Increasing competition and budgetary pressure on the provider side are the biggest challenges facing the medical technology industry in Europe. Joerg Kruetten and Carlos Meca discuss the findings of a new industry survey.
Nobody would dispute that the medtech industry is a bastion of strength compared to many other industry sectors in the current economic turmoil. With an ageing population and an increasing prevalence of chronic and prosperity-related diseases, the EU market for medical technology products is and will continue to be a key place for the industry, with growing demand for efficacious and efficient prevention, diagnosis and treatment methods. The industry’s overall business expectations for 2011 are positive.
However, a second and deeper look at the EU markets shows that the environment has become significantly more challenging in recent years. Stricter reimbursement controls by payers, which increasingly often are bound up with health technology assessments and/or case-based funding across the EU, are putting significant budgetary pressure on caregiver institutions. In response to cost pressures, many caregivers are focusing on the procurement side as a comparatively easy area to cut operating costs. This has increased the influence of procurement departments and reduced the influence of clinical staff on product and therapy choice.
In recent years, the focus on cutting procurement costs has also led to a high and growing prevalence of different forms of pooled purchasing in the EU member states through private provider chains, group purchasing organisations, national or regional public tenders or international distributors.
As a result of these developments, the industry is facing increasing price pressure and business risks as well as decreasing customer commitment and room for competitive differentiation. The impact of these procurement trends, however, largely varies with the complexity and maturity of a product or product category. Whereas purchasing department influence and pooled purchasing are very common for simple medical supplies, they are less prevalent with new and complex surgical procedures or capital equipment, where the purchasing/adoption decision is still predominantly influenced by the clinical and technical staff at the institution level.
A second unfavorable trend for established industry players is the emergence of new low-cost competitors, threatening their market position with good-quality and predominantly me-too products at very attractive price points. These low-cost companies strongly embark on the trend of caregiver institutions focusing on cutting procurement costs. Compared to established players that are driven strongly by innovation and have high R&D as well as sales and marketing expenditures, the new competitors follow different business models. Three types of new low-cost competition can be observed in the EU marketplace:
• Asian ‘broad liners’ who are still focused on R&D but benefit from lower personnel costs, scale on the procurement side, favorable currency fluctuations and lean sales and service models.
• ‘Copycats’ who are copying established products by intelligently circumventing existing patents, and are comparatively small in size and lean on the administration and sales side.
• ‘One-stop-shop’ distributors who benefit from procurement and sales scale and offer their own private label products in addition to established brands.
Besides these new competitors, further low-price competition can be found among established players who offer basic and/or mature products at high discounts to protect the remaining part of their business or offer a low-price product/brand alternative to their premium product by keeping an old-generation product on the market.
Major firms face trouble
These market trends were largely confirmed by the MedTech Barometer 2011, an industry survey conducted by global strategy and marketing consultancy Simon-Kucher & Partners. More than half of the 70 respondents, who are senior decision makers in globally leading medical technology companies with European business responsibility, stated that tight budgets on the customer side and increasing price competition are the biggest commercial challenges they currently face in the European marketplace.
The respondents saw a clear mid-term trend in Europe of increasing competitor price aggression in the fight for higher market shares. On the customer side, there is a clear expectation that purchasing department influence and the pooling of purchasing power will strengthen in the coming years.
60% of the respondents expect a ‘tighter to much tighter’ reimbursement and funding environment in the future, driven by the uncertain fiscal climate and forecasted revisions of reimbursement prices and rates in the EU member states. Close to 60% expect overall market prices to be ‘worse or much worse’ in the near future.
In response to these unfavorable commercial trends, the surveyed managers give first priority to increasing sales force effectiveness in order to deal with consolidation of buying centers and non-clinical procurement stakeholders. The second stated priority is the launch of new and enhanced products and services to increase competitive differentiation. In terms of other business goals, winning competitor accounts and increasing market share were prioritised over raising prices or slowing down price erosion.
