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Is Africa the New Asia for Western MedTechs?

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Medical Technology

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GE HealthCare, Siemens Healthineers, and Philips Healthcare entered the Chinese market in the 1980s and prospered
The once-booming era for Western MedTechs in China has slowed and become challenging
Latecomers to the Chinese MedTech market face geopolitical uncertainty, changing market dynamics, domestic competition, stringent regulations, IP risks, and healthcare reforms
Due to these obstacles and the Chinese’s economy slowing MedTechs are seeking international growth opportunities beyond China and Asia
Africa is emerging as the new frontier driven by its burgeoning population, growing middleclass, economic growth, abundant natural resources, and Beijing’s investement
MedTech pioneers in China, such as GE HealthCare, Siemens Healthineers, and Philips Healthcare, are early entrants in the African market
Prudential plc, an insurance giant, has made a vast strategic bet on Africa’s growth potential
Given insurers are healthcare payers, should MedTechs view Africa as the new Asia?

Is Africa the New Asia for Western MedTechs?

Preface

In the realm of international expansion for Western MedTech companies, Asia, particularly China, has historically been a key focus due to its vast size and rapid economic growth. However, the shifting global economic and geopolitical landscape suggests a re-evaluation. Is Africa positioned to emerge as the next hub of opportunity and growth for MedTech enterprises? China's remarkable economic ascent, initiated by reforms in 1978, accelerated it to the status of the world's second-largest economy, following the US. Western MedTechs that ventured into China's market in the 1980s prospered. Yet, those who hesitated due to concerns, including intellectual property (IP) theft, now face mounting challenges, which include geopolitical uncertainties, evolving Chinese attitudes towards Western corporations, a limited understanding of the Chinese market, and China's ambition to lead global technology by 2030. The recent deceleration in China's economic growth adds to the apprehensions of Western businesses. Moreover, China's rapid economic expansion has led to an aging population, characterized by declining birth rates, and increased life expectancy. By 2040, those aged ≥60 are projected to reach ~402m, constituting ~28% of the nation’s population. This demographic shift, with a shrinking workforce and a rising number of elderly consumers, is expected to exert downward pressure on China’s GDP growth, while straining public budgets with escalating healthcare and retirement costs. Given this evolving landscape, it becomes prudent to explore whether the once-promising prospects for Western companies in China and Asia are diminishing, prompting an examination of alternative international markets. While established MedTech players in China continue to provide essential healthcare products and services, they may benefit from contemplating strategic adjustments and, in many cases, restructuring their commercial operations to adapt to the changing dynamics of the Chinese market. Notably, some companies view Africa as a promising new frontier. Early entrants into the Asian medical device market, such as GE HealthCare, Siemens Healthineers, and Philips Healthcare, have already established footholds in Africa. Could Africa be on the verge of becoming the new frontier, reminiscent of what Asia once represented?

In this Commentary

This Commentary is divided into two sections. In Section 1, we briefly mention the early successes of prominent MedTech companies in the Chinese market during the 1980s. The section also notes that because geopolitical tensions between Beijing and Washington have increased, and recently China's economic growth has slowed, some Western MedTechs are seeking alternative growth regions to expand their international presence and reinvigorate their stagnant market values. Section 2 challenges popular perceptions by proposing that Africa could emerge as the new frontier for the MedTech industry. Despite Africa's enduring challenges, including political instability, corruption, poverty, and limited literacy, it seems to have potential. Albeit from a low start, Africa is projected to be the world's fastest-growing region in 2023, characterized by a youthful population, abundant natural resources crucial for renewable technologies, and an emerging middleclass. Decades ago, Beijing recognized Africa's potential, and more recently, a group of MedTechs, including early entrants to China, have established a presence in the African market. The section concludes by noting the strategic entry of a giant insurance company into the continent. Given the role insurers play in healthcare expansion and the demand for medical technology this maybe a positive omen for the MedTech industry, with Africa as its new frontier.

Part 1
MedTech pioneers in China

In the 1980s, as China underwent transformative economic reforms under President Deng Xiaoping, several Western MedTechs, including GE HealthCare, Siemens Healthineers, and Philips Healthcare, entered China, and capitalized on the nation's economic growth and modernization over the ensuing decades. GE HealthCare, equipped with medical imaging devices and healthcare solutions, forged relationships with Chinese hospitals and research institutions. Siemens Healthineers, a leader in imaging and laboratory diagnostics, followed suit in the late 1980s, emphasizing local R&D and strategic partnerships with Chinese healthcare providers. Philips Healthcare, with its diverse range of patient monitoring systems and diagnostic imaging equipment, also made its mark.

These companies showed their ability to adapt and succeed by adjusting their products to fit the needs of local customers and by encouraging new ideas through partnerships. Initially, they embraced expansion-type business models with multiply marketing and sales tiers, which emphasized rapid growth over stringent financial discipline. The plan worked well because China's medical technology sector was thriving, and experienced annual growth rates of ~10 to ~15% during the first two decades of the 21st century. However, since then, things have changed. Now, the focus is on making operations smoother and more efficient, which has meant reducing the number of marketing and sales layers between enterprises and their principal customers.

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Recent Western MedTech entrants, attracted by the vast Chinese market, faced heightened scrutiny and regulatory obstacles. Their limited knowledge of local markets and different administrations hindered their growth, which was compounded by concerns about safeguarding their IP. Meanwhile, Chinese MedTech firms rapidly advanced, increasing competition for Western latecomers. As of December 2022, the number of Chinese medical device companies amounted to 32,632. The once-lucrative "gold rush" in China for Western MedTechs has faded due to shifting sentiments, regulatory hurdles, and local competition. As China pursues global technological leadership by 2030, Western firms are likely to encounter mounting challenges. To sustain international expansion, they should consider exploring alternative global markets where they can leverage their expertise and resources more effectively. This suggests a turning point, highlighting the need for strategic diversification and adaptation to evolving global dynamics in the MedTech industry.

Headwinds for MedTechs expanding in China

Here we describe some of the headwinds facing Western MedTechs attempting to increase their footprints in the Chinese market.

Geopolitical Uncertainty
Ongoing geopolitical tensions, such the political status of Taiwan, which Beijing claims is a province of the People's Republic of China, whereas Taiwan’s current Tsai Ing-wen administration maintains it is an independent country, and South China Sea disputes, which involve conflicting island and maritime claims by China, Taiwan, Brunei, Malaysia, the Philippines, and Vietnam. These and other geopolitical uncertainties pose risks, particularly for late entrants to the Chinese market. However, despite these tensions, US-China trade remains strong, but doing business in China has become increasingly challenging.

Changed Market Dynamics
China's healthcare landscape has evolved driven by the largest middleclass cohort in the world. Beijing has increased healthcare spending, which has intensified competition in the MedTech sector. Trade conflicts between the US and China add complexity to market dynamics. Relationships between the two countries deteriorated in January 2018, when American President Donald Trump began setting tariffs and other trade barriers on China. The objective was to force Beijing to make changes to what the US says are longstanding unfair trade practices and IP theft. A recent example of such tensions occurred in September 2023, during a visit to China by US Secretary of Commerce Gina Raimondo, who oversees regulating technology. The Chinese tech giant Huawei chose this time to release its new smartphone, powered by an advanced chip. This shocked American industry experts who could not understand how Huawei could have obtained such an advanced chip following efforts by the US to restrict China’s access to foreign chip technology.

Domestic Competition
Chinese MedTech companies (>32,000) have rapidly gained market share, technical sophistication, and innovation capacity. They understand local customer needs and regulations better, posing increasing competition for Western counterparts. In 2021, China’s 134 listed MedTech companies generated US$44bn in revenues, a compound annual growth rate (CAGR) of 36% since 2019, ~3X the market’s overall rate of growth. More than five Chinese MedTechs have obtained the US Food and Drug Administration’s (FDA) breakthrough designation, with innovations like the VenusP-Valve, which has already been approved in >30 countries, and in April 2022, secured EU’s CE marking under its Medical Devices Regulation (MDR). This suggests that Western corporations will not only encounter heightened domestic competition but are likely to face increasing competition from Chinese MedTechs in the global arena.

Regulatory challenges
Regulatory hurdles in China pose challenges for Western MedTechs. Adherence to regulations, standards, and compliance measures, often different from Western counterparts, necessitates an in-depth understanding and adaptation. Central to China's regulatory framework is the National Medical Products Administration (NMPA), which is akin to the FDA. It prioritizes safety, efficacy, and quality in evaluating medical device registrations for market entry. While global acceptance of real-world evidence (RWE) in healthcare is rising, China is in the early stages of embracing the concept. Notably, a 2020 NMPA draft guideline hinted at the potential utilization of RWE from Boao Lecheng. Situated in Hainan, an island province in the nation’s southernmost point, Boao Lecheng has become a medical innovation hub, focusing on technology, high-quality healthcare, and medical tourism. It actively promotes advanced clinical research, housing globally recognized medical institutions like the Raffles Medical Group and Brigham and Women’s Hospital (BWH). The collaboration between Western MedTechs and initiatives like Boao Lecheng holds promise in tackling China's regulatory complexities.

Intellectual property (IP) risks
Protecting IP is a concern for Western MedTechs in China. Enforcing IP rights can be challenging due to factors like judicial protectionism, evidence gathering obstacles, modest damage awards, and perceived foreign bias. China follows a "first-to-file" principle for IP registration, granting ownership to the first registrant. Foreign companies also face pressure from government and state-owned enterprises to transfer technology for market access, investment opportunities, or approvals. Some are compelled to license technology at below-market rates. Despite China's efforts to enhance IP protection, concerns persist. Corporations need to balance IP protection with local engagement and government cooperation to navigate China's complex IP landscape effectively.

Healthcare reforms
China's healthcare system has undergone a significant transformation driven by various factors, including increasing incomes, heightened health awareness among its citizens, and a rapidly aging demographic. The government has placed substantial emphasis on healthcare, as evidenced by its ambitious goals outlined in the Healthy China 2030 plan. This plan envisions the nation's healthcare market reaching a value of ~RMB16trn (~US$2.4trn) by 2030. China's dedication to enhancing healthcare is underscored by the establishment of a comprehensive health insurance system that now provides coverage to ~96% of the population, benefiting >1.36bn individuals. According to a 2023 McKinsey Report, China's MedTech sector, which was valued at ~US$70bn in 2021, is poised to potentially double in size by 2030. Such growth would elevate China's MedTech market share to ~20% of the global market. To thrive in this burgeoning market, enterprises must be agile in adapting to changes, forge strategic partnerships, and effectively navigate the evolving healthcare landscape.

Navigating China’s Diversity
Succeeding in the Chinese market hinges on effective communication and a deep understanding of Chinese culture. China's administrative divisions include 23 provinces, five autonomous regions (Inner Mongolia, Guangxi, Tibet, Ningxia, and Xinjiang), four municipalities (Beijing, Tianjin, Shanghai, and Chongqing), and two Special Administrative Regions (Hong Kong and Macao). Furthermore, China boasts 129 dialects, with Mandarin as the standard and Chaoshan as predominant in the Guangdong region. Given this diversity, Western MedTech companies often grapple with cultural and linguistic barriers. Establishing vital connections within China's intricate administrative and business landscape can prove challenging. Therefore, crafting effective market entry and expansion strategies is imperative. Chinese consumers have preferences and expectations when it comes to medical technology. Western companies must be ready to adapt their offerings to align with these preferences, a critical factor in gaining market acceptance. Failing to do so can hinder market penetration and long-term success.

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Data Privacy and Security Concerns
Data privacy and security are concerns in China. Entrants must navigate stringent data protection regulations, which may differ significantly from Western standards. Building trust with healthcare providers and patients is essential to address these concerns. Failure to do so can lead to regulatory issues, damage brand reputation, and erode customer trust.

Reassessing global strategies amid China's economic slowdown

China, as the world's second-largest economy, has been a pivotal market for major Western MedTech companies. However, the current economic climate calls for a strategic re-evaluation. China's economy has recently experienced a slowdown, with repercussions felt not only in neighbouring nations but also globally. South Korea, a historical driver of global growth, faces its longest factory activity decline in nearly two decades. Other major Asian exporters are also dealing with sluggish demand, and Japan's manufacturing activity has declined, with Taiwan reporting contracting output and weakened foreign demand. In September 2023, concerns grew as China experienced deflation, raising questions about currency stability, challenges in the property sector, and high local government debt. China's decision to not stimulate its economy further exacerbated the situation, impacting key financial hubs like Hong Kong and Singapore, as well as satellite economies. This economic slowdown in China is expected to persist and likely have far-reaching global consequences. Businesses worldwide, including those in the US and Europe, heavily reliant on China for growth, should explore alternative regions for sustainable value and expansion. Western MedTech companies need to carefully assess the challenges and costs associated with further expansion in China.

An alternative strategy emerges; companies should consider complementing their Asian focus and explore the growing economies of Africa. Just as early MedTech pioneers capitalized on Asia's rapid expansion, companies today should contemplate laying the groundwork for a fresh international strategy in Africa. The continent has potential, and a proactive approach could yield sustainable growth opportunities, helping to mitigate the impact of China's economic challenges and slowdown on global ambitions.

Part 2
Africa's Ascendance

With a few notable exceptions, Western MedTech executives tend to overlook Africa due to its challenging socio-economic conditions, which include political instability, corruption, extreme poverty affecting ~50% of the population, limited access to necessities, and a high illiteracy rate of ~40%. Notwithstanding, China has long recognized Africa's potential, which mainly revolves around Africa's abundant natural resources, which constitute ~30% of the world's mineral reserves, including critical resources for renewable and low-carbon technologies. For instance, Zambia leads in unrefined copper exports, Guinea boasts the world's largest bauxite reserves, and South Africa contributes ~90% of the world’s platinum group metal reserves. Furthermore, Africa has the world's youngest population, with substantial projected growth.

Asia plays a pivotal role in Africa's trade dynamics, accounting for >42% of its exports and >45% of its imports, surpassing Europe in both cases. According to a 2023, Business Insider Report, Africa is poised to become the world's fastest-growing region, with six of the ten fastest-growing economies located on the continent, albeit starting from a relatively low economic base. In addition to its mineral wealth, the continent's path to economic success is partly based on developing an export-led manufacturing economy, akin to China's transformation in the 1980s. This, already in progress, has the potential to lift >0.5bn people out of poverty, create >100m jobs, and establish a substantial and rapidly growing middleclass that will demand improved services, including healthcare.

