By Jim Welch and John Babitt, EY
The COVID-19 pandemic vaulted medtech into the spotlight. Medical devices and supplies were on the frontlines, supplying ventilators, diagnostic equipment, and PPE to healthcare systems grappling with the global crisis. Fast-forward to 2022, and the data show that medtech has not only weathered major challenges but has entered a period of recovery and renewal. The pandemic has shifted healthcare’s center of gravity in fundamental ways, to which the industry must now respond, as detailed in our annual Pulse of the Industry report.
Medtech’s Year In Review: Strong Business Performance
From 2020 to 2021, the industry’s revenues grew for the fourth consecutive year (+6.3%), with the non-imaging-diagnostics segment recording a particularly impressive 24% annual growth rate. Notwithstanding further disruption from current and emerging variants in the U.S. and other geographies, companies reliant on elective procedures seem set for accelerated growth as surgeries and other elective procedures get back on track.
Investor sentiment remains strong, and medtech market capitalization has strongly rebounded since the global dip of March 2020, outpacing Big Pharma and the broader indices. This was driven by the very strong performance of medtech’s emerging leaders; these companies with annual revenues below $500 million saw a 128% rise in public valuations between January 2020 and August 2021.
Data indicates that medtech has a healthy innovation ecosystem, as evidenced by investment in R&D and M&A. Pure-play medtechs reinvested heavily in R&D in 2020 — recording the largest annual growth rate in R&D spending (+17.2%) since before the financial crisis of 2007 — signaling the industry’s confidence in its capacity to keep innovating. And over the 12 months ending in June 2021, medtech companies executed 288 M&A deals, the highest annual number seen in 15 years.
As 2022 begins and we look to a future where COVID-19 becomes endemic, we believe the medtech business model must evolve in five key areas: connecting medtech with patients at home; leveraging data to make products smarter and better connected; pushing for regulatory reforms; ensuring supply chain resiliency and agility; and improving environmental, social, and governance (ESG) measures.
Connecting Medtech With Patients At Home
One of the key legacies of COVID‐19 in medtech is the industry‐wide shift toward seeking new ways to connect with patients. Compelled by the narrowing or outright shutdown of traditional care channels, medtech companies have explored new approaches to delivering care outside their legacy operating models, reaching into patients’ homes to deliver therapeutics, diagnostics, and other tools for remote care.
In November 2020, the U.S. Centers for Medicare & Medicaid Services introduced the Acute Hospital Care At Home program, providing eligible hospitals with unprecedented regulatory flexibilities to treat eligible patients in their homes. As of 2021, the program had been adopted by dozens of health systems and hundreds of hospitals across the U.S., indicative of an embracing of home-based care.
Using digital technologies to expand home-based care offers medtechs the prospect of better patient engagement. Analyses suggest that digital health apps and telehealth will play an enlarged role in actively managing chronic conditions from diabetes to mental health for between 30% and 45% of the U.S. patient population in the future. While such a shift in care delivery has long been advocated and anticipated by industry analysts, it took the profound disruption caused by the pandemic to make this transformation a matter of strategic urgency.
Leveraging Data Ecosystems
To deliver care at home and validate its cost‐effectiveness, medtechs should capture real‐world evidence (RWE). To this end, the Medical Device Innovation Consortium, a public/private consortium, has launched the National Evaluation System for Health Technology Coordinating Center, seeking to assess RWE from multiple data sources.
Take the orthopedics market, which was hit harder in terms of revenue than any other medtech therapeutic area in 2020. Orthopedic medtech companies’ relationships with patients are traditionally confined to the episode of care and as COVID-19 demonstrated, outside such episodes, access to patients is extremely limited. In the future, however, orthopedic medtechs can build far closer ongoing relationships with patients, like what we currently see in chronic disease therapeutic areas such as diabetes, via data-producing sensors embedded within orthopedic implants.
A significant future challenge will be seamlessly combining in-person care with the rapidly expanding range of digital health tools. The data that connected devices capture will only deliver better outcomes if medtechs can learn to “fit in” with a broader ecosystem, connecting their data to patients, providers, and payers. But as medtech and its ecosystem partners increase the data they share, the importance of cybersecurity will increase in lockstep. In August 2021, the FDA announced that it would require medtechs to ensure their capability to update and patch device security into a product’s design, as well as disclose cybersecurity vulnerabilities. This is one of many regulatory changes that medtech can anticipate in the aftermath of the COVID-19 crisis.