50–60% of the respondents mentioned that they already face strong pressure from low-cost competitors and that this pressure is expected to increase in most sectors. The diagnostics sector in particular has been heavily exposed to low-cost competition: all respondents representing this sector have already been affected. Whereas the equipment and supplies sectors expect pressure from low-cost competition to increase, the device side expects the pressure to remain significant but stable.
Increasing innovation, enhancing customer service and processes, and better customer segmentation and prioritisation are believed to be the most effective responses to low-cost competition. Very few respondents believe that trying to match the price points of these competitors by reducing their own prices or introducing low-cost offers/brands is a commercially viable option.
Ready for the fight
In summary, the political framework and the demographic developments will continue to make Europe an important, growing and innovation-friendly market environment for medical technology products in the foreseeable future, despite the ongoing economic turmoil. However, the market climate for established industry players has and will continue to deteriorate due to stricter reimbursement controls and increasing purchasing professionalism and power on the customer side coupled with consistently strong and increasing competitive dynamics.
Despite the commercial challenges that established players in Europe are facing, the business outlook for the coming year remains positive. The respondents across the different sectors expect their operations to grow by 5–10% in terms of revenue, with device and diagnostics companies expecting the highest growth rates. At the same time, the surveyed companies expect to increase their market shares moderately in the area of 3%. The companies’ average selling prices are expected to remain stable. In essence, new product launches are compensating for price erosion among established products.
With increasing budgetary pressure at the payer level and economic uncertainty in the EU member states, it is however very likely that the commercial climate in the medical technology sector will deteriorate further. Stricter reimbursement controls, health technology assessments and cost-cutting pressure on the provider side, combined with strong competitive dynamics, will further increase pressure on prices and margins; the adoption of new products and technologies is likely to slow down. The automatism of continuously compensating for negative developments among established products with new product launches may come to an end at some point.
A lot will depend on maintaining innovation, and the European market is sure to remain an innovation-friendly environment. Companies that launch true innovations with convincing clinical and/or health economic benefits will continue to have great market opportunities. Still, the vulnerability of companies that only launch regular gradual improvements of existing products and companies with a high exposure to very mature product categories will continue to increase. The long-term success of established players in the European marketplace will largely depend on having a strong innovation pipeline and controlling the price erosion of established products.
Strategies for success
Long-term business success in Europe will thus require strategic and tactical adaptations by established firms. European medtech companies are still in general very R&D-orientated. Successful innovation will be key to developing competitive differentiation and limiting the exposure to increasing price pressure. However, European companies – which are often extremely good at selling technical and clinical benefits to clinical users and technicians – need to become better at selling clinical and health economic benefits to commercially-driven purchasers.
This means focusing primarily on the following areas:
• Prioritising and steering R&D projects early on according to reimbursement and price potential.
• Producing better clinical and/or health economic evidence to support positive reimbursement and adoption decisions when launching new products.
• Resources, skills and engagement models for interacting effectively with national or regional payers, as well as procurement managers and financial administrators.
• Balancing market share and profitability goals, differentiated by business area and according to a product’s life cycle stage and the level of competition.
• Offering service support areas to payers and providers that measurably help to drive their organisational efficiency beyond simple price cuts.
• Offering new and intelligent contract models to providers that limit upfront investment burden or ensure budget compliance while securing customer commitment.
• Pursuing a structured and defendable pricing policy rather than making opportunistic and spontaneous pricing decisions.
A management summary of the MedTech Barometer 2011 is available on request. Please contact Claudia Schulz at Simon-Kucher & Partners: email@example.com, tel. +49 228 98 43 372.
Joerg Kruetten is Executive Vice-President at Simon-Kucher & Partners, a global consulting firm focused on Smart Profit Growth, and is head of the company’s international medical technology competence center. Dr. Carlos Meca is a senior consultant at Simon-Kucher & Partners.