Currently, Africa's manufacturing sector contributes only ~9% to the continent's gross domestic product (GDP) and ~2% to global manufacturing output. However, the African Union has placed manufacturing at the forefront of its Agenda 2063, a strategic framework supported by all 55 African countries, aimed at achieving socio-economic transformation over the next 50 years. This commitment gains significance amid escalating trade tensions between the US and China, which have global economic implications. Africa has weathered recent shocks, including weakened external demand, global inflation, higher borrowing costs, and adverse weather events, which have hindered its post-pandemic recovery. Nonetheless, in the coming decades, the "Made in Africa" label may come to symbolize quality products, solidifying the continent's position as a prominent player in global manufacturing, akin to how "Made in China" became synonymous with quality two decades ago.

China’s impact on African manufacturing

China has been instrumental in the economic transformation of African nations, which partly stems from the Chinese strategy to relocate its low-level manufacturing operations to Africa. As China's domestic manufacturers have advanced technically, they have systematically shifted their basic manufacturing capabilities to African countries. This provides Africa with an opportunity to mirror China's journey from standard manufacturing to advanced production processes over several decades.

Chinese companies have made substantial investments in labour-intensive manufacturing facilities notably in Ethiopia. This has created jobs and fueled the growth of local manufacturing sectors. For instance, the Huajian Group, a leading Chinese footwear manufacturer, established plants in Ethiopia in 2012, employing >7,000 people and producing ~5m shoes annually. The Group’s partner in this project is the China-Africa Development Fund (CADFund), a private equity facility promoting Chinese investment in the continent. Huajian also invested in Ethiopia's Jimma industrial park, contributing US$100m to build shoe and coffee processing plants and a technical education centre.

As Chinese enterprises expanded in Africa, they provided training to local workforces, and transferred their manufacturing expertise. This collaborative effort is helping to develop a skilled labour pool important for sustaining manufacturing growth. Notably, Ethiopia's Eastern Industrial Zone, supported by Chinese investment, evolved into a thriving manufacturing hub, attracting both domestic and foreign investors. Additionally, Beijing's Belt and Road Initiative has led to significant infrastructure developments across Africa, including roads and ports, which further stimulate the continent's manufacturing sector. China’s investment in Africa stands out due to its tangible presence, in contrast to other nations whose involvement in the continent is characterized by distant and arms-length financial engagements. With the influx of such investments, technology transfers, and ongoing skill development, some African nations are positioned to follow China's path towards a manufacturing transformation.

MedTech’s early entrants to the African market

For years, support for Africa’s healthcare tended to concentrate on education and malaria nets. In recent years however, as developed-world disorders, like cancer and heart disease, grew in Africa so medical technology companies increasingly found a market in supplying devices to private healthcare operators and investing in healthcare initiatives through partnerships with governments. US President George W. Bush recognised Africa’s strategic importance, emphasising investments for development and health initiatives, including the President’s Emergency Plan for AIDS Relief (PEPFAR), which, announced in 2003, reflected a commitment to fostering stability and wellbeing on the continent. Since then, American governments have not shown much interest in Africa. However, the MedTechs that entered the Chinese market ~4 decades ago and prospered, have established footprints in the African market by adapting their products and services to local needs, building partnerships with local healthcare providers, and addressing challenges such as infrastructure limitations and affordability. Their presence caters to Africa’s large and growing middleclass and has contributed to the improvement of healthcare standards in the region.

Philips Healthcare has made inroads into the African market and operates in several African countries, including South Africa, Kenya, and Nigeria. One of the advantages they offer is a wide range of medical devices and equipment tailored to different healthcare settings, from high-end hospitals to remote clinics. Their focus on technology that can operate efficiently even in areas with unreliable power grids has been instrumental in their success. GE HealthCare has a presence in countries like South Africa, Nigeria, and Egypt. Their commercial advantage is in their commitment to providing innovative medical technologies across various healthcare domains, from diagnostic imaging to healthcare IT solutions. The company collaborates with local healthcare providers and governments to build sustainable healthcare infrastructures. Siemens Healthineers is active in South Africa, Kenya, and Ghana. The company’s advantage stems from their portfolio of medical equipment, laboratory diagnostics, and digital health solutions. They often tailor their offerings to meet the specific needs and budgets of healthcare providers in Africa, contributing to improved patient care and diagnostic accuracy.

Unveiling MedTech opportunities: the impact of insurers

Large insurance firms wield significant influence in shaping the trajectory of the medical technology industry. They play a pivotal role in extending health insurance coverage to middle-class populations worldwide, not only bolstering healthcare systems but also driving the demand for medical technology. In essence, these insurance giants act as catalysts for the MedTech industry's growth.

A case in point is Prudential plc., a global insurance powerhouse with >23,000 employees and 2021 annual revenues of >US$70bn. The company holds dual listings on the London and Hong Kong Stock Exchanges and is a constituent of the FTSE 100 Index. It also maintains secondary listings on the New York Stock Exchange and the Singapore Exchange. In February 2023, shortly after Anil Wadhwani assumed the role of Prudential's new CEO, he publicly declared his intent to chart a new course and focus on Africa for growth. Wadhwani highlighted that the growth drivers in Africa today closely resemble the trends previously witnessed by the company in Asia: rapidly expanding middle-class populations with a growing appetite for insurance and enhanced services, including healthcare. He emphasized that Africa would complement Prudential's expanding Asian presence. IMF's 2023 reports indicate that countries such as South Africa, Ghana, Kenya, Ethiopia, Côte d'Ivoire, and Rwanda are prime candidates for substantial future growth. It is increasingly plausible that Africa could emerge as the next frontier for MedTech companies, thanks to the leadership of individuals like Anil Wadhwani, who steer insurance giants toward new horizons.

Takeaways

In recent years, Western MedTechs have witnessed a significant transformation in China's healthcare landscape, driven by changing demographics and an increased emphasis on technological self-reliance. Notably, industry giants such as GE HealthCare, Siemens Healthineers, and Philips Healthcare, which established a presence in China during the 1980s, are now extending their reach into Africa with hopes of replicating their prior successes. While some may view this expansion as unconventional due to factors like political instability, corruption, and poverty, the continent has potential. Africa's attraction for MedTechs includes some of its countries with significant economic growth potential, a burgeoning youthful population, a growing middleclass, and abundant natural resources that align with the evolving demands of a rapidly expanding global green economy. Much like the historical pattern of MedTech companies venturing into Asia, a similar trend is emerging in Africa among a select group of firms. Another critical point to consider is the emerging role of insurance companies as potential guides in this new journey. These insurers are participating in the continent’s healthcare expansion and innovation, and where they lead, MedTech companies should consider following. The growing middleclass, equipped with medical insurance, will eventually exert pressure on healthcare systems in the region to enhance access to quality care. This, in turn, will expand the market for medical devices. Despite the complexities and contradictions that Africa presents, it represents an opportunity that warrants consideration. The question of whether Africa will become the new Asia suggests the need for MedTechs to embrace a new era where innovation and progress thrive on the courage to venture beyond the familiar. By doing so, corporations can discover a promising landscape for growth and innovation, tapping into Africa’s underserved opportunities and playing a role in enhancing global healthcare.

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Forging a path for digital excellence in the MedTech Industry

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Medical Technology

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Artificial Intelligence

The MedTech industry faces a pivotal moment as it confronts the challenge of adopting transformative technologies amidst a rapidly changing healthcare ecosystem
Despite progress in other sectors, MedTech has shown reluctance to fully integrate digitalization, potentially hindering its growth and competitiveness
There have been some notable exceptions such as Medtronic, Siemens Healthineers and Philips
Many large diversified MedTechs could unlock growth and value by capitalizing on the potential synergies between traditional medical devices and innovative digital solutions and services
The convergence of digital offerings with legacy medical devices provides opportunities for improved patient care, operational efficiency and R&D innovation
There is a pressing need for MedTechs to comprehensively embrace digitalization to avoid reduced competitiveness, limited growth, and diminished value enhancement

Forging a path for digital excellence in the MedTech Industry

In an era of rapid technological advancement, the medical technology (MedTech) industry is at a crossroads. While numerous other sectors have enthusiastically embraced digitalization and moved forward, the MedTech sector, barring a few notable exceptions, has been hesitant to embrace these transformative technologies. However, the time has come for large diversified MedTechs to recognize the opportunities that digitalization offers for growth and value creation. The convergence of traditional medical devices with digital solutions and services presents an opportunity for the industry to improve patient care, streamline operations, and drive innovation. Failing to fully integrate digitalization into their operations in a timely way may lead to unexpected consequences, including a shorter window of competitiveness and a struggle to enhance growth rates and augment value. The reluctance of many MedTechs to adapt now could translate into a significant handicap in the rapidly evolving landscape of healthcare technology.

In this Commentary

In this Commentary, we tackle four questions: (i) What is digitalization? (ii) Why is digitalization important for MedTechs? (iii) Which MedTechs have implemented successful digitalization strategies? and (iv) What defines an effective digitalization strategy? In addressing the fourth question, we present a strategy that encompasses 20 'essentials', which are not meant to follow a linear, sequential path. Instead, they are orchestrated by agile cross-functional teams, collaborating and pooling resources. Together, these teams oversee the execution of various elements of the strategy, while assuming responsibility for its overall effectiveness. This approach signals a departure from hierarchical departments and advocates a matrix-style organizational structure characterized by a web of interconnected reporting relationships. This structure goes beyond the confines of the conventional linear framework and incorporates specialized clusters, akin to "nests," each housing unique competencies, spanning multiple dimensions, and encompassing responsibility, authority, collaboration, and accountability.

1. What is digitalization?

Digitalization, also referred to as digital transformation, involves harnessing digital technologies to improve and refine business operations, processes, and services. By integrating digital tools across all facets of an organization, digitalization streamlines workflows, amplifies customer experiences, and achieves strategic goals. This includes automating tasks, utilizing data analytics for informed decision-making, and leveraging cloud computing for scalable and flexible operations. The Internet of Things (IoT) facilitates data exchange through connected devices, while artificial intelligence (AI), machine learning (ML) and large language models (LLM) empower computers to perform tasks requiring human-like intelligence. Virtual and augmented reality (VR/AR) enrich experiences, while cybersecurity measures are important to safeguard digital assets.

2. Why is digitalization important for MedTechs?

Digitalization is important for the MedTech industry since it acts as a driver for significant and positive change. By fully embracing this transformation, the industry develops the ability to use data and analytics to create innovative medical solutions and services. These are built on insights and predictions obtained from large amounts of information. Apart from these benefits, digitalization also affects the core of how clinical operations work. It makes workflows more efficient and frees-up healthcare professionals to focus more on taking care of patients. One significant development is the rise of collaborative telehealth platforms, which play a role in improving the quality and efficiency of healthcare delivery. Additionally, the power of technologies like AI, and ML becomes more evident. These advanced tools, driven by their ability to rapidly analyse vast data sets and make predictions, contribute to breakthroughs in care with the potential to improve patient outcomes while reducing costs.

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The collaboration between smart devices and blockchain technology becomes important in a digital transformation, enhancing patient safety, and ensuring regulatory compliance. As the MedTech sector embraces digitalization, it enables companies to succeed in value-based healthcare environments, which results in quality care becoming more accessible and affordable. This is partly made possible through remote monitoring and proactive interventions that overcome distance. A distinctive aspect of digitalization is the ability to provide personalized care. Focusing on creating solutions and services tailored to individual needs helps to create an innovative environment within MedTechs, which can be leveraged to drive continuous growth and value creation. As digitalization becomes more influential, the MedTech industry should move closer to personalized health, which means care is centered around patients, innovation is continuous, and growth is more certain.

3. Which MedTechs have implemented successful digitalization strategies?

There are several large MedTechs that have successfully leveraged digitalization strategies to gain access to new revenue streams. Here we briefly describe just three. Philips is known for its diverse healthcare products and services, including imaging systems, patient monitoring, and home healthcare solutions and services. They have successfully utilized digitalization by creating a connected ecosystem of devices that capture and transmit patient data, enabling real-time monitoring and personalized care. Their strategy also includes software solutions for data analysis, predictive analytics, and telehealth, contributing to the creation of new revenue streams beyond traditional medical devices. Siemens Healthineers focuses on medical imaging, laboratory diagnostics, and advanced healthcare IT. Their digitalization strategy involves offering integrated solutions that connect medical devices, data analytics, and telemedicine platforms. For instance, their cloud-based platforms enable healthcare providers to store, share, and analyze medical images and patient data, resulting in streamlined workflows and new revenue opportunities through data-driven insights. Medtronic, a global leader in medical technology, offering a wide range of products and services in various medical specialties, has successfully embraced digitalization by incorporating smart technologies into their devices, such as pacemakers and insulin pumps, allowing remote monitoring and data collection. This has improved patient care and given the company access to new revenue streams through subscription-based services for data analytics and remote monitoring.

4. What defines an effective digitalization strategy?

In today’s business climate, developing an effective digital strategy has shifted from being a ‘nice to have’ to a necessity. As MedTechs navigate the dynamic technology landscape, digitalization has become a priority. In this section, we present a 20 'essentials' for crafting and implementing a digitalization strategy. These are not linear, but collectively constitute a path towards a digital transformation for a large diversified MedTech company.

1. Crafting a Cohesive Vision

Digitalization starts with an evaluation of a company's existing products, services, processes, and technologies. This forms the basis upon which a vision and strategic goals are constructed. The main objective here is to align a company's aspirations with the dynamic MedTech landscape, creating a basis for innovation. Digitalization entails more than the integration of peripheral technologies. It is a paradigm shift. The initiation of a digitalization vision depends upon sound long-term strategic objectives. This involves not only envisioning the transformative potential of digitalization within an organization but also projecting its impact, whether that be improved patient experiences, data-driven operational enhancements, or the exploration of new revenue streams. As this vision takes shape, often in the form of a story that everyone in an organization can buy-into, it should steer decisions and guide investments throughout the entire digital transformation process. Further, it provides tangible benchmarks against which progress can be gauged and strategies can be refined. It is important that digitalization goals are aligned to the evolving needs of healthcare. MedTechs should harness the power of digitalization to meet the expectations of patients and adapt to dynamic clinical practices. This requires reconciling digital innovations with a company’s core values. A comprehensive and forward-looking vision (story) functions to safeguard a company's strengths against potential challenges. This first step toward a digitalization strategy serves to position a company for sustainable growth and enduring value creation.

