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2023 – A maintenance phase of the pandemic, unless Covid rears its ugly head again

All that economic inertia is catching up with us as the world enters the pandemic’s maintenance phase. As global manufacturers continue to fall short of demand, and inflation soars to record levels, a recession appears to be just around the corner. Medical devices businesses are under extreme pressure to navigate this unsteady economic environment while sustaining the pace of research and bringing essential technology to the patient-care environment. There is no margin for error in their decisions.

For medical devices manufacturers, the year 2023 will be about balancing overhead inflation with market pressure on pricing, responding to demands for a data-based value narrative, and changing the commercialization process to a post-pandemic reality that is starting to emerge.

Across the globe, engagement with stakeholders will require new approaches as systems and practices continue to limit representative access in some therapeutic areas. This will force continued innovation and an omni-channel approach – not just in engagement efforts, but organizationally, in the way they structure and support their commercial model. The ongoing need for new and different ways to engage with healthcare executives, physicians, and payers is here to stay.

Regulators will continue tough enforcement, especially in the adverse event reporting universe. Globally, cost effectiveness evidence will play an ever more significant role in approvals. Given heightened economic pressures, government payers worldwide will insist on transparency for comparative quality and pricing, real-world evidence, and risk-based pricing. The aftershocks of the pandemic have intensified supply chain challenges. Manufacturers will increase efforts to re-shore critical supply chain elements to control end-to-end supply, quality and cost.

Demanding evidence of better outcomes and lower costs, private payers will continue to expand value-based contracting, reference pricing, and direct purchasing of devices. Consumers will get more involved in choosing diagnostic tests as they also shop for lower-cost, higher-quality procedures. Employers and payers will look for ways to accelerate the migration of care to outpatient clinics as a path to lower costs and improved outcomes, creating new opportunities for innovative medical devices makers.

Given this outlook, what is next?
Even though there are many challenges to navigate in the medical devices industry, there is opportunity on the horizon. Some of the keys to success will be to build strong partnerships; redesign commercial models, targeting/segmentation; align R&D, medical affairs, commercial functions; innovate new products/services for select markets and use across the care continuum, including health at home; elevate business acumen, diagnostic, and influence skills; and structure more strategic collaborations with providers/payers.

Global market dynamics
In 2022, the global MedTech market reached USD 646.7 billion, and following complete recovery from the Covid-19 pandemic, is expected to deliver a CAGR of 5.9 percent reaching USD 766.7 billion by 2025. Rising chronic diseases, an increasing geriatric population, growing demand for minimally invasive treatments, and the emergence of advanced medical technologies are some of the major factors driving the global market.

From a therapeutic segment standpoint, in-vitro diagnostics (IVD) remained the largest segment in 2022, generating nearly USD 134.07 billion or 21 percent of the total market. And while IVD is expected to decline over the next 3 years period to compensate for the high surge it underwent during the Covid-19 period, it will continue to remain the largest segment in 2025.

Despite the disruption caused by the pandemic, the global MedTech market has started to witness recovery, with certain categories showing higher growth than the others, depending on regulatory mandates and urgent medical conditions. Capital-intensive equipment like diagnostics are recovering at a slow pace, given the large budgets that are required. Device segments, such as ophthalmology, dental, cardiovascular, orthopedics, and general surgery are already showing signs of recovery and improved demand as the caseload increases.

Endoscopy, wound management, diabetes care, dental equipment and consumables, neurology, and general surgery devices markets are expected to deliver the highest growth to make up for the Covid-19-driven declines during the peak of the pandemic.

North America. During 2022–2025, North America is expected to grow at a rate of 4.5 percent per year, and will continue to remain the largest MedTech market with sales of USD 250.1 billion by 2025. Maintaining its leading global rank, the US generated sales of USD 201.6 billion in 2021 and is expected to reach USD 240.1 billion by 2025. Despite the impact of the pandemic, the North American MedTech market will experience strong growth through the forecast period, driven by favorable patient demographics, rising prevalence of chronic diseases, a surge in the usage of digital therapeutics, and increased availability of clinical data supporting efficacy of innovative devices. Additional momentum will come from the US government plans to further build on the Affordable Care Act (ACA) to increase access to coverage and reduce costs for several treatments and healthcare services – including screening and other preventive medicine, which may further increase the proportion of insured individuals in the US, supporting the overall North American MedTech market.

