Faced with fierce competition and pressure to reduce costs across the healthcare spectrum, medical device manufacturers are banking on growth through breakthroughs in innovation and engineering.
The past decade has brought unprecedented change to the medical device sector, and the pace seems to be quickening. New regulatory requirements, fierce competition, and rapidly emerging technologies are creating new complexities and challenges for those operating in the sector. As governments in many parts of the world seek to reduce healthcare costs, the pressure is on to produce products with lower price points, further squeezing profit margins.
In this environment, it is no surprise that sales growth and new product development are the top two strategic priorities for medical device companies over the next 12 –24 months, followed by cost optimization (see Top 3 strategic priorities). Compared to other global manufacturers from the survey, medical device companies are far more likely to strategically prioritize R&D and product development than any other manufacturing industry.
According to the survey results, all manufacturing companies expect to increase their R&D spending as a percentage of revenues in the next 2 years, compared to the previous 2 years. Almost a quarter of all respondents say they spent more than 6 percent of revenues on R&D in the last 2 years (see Spending on R&D/innovation in the next 2 years). The number of medical device companies that expect to spend more than 6 percent of revenue on R&D/innovation is rising and exceeds the number of companies in the other industries surveyed that plan to re-invest this level of profit in R&D.
While lower cost manufacturing opportunities will drive pressure on price, we believe innovation will be the catalyst for the way pricing impacts the market overall. The traditional market model of a low unit cost per product, allowing for greater market share, is shifting, as value-based pricing takes center stage within the healthcare ecosystem.
The non-traditional pricing model is that a superior device, which allows for better outcomes, will create a market for premium-priced products that have demonstrably improved clinical results. R&D investments in the sector today are well-placed if they accommodate the increasing shift toward breakthrough innovation in the sector.
When asked about their strategic focus, the majority of medical device companies characterize their focus as being engineering/innovation led, followed by sales-led strategies (see Categorize your company’s strategic focus). Only a minority is led by manufacturing or supply chain prospects, and these types of strategies are less prevalent in medical device than other global manufacturing sectors.
As we discuss in this report, however, medical device manufacturers that focus solely on engineering- and/or sales-led strategies may be forgoing valuable opportunities for collaborative development within their supply chains.
As outlined in our recent report, Fast forward: Future proofing the life sciences supply chain (kpmg.com/fastforward), any change in the supply chain involves an element of risk, and life sciences companies are historically risk averse.
However, the health and well-being of consumers around the world depends on the accessibility and quality of life sciences products. This cautious approach makes business sense for an industry that requires complex infrastructures, capital intensive R&D and long-term market strategies.
At the same time, risk can lead to opportunities for strong growth, product diversity and entry into new markets. We believe that taking the right steps today for future proofing the life sciences supply chain can balance risk with reward and turn an operational cost into a true competitive advantage for companies.
Medical device companies seeking growth in the near-term face an array of daunting challenges, with intense competition and pricing pressure at the top of their list. With profit margins being squeezed, improving efficiency in the R&D process is seen as the second biggest challenge (see Biggest challenge for the next 12 to 24 months).
Rounding out the top three challenges for medical devices manufacturers are threats from increased regulation. With rising involvement of industry stakeholders and consumer advocacy groups, in addition to widely publicized safety concerns and product recalls, regulatory agencies are being compelled to take action in response. Medical device companies surveyed say regulatory risks are a much higher priority than for other manufacturers. For example:
As regulatory requirements change and evolve, medical device manufacturers need to understand the implications and prepare their response – defining the strategy for implementing regulatory driven change and developing technologies and processes necessary to enable timely and effective compliance across the globe. Companies also need to ensure they have the right internal competencies to keep up with increasing regulations and assess their impact.
As medical device companies pursue growth through R&D and new product development, they would do well to evaluate potential cost volatility of inputs as part of the product design process. At the same time, they should ensure contingency plans are in place for their existing product lines in the event of extreme input cost fluctuations.
Such plans could involve identifying alternate supply streams and developing approaches to balance security of supply against holding inventory. Cost fluctuations should be factored into enterprise risk scenario modeling. Medical device manufacturers should also seek clear visibility beyond their Tier 1 and 2 suppliers to their entire supply chain so they can manage all their supply chain risks, including those arising from over-dependence on specific sources of inputs. Finally, they should consider the impact of potential regulatory changes that could affect suppliers and result in input cost increases.
Taking steps like these will help medical device companies ensure they are not at the mercy of cost volatility. At the same time, it will open a window on future developments within new start-ups (e.g. in purchasing, partnering and collaborating), increasing the company’s ability to spot opportunities for breakthroughs or significant product development.
This is just one example of the value that closer integration and collaboration between suppliers and other third parties can create. In the next section, we discuss the tremendous opportunities for medical device manufacturers to work with their suppliers and a host of new players on innovative projects and the range of models that are being used to facilitate and implement these partnerships.