2. Leadership commitment
The significance of securing buy-in from senior leadership teams lies in its assurance of resources, funding, and support, which are vital for the success of such an initiative. The endorsement from executives, beyond being a signal of change, serves as a catalyst for the allocation of both financial and human resources and has a substantial impact on the direction and depth of a digitalization strategy. By wholeheartedly supporting such an initiative, leaders disseminate not only a positive message about the importance attached to digitalization, but they also foster employee engagement, subsequently paving the way for the potential integration of digitalization across an entire company.

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3. Cross-functional synergy

Creating cross-functional teams is central for driving change, and should span departments like IT, R&D, operations, marketing, and regulatory affairs. The nature of a MedTech's digitalization strategy requires diverse expertise to successfully release technology's full potential. IT professionals contribute technical knowhow, which ensures the implementation and integration into existing infrastructure. R&D members provide visionary insights, encouraging innovative solutions and services. Operations specialists optimize processes for digital efficiency. Marketers strategize effective communications of digital progress. Regulatory experts ensure compliance and ethical considerations. Each contribution plays a distinct yet interconnected role, fostering collaborative brainstorming, shared goals, and pooled talents within a developing culture of agility and innovative. This approach breaks down silos, and aims to create a unified, technology-optimized future. Cross-functional teams act as the driving force to transform digital potential into a tangible reality.

4. Informed market insight

Market and consumer research is an important element of the strategy, as it uncovers customer needs, preferences, and pain points in digital healthcare. Such insights form the basis for tailored technologies that cater to specific needs, increasing patient engagement and satisfaction. Additionally, a successful digitalization strategy needs to identify and adapt to evolving trends in the digital MedTech sector. This entails monitoring emerging technologies, shifts in consumer behaviour, and advances in medical practices. Equally important is analyzing the competitive landscape to benchmark offerings and drive innovation. When companies are aligned to market dynamics, they are more likely to become digital leaders, fostering continuous improvement and innovation.

5. Technology assessment
Assessing a company's existing technology infrastructure helps to gauge whether a strategy can effectively leverage current investments and assets. Simultaneously, the assessment should uncover gaps and shortcomings. Identifying these informs targeted resource allocation for new technologies that support digital goals. Thus, a technology assessment allows organizations to strike a balance between leveraging existing capabilities and making targeted investments, in pursuit of their digital transformations.

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6. Effective digital solutions

An essential aspect of a digitalization strategy involves identifying effective solutions and services. This process entails exploring various facets of an organization to integrate innovations; from improving customer engagement to optimizing workflows. Equally crucial is deploying technologies that improve patient outcomes, diagnoses, treatments, and monitoring. This stage also identifies potential revenue streams derived from new digital solutions and services, like remote patient monitoring, telemedicine, data analytics, and AI diagnostics, which strengthen existing offerings.

7. Partnerships

Engaging in collaborations with technology companies, start-ups, and various stakeholders creates opportunities for synergistic growth. Such partnerships enable enterprises to tap into diverse expertise, gain fresh perspectives, and access specialized resources, all of which support the development and implementation of digital solutions and services. Collaboration facilitates knowledge and resource pooling, enhancing innovation cycles and ensuring a comprehensive transformation of healthcare services. Simultaneously, acquisitions can enhance in-house capabilities. Exploring the acquisition of companies possessing relevant digital competencies or disruptive technologies offers a potential competitive edge. Such moves can help with assimilating novel technologies and developing a culture of innovation. Acquisitions can assist companies to position themselves as key players, advancing their digital health agenda and solidifying their position in an evolving industry.

8. Data management and security

Enhancing data management entails developing and implementing robust protocols. This involves refining data collection procedures, enforcing privacy and security measures, and adhering to healthcare regulations like the US Health Insurance Portability and Accountability Act (HIPAA) and the EU General Data Protection Regulation (GDPR), which safeguard patient data from breaches or misuse. Such measures establish a foundation for data management and security and help to foster stakeholder trust. Compliance with regulations like HIPAA and GDPR should not simply be viewed a legal obligation, but also as a moral commitment when handling sensitive patient data. Such a proactive stance strengthens a company's reputation for data integrity and helps to avoid legal repercussions.

9. Technology roadmap

A technology roadmap is a blueprint charting a course toward enhanced efficiency, patient-centric care, and heightened competitiveness. Beyond action planning, it provides clarity and purpose in navigating technological advancements. It consolidates an enterprise's digitalization efforts by integrating initiatives with timelines and resources, thereby establishing a framework for goal setting and assessment. Such planning assists timely project execution and supports the rationale for digitalization with measurable benefits. With a well-structured roadmap, stakeholders can appreciate how digital initiatives improve operations, trigger innovation, and enhance patient outcomes.

10. Pilot programmes

Pilot programmes serve as incubators and evidence-based validators for innovations, offering a means to test and enhance digital solutions before they are fully implemented. Such initiatives provide tangible evidence to support an enterprise's commitment to a digitalization strategy. Pilots offer concrete proof of an enterprise’s commitment to its digitalization strategy. Each programme should concentrate on specific solutions and establish a controlled setting for gathering user feedback, which constitutes an on-going effort to refine functionality. Additionally, pilots demonstrate a commitment to user-centric offerings by proactively tackling challenges, thereby improving the chances of successful, large-scale digital deployments.

11. Scalability and integration
Establishing scalability and integration capabilities is important for MedTechs to realize their digital transformation. As healthcare technology landscapes evolve and organizational needs change, the ability of digital solutions to scale and integrate with existing structures increases in importance. Ensuring these attributes contributes to a digital transformation. Scalability emphasizes a company’s adaptability to evolving demands. A scalable digital solution that expands in scope without sacrificing functionality invokes confidence. Further, integrating novel solutions and services with existing systems signals operational intelligence, which adds credibility to the digital transition. When digital solutions merge with legacy structures, they reflect an alignment of traditional expertise and cutting-edge technology. Emphasising scalability and integration involves anticipating future requirements and aligning digital strategies with longer-term organizational objectives.

12. Change management
By supporting a mindset that views digital technologies as enablers rather than disruptors, companies demonstrate their commitment to progress and cultural change. Implementing change management acknowledges the importance of cultural shifts and affirms an intent to embrace digital technologies holistically and sustainably. It acts as the vehicle, which guides an enterprise through transformation, and ensures stakeholder support for technological evolution. Through communication, training, and engagement policies, enterprises lay the groundwork for digital adoption, and smooth technology integration. This strengthens the case for change and demonstrates an organization's commitment to fostering an innovation-receptive environment.

13. Training and skill development
Central to a successful digitalization strategy is an investment in training and skill development. This underlines an organization's commitment to harnessing and effectively utilizing the transformative potential of technology. By training, corporations equip their employees with capabilities required to support digital solutions and services. Training bridges the gap between skill shortages and technological advancements. Empowering employees with the capacity to navigate digital technologies positions an enterprise for a successful transition, by a process that reconciles change with employee growth. Training reinforces the notion that digitalization is not just an operational enhancement but also a means to cultivate a workforce with capabilities, which contribute to operational excellence and sustainable expansion.

14. Regulatory adherence
Regulatory compliance is an important feature of a digital shift, as it demonstrates a company's commitment to upholding the highest standards of patient care and industry excellence. It shows that transformation is about embracing the future with integrity by ensuring that an enterprise’s innovations are synchronized with the values underpinning medical practice. Adherence to regulatory standards is a declaration of an organization's commitment to patient safety and industry integrity. By ensuring all digital solutions and services adhere to rigorous medical regulations, corporations strengthen their case for digitalization within ethical and legal boundaries. Demonstrating adherence to medical regulations and industry benchmarks reinforces a new digital strategy as a responsible and trustworthy pursuit and showcases an organization's commitment to delivering technologies that both innovate and enhance patients' therapeutic journeys while respecting established medical protocols.

15. Market communication
Crafting a communication strategy is important as it underlines an organization’s commitment to transformation. Employing a variety of smart communication methods to describe the benefits of new digital offerings enables MedTechs to garner support from stakeholders and thereby strengthen their market position. By aiming at healthcare professionals, investors, payers, patients, providers and other stakeholders, these messages inform and persuade by highlighting the tangible benefits they bring to patient care, operational efficiency, and industry progress.

16. Feedback loop and iteration
Stakeholder feedback can be used to enhance digital solutions and services. By engaging users and patients, healthcare technologies can be tailored to cater to specific needs and preferences, fostering a user-centric design ethos. This collaborative approach identifies bottlenecks, deficiencies, and possible enhancements, which contribute to efficacious digital solutions and services. Moreover, stakeholder involvement helps to ensure a company's technological endeavours support broader healthcare goals, enhancing the overall quality of care. Iteration should be synonymous with evolution. Regularly integrating feedback to enhance the functionality of digital offerings enables an enterprise to adapt to market challenges and healthcare advancements.

17. Performance measurement

Effective evaluation of a company's digitalization strategy demands the use of key performance indicators (KPIs). These serve as a compass to assess the impact of digital solutions across patient outcomes, operational efficiency, and business expansion. By selecting relevant KPIs, MedTechs can show stakeholders the tangible effects of their digitalization strategy. These quantifiable metrics offer a lens to observe enhanced patient care, rectify operational inefficiencies, and decipher trends in business growth.

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18. Fostering a culture of continuous innovation

An effective digitalization strategy relies on fostering a culture of perpetual innovation, which is essential to maintain a market-leading position. Such an approach encourages the creation, implementation and refinement of smart technological solutions and services. It equips MedTechs with the agility to quickly embrace emerging trends, capitalize on novel prospects, and tackle unforeseen challenges. Further, a culture of continuous innovation encourages an executive mindset that perceives setbacks as opportunities and views technology as evolving tools to improve patient care and operational efficacy.

19. Adaptation to market changes

MedTechs must rapidly adjust their digital strategies to match prevailing technological trends, regulations, and market dynamics. These ever-changing elements emphasize the need for a proactive, flexible digitalization approach that can swiftly adapt. By staying ahead of shifting trends, businesses are better positioned to leverage emerging technologies and provide solutions for evolving market needs. Navigating regulatory changes is equally important. Balancing compliance with innovative solutions ensures the integration of digital offerings in a dynamic healthcare setting. Flexibility should extend to market fluctuations, aligning digitalization strategies with customer demands and competition. This not only helps a company to navigate volatile markets but also positions it as an agile player, primed for change and enduring growth.

20. Embracing longer-term sustainability

For MedTechs, it is important that their digital strategies align with their principal longer-term objectives. Instead of solely pursuing immediate gains, this strategy should support a company's core purpose and future aspirations, which are embedded within its day-to-day operations. Such an approach establishes an innovative, adaptable, and resilient framework and strengthens the potential for growth. When a digitalization strategy is aligned with a company’s longer-term goals, it assumes the role of a catalyst for growth by optimizing the utilization of resources, improving brand resilience, and securing a distinct competitive advantage. During constantly evolving technologies and markets, such an alignment provides the capacity for a company to effectively confront challenges and capitalize on emerging opportunities, thereby either moving into, or securing, a leadership position within the rapidly changing market landscape.

Takeaways

In the face of rapid technological evolution, the MedTech industry finds itself at a crucial juncture. While other sectors have embraced digitalization, many large diversified MedTechs have been hesitant in adopting these transformative tools. Yet, the imperative is clear: for sizable companies, the present demands recognition of digitalization's potential to drive growth and cultivate value. The fusion of conventional medical devices with digital innovations not only augments patient care but also streamlines operations and encourages innovation. The consequences of delaying this integration are significant. Without prompt action, corporations risk narrowing their competitive horizons and struggling to accelerate growth and enhance value. Failure to adapt may result in a substantial disadvantage in the rapidly changing arena of healthcare technology. It is important for MedTechs that have not already done so, to pivot towards digitalization and transform their challenges into opportunities, ensuring a dynamic and thriving future in an increasingly interconnected world.

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Unleashing MedTech's Competitive Edge through Transformational Technologies

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Medical Technology

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Artificial Intelligence

transformational technologies

Digitalization, big data, and artificial intelligence (AI) are transformational technologies poised to shape the future of MedTech companies over the next decade
Fully embracing these technologies and integrating them in all aspects of a business will likely lead to growth, and competitive advantage while treating them as peripheral add-ons will likely result in stagnation and decline
MedTech executives’ analogue mindsets and resource constraints prevent them from fully embracing transformational technologies
There are also potential pushbacks from employees, patients, providers and investors
Notwithstanding, there are unstoppable structural trends forcing governments and payers throughout the world to oblige healthcare systems to leverage digitalization, big data, and AI to help reduce their vast and escalating healthcare burdens
Western MedTechs are responding to the rapidly evolving healthcare landscape by adopting transformational technologies and attempting to increase their presence in emerging markets, particularly China
To date, MedTech adoption and integration of digitalization, big data, and AI have been patchy
To remain relevant and enhance their value, Western MedTechs need to learn from China and embed transformational technologies in every aspect of their businesses

Unleashing MedTech's Competitive Edge through Transformational Technologies
Digitalization, Big Data, and AI as Catalysts for MedTech Competitiveness and Success

In the rapidly evolving landscape of medical technology, the integration of digitalization, big data, and artificial intelligence (AI) [referred to in this Commentary as transformational technologies] has emerged as a pivotal force shaping the future of MedTech companies. Such technologies are not mere add-ons or peripheral tools but will soon become the lifeblood that fuels competition and enhances the value of MedTechs. From research and development (R&D) to marketing, finance to internationalization, and regulation to patient outcomes, digitalization, big data, and AI must permeate every aspect of medical technology businesses if they are to deliver significant benefits for patients and investors. To thrive in this rapidly evolving high-tech ecosystem, companies will be obliged to adapt to this paradigm shift.

