How will China’s medical device industry develop over the next decade?

While the outlook for medical-device companies appears promising, unsustainable healthcare costs and the entry of new competitors suggest that the industry’s future landscape is likely to shift. If today’s manufacturers fail to secure a strong position within the evolving value chain, they will face a difficult dilemma and risk being commoditized. To maintain a leading edge, they must deliver value that goes beyond the device itself—addressing real clinical challenges rather than merely making incremental contributions.

The Medical Device Industry in 2030: Becoming Part of the Solution

Reimagine business and operating models, reposition, and restructure the value chain.

The days of simply manufacturing devices and selling them to healthcare providers through distributors are over. Value has become the new hallmark of success, prevention is the optimal clinical outcome, and intelligence is the new source of competitive advantage. This article explores how medical device companies can achieve success by adopting a “three-pronged” strategy by 2030.

Reimagine business and operational models

Medical device companies should carefully review their existing organizational structure and reshape traditional business and operational models in the following ways to align with future development:

Integrate intelligence into product portfolios and services to positively impact the treatment process and foster connections with clients, patients, and consumers.

Deliver services that go beyond the equipment and intelligence that transcends those services—truly shifting the value proposition from cost to intelligent value.

Invest in enabler technologies—make the right choices to support multiple, parallel business models tailored to customers, patients, and consumers (including potential patients)—and ultimately align these efforts with the organization’s financial objectives.

Repositioning

Adopt a “from the outside in” perspective to prepare for the future. By 2030, the external environment will be highly volatile, requiring medical device companies to reposition themselves within the new competitive landscape and address disruptive forces from the following areas:

New entrants, including competitors from unrelated industries.

New technologies, because technological innovation will continue to outpace clinical innovation.

New markets, as developing countries continue to maintain a high-growth trajectory.

Reconstructing the Value Chain

The value chain for traditional medical devices will evolve rapidly, and by 2030 companies will assume markedly different roles. Following a reshaping of their business and operating models and a repositioning effort, medical-device firms will need to reconstruct their value chains and define their place within them. The myriad ways in which these value chains can be “built” will compel firms to make fundamental strategic choices. It is already evident that manufacturers will continue to engage directly with patients and consumers, or—through vertical integration—collaborate with healthcare providers and even payers. The decisions involved in rebuilding the value chain are far from straightforward and are likely to vary across a company’s market segments, such as device categories, business units, and geographic regions. As other firms seek to reconfigure their value chains to achieve their strategic objectives, the value chain itself will undergo dynamic evolution, further complicating the landscape. Nevertheless, the right choices will deliver substantial value to end users and help companies steer clear of a future characterized by commoditization.

Industry executives must challenge conventional thinking and reimagine the role their organizations will play in 2030. To do so, they need to restructure their current organizations, shifting from mere value-chain participants to providers of sustainable healthcare-cost solutions.

Beware of falling into a dilemma.

Unbearable pressure upends the status quo.

The medical device industry is poised for steady growth, with global annual sales projected to expand at a rate of more than 5% per year, reaching nearly US$800 billion by 2030. These forecasts reflect the rising prevalence of lifestyle-related diseases in modern life, which is driving sustained demand for innovative new devices—such as wearable technology—and digital health services—such as health data platforms—as well as the substantial growth potential unlocked by economic development in emerging markets, particularly China and India.

Despite the promising outlook, relentless downward pressure on prices continues to cast a shadow over the industry. Governments worldwide are striving to reduce healthcare costs—particularly in the most expensive segment of the healthcare system: hospitals. They aim to cut spending on medical devices while simultaneously seeking greater value in terms of improved clinical outcomes.

Increasingly, decision-making authority over procurement has shifted from healthcare institutions to economic policymakers. Despite short-term moratoria, such as the two-year suspension of the U.S. medical-device excise tax, pricing trends appear to be moving in only one direction—downward. With the EU Medical Devices Regulation coming into full force in 2020 and China introducing policies that incentivize domestic innovation, the industry is poised to face even greater uncertainty going forward.

The evolution of these circumstances has placed medical-device companies—long focused on manufacturing and R&D—in a difficult position: healthcare budgets are now constrained, and the new reimbursement regime continues to erode profit margins. Moreover, new entrants—some from entirely different industries—are leveraging data to gain deep insights into customers, patients, and consumers, thereby disrupting the industry. In today’s rapidly changing market, device manufacturers, if they remain mere commodity producers, face a significant risk of becoming trapped in a dilemma within the value chain.

The Evolving Value Chain

Competing for Strength in the Future Value Chain of Medical Devices

Medical device companies have traditionally delivered value primarily by manufacturing and selling products. However, as pressures on the healthcare system continue to mount and healthcare delivery models undergo fundamental transformation, the industry’s value chain is poised for significant change.

