Q&A: JEANETTE MARCHANT

Report Surveys Challenges Facing Device Industry

A former editor of Clinica, Jeanette Marchant recently authored The Medical Device Industry: Business Strategies for Success (London: Economist Intelligence Unit, 1998). Her report describes a "battered, bruised, but buoyant industry" that must continue to adapt to a changing marketplace if it is to thrive in the next millennium. In this column, she offers some insights on the new business paradigm. Marchant, a principal of the healthcare writing and editing consultancy JM Communications, is a contributing editor to Diagnostic Imaging Europe. She is also a contributing writer to EMDM.

Q: In your report summary, you write that "companies need to redraft their entire business strategy if they are to flourish in 21st century healthcare." Let's focus on the research and development sector: what are some of the challenges that companies must overcome to remain competitive?

A: The speed with which high-technology breakthroughs are reaching the marketplace is fast reducing the profitable lifetime of technologies. In cardiology, for example, just months after Heartport unveiled its technique that enables bypass surgery to be conducted on a stilled heart using cryogenics, CardioThoracic Systems had come up with a way to allow surgery to be performed on the beating heart.

In order to maintain the flow of new technologies, investment in R&D is a high priority for device companies. Some 5.6% of global revenues are channelled by industry into the search for better and innovative devices. The challenge for companies is to identify those products that meet local market needs, are affordable, and will satisfy regulatory requirements. These criteria are more relevant than ever before, as the healthcare environment in all the major global markets continues to undergo change in terms of healthcare systems and regulation of devices.

Q: One of those changes that has had a dramatic impact on industry is cost containment in the healthcare sector. Based on your research, this trend will not diminish?

A: Indeed, political measures aimed at containing escalating healthcare costs have caused major upheavals in the hospital sector, which has borne the brunt of government reforms. Hospitals are having to manage budgets and reexamine their purchasing policies in light of increasing financial pressure. In France, Germany, and Spain, for instance, hospital budgets are capped in order to control costs and this leads to cutbacks in spending as money runs out toward the end of the financial year.

The adoption of the US system of diagnosis-related groups to replace loose fee-for-service arrangements, which is being introduced in European hospitals, will place hospitals under even greater pressure to seek cost-efficiencies.

The shift to move patient care out of the hospital to the less-expensive primary-care setting has been helped by improved treatments and minimally invasive surgery, which enables more surgical procedures to be performed as day cases. Hospitals are more responsive to technologies that make better use of their monetary resources and reduce hospital stays rather than those products that merely cost less. The emphasis is shifting toward achieving value for money and cost-efficiencies rather than on price or cost containment per se.

R&D will become increasingly honed to market needs. Companies will need to find out what their customers really want and what they can afford to pay before embarking on costly development of technologies that could end up being dismissed as marginal or expensive.

Q: Demonstrating a product's cost efficiency is already a key factor in its acceptance by the healthcare community. How will this evolve?

A: Proving that a product is safe and effective is not enough even today. Gaining reimbursement approval can be tougher than obtaining regulatory approval. While in theory there is one pan-European regulatory system, there are 15 different reimbursement systems that companies have to cope with in the EU. Proving cost-effectiveness is crucial if companies are to convince payers to buy new technology.

Hospitals in Germany are demanding data about the financial impact of using a new technology, such as cost per procedure and length of hospital stay, to be better positioned to negotiate fees with the Krankenkassen. In the UK, evidence of cost-effectiveness will become increasingly critical when the government sets up the National Institute for Clinical Excellence this year to provide guidance on clinical and cost-effective treatment practices.

Health economics studies will become as important as clinical studies in product development in all the major markets. Companies need to plan their economic strategy before embarking on clinical trials—many manufacturers are already running outcomes studies in conjunction with clinical trials. Manufacturers will need to recruit new staff, such as biostatisticians and informatics experts, and learn new skills to review the economic benefits of their products. Enlisting the help of independent organizations such as universities goes a long way to overcoming the skepticism of payers [regarding] industry-generated data.

New technologies will not sell themselves. Gone are the days when a new device would find a receptive market in which clinicians had to have the latest technology at any price. Marketing strategies must not only convince payers of the cost benefits but also train and educate end-users in new techniques. Talking to customers to find out what the needs are and to get feedback on new products is a vital part of the R&D strategy.

Q: In your report, you predict that shifting marketing and business strategies may result in a more adversarial climate between manufacturers of pharmaceuticals and devices. What are some of the reasons for this wedge?

A: With greater scrutiny by payers on the most cost-effective treatments, the old mantra "use a device as a last resort if drugs fail" is no longer valid. Devices are gaining a new respectability as treatments in their own right. Defibrillators, for instance, are gaining ground as first-line therapy for patients with high-risk arrhythmias. Conversely, the introduction of innovative drugs to treat conditions for which devices have been the only available therapy bring the two sectors into direct conflict. The most obvious recent example is Viagra, which threatens to curtail sales of devices for erectile dysfunction. Comparisons of the costs and benefits of drug therapies and alternative technologies will bring the two sectors into sharp focus and underline the need for good supporting outcomes data.

Q: Do you see any areas where the interests of manufacturers of devices and pharmaceuticals might converge?

A: Yes, there are situations where medical technology can increase the potential for drug sales: the combined use of platelet inhibitors with stents is one example.

Future cooperation between the two industries is more likely to be in areas of marketing partnerships, where there are synergistic opportunities, rather than mergers or acquisitions.

Q: You quote Michael Baker, director general of EUCOMED, as saying that "unless we do something in the next one to two years, [Europe] will be way, way behind in the global market and will just have to leave it to the Americans." Do you share his view?

A: Americans are traditionally more prepared to take risks than Europeans and have been quick to forge alliances with academic institutions and start-up companies to augment their in-house capabilities. From the point of view of start-up companies, the receptive business climate has spurred the entrepreneurial scene. Over US$2 billion was raised in initial public offerings in the US in 1996, compared with just US$200 million in European flotations.

There is an apparent lack of awareness of financial resources that are available to European companies for medical technology research through the European Commission. Also, companies cite a lack of government funds to foster basic research. However, there are reasons to hope that Europeans will close the innovation gap with their transatlantic colleagues.

The regulatory climate is attracting more research companies to conduct clinical trials in Europe, which will provide more opportunities for collaboration. The financial climate is also becoming more favourable. The establishment in 1996 of alternative capital markets—such as the Alternative Investment Market [AIM] in London, the Nouveau Marché in Paris, the Neuer Markt in Frankfurt, and the EASDAQ [the European Association of Securities Dealers Automated Quotation]—augurs well for investment in new technologies.

It remains to be seen, however, whether European industry can regain lost ground and meet American innovators on equal terms or [will] become the producers of "me too" products. The jury is still out on that.

The Medical Device Industry: Business Strategies for Success is available from the Economist Intelligence Unit at a cost of 775 pounds sterling. To purchase the report or for more information, contact EIU, 15 Regent St., London SW1Y 4LR, UK; phone: +44 171 8301007; fax: +44 171 8301023.