Gone are the days when traditional approaches would suffice in the face of escalating complexities and demands within the healthcare industry. The convergence of transformational technologies heralds a new era, where innovation and success are linked to the ability to harness the potential of digitalization, big data, and AI. MedTech companies that wish to maintain and enhance their competitiveness must recognize the imperative of integrating these technologies across all facets of their operations. From improving their R&D processes by utilizing advanced data analytics and predictive modeling, to optimizing internal processes through automation and machine learning algorithms. Embracing such technologies opens doors to enhanced marketing strategies, streamlined financial operations, efficacious legal and regulatory endeavours, seamless internationalization efforts, and the development of innovative offerings that cater to the evolving needs of patients, payers, and healthcare providers.

This Commentary aims to stimulate discussion among MedTech senior leadership teams as the industry's competitive landscape continues to rapidly evolve, and the fusion of digitalization, big data, and AI becomes not only a strategic advantage but a prerequisite for survival in an era defined by data-driven decision-making, personalized affordable healthcare, and a commitment to improving patient outcomes.

In this Commentary

This Commentary explores digitalization, big data, and AI in the MedTech industry. It presents two scenarios: one is to fully embrace these technologies and integrate them into all aspects of your business and the other is to perceive them as peripheral add-ons. The former will lead to growth and competitive advantage, while the latter will result in stagnation and decline. We explain why many MedTechs do not fully embrace transformational technologies and suggest this is partly due to executives’ mindsets, resource constraints and resistance from employees, patients, and investors. Despite these pushbacks, the global healthcare ecosystem is undergoing an unstoppable transformation, driven by aging populations and significant increases in the prevalence of costly to treat lifetime chronic conditions. Western MedTechs are responding to structural shifts by adopting transformational technologies and increasing their footprints in emerging markets, particularly China. To date, company acceptance of AI-driven strategies has been patchy. We suggest that MedTechs can learn from China and emphasize the need for organizational and cultural change to facilitate the comprehensive integration of transformational technologies. Integrating these technologies into all aspects of a business is no longer a choice but a necessity for companies to stay competitive in the future.

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Transformational technologies in MedTech

Digitalization in the MedTech industry involves adopting and integrating digital technologies to improve healthcare delivery, patient care, and operational efficiency. It transforms manual and paper-based processes into digital formats, enabling electronic health records, connected medical devices, telemedicine, and other digital tools. This allows for seamless data exchange and storage, improving clinical processes, decision-making, and patient empowerment. Big data in the MedTech industry refers to the vast amount of healthcare-related information collected from various sources. It includes structured and unstructured data such as patient demographics, clinical notes, diagnostic images, and treatment outcomes. Big data analysis identifies patterns, correlations, and trends that traditional methods may miss. They aid medical research, drug discovery, personalized medicine, clinical decision support, evidence-based care, population health management, and public health initiatives. Data privacy, security, and ethical use are crucial considerations. Artificial Intelligence (AI) in the MedTech industry uses computer algorithms to simulate human intelligence. AI analyzes medical data to identify patterns, make predictions, and improve diagnoses, treatment plans, and patient outcomes. It assists in medical imaging interpretation, personalized medicine, and patient engagement. In R&D, AI accelerates the development of devices and the discovery of new therapies and has the capacity to analyze scientific literature and molecular data. The technology serves as a tool to augment healthcare professionals' expertise and support decision-making.

With the proliferation of large language AI models (LLM) and to borrow from a recent essay by Marc Andreeseen - an American software engineer, co-author of Mosaic, [one of the first widely used web browsers] and founder of multiple $bn companies - everyone involved with medical technology, including R&D, finance, marketing, manufacturing, regulation, law, international etc., “will have an AI assistant/collaborator/partner that will greatly expand their scope and achievement. Anything that people do with their natural intelligence today can be done much better with AI, and we will be able to take on new challenges that have been impossible to tackle without AI, including curing all diseases.”

Two scenarios

We suggest there are only two scenarios for MedTechs: a company that fully embraces transformational technologies and one that does not. The former, will benefit from strengthened operational efficiencies, improved patient outcomes, and enhanced innovations, which will lead to increased market share and investor confidence. By leveraging digital technologies, such as remote monitoring devices, telemedicine platforms, LLMs, and machine learning, a company will be able to offer more personalized, effective and affordable healthcare services and solutions. An enterprise that integrates these technologies into their strategies and business models will, over time, experience improved growth prospects, increased revenues, and potentially higher profitability. These factors will contribute to a positive perception in the market, leading to an increase in company value. MedTechs that fail to fully embrace digitalization, big data, and AI will face challenges in adapting to the rapidly evolving healthcare landscape. They will struggle to remain competitive and relevant in a market that increasingly values transformational technologies and data-driven approaches. As a result, such companies will experience slower growth, lower market share, and limited investor interest, which will lead to a stagnation or decline in their value.

The analogue era's influence on MedTechs

If the choice is so stark, why are many MedTechs not grabbing the opportunities that transformational technologies offer? To answer this question let us briefly remind ourselves that the industry took shape in an analogue era, which had a significant effect on how MedTech companies evolved and established themselves. During the high growth decades of the 1980s, 1990s, and early 2000s, the medical technology industry operated with limited access to the technologies that have since radically changed healthcare. The 1980s marked a period of advancements, which included the widespread adoption of medical imaging such as computed tomography (CT) scans and magnetic resonance imaging (MRI). These modalities provided detailed visualizations of the human body, supporting more accurate diagnoses. Medical devices like pacemakers, defibrillators, and implantable cardioverter-defibrillators (ICDs) were developed and improved the treatment of heart conditions. The 1990s witnessed further advancements, with a focus on minimally invasive procedures. Laparoscopic surgeries gained popularity, allowing surgeons to perform operations through small incisions, resulting in reduced patient trauma and faster recovery times. The development of laser technologies enabled more precise surgical interventions. The decade also saw the rise of biotechnology, with the successful completion of the Human Genome Project and increased emphasis on genetic research. The early 2000s saw the emergence of digital transformation in some quarters of the medical technology industry. Electronic medical records (EMRs) began to replace paper-based systems, increase data accessibility and upgrade patient management. Telemedicine, although still in its nascent stages, started connecting healthcare providers and patients remotely, overcoming geographical barriers. Robotics and robotic-assisted surgeries gained traction, enabling more precise and less invasive procedures. During these formative decades, the medical technology industry focused on enhancing diagnostic capabilities, improving treatment methods, and streamlining healthcare processes. The industry had yet to witness the transformational impact of digitalization, big data and AI that would emerge in subsequent years, enabling more advanced analytics, personalized medicine, and interconnected healthcare systems.

From analogue to digital

During these formative analogue years, MedTechs experienced significant growth and expansion, where innovative medical technologies changed healthcare practices and improved patient outcomes. Companies thrived by leveraging their expertise in engineering, biology, and clinical research and developed medical devices, diagnostic tools, and life-saving treatments. For MedTechs to experience similar growth and expansion in a digital era, they must fully harness the potential of transformational technologies, and to achieve this, there must be a receptive mindset at the top of the organization.

According to a recent study by Korn Ferry, a global consulting and search firm, the average age of CEOs in the technology sector is 57, and the average age for a C-suite member is 56. Thus, as our brief history suggests, many MedTech executives advanced their careers in a predominantly analogue age, prior to the proliferation of technologies that are transforming the industry today. Thus, it seems reasonable to suggest that this disparity in experience and exposure colours the mindsets of many MedTech executives, which can lead to them underestimating and under preparing for the significant technological changes that are set to reshape the healthcare industry over the next decade. Senior leadership teams play a pivotal role in developing the strategic direction of companies and driving their success. Without a proactive mindset shift, these executives may struggle to fully comprehend the extent of the potential disruptions and opportunities that digitalization, big data, and AI bring.

By embracing such a mindset shift, senior leadership teams could foster a culture of innovation and agility. But they must recognize the urgency of preparing for a future fueled by significantly different technologies from those they might be more comfortable with. Such urgency is demonstrated by a March 2023 Statista report, which found that in 2021, the global AI in healthcare market was worth ~US$11bn, but forecasted to reach ~US$188bn by 2030, increasing at a compound annual growth rate (CAGR) of ~37%. As these and other facts (see below) suggest, the integration of digitalization, big data, and AI has already begun to redefine healthcare delivery, patient engagement, and operational efficiency and is positioned to accelerate in the next decade. To remain competitive and relevant in this rapidly evolving high-tech world, MedTechs must foster a culture of openness to change and innovation. Leaders should encourage collaboration, both internally and externally, and create cross-functional teams that bring together expertise from various domains, including AI and data analytics. This multidisciplinary approach facilitates the integration of transformational technologies into all aspects of the business, ensuring that the organization remains at the forefront of the evolving industry.

Implementation and utilization

Limited resources, such as budgets and IT infrastructure, can hinder the adoption and utilization of digitalization, big data, and AI, especially for smaller companies. Compliance with healthcare regulations like HIPAA and GDPR adds complexity and can slow down technology implementation. Resistance to change from employees, healthcare providers, and patients also poses challenges. Fragmented and unstandardized healthcare data limit the effectiveness of AI-driven strategies. The expertise gap can be bridged through collaboration with academic institutions and technology companies. Demonstrating the tangible benefits of digitalization, big data and AI is essential to address concerns about return on investments (ROI). Strategic planning, resource investment, collaboration, and cultural change are necessary for the successful implementation and utilization of transformational technologies in MedTech companies.

Organizational and cultural changes

MedTechs must embrace agility and innovation to harness the potential benefits from transformational technologies. This requires fostering a culture that encourages risk-taking and challenges conventional practices. Creating cross-functional teams and promoting collaboration nurtures creativity and innovative solutions. Transitioning to data-driven decision-making involves establishing governance frameworks, ensuring data quality, and leveraging analytics and insights from big data. Talent development and upskilling are crucial, necessitating training programmes to improve digital literacy and add analytics skills. Collaboration and partnerships with external stakeholders facilitate access to cutting-edge technologies. Enhancing patient experiences through user-friendly interfaces and personalized solutions is essential. Investing in agile technology infrastructure, including cloud computing and robust cybersecurity measures is necessary. MedTechs must navigate complex regulatory environments while upholding ethical considerations, transparency, and patient consent to gain credibility and support successful technology adoption.

Investors

A further potential inhibitor to change is MedTech investors who may harbour conservative expectations that tend to discourage companies from taking risks, such as fully embracing and integrating digitalization, big data, and AI across their entire businesses. This mindset also can be traced back to the formative analogue decades on the 1980s, 1990s, and early 2000s when investors became accustomed to growing company valuations. During that time, most MedTechs catered to an underserved, rapidly expanding market largely focussed on acute and essential clinical services in affluent regions like the US and Europe, where well-resourced healthcare systems and medical insurance compensated activity rather than patient outcomes. However, the landscape has since undergone a radical change. Aging populations with rising rates of chronic diseases have significantly increased the demands on over-stretched healthcare systems, which have turned to digitalization, big data, and AI in attempts to reduce their mounting burdens. These shifting dynamics now demand a more forward-thinking approach, but investor expectations often remain fixed on a past traditional model, which impedes the adoption and full integration of transformational technologies into MedTech enterprises.

To overcome investor conservatism and reluctance to embrace transformational technologies requires a concerted effort by MedTechs to demonstrate the tangible benefits of these technologies on the industry. Companies can focus on providing evidence of improved patient outcomes, increased efficiency, cost savings, and competitive advantages gained through the integration of digitalization, big data, and AI. Engaging in open and transparent communications with investors, showcasing successful case studies, and highlighting the long-term potential and sustainability of a technology-driven approach can help shift investor expectations and encourage a more receptive attitude towards risk-taking and innovation.

Global structural drivers of change

For decades, Western MedTechs have derived comfort from the fact that North America and Europe hold 68% of the global MedTech market share. These wealthy regions have well-resourced healthcare systems, which, as we have suggested, for decades rewarded clinical activity rather than patient outcomes, and MedTech’s benefitted by high profit margins on their devices, which contributed to rapid growth, and enhanced enterprise values. Today, the healthcare landscape is significantly different. North America and Europe are experiencing aging populations, and large and rapidly rising incidence rates of chronic diseases in older adults. Such trends are expected to continue for the next three decades and have forced governments and private payers to abandon compensating clinical activity and adopt systems that reward patient outcomes while reducing costs. This shift has put pressure on healthcare systems to adopt transformational technologies to help them cut costs, increase access, and improve patient journeys. MedTech companies operating in this ecosystem have no alternative but to adapt. Their ticket for increasing their growth and competitiveness is to adopt and integrate digitalization, big data, and AI into every aspect of their business, which will help them to become more efficient and remain relevant.

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Most developed economies are experiencing aging populations, which affect everything from economic and financial performance to the shape of cities and the nature of healthcare systems. Let us illustrate this with reference to the US. According to the US National Council on Aging, ~56m Americans are ≥65 and this cohort is projected to reach ~95m by 2060. On average, a person ≥65 is expected to live another 17 years. Older adult Americans are disproportionately affected by costly to treat lifetime chronic conditions such as cancer, heart disease, diabetes, respiratory disorders, and arthritis. ~95% of this older adult cohort have at least one chronic disease, and ~80% have two or more. Multiple chronic disorders account for ~66% of all US healthcare costs and ~93% of Medicare spending.

According to a May 2023, Statista report, the US spends more on healthcare than any other country. In 2021, annual health expenditures stood at US$4.2trn, ~18% of the nation’s Gross Domestic Product (GDP). The demographic trends we described in the US are mirrored in all the principal global MedTech markets. Many of which, particularly Japan, are also experiencing shrinking working age populations resulting from a decline in fertility rates, and curbs on immigration. This shrinkage further impacts a nation’s labour force, labour markets, and tax receipts; all critical for resourcing and paying for healthcare services.

MedTechs’ response to structural changes

Western MedTechs’ response to these structural challenges have been twofold: (i) the adoption of transformational technologies, which contribute to lowering healthcare costs, improving innovation, and developing affordable patient-centric services and solutions and (ii) targeting emerging markets as potential areas for growth and development. As we have discussed the first point, let us consider briefly the second. Decades ago, giant MedTechs like Johnson and Johnson (J&J), Abbott Laboratories and Medtronic established manufacturing and R&D centres in emerging economies like Brazil, China, and India, where markets were growing three-to-four times faster than in developed countries. Notwithstanding, many MedTechs, were content to continue serving wealthy developed regions - the US and Europe - and either did not enter, or were slow to enter, emerging markets. More recently, as a response to the trends we have described, many MedTechs are either just beginning or accelerating their international expansions. However, such initiatives might be too late to reap the potential commercial benefits they anticipate. Establishing or expanding a footprint in emerging economies is significantly more challenging today than it was two decades ago.