New Regulatory And Reimbursement Models
Standard device approval processes slowed during the pandemic. Regulators viewed 2021 as a “reset” year and many anticipate a resumption of normal approval rates in 2022. Yet as the industry rethinks business models, it needs to work with regulators to forge a regulatory environment that can support this evolution. During the crisis, regulators showed flexibility to accommodate the expansion of remote care provision and allow a rapid emergency rollout of new products; the challenge for the industry now is to consolidate these changes in legislation to underwrite the ongoing transformation of care delivery.
Multiple issues are on the table, including the possibility of value-based care, review of the funding structure for devices, a potential overhaul of the 510(k) pathway, and progress on the Medicare Coverage of Innovative Technology: a new pathway for medical device reimbursement that would directly reward breakthrough medtech innovations with immediate reimbursement.
Also at the forefront is how to widen the “hospital at home” model that has gained such significant traction during the pandemic. The question of whether Congress will support the permanent expansion of telehealth and whether it can allay outstanding concerns about reimbursement rates, fraud, waste, and abuse remain, and the U.S. may see uneven national coverage before home care becomes an established permanent policy. With medtech standing to play a pivotal role in home‐based care, the industry’s advocacy for this long‐term transformation is vital.
Supply Chain Resilience And Agility
COVID‐19 highlighted concerns that the supply of key devices may be vulnerable in times of global disruption. It’s another area where regulatory involvement is intensifying, with lawmakers discussing the potential need for onshoring or nearshoring certain operations to bolster resiliency. Indeed, FDA Acting Commissioner Janet Woodcock blogged that “the pandemic has exposed great weaknesses in the medical device supply chain,” with the agency intending in future to apply “state-of-the-art supply chain intelligence” to increase surveillance and transparency of medtech’s supply networks.
Yet the industry has its own internal imperatives to overhaul supply chain operations. At present, medtech supply chains operate in an asset‐heavy business model. They typically hold a significant amount of redundant inventory, from orthopedic spare parts to unutilized loose instruments. If the industry can better translate demand signal into supply chain reality (cutting out, for example, distortions caused by salesforce overoptimism), embrace AI analytics for better forecasting, and build greater flexibility — in addition to other innovations such as using smarter use of imaging to anticipate the size of implants required — the industry could significantly downsize its redundant inventory.
With providers and regulators apparently supporting a move away from traditional clinical settings toward data‐driven, home‐delivered healthcare, medtechs will need to build smarter, more agile supply chain strategies to deliver care to a patient’s front door.
Improving ESG Measures
Global recognition of the need to define best practices for measuring sustainability has increased over the past two decades. Indeed, sustainability is no longer seen as a marginal concern but as a core aspect of a company’s market value. Medtech must think strategically about helping to ensure its own sustainability and commit to measuring it over time. A 2020 Health Affairs analysis suggested that the global health industry generated 4.6% of all greenhouse emissions (twice as much as the aviation industry), with medical device supply chains presenting major opportunities to increase sustainable practice.
From manufacturing processes to packaging and recycling of products at the end of their shelf life, there are significant areas for medtechs to focus on reducing the broader environmental consequences of their products. For companies in the business of delivering better health outcomes, there is a greater need to walk the talk. That includes not building their operations on supply chains associated with outsize carbon footprints or pollutant by‐products. Instead, companies need to embrace sustainable manufacturing, potentially sharing capacity and infrastructure to reduce wastage.
In 2021, medtech rebounded strongly from the impact of COVID‐19. To sustain that momentum, it needs to focus on ensuring it has patient‐centric business models, the tools to capture and use data effectively, an optimal regulatory environment, and resilient supply chains. It also must prioritize sustainability. This will be the final and critical component in locking in long‐term value for medtech into the future.
About The Authors:
Jim Welch is the EY global medtech leader, where he leads the demand side of EY strategy, operations, risk, and compliance business for healthcare providers, payers, pharmaceutical, medical technology, and clinical research organizations. He also co-authors the annual Medtech Pulse of the Industry report. He has a Bachelor of Science in business from Miami University, Oxford, OH.
John Babitt is a partner at EY with almost 30 years of experience, all in the life science, medtech, and healthcare industries. He advises clients on various projects, including M&A, supply chain, IT, financial/accounting, and tax considerations and frequently speaks at Medtech Strategist, AdvaMed, and BIO. He holds an MBA from the University of Miami.
The views expressed by the authors are not necessarily those of Ernst & Young LLP or other members of the global EY organization