A trend that is becoming painfully obvious in the US medtech market is the increasing cost-consciousness of hospitals, in response to both economic and governmental pressures. As noted in the recent Ernst & Young report on the medical device industry, one of the major effects of this trend is the increasing use of group purchasing organizations (GPOs) to buy medical devices. These groups function by increasing the purchasing power of hospitals by making very large bulk purchases, allowing them to negotiate significant discounts. As the report notes, this represents a major change in competitive tactics for medical device companies, which have traditionally relied on maintaining close relationships with physicians to drive sales.

This generally represents a problem among companies selling devices that are more commoditized and where innovations are more incremental rather than game-changers. Some examples of markets that are being particularly affected by this trend include the reconstructive joint implant markets, the spinal fusion implant market, various endoscopy device markets, and the vascular access device market.

In these markets, the focus is going to move away from brand reputation and device features, and focus mostly on pricing. Companies will therefore need to examine if their profit margins can take a hit, or if they need to take more extreme measures, such as reducing manufacturing costs. Unfortunately, justifying higher prices for newer device features will likely become more difficult under these conditions the onus will be on the companies to prove that it's not just a me too device, which are characteristic in these markets. The presence of GPOs is likely to benefit the larger companies the most because these companies will be better able to negotiate more attractive discounts due to their broad product lines and more extensive manufacturing capabilities.

There has been some pushback to this trend, however. In 2011, Medtronic Spinal & Biologics the spinal implant market leader cancelled its agreement with two GPOs, opting instead to negotiate directly with facilities. This way, the company avoids GPO administration fees and has more control over price cuts. The company does, however, risk losing some customers to companies willing to absorb the reduction of their profit margins in order to secure the high number of unit sales.

Overall, however, it's looking like US medtech companies are going to have to gear up to face shrinking profit margins.

A novel approach to treating neurodegenerative disease

View Now