For instance, two decades ago, China lacked medical technology knowhow and experience and welcomed foreign companies’ participation in its economy. Today, the country has evolved, enhanced its technological capacity and capabilities, and is well positioned to become the world’s leading technology nation by 2030. No longer so dependent on foreign technology companies, the Chinese Communist Party (CCP) raised barriers to their entry. In 2017, government leaders announced the nation's intention to become a global leader in AI by putting political muscle behind growing investment by Chinese domestic technology companies, whose products, services and solutions were used to improve the country's healthcare systems. Over decades, the CCP committed significant resources to developing domestic STEM skills, and research to achieve “major technological breakthroughs” by 2025, and to make the nation a world leader in technology by 2030, overtaking its closest rival, the US. According to a 2023 AI Report from the Stanford Institute for Human-Centered Artificial Intelligence, in 2021, China produced ~33% of both AI journal research papers and AI citations worldwide. In economic investment, the country accounted for ~20% of global private investment funding in 2021, attracting US$17bn for AI start-ups. The nation’s AI in the healthcare market is fueled by the large and rising demand for healthcare services and solutions from its ~1.4bn population, a large and rapidly growing middle class, and a robust start-up and innovation ecosystem, which is projected to grow from ~US$0.5bn in 2022 to ~US$12bn by 2030, registering a CAGR of >46%.

>4 years ago, a HealthPad Commentary described how a Chinese internet healthcare start-up, WeDoctor, founded in 2010, bundles AI and big data driven medical services into smart devices to help unclog China’s fragmented and complex healthcare ecosystem and increase citizens’ access to affordable quality healthcare. The company has grown into a multi-functional platform offering medical services, online pharmacies, cloud-based enterprise software for hospitals and other services. Today, WeDoctor owns 27 internet hospitals, [a healthcare platform combining online and offline access for medical institutions to provide a variety of telehealth services directly to patients], has linked its appointment-making system to another 7,800 hospitals across China (including 95% of the top-tier public hospitals) and hosts >270,000 doctors and ~222m registered patients. It is also one of the few online healthcare providers qualified to accept payments from China's vast public health insurance system, which covers >95% of its population. WeDoctor, like other Chinese MedTechs, has expanded its franchise outside of China and has global ambitions to become the “Amazon of healthcare”. China’s investment in developing and increasing its domestic transformational technologies and upskilling its workforce has made the nation close to technological self-sufficiency and has significantly raised the entry bar for Western MedTechs wishing to establish or extend their presence in the country.

China's progress in AI and digital healthcare underscores the urgent need for Western MedTechs to adopt and implement these technologies. To remain relevant and survive in a rapidly changing global healthcare ecosystem, Western MedTechs might do well to learn from China's endeavours in leveraging AI, big data, and digitalization to drive innovation, enhance competitiveness, and ultimately contribute to the transformation of the global healthcare landscape. Notwithstanding, be minded of the ethical concerns Western nations have regarding China’s utilization of big data and AI in its healthcare system and its potential to compromise privacy and individual rights due to the CCP's extensive collection and analysis of personal health data.

Takeaways

Digitalization, big data, and AI are transformational technologies that have the power to influence the shape of MedTech companies over the coming decade, and their potential impact should not be underestimated. Fully embracing these technologies and integrating them into every aspect of a business is necessary for growth and competitive advantage. On the other hand, treating them as peripheral add-ons will likely lead to stagnation and decline. However, the path towards their full integration in companies is not without its challenges. MedTech executives, hindered by their analogue mindsets and resource constraints, often struggle to fully embrace the potential of digitalization, big data, and AI. Moreover, there may be pushbacks from various stakeholders including employees, patients, healthcare providers, and investors. These concerns and resistances can impede the progress of transformation within the industry. Nonetheless, governments and payers across the globe are being compelled by unstoppable structural trends to enforce the utilization of digitalization, big data, and AI within healthcare systems. The large and escalating healthcare burdens facing economies throughout the world leave them with little choice but to leverage these technologies to reduce costs, improve patient access and outcomes. In response to the rapidly evolving healthcare landscape, Western MedTechs are making efforts to adopt transformational technologies and expand their presence in emerging markets, particularly China. They recognize the need to stay ahead of the curve and adapt to the changing demands of the industry. However, the adoption and integration of digitalization, big data, and AI by companies thus far have been inconsistent and patchy. To remain relevant and enhance their value, Western MedTechs, while being mindful of ethical concerns about China’s use of AI-driven big data healthcare strategies, might take cues from their Chinese counterparts and embed these transformational technologies in every aspect of their businesses. The transformative impact of digitalization, big data, and AI on MedTech companies cannot be overstated. While challenges and resistance may arise, the inexorable drive towards leveraging these technologies is unstoppable. MedTech companies should shed their analogue mindsets and resource constraints and fully embrace the potential of these transformational technologies.

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Can elephants be taught to dance?

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MedTechs have built proficiencies to successfully create and market physical devices predominantly for the US and Western European markets
To remain relevant in the rapidly changing healthcare ecosystem they will need to develop advanced digital and data capabilities and increase their penetration of Asian markets, which will present challenges for most of them
Will companies be forced to decide whether to remain hardware manufacturers or become software enterprises, or can they look both ways and prosper?
Given the rate of market changes, the next 5 years represent a window of opportunity for traditional MedTechs to pivot and transform their strategies and business models

Can elephants be taught to dance?
MedTech’s strategic challenges

MedTechs are at a crossroad of manufacturing physical devices and developing software solutions. Both aim to deliver value by enhancing patient outcomes while reducing costs. Can these two scenarios co-exist, or will industry leaders be forced to choose one or the other?

For decades, many companies have displayed a deep-rooted reluctance to transform their business models and adopt digitalization strategies and have used M&A activity to become bigger. This suggests that a significant proportion of MedTech leaders are likely to manage increased competition and changing healthcare ecosystems by accelerating M&A activities, which are familiar to them and require no significant change. However, such activities alone will not future-proof companies. Over the next five years, “informed” MedTechs will benefit by shifting away from their current business models that depend on developing and selling physical products predominantly to hospitals in the US and Western Europe and move toward providing patient-centric software solutions as partners in dynamic, connected international healthcare ecosystems.

M&A activity to enhance scale

For decades, M&A activities have helped MedTechs to acquire mature assets to tuck into their existing sales and distribution channels. More than anything, this has assisted them to increase their scale, while optimising their portfolios, reducing competition, and improving profits. Over the past decade, when Western markets became more uncertain, monetary policy tightened, technologies advanced, and global economic growth slowed, MedTechs responded by exploiting the fall in the cost of capital to increase their M&A activities with the main purpose of increasing their scale: bigger was generally perceived by industry leaders to be better.

Before the COVID-19 pandemic crisis, 2020 was expected to be a strong year for MedTech’s M&A. However, the disruptive impact of the coronavirus outbreak slowed the industry’s M&A performance, and between July 2019 and June 2020, M&A expenditures plunged by 60% compared to the previous 12-month period. Activity returned in Q3, 2020, and today, although high asset valuations and increasing cost of capital have impacted M&A transactions and re-focused attention on organic growth, there are signs that a M&A buyer’s market is developing, but with a difference.

The difference is a significant number of M&A transactions do not appear to be focussed entirely on acquiring scale. While there are still some advantages to increasing scale, there are disadvantages, which include having to integrate and service more customers, more employees, and more institutional investors, and this often contributes to strategic rigidities.

The demise of scale

The significance of scale was first elaborated in 1937 by Nobel economics laureate Ronald Coase in his seminal paper, The Nature of the Firm, and ~50 years later, repeated by Michael Porter in his book, Competitive Advantage. Both Coase and Porter suggested that scale gained from reducing the ratio of overhead to production would increase the power of firms in markets. In 2013, Rita McGrath challenged this thesis in, The End of Competitive Advantage, by suggesting that bigger was not necessarily better. According to McGrath, in an increasingly high-tech environment, more important than size, is whether enterprises have access to technical capabilities, which can drive top-line growth in dynamic market settings.

Recapitalized MedTech’s M&A firepower

According to a 2020 report on the state of the MedTech industry, published by EY, a consulting firm, between July 2019 and June 2020, MedTechs took advantage of low interest rates, and financing levels more than doubled to a record US$57.1bn compared to the previous 12 months; with >40% resulting from debt financing. Thus, as we emerge from restrictions imposed by the COVID-19 pandemic, there is a lot of liquidity in the market and larger MedTechs have significant M&A firepower. Will they use this to become bigger, or will they use their capital to make strategic investments in new technologies and to penetrate large rapidly growing Asian markets?

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MedTech must digitize to remain relevant

Is the digital transformation of MedTech companies a choice or a necessity?

M&A driving a shift to digital health

In H1,2021, the MedTech sector recorded a total of 33 M&A deals, up from 25 in the whole of 2020. There is some evidence to suggest that some companies in the sector are using their renewed M&A firepower to acquire high growth digital and AI opportunities that can be integrated into their existing product offerings to provide access to new revenue streams and help companies pivot away from being solely dependent upon manufacturing physical devices. We briefly describe four such deals.

In January 2020, as the first COVID-19 case was reported in the US, Boston Scientific paid US$0.925bn for Preventice, a developer of mobile health solutions and remote monitoring services, which connect patients and caregivers. Its digitally enabled service has the potential to reduce healthcare costs and improve patient outcomes. In February 2020, Medtronic, acquired, for an undisclosed sum, Digital Surgery, a London-based privately-held pioneer in surgical AI, data and analytics. The acquisition is expected to accelerate Medtronic’s plans to incorporate AI and data into its laparoscopic and robotic-assisted surgery platforms. In December 2020 Philips acquired BioTelemetry for US$2.8bn. BioTelemetry is a US-based provider of remote cardiac diagnostics and monitoring, with offerings in wearable heart monitors and AI-based data analytics and services. The deal provides Philips with the capability to expand its remote monitoring business outside of hospitals and into lower cost day-care settings and patients’ homes. One of the largest healthcare deals of 2020 was Teladoc’s US$18.5bn acquisition of Livongo, a remote patient monitoring company, founded in 2014, to build a cloud-based diabetes management programme, linking a person’s glucose monitor to personalized coaching to help control blood sugar levels. In 2019, just one year before Teladoc’s acquisition, Livongo IPO’d at a valuation of US$355m, and expanded its products and services to cover high blood pressure and behavioural health with an ultimate goal of leveraging digital medicine to address “the health of the whole person”.

These four acquisitions are from market segments, which run parallel to traditional medical devices and are often perceived by some MedTech executives to be competitors destined to be controlled by giant tech companies such as Apple, Huawei, and Samsung. However, given the rate at which technology is developing, the speed at which MedTech and pharma are converging, and the renewed liquidity in the market, it might be more efficacious for MedTechs to view such specialised digital health companies as partners rather than competitors.

Technologies helping MedTechs to develop actionable solutions

Today, many new biomedical technologies are being developed and benefit from continuous miniaturization, enhanced battery life, cost reductions and increasing data storage capacity. One such technology is photoplethysmography (PPG), a non-invasive, uncomplicated, and inexpensive optical measurement method that employs a light source and a photodetector to calculate the volumetric variations of blood circulation. PPG is employed in smartphones and wearables that are used by billions of people worldwide. There is a large and growing global research endeavour to develop more effective and sophisticated PPG algorithms that could be attached to traditional, non-active medical devices and implants to provide accurate and reliable real time monitoring of a wide range of conditions.

Outside of specific health monitoring technologies, few MedTechs collect, store, and analyse data generated by their existing traditional devices and implants, and even fewer use such data to facilitate real time, monitoring of conditions. However, some companies are beginning to transform their dumb devices into intelligent ones to gain access to new revenue streams. For example Zimmer-Biomet’s “smart” knee, utilizes a biosensor [an analytical device that uses natural biological materials to detect and monitor virtually any activity or substance] to generate self-reports on patient activity, recovery, and treatment failures, without the need for physician intervention and dependence upon patient compliance.

According to Roger Kornberg, Professor of Structural Biology at Stanford University and Nobel Laureate for Chemistry, “the excitement of biosensors pertains to their microscopic size and the ease with which they can transmit wirelessly in real time information about responses to treatment from an implantable device within the body”. [See video below].

A fast-growing field of AI is tiny machine learning (TinyML), which has the capability to perform on-device, real time, sensor data analytics at extremely low power, typically in the mW [one thousandth of a watt] range and below. The technology is expected to make always-on use-cases economically viable and accelerate the transformation of dumb devices and implants into smart ones.

Changing traditional R&D models

In their search for innovative healthcare solutions, MedTechs might consider increasing their R&D spend and reorganizing their R&D function. MedTech’s R&D spend, as a percentage of revenues, has slowed compared to levels the industry recorded prior to the 2007 financial crash. Overall, the industry tends to allocate more of its capital to share buybacks and investor dividends than to R&D. This strategy may please shareholders in the short term, but it suggests some uncertainty among industry leaders about how to invest for growth in the longer term and could have a medium- to long-term potential downside.

Further, a significant percentage of R&D spend goes on tweaking existing products rather than creating new ones. Given that the future of the industry is dependent upon innovation, it seems reasonable to suggest that, as competition increases and markets tighten, MedTechs will need to consider increasing their R&D resources and capabilities to develop innovative technologies that provide improved actionable solutions across entire patient journeys.

Unlocking value from R&D innovations might require a different culture and new operating models to the ones that tend to prevail today. Instead of lengthy R&D cycles fixed on the launch of a physical product, it could be more beneficial to focus on developing minimum-viable patient-centric solutions, which research teams can deploy early, test, learn from and enhance. Moreover, R&D strategy sessions might benefit by including a mandatory question: “In the near- to medium-term, are there any evolving technologies likely to disrupt a specific market segment important to our company?”.

