Why the domestic medical device industry’s growth is slowing

Market Realist

Slow domestic growth

According to a report released by Ernst and Young, the medical device industry is experiencing slower growth in the United States. Expectedly, this is the result of tougher regulatory standards, wary investors, and pricing pressure.

Innovation used to drive growth in the industry. Innovation was itself driven by doctor demand for differentiated products catered to their specifications. However, as payers began limiting reimbursement to cheaper, no-frill brands, innovation suffered. Accordingly, growth in the domestic industry has slowed dramatically.

(Read more: Medtronic purchases Cardiocom: Bad for medical device industry?)

Investors are wary

From 2007 to 2012, the number of medical device IPOs fell 50%. Failures to innovate and an increasingly risky environment have largely driven this decrease. Pricing and reimbursement have also declined, according to a study by AdvaMed. This increasingly pressures device revenues. The implementation of the excise tax has also drawn away investors worried about the industry’s performance ahead of the tax.

(Read more: Why shifts in Chinese regulation could benefit U.S. device makers)

Innovating differently

Medical device companies are trying to spur innovation with lower-cost value-adding services such as call services, which help assist patients with their devices. Adding services to products can increase productivity at minimal costs, creating a more competitive product. By innovating and engaging in the broader healthcare environment, device manufacturers can improve efficiencies and benefit from the cost savings.

(Read more: Medicare’s competitive bidding seriously threatens device makers)

Business expansion

Salvaging growth in the industry lies in expanding into two business areas: emerging markets and broader healthcare services. Device companies must capitalize on emerging markets with more lenient regulatory and pricing environments to drive revenues in order to spur innovation on products sold in the United States and abroad. By leveraging capital from overseas sales, device makers can make themselves more competitive in the domestic market.

Changing the value proposition of their products is also key to growth. By capturing more value with their products (adding call services, for example), manufacturers can expand their business model and business opportunities.

Medtronic and Abbott Laboratories have already engaged in these efforts and look to benefit from the increase in their products’ value.

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