5 disruptive forces to buffet cardiovascular device makers

Cardiovascular device makers may need to brace and embrace to stay afloat, according one market projection. Analysts predicted a 6 percent decline in margins for medical device companies by 2020, which could be offset by $34 billion in profits and cost reductions.

Staff at A.T. Kearney, a management consulting company, interviewed 30 executives at 20 leading medical device manufacturers about the state of the industry with a focus on products where physicians traditionally had say over purchasing decisions. They identified five disruptive forces that they argued will negatively impact businesses. Cardiovascular device makers can expect to wrestle with all five.

A shift away from physician-preferred purchasing to evidence-based care topped the list. The analysts noted several trends that give payers and providers more clout in these decisions: the growth in employed physicians, accountable care organizations and hospital consolidation. These factors increasingly place purchasing decisions in a value chain where cost and proven efficacy take precedence.

“While physicians’ preferences still matter, their freedom to choose can no longer be taken for granted; many executives interviewed indicated that pressure for price reductions has increased notably over the past few years,” they wrote.

Device companies should anticipate increased scrutiny from regulators, they warned. Device approvals and postmarketing surveillance in the U.S. and Europe will require more evidence and monitoring. These demands will prolong approval times, increase costs and hamper product enhancement.

Regulatory burdens also will constrain innovation, they predicted, resulting in fewer venture capital investments and a limited pipeline of novel therapies. While proof of noninferiority before sufficed, regulators and payers will want superiority from these new products. “[P]roducts in established therapy areas (such as prosthetics, cardiology, ophthalmology and audiology) already effectively meet patients’ and clinicians’ needs,” they claimed.

Device manufacturers will need to revise business strategies to meet the expectation of new healthcare delivery models, which emphasize savings, services and solutions rather than the device itself.

The analysts also challenged the notion that developing countries offer the best opportunity for growth. They instead favored traditional markets and recommended device manufacturers target previously undeserved patient populations that now will receive care under the Affordable Care Act (ACA). In what they consider a conservative estimate, the ACA will create at least 10 percent growth for the device industry.

The purchase power shift to payers and providers and the need to serve lower socioeconomic groups under ACA will hit cardiovascular device makers especially hard, according to the report. The other three disruptors also will be critical.

The five disruptors will contribute to a decline in margins, they predicted. Price erosions will reduce forecasted operating margins from 23 percent in 2014 to 16 percent in 2020.  

To be successful, device companies should consider approaches to attract broader markets and value chains. They might need to partner, acquire service businesses and weed out obsolescence. Companies that prevail could chalk up annual sales increases of 2 percent through 2020, according to the analysts, for industrywide operating profits of $24 billion. Tack on capital reductions of $10 billion and “we estimate the cash value generation potential for the industry to be $34 billion by 2020.”

A.T. Kearney released the report Oct. 20.