The potential of innovative technologies to disrupt markets

To illustrate the significance of this question, consider traumatic brain injury (TBI), which each year affects ~69m individuals worldwide. There is no cure for the condition, and the cornerstone of its management is to monitor intracranial pressure (ICP). [Pressures >15 millimetres of mercury (mm Hg) are considered abnormal, and ICP >20 mm Hg is deemed pathological]. An ICP monitor is expected to be easy to use, accurate, reliable, reproducible, inexpensive and should not be associated with either infection or haemorrhagic complications. Currently, the gold-standard is to drill a small burr hole in the skull, insert a catheter and place it in a cavity [ventricle] in the brain, which is filled with cerebrospinal fluid (CSF). Such an invasive intraventricular catheter system is accurate and reliable, but it is also a health-resource-intensive modality, which runs a risk of haemorrhage and infection. Recent advances in PPG and other technologies have accelerated research developing non-invasive techniques to continuously measure and monitor ICP, which in the medium-term, could replace the gold standard and avoid drilling a hole in a traumatised patient’s skull.

Pros and cons of the COVID-19 crisis

One beneficial outcome for MedTechs of the COVID-19 crisis has been the change in regulatory norms, which favour innovation. In the US, the FDA reduced barriers to market entry for new devices by increasing its emergency use authorization (EUA), which fast-tracks the availability of medical devices. Also, at the onset of the pandemic, the EU deferred for one year the implementation of its Medical Device Regulation (MDR), which governs the production and distribution of medical devices in Europe. In mid 2021, when governments began removing the outstanding legal restrictions imposed to reduce the impact of the third wave of the COVID-19 pandemic, some MedTechs, which had invested in remote communication strategies, chose to build on the changes they had made and invest further in digitalization AI strategies, while many others reverted to their labour-intensive supply channels. According to a June 2021 Boston Consulting Group (BCG) study, “On average, MedTech companies are still spending two to three times more on selling, general, and administrative (SG&A) expenses (as a percent of the costs of goods sold) than the typical technology or industrial company”.

A potential disadvantage for MedTechs of the COVID-19 pandemic is that it can lead to an excessive focus on short-term challenges and put off addressing longer-term strategic threats.

MedTech executives have never had it so good

Why are some companies reluctant to transform their strategies and business models?

We suggest that a deep-rooted resistance to change results from MedTechs “never having it so good” over a long period. Indeed, for several decades before the global economic crisis in 2007 and 2008, the medical device market was buoyed by limited competition, benign reimbursement policies, aging populations, and a slower pace of technological change compared to today. These factors promoted double-digit growth rates, investor confidence, and solid valuations. This fostered a sense of security among C suites and encouraged “business as usual” agendas, which tended to focus on sharpening legacy products, legacy business models, legacy forms of market access and pricing and legacy capabilities.

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Who should lead MedTech?

The 2007-8 financial crisis only inflicted a short-lived blow to the industry and most companies bounced back relatively quickly. Throughout the decade that followed, MedTechs maintained solid financial performance, steady growth, investor confidence and robust valuations. Many enterprises across the industry ended 2019 in a strong position, with some trading at 52-week highs and the industry overall growing revenues at ~6%.

In 2020, the COVID-19 pandemic threw some segments of the industry off course by a substantial reduction in elective care. However, by 2H 2021, most MedTechs had recovered, albeit their annual growth in revenues did not recapture the heights of the early years of the 21^st century.

MedTechs became like elephants

It seems reasonable to suggest that decades of commercial success shaped the mindsets of industry leaders and resulted in MedTechs becoming like elephants. In 1990, James Belasco published, Teaching the Elephant to Dance, in which he likened organizations to elephants. The book describes how trainers shackled young elephants to a stake securely embedded in the ground so that they could not move away despite their efforts. By the time the elephants became fully grown and had the strength to pull the stakes out of the ground, they were so conditioned they did not move and remained in position even though most were no longer tethered to the stakes. The author uses this analogy to warn how companies can become stuck in obsolete working practices, which are obstacles to their future commercial success.

In 1993, IBM, the world’s largest manufacturer of mainframe computers, had become “an elephant” continuing to produce hardware appliances when the industry was embracing software solutions. IBM, which had posted a US$8bn loss, appointed Lou Gerstner, an executive from outside the computer industry, to turn the company around. Nine years later, IBM had become one of the world's most admired companies. In a book published in 2002, entitled, Who Says Elephants Can't Dance?, Gerstner described how he successfully changed IBM from a maker of hardware to a service orientated company.

A 5-year window of opportunity

A doubt as to whether many traditional MedTechs can be taught to dance was sewn in a 2021 BCG study cited above, which suggested that enterprises “do not yet have the capabilities in place to develop and implement a next-generation, omnichannel commercial model”. Ten years from now, the MedTech market is projected to be significantly different to what it is today, and what it has been for the past four decades. However, it seems reasonable to assume that because of its size and growth rate, [~US$0.5tn, growing at a compound annual growth rate (CAGR) of ~6% and projected to reach US$0.75tn by 2030], many industry leaders will not feel any pressing need to transform their strategies and business models in the short-term.

However, with a rapidly changing healthcare ecosystem, it seems reasonable to suggests that, to remain relevant after 2030, MedTechs will need to use the next five years as a window of opportunity to prepare solutions that enable them to focus on entire patient treatment pathways, create best-in-class distributive services, and develop digital marketing and sales capabilities that help to expand their influence beyond selling hardware. This will require targeting the “right” market segments, developing the “right” solutions, funding in the “right” R&D, creating the “right” playbooks; and recruiting, retaining, and developing the “right” people with the “right” capabilities.

From restricted staged events to real time distribution

Companies are rich reservoirs of clinical data and expertise, but the data tend to be kept in silos and distributed intermittently to a limited number of clinicians and providers at “staged” events. Digital technologies can unlock these assets and facilitate real time, online marketing, self-service portals, and virtual engagements; all of which can provide physicians and providers with unprecedented access to knowhow that can help improve the quality of care and reduce costs. However, shifting to such a distributed care model to drive profitability requires developing a digital, remote, marketing and sales force, which is supported by data analytics, virtual demonstrations, automated call reporting, and AI-supported coaching tools.

The reduction of obstacles to data rich digital distributed care strategies

While distributed computing and communications systems have significantly enhanced a wide range of commercial organizations, they have yet to take root in MedTech settings, despite data sharing being critical in modern clinical practice and medical research. A challenge for MedTechs is to engage in data sharing that reconciles individual privacy and data utility. This will entail universally agreed AI and machine learning practices. Although there are sophisticated technologies that can help with this, MedTech’s management and information systems’ personnel may not be prepared to effectively reconcile these competing interests and push for universal data standards. According to a US National Institute of Health report, “The lack of technical understanding, the lack of direct experience with these new tools, the lack of confidence in their management, the lack of a peer group of successful adopters (except for a few academic medical organizations), and uncertainties about reasonable risks and expectations all leave conservative organizational managers hesitant to make decisions”.

While the mindsets of some industry leaders appear to be obstacles to change, other obstacles to transformative business models have been reduced. For instance, privacy is now less of an obstacle for data-rich strategies than it once was. Increasingly, patients show a willingness for their clinical and personal data to be used anonymously in the interest of improving healthcare. Further, regulators’ attitudes towards data are changing. In September 2021 the FDA published its AI enabled devices that are marketed in the US, which embrace the full scale of approvals from 510(k) de Novo authorizations to Premarket (PMA) approvals. The FDA’s initiative comes at a time of continued growth in AI enhanced digital offerings that contribute to a variety of clinical spheres, and the increasing number of companies seeking to enter this space. There are ~130 algorithms approved for clinical use in the US and Europe.

A recent report from Frost & Sullivan, a US market research company, suggests that although in the near-term, traditional medical devices will continue to make up the bulk of the market, after 2024, they are expected to grow at only a CAGR of ~2%. By contrast, digitally enhanced medical devices, and algorithms, which facilitate managing patients remotely and non-intrusively, are expected to grow at a CAGR >14% and reach US$172bn by 2024.

The shift to low-cost settings

Over the next five years, as technology advances, populations age, healthcare costs escalate, patient expectations continue to rise, and markets tighten, we can expect the shift away from hospitals to outpatient settings and other lower-cost venues to accelerate. This move to a distributed care model is a headwind for traditional MedTechs, whose principal focus is provider systems rather than patients, and a tailwind for new players entering the market unencumbered by legacy supply chains, costs, and infrastructures. According to an EY 2020 study, ~70% of start-ups in the diagnostics segment have products applicable to the point-of-care setting.

Corporate venture funds

To help traditional MedTechs dance leaders of medium sized, well capitalized enterprises might consider copying the world’s largest MedTechs and create corporate venture capital (CVC) funds to invest in tech-savvy start-ups. While 7 of the top 10 MedTechs by sales have venture arms, many company leaders shy away from investing in early-stage, unproven technologies. However, CVC funds offer traditional corporates access to innovations and scarce science, technology, engineering, and mathematics (STEM) skills, which are necessary to capture and analyse data, deliver enhanced care, and drive biomedical R&D with the potential to improve patient outcomes and lower costs.

The latest giant MedTech to launch a CVC fund is Intuitive Surgical. In Q4 2020, the company started disbursing capital from its initial US$100m venture fund to start-ups developing digital tools and precision diagnostics, with an emphasis on minimally invasive care. Intuitive is the world’s largest manufacturer of robotic surgical systems for minimally invasive surgery. Since its lead offering, the da Vinci Surgical System, received FDA approval in 2000, it has been used by surgeons in all 50 US states, ~67 countries worldwide and has performed >8.5m procedures.

In the first three quarters of 2020, CVCs participated in investment rounds worth US$1.2bn, which amounted to >25% of the total venture funding the sector raised. The lion’s share went to products and solutions that address digital therapies, telehealth, and treatments for low-cost settings. Such technologies are positioned to continue receiving significant funding in 2022 and beyond. A 2021 study by Deloitte, a consulting firm, suggests that MedTech start-ups, unencumbered by legacy products and practices have capabilities, which stretch beyond traditional devices that support episodic care, and focus on distributed solutions, which address the full patient journey: from diagnosis to rehabilitation. The study also maintains that technologies employed by these enterprises are getting smarter, with ~70% of them including digital AI capabilities.

Further, MedTechs with CVC arms might consider allowing their digital business functions to operate within a different organizational framework, giving them greater decision-making authority and enhanced freedoms.

Asia Pacific MedTech markets

Before closing let us briefly draw attention to the increasing significance of the emerging Asia Pacific MedTech markets. For the past 4 decades, industry leaders were not obliged to seriously consider penetrating markets outside the US and Western Europe because ~70% of global MedTech revenues came from the US and Western Europe. However, as Western markets tighten, and become increasingly competitive, attention is moving East towards Asia.

Over two decades ago, a handful of giant MedTechs began investing in Asia, but most companies in the sector preferred not to risk navigating such unfamiliar healthcare territories. An early investor in the region was Medtronic, which, since ~2000, has achieved significant growth from a multi-faceted strategy that included exporting innovative products from the US to China, establishing R&D facilities in China to design products specifically for the needs of the Chinese market, crafting partnerships with Beijing to educate patients in under-served therapeutic areas, and acquiring domestic Chinese MedTech companies.

Because of the current political stand-off between the two countries, such a China strategy is not so feasible as it has been over the past two decades. However, it is worth bearing in mind that Asia is comprised of 48 countries with a combined population of ~5bn, which is projected to reach 8.5bn by 2030, [~60% of the world’s population], with 1 in 4 people >60. In 2020, ~2bn Asians were members of the middle class, and by 2030, this demographic is projected to grow to ~3.5bn. Moreover, health insurance coverage in the region is expanding. By contrast, the middle classes in the US and Western Europe are smaller and growing at lower rates. According to the Pew Research Center in 2018, ~52% of the 258m US adults (>18 years) was considered middle class. The dynamics of the Asian middle class is driving a large and rapidly growing Asian MedTech market, which is on the cusp of eclipsing Europe to become the world’s second largest regional market, growing at a CAGR of ~9%.

Further, the region has become an important source of technological innovation. For example, in 2020, its digital health market was valued at ~US$20bn and projected to grow at a CAGR of ~21% until 2027, when its value is expected to be ~US$80bn. Despite its complexities and unfamiliarity, Asia represents a substantial opportunity for MedTechs. However, for Western enterprises to succeed in Asian markets they will require in depth local knowhow, long term commitments, agility, innovation, and robust strategies that can prosper under fiercely competitive conditions.

Takeaways

MedTechs have built capabilities to develop, launch, market and sell physical devices. With some notable exceptions, few have the capabilities necessary to drive significant growth from digitalization and data strategies. Sharpening traditional commercial procedures and practices alone is unlikely to significantly increase growth, especially when competitors and new entrants have business models that are more effective, promote better patient outcomes and provide greater value to healthcare systems.

MedTechs could play a significant role in the transformation of healthcare, but not without risks and some significant changes to the way they operate. Over the next five years, as competitive pressures increase, industry leaders have a window of opportunity to pivot. Here are six strategic questions that might help in this regard:

Should we support significant investments in digitalization, and data analytics to improve our supply chains and R&D endeavours to convert dumb devices and implants into smart ones?
What are the top three actionable innovations that we can develop in the near-term to provide access to new revenue streams?
What are the top three technologies likely to disrupt our product offerings in the near- to medium-term and what should we do about them?
Can we remain a hardware manufacturer while developing significant software solutions that embrace entire patient journeys or must we choose between manufacturing and software?
How do we create valuable solutions that enhance patient journeys from data?
How are global markets changing in ways that are not reflected in our company’s discussions?

The answers to these questions will help to shape a corporation’s strategy, and inform M&A and CVC activities, “must have” capabilities, desired partnerships, R&D spend and agendas, and the type of business models to pursue. All critical for teaching elephants to dance.

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Digitalization: the reinvention of spine companies’ supply chains and controlling the inventory-to-revenue ratio

HealthPad

Directory:

Neurosurgery

Tags:

Traditional spine companies’ supply chains are linear, labour intensive and siloed and their inventory-to-revenue ratios tend to be high
To remain relevant in an environment where the physical and digital worlds are converging company leaders will need to improve their supply chains
Digitalization can help achieve this but requires embracing data management techniques
As a response to the COVID-19 crisis some MedTech’s introduced and extended their digital strategies
Have they done enough to remain relevant in a rapidly evolving ecosystem?

- Low back pain and the global spine industry -

Digitalization: the reinvention of spine companies’ supply chains and controlling the inventory-to-revenue ratio

In 2020, spine companies, like most MedTechs, absorbed shocks of the COVID-19 crisis by digitizing aspects of their supply chains, which consists of a wide range of transactions and constitute a significant part of a company’s’ total value creation. Industry observers are asking: Will enterprises extend their digitalization strategies and emerge stronger after the impact of the pandemic, or will they reduce their digital activities and emerge weaker?