Europe. The European MedTech market generated sales of USD 167.336 billion in 2022, and is expected to reach USD 188.3 billion by 2025, growing at a modest rate of 4 percent per year. Like the US, demand for MedTech in Europe will be shaped by continuing cost-containment pressures, the shift to value-based healthcare, technological advancements, and shifting demographics. However, the most noteworthy impact will be due to the regulatory changes. Recently implemented EU Medical Devices Regulation (MDR) and In-Vitro Diagnostic Medical Device Regulation (IVDR) require more stringent clinical evidence and quality-management practices as a prerequisite for product approval. And while the industry views the new rules as complex and unpredictable, thereby making it less appealing to develop and launch novel products in Europe, geopolitical factors, such as Brexit and intense pricing pressure, may also impact the MedTech industry in Europe. Despite these challenges, the new regulations provide MedTech companies with an opportunity to streamline their innovation and R&D processes, and rethink their business strategies. As an example, MedTech companies historically would look for approval in the EU first, and only after commercial success in EU, would they expand into the more stringent US market. Now, due to increased cost and approval time in the EU, companies are beginning to rethink this approach. Nonetheless, because the implementation of the MDR and IVDR is meant to ultimately ensure that the devices entering the European market are backed by strong clinical evidence, the impact of the delayed entrance of some new technologies will be mitigated by the adoption of novel products that are supported by clinical evidence.

Looking ahead to 2023, as manufacturers overcome these EU regulatory hurdles, they will now need to prepare for the UK Conformity Standard, which will be required starting in June 2023 for all devices entering the UK market.

Asia Pacific. The APAC MedTech market generated sales of USD 163.12 billion in 2022, primarily driven by China, Japan and India, and is expected to reach USD 209.1 billion by 2025, growing at a noteworthy CAGR of 8.6 percent per year. APAC is home to nearly 4.3 billion people – 60 percent of the world’s population. By 2050, one in four people in APAC will be over the age of 60, and rising affordability will see a large part of the population join the consuming class. However, healthcare in APAC is at an inflection point. Demand for quality healthcare is soaring due to socio-demographic trends, despite improving affordability issues remain with reimbursement and/or ability to pay. Coupled with that, resource constraints, low awareness, or limited training of medical professionals, physical inaccessibility of provider locations persist in APAC countries. These barriers have resulted in large unmet needs in the region. The solutions will lie in MedTech innovations that address the needs of the population – providing value for the developers of these solutions. Additionally, as the APAC MedTech market grows, the region is witnessing high innovation as demonstrated by the advent of transformational technologies in the cardiovascular, pulmonology, ophthalmology, oncology, and surgical space by APAC-based MedTech innovators. However, the race for the next game-changer will see two types of players emerge in this intensifying environment – local companies with some global presence and looking to expand to new markets, and large multinational corporations (MNCs) competing for market share. With the growth in the region at stake, both groups of market players will need to navigate the complexities of this heterogeneous landscape, devising business models that leverage their strengths while adapting to the needs of the region.

With a CAGR of 7.5 percent, Latin America is forecasted to be the second-fastest growing region. Delivering sales of USD 65.9 billion in 2022, the market is expected to reach USD 81.8 billion by 2025.

The Brazilian MedTech market is significantly larger than other Latin American countries. The main reason is that it has the largest population in the region, which is why most of the manufacturers launch their devices in Brazil first – even if approval is slower. Therefore, the Latin American MedTech space is largely determined by Brazilian market trends. However, countries, such as Chile, Colombia, Mexico, and Peru also have a significant influence on market growth and trends, based on aging populations, rising economic status, increased insurance coverage among the middle class, and an increased expenditure on chronic and critical diseases by the local governments.

However, the Latin American MedTech market is also constrained by widespread poverty and restricted access to healthcare in rural areas, where there is little or no incentive for physicians to practice. In addition, many patients remain uninsured because insurance companies are reluctant to provide coverage due to the risks associated with paying high premiums for unregulated medical care. In addition, an economic downturn has affected a number of people, who have or have had access to private insurance or are able to pay out-of-pocket medical expenses.

While growing demand for medical technologies across the region creates significant opportunities for foreign investment as well as locally driven growth, the Latin American market is very centralized, with 60–90 percent of business concentrated in the national capitals. Nonetheless, Colombia, Brazil, and Mexico do not follow this trend. In these markets, it is almost impossible to find a distributor with true national coverage and reach. A few of the LATAM countries have difficult-to-navigate processes that despite a growing trend of foreign registrations, remain challenging for many foreign companies.

