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Are You Starving Your Innovation?

Posted by Roz Lawson on October 26, 2016



 

A recent review of global medtech business reports that the sector’s total revenue fell in the past year for the first time since 2011, U.S. and European medtech financing dropped, and top shutterstock_442892134.jpgmanagement of established medtech companies appears to be focusing on short-term allocation of capital, turning $13 billion over to shareholders in 2015 rather than reinvesting it in their companies. Both large and small companies are limiting their investment in taking new technologies to market and expanding their customer base.

The risk-averse climate isn’t surprising. Historically, many companies have struggled to recognise the benefits of an acquisition due to a focus on short-term results. Take the example of a big company that has acquired a promising device from an innovative startup, integrated it into their less-than-agile decision-making structure, and then managed it with a one-year-return mentality to satisfy their shareholders. The result? Unsurprisingly, growth falters, and then investment is restricted, so growth stalls, and so on. A few years down the line, the big company is considering selling off its once-promising asset. I won’t name names, but I can think of many examples, and some big companies are serial offenders.

Smaller and mid-sized medtech companies are often acting the same way. Of course, for a startup, the pressures are very different: You can only spend based on your latest round of funding, and “cash is king.” But we still see extreme conservatism when taking new technologies to new market segments or when expanding internationally. Even when there’s a differentiated product that meets a true patient need, and a change in reimbursement means that payers will pay for it, companies think about adding a few extra sales reps. In one recent example in Germany, a new reimbursement category had only one product on the market, and there was a six-month window of opportunity before competitors would launch. This gave the company an opportunity to really take the market, but instead they were conservative in adding resources and opted for safer incremental growth.


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We all know the questions to ask when deciding where to invest:

  1. Does the technology meet a genuine patient need?
  2. Will either the payer/provider or the patient pay for it?

Then you need to be honest. If you aren’t confident that your product is truly differentiated and there is clear willingness to pay, then you need a different strategy. Larger companies especially will already know this through market research and detailed follow-ups. Smaller companies should be listening to the voice of the customer early and regularly in the commercialisation process. It sounds obvious, but so many medtech companies under-invest (or cut) and still expect growth. For example, global companies often segment countries into “grow” markets and “maintain” or “milk” markets, but they’re rarely bold enough to allocate investments differently between the two. The “grow” countries have to fight for increased resources, while the “milk” countries still maintain large sales teams and extensive professional education programmes.

If the technology does meet a genuine patient need and either the payer/provider or the patient is willing to pay for it, then be bold: Invest for the type of business that you want to see in three or five years’ time. Reduce the risk by checking the facts on market dynamics, the reimbursement situation and competition, and definitely by listening to your prospective customers and understanding their needs and constraints in the right way.

Growing through acquisition is going to remain a key strategy for the medtech sector. If you’re in one of the bigger companies that doesn’t have a great track record of successfully growing its acquisitions, think about approaches to keep the entrepreneurial spirit alive—for example, with an incubator unit with a separate management structure, different location, etc.—and find ways to decouple results from short-term profit targets. If you’re in a smaller innovator company, have a clear exit strategy and start courting target buyers early.

M&A remains a very important source of innovation, but the medtech industry needs to be smarter about how it fosters, nurtures and harvests innovation.

Topics: Innovation, Roz Lawson, medtech, mergers and aquisitions, product, M &A

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AUTHORS
Brian_Chapman_thumbnail
Brian Chapman
Principal,
ZS Associates
Tobi_Laczkowski_thumbnail
Tobi Laczkowski
Principal,
ZS Associates
Will_Randall_thumbnail
Will Randall
Manager,
ZS Associates
Matt-Scheitlin-London_thumbnail
Matt Scheitlin
Associate Principal,
ZS Associates
Andy-kach_thumbnail
Andy Kach
Associate Principal,
ZS Associates
Bhargav_Mantha_thumbnail
Bhargav Mantha
Associate Principal,
ZS Associates
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