Market changes

Even before the COVID-19 pandemic, the days of business-as-usual for spine companies were numbered as technologies advanced, regulations became more stringent, populations aged, healthcare systems struggled with unsustainable costs of surgeries for common age-related degenerative disc disorders, and payors tightened their reimbursement policies. In the US, which is the biggest market for spinal implants and devices, an increasing percentage of people have become covered by Medicare and Medicaid [state and federal government healthcare programmes], which reimburse providers at a fraction of private healthcare insurance levels. These changes encouraged independent hospitals in the US to join purchasing syndicates, clinicians to give up private practice and become salaried employees of hospitals, and private payors to shift away from a fee-for-service provision towards a value-based reimbursement approach focussed on improving patient outcomes and lowering costs. This shift encouraged policies to keep patients out of hospitals and increased the utilization of outpatient settings and other measures expected to improve outcomes and generate shared savings.

The structural headwinds described here have not abated and are likely to intensify over the next five years. To prosper in this evolving ecosystem, companies will need to devise and enhance solutions that bring enhanced clinical benefits to patients and economic rewards to the system. Tried and tested and widely used digital strategies can help to improve supply chains. However, while these structural changes have been progressing, spine market supply chains have tended to remain linear and labour-intensive and are now becoming significant obstacles to change, while producing infrastructures with unsustainable costs.

In the Commentary

This Commentary suggests that, over the next five years, market forces will oblige spine companies to pivot away from their inefficient supply chains and start developing supply networks, predicated upon digital strategies that add value to patients and reduce costs. Such systems, employ common digital applications that are used extensively in other industries to ensure the right products and services are delivered to the right place, at the right time, at the lowest cost. This would constitute a “first step” in a bigger digital transformation of the spine market, which will be necessary to create new levels of productivity, growth, and sustainability. We suggest that the reluctance of some MedTech’s to transition from inefficient supply chains to efficient ones could be explained by a significant proportion of their C suite members not acquiring a familiarity with digital systems until much later in their careers when they were adults. The Commentary uses two concepts: ‘digitization’ and ‘digitalization’. The former is a process to convert various physical signals into digital formats and the latter leverages digitized information to improve business processes.

Digitizing supply chains

Over the past two decades the cost of digital technologies has plummeted while their power and capabilities have substantially increased. This has enabled business leaders to combine technologies associated with information and operations and empowered them to create value in new and different ways. Improved processing capabilities now augment human thinking to analyse more data more quickly, and then act upon the outcomes. Such changes have ushered in the new digital era for MedTech’s.

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Will a rear mirror mindset slow the adoption of technologies poised to influence the spine market?

However, the spine market has been slow, compared to other industries, to adopt digital supply networks. The process of developing such strategies to drive productivity, while absorbing the shock of a pandemic has not been easy as it meant installing new technologies under pressure. However, the COVID-19 crisis created an incentive to reconfigure operations. The companies that did this have an opportunity to develop an omnichannel [multichannel approach to sales and marketing] dedicated to enhancing engagements with healthcare professionals and improving the overall quality of care, patient outcomes, revenues, productivity, employee satisfaction, and talent attraction and retention. But this will mean companies establishing virtual options as a core competence and reinventing the way they engage with stakeholders to provide a seamless experience across digital, remote, and in-person channels.

Neo Medical and value-based spine care

A firm that has employed digital strategies to streamline part of its supply chain to enhance value and gain a competitive edge is Neo Medical, a privately held Swiss company founded in 2013 by two former Stryker employees. The company has developed a universal value-based surgical spine platform to provide patients with high quality outcomes at relatively low costs. Neo’s approach is predicated upon its ability to reduce an instrument set, comprised of >200 screw sizes to 14, and use it in a novel approach to thoracolumbar fusion. [The thoracolumbar spine is the area between your stiff thoracic cage and your mobile lumbar spine].

Neo refers to its solution as a ‘controlled fixation’, which is beginning to have an impact in markets across the EU-27, Asia-Pacific (APAC) and more recently, the US. The approach is designed to facilitate an anatomically neutral, balanced, and stable spine load bearing to achieve a more functional fusion. It is reported that the platform: (i) enables clinicians to limit stress overload on a patient’s spine and thereby reduces the risk of screws loosening and hardware failing, (ii) limits infections, (iii) removes the need for re-sterilization, (iv) declutters the operating room, (v) reduces revision rates and (vi) cuts costs.Equally important are Neo’s digital strategies to provide an easier and more efficient experience for patients, surgeons, and hospitals.

Findings of a study, published in the December 2020 edition of Interdisciplinary Neurosurgery, suggest that Neo Medical’s value proposition saves costs by: (i) reducing supply chain processing and logistical expenses, (ii) decreasing rates of contaminated instruments, (iii) minimizing operating room delays and (iv) potentially lowering revision and infection rates.

Reconfiguring the supply chain

By contrast, traditional industry supply chains tend to be linear, labour intensive and siloed. As suggested by Neo Medical and others, digitalization can transform these inefficient systems into dynamic, interconnected efficient networks with the capacity to accommodate a range of stakeholders simultaneously. The shift from linear, sequential structures to interconnected, open supply operations could provide a foundation for how spine companies compete in the future.

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Robotic surgical spine systems, China, and machine learning

Companies in other sectors have already made such transformations and integrated their supply networks into their operations and decision-making processes with the objective of gaining competitive advantages. However, business leaders should be mindful that the more customer focussed enterprises become, the more developed their data and analytical capabilities must be.

Currently, few MedTech’s integrate their supply chains into their long-term strategies, and few actively and fully embrace the potential of data management techniques. This reluctance decreases a company’s ability to optimize inventories and enhance operational efficiencies of product offerings moving across supply chains. Given the increasing number of exogenous forces affecting the spine market, [e.g., ageing populations, vast and escalating healthcare costs, more stringent reimbursement policies, pricing pressures, tightening regulations, increasing competition, advancing technologies and heightened customer expectations], it seems reasonable to suggest that investing in and developing digital supply networks could be a logical step to enhance value agendas.

Appropriate digitalization of supply chain planning and processing could help to: (i) reduce operational siloes, (ii) respond effectively to market disruptions, (iii) minimize the time, costs and risks associated with onboarding and collaborating with suppliers, (iv) deliver products and services that customers need, when they need them, where they need them at the lowest cost and (v) enable end-to-end supply chain visibility and transparency to facilitate gathering and analysing real-time intelligence to enhance efficiencies.

C suites and digital immigrants

Given that there are significant advantages in adopting digital technologies, why is the spine market lagging other industries in adopting such strategies to improve its supply chains to enhance its productivity and sustainability? A preponderance of digital immigrants among C suites could help to explain why some MedTech’s fail to grasp the full potential of digitalization strategies. Let us explain.

According to research undertaken by Korn Ferry, a consulting firm, the average age of a C suite executive of the top 1,000 US organizations is ~57. Statista confirms this and reports that in 2018, the average age of CEOs in US at the time they were hired stood at 54 years, while the average age of CFOs when they were hired was 50. Since 2005 the average age for CEOs and CFOs has been trending upwards. To the extent that these data are indicative of MedTech’s, it seems reasonable to suggest that their C suite members: (i) would have completed their formative schooling before the digital era, and (ii) when they started their professional careers the digital age was just beginning. For example, in 1989 only 15% of US households owned a personal computer, <1% of the world's technologically stored information was in a digital format, and the World Wide Web did not become publicly available until 1991. In 1990, when the average C suite member would have been ~31, there were only ~12.5m cell phone subscribers worldwide; ~0.25% of the world’s population, and Internet users only amounted to ~2.5m; 0.05% of the world’s population. In 2002, when the average US C suite executive would have: (i) been ~37, (ii) completed their professional training and (iii) well into their careers, digital technologies were still relatively underdeveloped. For example, cell phone subscribers were only ~1.5bn; 19% of the world’s population, and Internet users were only ~631m; 11% of the world’s population.

This suggests that during C suite executive’s formative education and professional training, digital technologies were embryonic, and the Internet, mobile devices, social networking, big data, and computing clouds, had not yet transformed work practices and healthcare. Thus, a significant proportion of current executives of US MedTech’s could be digital Immigrants: people whose professional careers were influenced by analogue technologies, paper, and television, and they only acquired a familiarity with digital systems later in their careers when they were adults. This could affect their ability to appreciate the full potential of digital technologies and help to explain the relative reluctance of MedTech’s to digitize labour intensive, inefficient, linear supply chains.

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Minimally invasive spine surgery and computer assisted navigation systems

Stringent regulation and digitization

This reluctance becomes more significant as regulators demand that MedTech’s employ more sophisticated digital strategies. Increasingly, people are being given spinal implants and devices, which cannot be subsequently removed. Patients rely on these to be safe and to perform as intended for their lifetime, and regulators are devising more stringent rules to ensure that this is the case. For example, the European Medical Device Regulation (MDR), which entered into force in May 2017, requires all medical devices sold in the EU-27 and Switzerland to be MDR approved. The EU-27 represents ~33% of the spine market’s global revenues. MDR governs the production and distribution of medical devices and their compliance. The regulation states that, “Medical device manufacturers are required to have systematic methods for examining their devices once available on the market, by systematically gathering, recording, and analysing data on safety and performance”. MDR expects all MedTech’s to have robust supply chains and the ability to conduct data-driven audits to trace manufacturing modifications to specific implants and devices and to prove the resolution of any problem that might arise. While tightening regulations increase approval costs and prolongs product development time, they also provide incentives for companies to enhance their digital supply networks.

Controlling the inventory-to-revenue ratio

A digital supply network can enhance an organization’s ability to manufacture products in optimum volumes and deliver them to the right customers at the right time. This could help to improve patient outcomes and lower costs. Also, digitalization assists enterprises to enhance the control of their inventory by improving planning, forecasting and management, which is critical given their relatively high inventory-to-revenue ratios.

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Spine surgeons in hospitals need to have relevant implants and devices available in the operating room at the right time. Hospitals need to be able to locate products in their cabinets. Without appropriate digitalization strategies health professionals would need to spend time searching for devices that may or may not be used during an operation. This means increased costs, as high value surgical trays would flow through inefficient supply chains.

To reduce costs, hospitals and healthcare systems push the responsibility for inventory management onto their suppliers. This results in a range of different models, which tends to increase the risks to manufacturers. Currently, spine companies manage a range of different types of inventories, with a significant proportion of their product offerings being held either on consignment or by sales reps, who often spend time managing offerings on behalf of their customers. This increases the difficulty to accurately account for supply levels, location, ownership, and usage, which further complicates billing and replenishment and often leads to excess inventory and unnecessary costs.

A digital supply network can help to reduce these inefficiencies by eliminating waste and saving costs for all stakeholders. Typically, spine surgical sets contain several types of devices, plates, and screws, and usually are sold on consignment. Hospitals return these for re-provisioning often after only having used some of the items in the trays. To guarantee that sales-reps and hospitals have sufficient supplies, manufacturers maintain relatively large, consigned inventories, at significant costs, which impact on the rate of excess and obsolete inventories.

A digital supply network effectively connects manufactures with their sales-reps and hospitals to reduce inefficiencies. Surgical trays are tagged with radio-frequency identification (RFID), so they can be effortlessly tracked by hospitals’ smart cabinets and by all other stakeholders. This allows: (i) hospitals to be billed as soon as a surgical tray, or a part of it, is removed, and the replenishment process started, and (ii) suppliers to reduce their consigned inventory, reduce their excess and obsolete inventory, and reduce their costs.

Ethical issues

We have broached some of the functional benefits and challenges of digitizing supply chains. Before closing, let us briefly draw attention to some ethical issues associated with digitization, which include increasing the challenges associated with data privacy, cybercrime, and the need to keep pace with new and rapidly developing technologies. This gives weight to environmental, social and governance (ESG) agendas, which are positioned to play an increasingly prominent role over the next five years and shall be discussed in a future Commentary.

Takeaways

We have made some suggestions about how common digitalization strategies could improve spine market supply chains and create added value for patients while delivering the highest sustainable returns for manufactures. We have also suggested reasons for the reluctance of some companies to employ digital strategies to transition from linear labour-intensive supply chains to supply networks. In response to the COVID-19 crisis, many organizations partially digitized their supply chains to sustain trading during what became a “new normal” of remote engagements. This suggested that digital enhancements could help spine companies improve their way of working, expand access to services, and deliver more valuable patient-clinician experiences. Dynamics within sectors usually change after a crisis. For example, following the 2008 economic crash, strong companies emerged stronger while weak companies emerged weaker. A defining difference between the strong and the weak was resilience: the ability not only to absorb shocks, but to use them to transform supply chains and enhance competitive advantage. Will spine companies emerge from the COVID-19 crisis stronger and extend their digitized supply networks or will they revert to their costly and inefficient labour-intensive linear supply chains? Keep an eye on the inventory-to-revenue ratio.

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Increasing MedTech’s future growth and value

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digitalization

global healthcare systems

healthcare expenditure

MedTech

Over the past decade MedTech valuations have outperformed the market without changing its business model
The healthcare ecosystem is rapidly changing and MedTech is facing significant headwinds which require change
MedTech’s future growth and value will be derived from data and smart analytics rather than manufacturing
MedTech leaders will be required to leverage both physical and digital assets

Increasing MedTech’s future growth and value

Over the past decade, the medical device (MedTech) industry has enjoyed relatively high valuations and outperformed broader market indices without changing its manufacturing business model. Some MedTech leaders suggest that because the industry’s product offerings are essential, demand for them is increasing as populations grow and age, so unlike other industries, MedTech is immune to market swings and its asset value will continue to increase. As a consequence of this mindset, MedTech has been reluctant to change and slow to develop digitization strategies. Notwithstanding, digitization is an in-coming tide and positioned to impose a step-change on the industry. Future MedTech leaders will need to derive increased growth and value from digitization and emerging markets while improving the efficiency of their legacy manufacturing business and meeting quarterly earnings’ targets.

According to a 2018 report by the consulting firm Ernst & Young,“Stagnant R&D investment, low revenue growth and slow adoption of digital and data technologies suggest that entrenched MedTech companies are overly focused on short-term growth, even as the threat of large tech conglomerates entering the space grows larger, which, in addition to the changing global healthcare ecosystem, threatens future revenue growth".