Under the new normal, companies must move beyond the traditional role of manufacturers by integrating services and intelligent data with their products to deliver end-to-end solutions. This calls for a “power struggle” across the value chain—simultaneously embracing business-to-consumer (B2C) models, strengthening existing business-to-business (B2B) models, and pioneering new ones. Such a power struggle is likely to unfold through a series of transactional activities, including mergers and acquisitions, strategic alliances, and collaborative partnerships.

Ultimately, medical device companies will strive to play a more pivotal role in the value chain, strengthening their relationships with customers, patients, and consumers. When managed effectively, this approach can not only open up new revenue streams but also shorten consultation times, reduce costs, and decrease the frequency of visits—thereby lowering overall healthcare expenditures.

Reimagine business and operational models

Much more than just manufacturing equipment

By 2030, the leaders in the medical device industry will be those companies that forge strong connections with customers, patients, and consumers—ultimately, end users—and proactively deliver value. To shift the focus from treatment and cure toward prevention, these companies must integrate “smart” services and solutions that help reduce healthcare costs and improve outcomes. Technology will play a pivotal role in enabling preventive care; when intervention remains necessary, it can also provide efficient, minimally invasive therapeutic options that shorten hospital stays.

To deliver value that goes beyond devices by 2030, medical device companies must rigorously assess their business and operating models while keeping a close eye on the following trends:

Establish connections with customers, patients, and consumers

To get closer to end users, manufacturers now need to leverage data and embed intelligence into their products more than ever—intelligence is rapidly becoming a key component of the value proposition for new devices. Data and analytics tools enable companies to establish direct, ongoing connections with users, prioritize prevention over treatment and cure, and empower patients to better manage their own care. To swiftly enhance their technological capabilities and effectively integrate intelligent services into their product portfolios, medical device companies can explore partnerships with other organizations.

We have already seen companies in the industry take the lead in forging collaborations, thereby validating this concept. Zimmer Biomet has partnered with technology-platform provider HealthLoop to support patients awaiting joint replacement. HealthLoop’s patient–provider engagement app guides patients on what to do before and after surgery, while also collecting data on surgical outcomes and postoperative care, helping to estimate reimbursement costs. Philips has adopted a different approach to target end users. Through its digital health platform, Philips Health Suite, the company is striving to expand its market share across a broad range of areas, including healthy living, prevention and diagnosis, treatment, rehabilitation, and home care. This cloud-based platform leverages IoT technologies to collect and analyze data from a wide array of devices, ultimately supporting hundreds of millions of connected patients, devices, and sensors.

We are living in one of the most challenging periods in the history of healthcare, confronted with a host of pressing issues: population growth and aging, the rising burden of chronic diseases, global resource constraints, and the shift toward value-based care. Addressing these challenges requires the deployment of connected healthcare IT solutions that integrate, collect, consolidate, and transmit high-quality data, thereby generating actionable insights to improve clinical outcomes, reduce costs, and enhance access to high-quality care.

—Jeroen Tas, Head of Innovation and Strategy at Philips

The growing prevalence of home healthcare devices—particularly wearable devices, which can be used at any time—has brought about a significant shift in the relationship between healthcare providers and end users. Clinicians are leveraging smart data to enhance diagnosis, disease monitoring, and prevention, while patients are able to avoid unnecessary—and costly—in-person visits. Moreover, both patients and consumers now have access to valuable guidance on lifestyle and dietary choices. In 2016, the number of patients undergoing remote monitoring increased by 44%, and is projected to exceed 50 million by 2021; meanwhile, the global market for patient remote-monitoring devices is expected to reach US$1.9 billion by 2025.

Manufacturers are also integrating intelligence into devices to deliver real-time analytics based on patient data. AliveCor has developed a medical-grade electrocardiogram (ECG/EKG) wristband that allows smartwatch users to detect arrhythmias—conditions that can increase the risk of stroke—as well as measure heart rate and rhythm. The ECG wristband leverages a smart app to process data collected by the device’s sensors and enables users to record voice notes, which can then be sent to physicians along with the ECG tracing. Portable Medical Technology has developed an application that has obtained European Union CE certification for medical devices, called ONCOassist. This software provides oncology specialists with clinical decision-support tools and offers a suite of prognostic aids for breast cancer, colorectal cancer, lung cancer, and gastrointestinal stromal tumors.

Although advancements in these areas can generate vast amounts of valuable data, the key challenge facing medical device companies is how to monetize this information. Consumers increasingly take such data for granted and are unlikely to pay for it, meaning revenue from end users may be minimal. Consequently, medical device firms must collaborate with payers to achieve effective commercialization and demonstrate how connected capabilities can demonstrably reduce healthcare costs. Moreover, the care landscape is shifting from hospitals to patients’ and consumers’ homes. As a result, the customer base for medical device companies is expected to undergo significant transformation, necessitating fundamental adjustments to their business models—such as assessing the implications for future sales forces.

