Medical Device Link.

MARKET PLACE

Sluggish sales

Revenues from sales of medical technology in the United Kingdom (UK) grew by only 2.7% in value terms in the first half of 2006, according to a survey by Ernst & Young.¹ This contrasts sharply with exports of UK-manufactured goods, which grew by 7.7% in value terms over the same period. One hundred per cent of the exporting companies that responded to the survey reported export growth; only 54% of the responding companies said they had experienced any growth in revenue from UK sales.

When comparing sales in January to June (HY1) 2006 with those in the same period in 2005, and taking into account adjustments for inflation, the analysis suggests only a marginally increasing UK market. These poor results are being attributed to government policies that are driving down the price of purchased goods.

The Ernst & Young survey is the first to measure the impact of the Supply Chain Excellence Programme and other recent National Health Service events on the UK medical technology market. It was conducted on behalf of the Association of British Healthcare Industries (ABHI), the industry trade association. ABHI’s Director General, John Wilkinson comments, “A large part of the Association’s current efforts to influence the Government around procurement policy surround the dangers of driving the attractiveness of the market down to the point where good companies start walking away from the UK. This is no binary thing, but an insidious creep where products are withdrawn because prices are too low, new products are not launched or are launched years after other markets and manufacturing activity is closed or moved overseas due to the poor dynamics of the domestic market. We have already seen a number of companies cite the dearth of activity in the UK as a reason for either profit warnings or significant steps to reduce dependence on the UK. Worst affected are often the largest employers in the sector.”

Trends by product sector

• Revenues from capital equipment increased by 2.67% between HYI 2005 and HYI 2006. This was driven by export sales, which increased by 12.6%. One hundred per cent of the surveyed companies reported an increase on 2005.
• Consumable revenues increased by 4.3%. In value terms the UK showed growth of 3.5% compared with 6.2% in export growth over that period. Of the surveyed companies, 75% had experienced growth, and 25 % had experienced decreasing revenues.
• Only 13% of survey respondents generate revenue from diagnostics; the UK accounted for 7.95% growth in value terms compared with 3.1% in exported goods.

Outsourced NHS purchasing

Trading is expected to be made worse by the recent government decision to outsource NHS logistics. It is believed that this will leave medical device companies competing in a dangerously anti-competitive market. DHL and US purchasing giant, Novation, now have control of almost one-third of the total National Health Service (NHS) medical supplies and equipment market, which is worth approximately £3.7 billion per year (e 5.47 billion). The organisations have been charged with making savings of £1 billion over the next 10 years and DHL claims that it will make a further £1.6 billion profit from the deal. This represents a cut of 12% in NHS procurement spend, according to the ABHI.

Ominously for the industry, Health Minister, Andy Burnham, MP, has said that the NHS should be using its purchasing power to obtain better deals from the multinationals supplying the NHS. He predicted a 14% saving on current deals with the new DHL/Novation. No one knows how they will go about making these predicted savings. Wilkinson said, “The UK medical technology sector is one of the most innovative in the world and we must be careful that this is not damaged by forcing smaller companies out of the market. DHL/Novation have made clear their intention to reduce suppliers and slash prices so we must be sure that the terms of the contract hold the new body accountable for ensuring fairness and quality.”

Collaborative procurement

A positive spin on procurement developments comes from Charles Hugh-Jones, partner at legal firm Hempsons. “The collaborative procurement model for health-care purchasing is expanding across the country and for medical equipment suppliers that could present excellent opportunities,” he says. The model has been trialled through major schemes in Greater Manchester, the West Midlands and Staffordshire and is now rolling out nationally. Approximately 11 hubs are being created across the country, each with potentially huge collaborative purchasing power. He asserts that this is good news for medical equipment suppliers, if they can fulfill the critical objective behind the creation of the hubs: to demonstrate immediate and longer-term savings for health-care providers. Innovation and service delivery will also play a vital part in selection. “Cost efficiencies can work both ways, with suppliers enjoying a much more focussed route into the health economy,” he continues. “They will be able to form strong partnerships with providers, through commitment to contracts. Suppliers should also benefit from a clearer system for selling, with more co-ordination, less duplication and fewer fragmented orders.”

Participation so far has not been compulsory for NHS organisations. “Individual organisations retain the element of choice, but it would be naïve to think that there will not be subtle pressure brought to bear to help all members of the hub optimise their purchasing power and achieve any potential volume, says Hugh-Jones. In his view, the important elements for medical equipment suppliers to consider when becoming involved in a collaborative procurement agreement should be

• Research thoroughly to ensure there is a real demand for the commodity or service
• Demonstrate immediate and longer-term savings for the health care providers
• Communicate fully and share information
• Agree clear expenditure thresholds with providers on where bulk purchase discounts come into effect and ensure all providers understand the savings they will enjoy by joining forces to reach those thresholds
• Ensure all framework agreements with the hub and individual contracts within that framework agreement comply with EC procurement rules.

Information supplied by ABHI (www.abhi.org.uk) and Charles Hugh-Jones, Partner at Hempsons. Hempsons is adviser to the Greater Manchester Hub, has recently been appointed to the South Yorkshire Supply Management Confederation, and acts for other national collaborative procurement groups made up of primary care and NHS Trusts. For more information, contact Charles Hugh-Jones, tel. +44 1423 522 331,
e-mail: c.hugh-jones@hempsons.co.uk www.hempsons.co.uk