In this Commentary

This Commentary suggests that to create future growth and value, MedTech will have to (i) leverage data generated by medical devices, patients, payers and healthcare providers to develop clinical insights and trend analysis, which are expected to significantly improve patient outcomes and reduce costs, and (ii) substantially increase its share of the large and rapidly growing emerging markets. We suggest that there is a significant relationship between MedTech’s digital capacity and competences and its ability to increase its share of emerging Asian markets. But first we briefly describe the MedTech industry and its traditional markets and draw attention to some concerns, which include the relative low rates of top-line growth, stagnant R&D and share buybacks, M&A slowdown, giant tech companies entering the healthcare market, and challenges to recruit and retain millennials with natural digital skills and abilities.

The medical device industry

The MedTech industry designs, manufactures and markets more than 0.5m different products to diagnose, monitor and treat patients. These include wearable devices such as insulin pumps and blood glucose monitors, implanted devices such as pacemakers and metal plates, and stationary devices that range from instruments to sophisticated scanning machines. Medical devices can be instrumental in helping healthcare providers achieve enhanced patient outcomes, reduced healthcare costs, improved efficiency and new ways of engaging and empowering patients. The principal business model employed by the industry is to manufacture innovative products relatively cheaply and sell them expensively in wealthy developed regions of the world; predominantly North America, Europe and Japan; which although representing only 13% of the world’s population account for 86% of the global MedTech market share. This premium pricing model is predicated upon doctors’ and health providers’ belief that MedTech products are of superior quality and safety. Notwithstanding, as eye-watering healthcare costs escalate, providers and regulators demand better evidence of clinical and economic value to justify the pricing and use of MedTech products. Over the next five years, the global MedTech industry is expected to grow at a compound annual growth rate of between 4% and 5.6% and reach global sales of some US$595bn by 2024.

Concern # 1: Reduced growth rates

Since the worse post-war recession ended in 2009, MedTech asset valuations have outperformed the market. Notwithstanding, of increasing concern is the slowdown of the industry’s revenue growth rates to single digits. The industry's aggregate revenue grew to US$379bn in 2017, an annual average industry growth rate of 4%, which now appears to be the new normal, and is significantly lower than the average annual growth rate of 15%, which the industry enjoyed between 2000-2007. The reduction in top-line growth rates is largely attributed to the world’s growing and aging population and the consequent growth in the incidence rates of chronic conditions, which increases the burden on overstretched healthcare budgets and intensifies pressure on MedTech’s to reduce their prices.

Population growth and aging

The aging population is driven by improvements in life expectancy. People are living longer and reaching older ages as fertility decreases and quality healthcare increases. People are having fewer children later in life. Some 8.5% of the global population (617m) have ages 65 and over. This is projected to rise to nearly 17% by 2050 (1.6bn). The number of Americans aged 65 and older is projected to more than double from 46m today to over 98m by 2060 – from 15% to 24% of the total US population. Around 18% of the UK population were aged 65 years or over in 2017, compared with 16% in 2007. This is projected to grow to 21% by 2027.

Concern # 2: Stagnate R&D spend and share buybacks

In addition to relatively low revenue growth rates, MedTech R&D spend has stagnated over the past decade despite the need for companies to develop new and innovative product offerings, which drive top-line sales. Over the same period, MedTech returned more cash to shareholders in the form of share buybacks and dividends (US$16.4bn) than it spent on R&D.

To the extent that share buybacks extract, rather than create value why are they popular? One suggestion is that because share incentive plans represent a significant portion of executive compensation, share buybacks make it easier for executives to meet earning-per-share (eps) targets by reducing the number of shares, in the 1970s, share buybacks were effectively banned in the US amid concerns that executives might use them to manipulate share prices. However, in 1982 the US Securities and Exchange Commission (SEC) lightened its definition of stock manipulation, and share buybacks became popular again.

Concern # 3: High asset values slow M&A activity

Over the past decade, as markets became more uncertain, monetary policy tightened, technologies advanced and global economic growth slowed MedTech’s, buoyed by the dramatic fall in the cost of capital, increased their mergers and acquisitions (M&A) activity. This optimised portfolios, increased scale, reduced competition and improved profits. Notwithstanding, MedTech’s current high asset valuations make M&A transactions challenging to underwrite, and so, M&A activity has slowed.

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Concern # 4: Giant techs entering market

Giant technology companies such as Apple, Amazon, Google and Microsoft, have entered the healthcare market by providing direct-to-customer innovative services, which leverage data, artificial intelligence (AI) and machine learning and define new points of value along the value chain, which is changing the traditional notion of “product vendor”. Such innovations and services result in raising the expectations of stakeholders who are beginning to insist that healthcare is as convenient and personalized as every other good or service they purchase. Notwithstanding, leveraging data generated by devices, patients, healthcare providers and payers is challenging for traditional MedTech’s who tend to view IT as an isolated cost centre often constrained by legacy systems, aging infrastructures, complexity and skills’ shortages rather than as a key strategic asset.

It seems reasonable to assume that over the next five years MedTech’s will be forced to rethink their role as product manufactures and forced to find new and innovative ways to deliver value in a rapidly evolving healthcare ecosystem. Failure of MedTech’s to accelerate their digital agendas will benefit giant technology companies who have entered the market and well positioned to take advantage of the digital transformation of the 4^th Industrial Revolution: characterized by the marriage of physical and digital technologies and an ability to change the nature of work to the extent where a significant proportion of future enterprise value will be predicated upon analytics, artificial intelligence and cognitive computing.

Concern # 5: The dearth of millennials

An obstacle for MedTech to develop digital strategies and keep up with the pace of innovation is its inability to recruit, develop and retain millennials. This is significant because millennials are “digital natives” and crucial to MedTech’s shift to increase their service offerings. Millennials have been raised in a digital, media-saturated world and are well positioned to opine on and contribute to digital initiatives. Also, millennials have a natural ability to understand, adopt and implement new technologies, use digital platforms and analyse data, which enable them to make informed decisions.

Unlike most C-suite executives, millennials inhabit a world unconstrained by precedent, where processes are digitized, and tasks automated to create seamless offline-to-online experiences. It seems reasonable to assume that with a dearth of such capabilities MedTech will lag other industries in defining and developing positive online interactions. This is important because effective digital strategies involve significantly more than simply providing online customer services. They involve leveraging social media and evolving technologies to create memorable experiences from content to customer support.

Millennials have a distinct ethical orientation and “sense of purpose”, which makes them difficult for traditional MedTech’s to recruit and retain. According to a 2018 survey by Deloitte’s, millennials tend to be pessimistic about the prospects for political and social progress and have concerns about social equality, safety and environmental sustainability. While they believe that business should consider stakeholders’ interests as well as profits, millennials’ perception of employers tend to be that they prioritize the bottom line above workers, society and the environment. This leaves millennials with little sense of loyalty to traditional business enterprises and thereby difficult to recruit and retain. According to Larry Fink, CEO, Black Rock, “To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society. Companies must benefit all of their stakeholders, including shareholders, employees, customers and the communities in which they operate”.

Given MedTech’s dearth of expertise in digital skills, it might be obliged to develop dedicated teams and processes to source and execute value-added partnerships in a similar way big pharma has.

Smartphone penetration driving digitization strategies

Digital healthcare strategies are driven by the increased penetration of smartphones and the plummeting costs of wireless communications. Smartphones are powerful multipurpose devices capable of performing a number of tasks beyond their primary purpose of communication. These range from using the mobile’s SMS function to send alerts and reminders, to leveraging inbuilt mobile sensors or apps to capture and interpret clinical data. Over the past decade, smartphones have fuelled the rapid uptake of internet access and transformed life for developed market consumers in terms of convenience and simplicity. In the US and UK smartphone penetration is about 84% and 80% respectively with the older age groups (55+) recording the highest growth. Smartphones have served an even more pivotal role for emerging market consumers by placing the internet into the hands of millions of consumers. In 2018, 98% of the global population had access to a mobile network with 75% having access to the fast 4^th generation networks. Smartphones, together with other wireless technologies, (mHealth), are increasingly used in healthcare by patients, healthcare providers and payers, to improve health outcomes, increase efficiencies and reduce large and escalating healthcare costs. It is anticipated that by 2020, global smartphone subscriptions will be about 6bn and growing rapidly especially in emerging economies such as China, India, Egypt, Turkey, and the United Arab Emirates. In the past three years health apps have doubled and have reached over 140,000. The global mHealth market is expected to grow at a CAGR of 45% over the next six years and reach US$236bn by 2026.

Concern # 6: Healthcare in emerging economies is predicated upon digital strategies

The relative high levels of healthcare demand and spending are expected to increase in emerging markets as populations grow, household spending rises and smartphone penetration increases. This is important to MedTech because emerging economies represent about 85% of the world’s population, 90% of which is under 30, and this cohort is expected to grow at three times the rate of the similar cohort in developed economies. Further, over the past decade, the number of high-income households have risen globally by about 30% to nearly 570m, with over 50% of this growth coming from emerging economies in Asia. Asia is comprised of 48 countries and represents roughly 60% of the global population, and its stake in world markets has grown dramatically in the last half-century. Today, Asian countries rank as some of the world’s top producers, which has brought them significant wealth.

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According to Euromonitor International more than 50% of the world’s (3.6bn) internet users reside in Asia. Between 2013 and 2018, Asia accounted for 60% of new users coming online and the region has become an economic powerhouse, populated by young, digitally savvy consumers. China is the largest mobile market in the world with close to 1.2bn subscribers. Significantly, in 2018, China’s rate of growth in mobile internet penetration reached 58% and the number of smartphone connections surpassed 1bn. Similarly, in India, the number of smartphone users is expected to double to 859m by 2022 from 468m in 2017; growing at a compound annual growth rate (CAGR) of 12.9% and expected to reach 859m by 2022.

Digitized services are replacing traditional distributors in China

Western MedTech operations in China have tended to replicate the Western commercial model, which relies heavily on distributor networks. But this is changing.

China has a land mass similar to that of the US and a population 1.4bn organised by 34 provincial administrative units, which are comprised of 23 provinces, four municipalities, five autonomous regions and two special administrative regions. Healthcare in China consists of both public and private medical institutions and insurance programs. About 95% of the population has at least basic health insurance coverage and is served by over 31,000 hospitals, primary care is patchy and there is a shortage of doctors. Because of China’s large number of dispersed healthcare providers, traditional distribution models employed by western MedTech companies tend to be inefficient and costly.

In recent years, MedTech’s operating in China, supported by Beijing policy makers, have been gaining back control over customers from distributors. The reason for this is because, in the vast bureaucratic Chinese healthcare system, distributors evolved far beyond their core capabilities and controlled most commercial activities. For instance, the value Chinese distributors capture, as opposed to manufacturers, is disproportionately high and has led to restrictive policies. This has caught the attention of policy makers who are seeking to correct these practices by promoting direct to customer digitized healthcare services. Beijing is minded that effective healthcare services for the nation’s vast and dispersed population cannot be achieved with traditional healthcare delivery models and has to be predicated upon appropriate digitized direct-to-customer operations. Similarly, this is true of other large emerging economies, particularly India.

The future is Asia and digitization

The reason we suggest that digitization is likely to help MedTech’s increase their market share in China is because digitization has become an essential part of everyday life in China including mobile payments, online-to-offline services, the sharing economy, smart retail, digital ID cards and healthcare services. WeDoctor and WeChat, are at the centre of this digitized society and only show signs of increasing their influence over Chinese healthcare and lifestyle.

WeDoctor is just one example of several Chinese start-ups that has leveraged data and digital strategies to re-engineer the nation’s healthcare system. Founded in 2010, the company has grown into a US$6bn enterprise and not only has increased access to healthcare, improved diagnoses, enhanced patient outcomes and lowered costs, but has disintermediated traditional distributors by simplifying and centralizing the procurement processes of medical devices.

It is sometimes hard for people based outside of China to grasp just how fully digitized Chinese society has become. WeChat, known in China as Weixin, is a multi-purpose messaging, social media and mobile payment app first released in 2011. By 2018 it had become one of the world's largest standalone mobile super-apps and controls life in modern China. For most Chinese citizens, especially those living in cities, it is possible to get through an entire day using WeChat for your every need. Millions of businesses have chosen to create mini-apps within WeChat instead of developing their own standalone apps. These allow businesses to send promotional messages directly to their customers via WeChat, as well as tap into the WeChat’s broader user base. With 1bn active monthly users, WeChat has reached the ceiling of its growth within China and its future will be about developing more services, which includes connecting people to businesses and products offerings.

Takeaways

Over the past decade, while the MedTech industry has increased its asset value, leaders focussed on, (i) short-term growth, (ii) portfolio optimization and (iii) returning cash to shareholders. Also, they allowed R&D to stagnate and were slow to appreciate the strategic significance of digitization. Data and smart analytics are positioned to play an increasing role in future MedTech growth and value creation. They are the key to creating new and innovative service offerings for healthcare providers, patients and payers and critical to MedTech increasing its share in large fast-growing emerging markets. Future MedTech leaders will be required to leverage both physical and digital assets. Significantly, they will need to enhance the efficiency of legacy manufacturing systems while developing and marketing new innovative offerings derived from data and smart analytics.

Postscriptum

A concern not mentioned in the above discussion is ‘recession, which although mooted since the sharp fall in markets in December 2018 has not materialized. Indeed, the S&P 500 continues to rally, rising from 2,351 in 24^th December 2018, to 3,026 in 26^th July 2019. However, a reason for bullish US stock markets is low interest rates: the lower the interest rate, the higher the multiple the market applies to earnings. One indicator of recession is the J.P. Morgan Global Manufacturing Purchasing Managers’ Index (PMI), which has been declining since January 2018. In May 2019, it fell below 50, which is the number that suggests a recession has started. Another indicator of a recession is the yield curve, which is a chart showing the interest rate paid on bonds of different maturity. As a forecasting tool, the difference between long- and short-term interest rates has proved to be a reliable indicator of future recessions. Currently, the difference between the yield on the US 10-year bond and the US 3-month T-Bill is negative. This means the yield curve is inverted, which indicates recession. However, the yield curve is only an indicator of a recession and is neither definitive nor causal.

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