The Middle East & Africa. The MEA medical devices market was valued at USD 30.5 billion in 2022, and is expected to reach USD 37.4 billion by 2025, at a CAGR of 7 percent. Israel, United Arab Emirates (UAE), Saudi Arabia, and South Africa are the key countries contributing to this growth on the back of improved healthcare indicators, economic progression, and government-led initiatives. Additionally, the region has quickly established itself as a hub for medical tourism with many European and Asian countries further driving the need for well-established and developed healthcare. Overall, the Middle-East MedTech market is dominated by imports from MNCs, with only a small part of the market being catered by local devices manufacturers. Established market access framework and regulatory environment, growing private sector and public private partnerships (PPP), investment toward AI, and innovation and technological advancements are four critical levers of the Middle-East MedTech landscape that serves as a platform to develop the local ecosystem. Small players have a tremendous opportunity to leverage the burgeoning start-up environment to develop niche, technology-based solutions catering to local needs.

Indian market dynamics
The Covid-19 pandemic has tested even the world’s most advanced healthcare systems, which has inevitably rattled India’s healthcare system as well. From USD 10.36 billion in 2020, the Indian market for medical equipment is estimated at USD 11.86 billion in 2022, and expected to increase at a 37-percent compound annual growth rate (CAGR) to reach USD 50 billion in 2025.

Massive expansion of medical facilities factored in and the introduction of the Medical Devices (Amendment) Rules 2020 is there to boost the demand for medical devices in the market. On the policy front, the Indian government is undertaking deep structural and sustained reforms to strengthen the healthcare sector. Recently, the Department of Pharmaceuticals, Ministry of Chemicals and Fertilizers, Government of India, has presented an Approach Paper on Draft National Medical Devices Policy 2022 for consultation. In order to drive the growth of the sector, the paper has been prepared with the aim to facilitate an orderly growth and provide a clear direction to meet the underlying objectives of accessibility, safety, and quality, while ensuring focus on self-sustainability and innovation.

The sector requires special coordination and communication between the industry and the stakeholders because of its diversified nature, continuous innovation, and variation. The Department of Pharmaceuticals (DoP), Ministry of Chemicals and Fertilizers, through various programmatic and schematic interventions, such as the PLI scheme for promoting domestic manufacturing of medical devices and the promotion of medical devices parks, intends to encourage the domestic manufacturing of medical devices. Realizing that the sector demands a high level of coordination between the regulators, who have a specific legal function but are spread over various departments, such as DoHFW, Consumer Affairs, Atomic Energy Regulation Board, National Institute of Biologicals, and MoEF&CC, the DoP attempts to resolve many of the issues through institutional arrangements, viz., standing forums and regulatory round tables.

The proposed policy strives to put in place a comprehensive set of measures for ensuring sustained growth and development of the MedTech sector, and address the further challenges of the sector, such as regulatory streamlining, skilling of human resources, lack of technology for high-end equipment, and lack of appropriate infrastructure, through a coherent policy framework.

A collaborative effort of KPMG, Invest India, and Asia Pacific Medical Technology Association, the report proposes multiple recommendations including predictable regulatory environment, harmonization of quality standards, a friendly public procurement policy, creation of supplier ecosystem and skilled talent pool and establishment of Brand India as a global hub for medical devices manufacturing and innovation.

On changes on the regulatory front, there is a need for a single central authority for medical devices regulation and a long-term roadmap for 10–15 years detailing the growth plans and implementation timelines. Also, the Bureau of Indian Standards (BIS) should focus on harmonizing the Indian standards with globally acceptable quality standards to enable domestic devices makers attain global competitiveness.

On building a supplier ecosystem, the government must take necessary steps to create pay-per-user common testing facilities, machine tool centers, solid waste management units, and warehouses.

However, the government’s PLI scheme, clusters of medical devices parks, and improved regulatory approval processes are steps in the right direction to support domestic manufacturing.

As MedTech companies undergo a paradigm shift to better align to patient needs, the introduction of new digital technologies, value-based care, and diagnostic tools will create opportunities for the industry to reap the benefits of increased growth and market expansion. Thanks to the growing patient demand and technological innovation, high growth can be expected in product areas, such as AI and machine learning-based medical wearables, robotics, and cloud-based remote patient-monitoring systems. AI is also facilitating the creation of increasingly sophisticated data-driven algorithms, such as autonomous diagnostics and prognostics. Despite recent Covid-19 holdups, opportunities thrive for MedTech companies of all sizes and maturity levels.