At the same time, the widespread availability of data poses another serious threat to the industry: cybersecurity risks. The connected nature of many medical devices makes them vulnerable to cyberattacks, necessitating that organizations adhere to stringent standards to safeguard patient privacy and security. In light of a series of recent cyberattacks, the U.S. Food and Drug Administration (FDA) has recently issued the “Postmarket Cybersecurity Guidance for Medical Devices,” which provides detailed guidance on addressing vulnerabilities.

Despite the risks, companies should continue to explore new approaches and tools for data collection to support the development of smart devices and to strengthen engagement with end customers. As preventive and personalized care emerge as the new standard of treatment, technologies that can both support patients in modifying their behaviors and encourage positive lifestyle changes will be in high demand going forward.

Shifting the focus from cost to value

Although the profit margins in healthcare services may currently be lower than those in the pure medical-device manufacturing sector, companies that fail to incorporate value-added services into their product portfolios risk losing market share and being forced to compete solely on price.

An increasing number of medical device manufacturers are now offering a suite of services to complement their products. Fresenius Medical Care operates 3,690 chain dialysis centers, making it a global leader in both the manufacture of dialysis machines—accounting for 50% of all hospital dialysis machines worldwide—and the operation of dialysis clinics; as of June 2017, the company was providing treatment to more than 315,000 patients. Fresenius has acquired U.S.-based home-dialysis equipment manufacturer NxStage Medical for USD 2 billion, with the aim of playing a pivotal role in the rapidly growing home-therapy market.

Siemens has rebranded its healthcare business as “Siemens Healthineers.” In the fourth quarter of 2017, Siemens Healthineers posted sales exceeding US$4 billion, making it the largest and most profitable segment within the Siemens Group, with a profit margin of 19%. This high margin is largely attributable to its innovative services, including managed services, consulting, and technology solutions. These offerings are delivered through strategic alliances and partnerships. Most recently, Siemens entered into agreements with several hospitals in Turkey to manage the operations of clinical laboratory services, which are expected to benefit more than 92 million patients over the next five years.

This project integrates our expertise in laboratory equipment with our service offerings, marking a significant milestone for us. It also demonstrates how we help our customers address the challenges they currently face and achieve outstanding performance in their respective fields. The original design intent of this new business model is to enable our customers to enhance efficiency and control costs right from the outset.

–Bernd Montag, CEO of Siemens Healthineers

Siemens Healthineers has also formed a strategic alliance with IBM Watson Health, focusing on population health management and value-based care solutions for hospitals. Through this collaboration, Siemens leverages its imaging business and clinical solutions to analyze the vast amounts of data generated by medical technologies, thereby deepening its understanding of diseases.

Although many companies have established their service businesses as independent entities, we are seeing a gradual trend of these service operations being reintegrated into the parent group as they become fully integrated components of the core services offering.

Furthermore, the rise of services and intelligent technologies will help transform concepts such as value-based pricing from hype into reality. In cost-controlled healthcare systems, manufacturers not only engage with procurement departments at healthcare institutions but also with economic decision-makers; thus, striking a balance between innovation and value is clearly essential. For each device category within a company’s product portfolio, it is crucial to define what value means to every stakeholder—payers, healthcare providers, patients, and, to some extent, even end consumers. By doing so, companies can identify opportunities to enhance product differentiation through more customer-centric solutions, complementary services, and value-driven smart devices. In turn, this will facilitate strategic decisions regarding the product portfolio—including divestitures of low-margin businesses—and the development of new care delivery channels, such as online platforms, telemedicine, and remote monitoring. The growing demand for robust clinical and economic evidence means that by 2030, value-based pricing and innovative risk-sharing contracts will become the norm for medical device manufacturers.

To successfully collect and report measurable, value-driven outcome data, medical device companies should invest in a robust data strategy and technological infrastructure that enables them to seamlessly link data to their devices, continuously define outcomes, and enhance transparency for healthcare stakeholders. To be truly effective, the starting point must be the user experience and the associated pain points, rather than the device itself—this calls for a “user-centric” rather than a “device-oriented” perspective. While this approach may be unfamiliar to traditional enterprises, it is already well-established among technology-driven companies.

Reimagining business and operating models may not be straightforward for all companies, particularly given that medical device firms must make choices by 2030 to fundamentally transform their business and operational approaches. Moreover, each product segment and geographic region requires a tailored assessment. For instance, the strategic priorities in orthopedics differ from those in diagnostic imaging, and the options available in the U.S. differ from those in China. Companies must conduct a thorough analysis of the clinical pathways associated with each device category and each market in which they operate to determine the optimal future business model.