Healthcare companies, facing new and unprecedented pressures from regulators, competitors, and consumers, continue to turn to dealmaking – by way of M&A, joint ventures, and other forms of partnership – as a means to survive in the industry’s new world order. Previously, we’ve profiled the drivers and models of deals among payers, providers, and pharmacy companies, though we have yet to touch upon an adjacent segment – medical technology – where dealmaking is unfolding in a distinct but interrelated manner.
Recently, Water Street sat down with Rick Anderson, Managing Director of PTV Healthcare Capital, a late-stage venture and expansion capital firm based in Austin, TX, and Greg Davis, CEO of MedCelerate, a consulting group that supports the growth of medical device companies through manufacturing and commercial ramp-ups, and Adjunct Professor at the Fuqua School of Business at Duke University. We discussed highlights of dealmaking trends among medtech companies today and talked about how companies in this sector are leveraging particular types of deals to propel innovation.
DISRUPTIVE DYNAMICS IN HEALTHCARE AND THE IMPACT ON MEDTECH
The evolution of the U.S. healthcare industry has been a matter of both regulatory change – principally catalyzed by the Affordable Care Act (ACA) and its imperative to shift the industry’s business incentives from “volume to value” – in addition to transformation compelled by macro-trends like the rapid advancement of technology and big data and their increasing accessibility to individual consumers. The impact on medical device, or medtech, companies is multifold: they are experiencing the pressure of reimbursement cuts indirectly through interactions with their customers, and they are also witnessing out-of-industry companies like Apple and Google testing capabilities in the traditional medtech domain.
Consolidation between and among payers and providers, who represent key customers of medtech, has contributed to parallel consolidation trends among device companies. Greg Davis notes that medtech companies have observed intense provider consolidation and reacted accordingly: “Medtech companies are continuing to consolidate at a rapid pace, making a scale and size play. Especially as payers and providers grow more consolidated, this approach helps the medtech players remain at the negotiating table, by enabling them to talk about a wider range of products.” Moreover, Rick Anderson points out that device companies, particularly those in commodity categories, are “facing tremendous pricing pressure” from payers and providers, and have reacted by leveraging acquisitions in an effort to, “get too big to ignore – they want to ensure that the payers and health systems and integrated delivery networks have to pay attention to them.”
The shift in traditional purchasing dynamics for devices has also impacted how medtech companies approach selling, as they increasingly need to engage a larger stakeholder group and acknowledge the emerging emphasis on value. According to Davis: “for decades, the med device industry has been focused on the physician as the key decision maker. But now many physicians are employed by hospitals; while they’re still at that negotiating table, they’re only a single voice at the table today.” Additionally, medtech companies are responding to the needs and preferences articulated by their customer base and regulators by increasingly considering broader contracting arrangements that cover larger product sets and reflect the emphasis on value and risk-sharing that is ubiquitous today among payers and providers. Davis says that device companies are expressing “interest in getting into the services side of the business; they’re talking about developing more complete packages that might mean they get paid based on the continuum of care, rather than for a particular implant or other device.”
That said, Rick Anderson suggests that there’s an element of dissonance between what many medtech companies communicate publicly versus carry out in day-to-day business operations: “They’re saying all the right things and claim to be figuring out population health, but the absolute truth is that most are really doing nothing about it – in fact, if they were really to enable population health initiatives, it would disrupt their business model; having to deal with things like risk-sharing would be inconsistent with how they sell their products.”
Medtech companies’ lack of substantive action on the population health front has facilitated the entrance of out-of-industry players like IBM and Alphabet (Exhibit 1), who, in Anderson’s words, are “looking over the fence at healthcare, and saying, ‘we can innovate in that space.’” While medtech companies collect and manage enormous amounts of data, Anderson and Davis suggest that technology companies like IBM Watson and Verily are the driving force behind new data analytics partnerships with established medtech players like Medtronic and Johnson & Johnson. Anderson says, “the people who are really doing something on this front are the data people, like those at Verily; it’s those tech companies who really understand the value of the data, and medtech is chasing rather than leading those partnership conversations.” While early examples of these partnerships like Verb Surgical and Galvani Bioelectronics still have yet to launch major product offerings, Anderson and Davis agree that the wealth of data housed in the medtech space is likely to continue attracting the attention of out-of-industry innovators.
Exhibit 1: MedTech Deal Activity by Out-of-Industry Companies
Click to Enlarge
In reviewing industry dynamics and the deal activity of medical device companies, Anderson and Davis describe a cast of archetypes that are likely to emerge as various players leverage different strategies – and more specifically, types of deals – to cope with industry-wide disruption. Anderson observes, “bigger companies are deciding, as we speak, whether to be ‘too big to fail’ or to be technology innovators.” He comments that the largest global players like Johnson & Johnson are more likely to choose the former, because, “they’re giant players with an unmatched global footprint; their strategy will be to occupy categories where they can win with scale.” Companies like these, in Anderson’s opinion, may invest modestly in innovation, but generally will play a consolidator role, operating under the assumption that “they can buy whatever they want at whatever price.”
POSITIONING FOR SUCCESS – EMERGING MODELS FOR MEDTECH DEALMAKING
Anderson also describes an alternative approach, in which companies like Siemens, GE, and Philips seek to vertically integrate and make targeted investments in particular services and therapeutic areas. The key to making this a winning strategy, according to Anderson, is to pick the right verticals that are well-positioned for innovation.... To continue reading click the link below.