Source: Factset
New advancements, new players
Innovation is no novelty in the med-tech world: since the industry first came to maturity, med-tech groups have sought to differentiate by bringing the latest medical advancements to the bedside and the operating room. Even against this backdrop, however, the pace of innovation appears to be accelerating, as a range of breakthrough technologies enters the healthcare arena for the first time.
These include, in the surgical field:
- Augmented reality applications with the potential to transform procedures, allowing surgeons to view rich data in real time as they operate, or presenting the surgeon with highly accurate visualisations to improve accuracy
- Robot technology which has been available to surgeons for many years. The capability and complexity of robot applications is increasing rapidly, with market growth forecast at an 8.5% compound annual growth rate from 2017 to 2024 [1]
- 3-D printing – also finding medical applications, allowing advances in orthotics, prosthetics, organ transplant and medical training
Each of these technologies may be transformative for patients or the clinicians, but for med-tech groups whose day job is to innovate, such progress represents more of an opportunity than a threat. In the case of the ongoing digital revolution, however, the pace and scope of change carries a greater risk of falling behind. Technological advances in sensors, coupled with developments in artificial intelligence, are broadening the definition of med-tech to include digital products and data-driven services. Further convergence between med-tech and the wider technology world is likely to lower barriers to entry, presenting the risk of disruption from competitors, especially those with a software focus.
Facing the uncertainties of this shift from products to services and towards “smart devices”, many med-tech groups have chosen to get collaborative, forging partnerships with tech groups to combine expertise and stay ahead of new entrants. One example is Medtronic’s partnership with IBM’s Watson Health division, which brings together data gathered from monitoring devices with Watson’s analytical expertise to improve diabetes treatment. To date, there is little sign of med-tech groups going a step further to consider M&A with tech vendors, but the CRO industry may offer a useful parallel, where Quintiles and IMS came together explicitly to bring Big Data expertise to bear on clinical trials.
Pressure to evolve
In his 2018 budget, the UK Chancellor of the Exchequer, Philip Hammond, declared that if not quite over, austerity was “coming to an end”. The logic of ageing, growing populations, however, means that pressure on public health systems to reduce costs will remain intense, and this ongoing pressure is driving changes in med-tech procurement in every developed market.
In some countries, the rise of Group Purchasing Organisations (GPOs) has been a natural response to these conditions, as hospitals have scrambled to match their bargaining power to an increasingly consolidated base of suppliers. Equally, distribution groups that were once simple go-betweens for suppliers and hospitals are now positioning themselves as allies in the struggle to drive down the cost of healthcare.
In the UK, generalised pricing pressure has been accompanied by significant regulatory change. The Department of Health and Social Care has established a new procurement model to replace the NHS Supply Chain contract. The new arrangements are aimed at reducing price variations and driving product range efficiencies in order to increase value for money and achieve greater consistency. This Future Operating Model has split the old contract into functional areas, such as logistics, IT and 11 ‘Category Towers’ (such as orthopaedics, rehabilitation and cardio-vascular) which will be run by specialist providers. For med-tech groups, the changes will mean further pressure on profitability, but the new system’s emphasis on specialism and value for money could allow clinically focused providers to build deeper, long-term partnerships with the NHS.
All of these developments highlight how med-tech is becoming increasingly solution- and outcome-driven, a value-based market in which businesses must demonstrate the value they create along the care continuum. The key to success is understanding that the definition of value in med-tech is expanding and evolving: suppliers must adapt to this changing definition, and for some groups, M&A will be an important part of how they achieve this.
Brexit means…?
For any resident of the UK since 2016, the topic of Brexit has been impossible to avoid, and the med-tech sector has more reason than most to follow events closely. The EU is the UK’s largest single export market for healthcare technologies, buying around £2bn of goods annually, with more than £3bn coming in the other direction. The med-tech regulatory framework has largely been set at the EU level in recent years, driving the convergence of national regimes. With an impending Brexit, the UK’s regulatory environment is now likely to diverge.
Assuming Brexit happens at all, and happens in a form close to the Draft Withdrawal Agreement, the UK and the EU will operate within “a free trade area and deep co-operation on goods, with zero tariffs and quotas”. This settlement would limit disruption to supply chains, and certainly avoid the nightmare scenario of life-saving equipment being held up by delays at hastily-established customs checkpoints. Much remains uncertain, however, and the detail will only emerge as the weeks to 29 March 2019 count down.
The med-tech sector, then, can plan for a degree of regulatory divergence over time, but perhaps not drastically or quickly. Uncertainty and complexity are never welcome in international trade, but it may be that the local difficulties occupying British minds have less impact on the sector in the long run than forces with more global import.
The pivot to Asia
For European and US med-tech companies seeking growth and protection against instability in their countries of origin, the boom in Asian demand has been a blessing. McKinsey predicts that Asia will become the second largest medical technology market in the world by 2020, and it could account for a third of global sales by 2025. Companies are now strengthening their presence by broadening out from countries such as China and Japan, into economies including Indonesia and Vietnam.
Entering Asian markets does bring challenges, not least the difficulties of navigating unfamiliar regulatory regimes across a highly diverse range of national markets. As with the pharma world, legal and regulatory obstacles have meant that speed to market has been a problem for med-tech groups seeking to bring new devices to – large but historically undeserved – populations in Asia.
More recently, the introduction of tariffs on med-tech products sold between China and the US has been causing pain for would-be exporters. The first of the two tranches of US tariffs implemented has affected around US$1bn of med-tech products – roughly a fifth of the value of all US med-tech imports from China. In retaliation, China has imposed tariffs on several product categories ranging from low-value consumables to high-value medical goods such as computed tomography equipment. Despite the tariffs being aimed at national champions on both sides, global med-tech companies with operations and production facilities in the US and China are among the hardest hit.
The causes of the current resurgence of protectionism are no doubt entangled with US-Chinese geopolitical rivalry, but the tariff battles do highlight a more commercial phenomenon – the steady rise in competition from Asian manufacturers, not just at lower price points, but increasingly at the high-value, innovation-driven end of the market. China in particular is increasingly producing its own intellectual property as it pushes for global leadership in high-tech sectors of the economy, a drive which will surely have a dramatic impact in the future both for patients and for med-tech companies worldwide.
Source: IP5 offices
Asia, then, represents a vast end-market and an increasingly dynamic source of competition. Should med-tech groups in Europe also look East for potential buyers? While the majority of European med-tech acquisitions continue to be carried out by buyers within the region, the Asian exit route is already a real one for targets with the right characteristics, and is likely to become increasingly important as groups from China, Japan, India and elsewhere seek to diversify, access specific technologies, and deploy capital generated in their home markets.
Value and volume of outbound med-tech M&A deals from China, 2017
Source: Thomson Reuters, ChinaVenture and PwC analysis [2]
Volume of outbound med-tech M&A deals from China by region of destination, 2017
Source: Thomson Reuters, ChinaVenture and PwC analysis [2]
Conclusion
The trends and issues highlighted above will continue to impact med-tech companies, which are already adapting as their markets evolve. While regulatory and trade obstacles may hold back some M&A activity, in the larger term, the dynamism of the med-tech world is likely to mean high levels of M&A activity in this increasingly global sector.
Should you have any questions regarding this content or our sector credentials, DC Advisory’s Global Healthcare team would be delighted to discuss in more detail.
