are, in turn, pressuring medtech companies to demonstrate how their products improve health outcomes for patients and efficiently use health care resources. Even if clinical trials are not required to get a product approved, payers will increasingly focus on post-marketing data on the comparative effectiveness of different interventions.
It is not surprising that a number of executives — in both this year's report, as well as the 2010 issue of Pulse of the industry — allude to the uncertain regulatory and reimbursement environment as one of their biggest challenges. Despite the fact that the US remains the world's largest market for medtech products, an outside US (OUS) strategy — in which emerging companies first obtain marketing approval of new products in non-US markets — has become increasingly common in recent years. While this approach may allow a company to obtain regulatory clearance quicker, the challenge of obtaining reimbursement is no easier in non-US markets — European countries, for instance, are wrestling with sovereign debt crises that will only exacerbate the pressures.
Customer realignment. The convergence of several trends is creating a fundamental realignment of the customer base to which medtech companies have traditionally sold their products — increasing the importance of some customer channels, while reducing the significance of others.
As governments across major markets move to rein in health care costs, hospitals are finding their margins reduced, exacerbating the pressure they have already been under in the aftermath of the economic downturn. In numerous markets, payers are starting to experiment with "capitation" approaches that allow them to place a cap on the amount they will pay out per patient, effectively transferring more of the financial risk to providers.
These pressures have, in part, driven a spate of mergers among US hospitals in the last couple of years. As they face increasing pressures, hospitals have also adopted a slew of measures to cut costs. They are increasingly relying on mechanisms such as technology assessment committees and group purchasing organizations to consolidate and standardize purchasing decisions. Surgeons and other physicians — who traditionally had free reign to pick the device they preferred — are increasingly finding that freedom curtailed, as hospitals limit the number of options in each product category. In many cases, hospitals are imposing price caps and/or reducing the number of vendors from which they will purchase. And, as a growing number of doctors abandon small private practices and become employees of large hospital systems, more and more of them are affected by these trends.
