Medical Devices and the Great Deflation

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The medical device industry’s financial growth has been cut dramatically following the Great Recession, even as sales volume has returned to pre-crisis levels. Is there an end in sight?

The medical device industry has “lost” about $131 billion in revenues since the financial collapse of 2008, according to analysts at Ernst & Young.

The findings, taken from the audit firm’s annual “Pulse of the Industry” report, paint a glum picture for the medtech industry, once considered to be “recession proof.”

Annual revenues for medical device companies in the U.S. and Europe grew at an annual rate of 13% from 2000 to 2007, according to the report. But even as the economy has recovered and sales volumes returned to pre-recession levels, sales growth across the medical device sector has increased just 7% since 2008. E&Y analysts estimated that the gap in growth totals about $131 billion in lost sales.

“The hard part is that a lot of that [drop-off] has come strictly off the top, from a pricing perspective, with companies dropping pricing,” Kevin Casey, a partner at E&Y in Boston, told MassDevice.com.

Current conditions represent a permanent adjustment, rather than a down cycle, Casey added.

“When you look at pre- and post-recession, you have to look at who is the major customer in healthcare, and it’s the government, ultimately, when you look at Medicare and Medicaid spending and the degree to which they set reimbursement levels through CMS,” he told us. “Just as much as companies are bringing pricing down, government is forcing pricing down to try and fix some of the cost equation.”

Major markets targeted by CMS include high-ticket items like pacemakers and orthopedic implants, Casey said, which have taken a major hit in terms of pricing since 2007. A recent industry-funded report said that hospitals paid 27% less for pacemakers in 2011 than they did in 2007 and 23% less for hip implants.

“This is the way of the double jeopardy the industry is placed under,” Zimmer (NYSE:ZMH) CEO David Dvorak told MassDevice.com during AdvaMed’s 2013 industry conference in Washington last month. Dvorak confirmed that the Warsaw, Ind.-based orthopedic device maker has experienced pricing declines consistent with the AdvaMed report’s findings.

“We have the device tax directly upon us and then customers who are expecting us to absorb a piece of what they’re being asked to take on to finance healthcare reform,” he told us.

As the Affordable Care Act pushes hospitals to find ways to reduce costs, vendors fall on the chopping block, often because it’s easier to cut budgets than to drive efficiency, Dvorak added.

“More pressure is being put on the hospital to absorb the financing of the healthcare reform, and those hospitals turn back around and look for someone to subsidize what they believe they’re putting forth in the way of a funding mechanism,” he said.

More companies are baking price erosion into their projections for new products, Casey said. But a new phenomenon is developing, he noted, in which medtech companies release new versions of current products just to maintain current pricing levels, unlike in the past when a next-generation device would result in premium pricing.

“That’s a tough part of the equation. They’re putting a lot of capital at risk, spending a lot of money, having some uncertainty from a regulatory perspective, and it’s all to preserve the status quo in pricing,” he said.

Although current conditions are tough, Casey said there’s some silver lining for smaller device companies.

“The big thing, from a small company perspective, is if you’re going to have economic buyers who are really focused on data and on cost effectiveness, a lot of smaller companies can use that to their advantage,” he said. “Ultimately the data will win, and if they’re the one’s innovating and taking a leap of faith in technology and can demonstrate that, not only is it safe and effective, but also cost effective, as opposed to the larger companies, they can win in that environment, much more so than in an environment where the relationships between the players and physicians drive buying decisions.”

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