Healthcare ecosystem is going digital
The last two years of the Covid-19 pandemic have accelerated the growth of digitization and technological innovation in the healthcare sector in India. From the ambitious healthcare initiatives of the union government like the Ayushman Bharat Digital Mission (ABDM) and the National Health Stack to technological innovations like healthcare omni-channel platforms by many private players, telemedicine consultations in the public and private sectors, artificial intelligence-based IoT tools for diagnosis, targeted treatments, and monitoring, the healthcare sector has moved to phygital (physical+digital). Along with these advancements, trends like 5G, digital twins, and metaverse are all set to create an entire range of new channels for delivering care that have the potential to lower cost of care and vastly improve access, quality of care, and patient experience.

Going digital. The deepest influence of digital healthcare has been on government programs. Rolled out on September 27, 2021, the union government-sponsored digital public good (DPG) project ABDM has already crossed 268 million Ayushman Bharat Health Account (ABHA) numbers, 28 million digitally linked health records, 170 thousand registered health facilities, and 97 thousand registered doctors and healthcare professionals. While the government dubbed it as the UPI of healthcare, the program’s transformative influence on the healthcare system is probably far more than UPI’s impact on financial technology. Similar to the way that multiple services could be built on the basis of the Aadhaar card, the core of ABDM is a scalable, interoperable public good stack that starts off with an ABHA number (similar to the Aadhaar number) for patients coupled with the creation of an integrated platform that covers healthcare professionals and health facilities, including hospitals and diagnostic players.

The ABDM facility allows a unified health interface and storage of personal healthcare information in a standardized and shareable digital format that healthcare facilities and professionals can access. ABDM has a value proposition for hospitals, doctors, as well as for pharmacies. For hospitals, it will enhance the OPD experience of patients with faster registration through their phone, using a QR code and ABHA, where the patients can enter their details. This will also extend to the admission and discharge processes. Additionally, the program is likely to provide a significant ease of claim processing and receivables management for hospitals, starting with settlement of claims under the Ayushman Bharat program. Doctors will benefit from ease of being searched, ease of using teleconsultation as a channel for patient connect, efficiency in follow-up and referral process, and access to patient health records in an organized manner. For pharmacies, there will be benefits in terms of ease of discoverability, ease of tracking patient prescription, creation of standardized drug registry, visibility of drug-level demand at PIN code level, and the ability to collaborate with pharma companies on the last-mile data.

ABDM’s public dashboard provides near-real-time information, such as ABHA numbers, healthcare professionals registry, and health facility registry. It acts as a one-stop window for information on the Mission’s progress at the state level.

Integrated with the government’s telemedicine service portal eSanjeevani, ABDM will help patients share their health records with doctors. This will help convert the anonymized patient health data, generated as part of the ABDM program, into data models that can be used to develop predictive risk profiles and trends on changing disease patterns across different parts of the country, which can then be used to guide targeted policy-intervention measures. The single, interoperable platform would have enough flexibility to absorb newer technologies and services as they become available.

ABDM is an example of platform thinking that can re-engineer today’s chaotic and sub-optimal healthcare ecosystem into a tight, highly efficient network that allows one-touch access and spurs innovative services. It is also likely to give a fillip to startups seeking to disrupt the healthcare sector using technology.

Telemedicine and AI. The severe constraints in access to healthcare facilities and professionals, triggered by Covid-19, witnessed much needed respite when the union government issued guidelines in March 2020, allowing remote consulting over A/V and text-based platforms. While teleconsultations had commenced in India well before the pandemic, the government impetus led to much wider adoption of this channel for patient-connect across different ecosystem players.

While there was a significant surge in teleconsultation appointments during the peak of Covid-19 in 2020 and 2021, the number of daily consults has currently stabilized, albeit at five to six times higher than the pre-pandemic levels. It is estimated that approximately 1.5 to 2 lakh teleconsultation appointments are conducted on a daily basis in India, of which close to 50 percent is currently represented by eSanjeevani. While teleconsultations have grown in India in comparison to pre-pandemic levels, its penetration is a meager 0.5 percent of total consult volumes in the country. Given that more than 50 percent of Indians are smartphone users, 60 percent are internet users, and 50 percent are 4G subscribers, there definitely exists potential for increased penetration of teleconsultation-led doctor appointments. The ramp up of the government-led eSanjeevani platform is testimony to that. Further, with 5G technology around the corner, virtual experiences are expected to improve significantly, driving even faster adoption.

In an aspiration to transform into comprehensive digitally enabled primary healthcare providers, teleconsult platform players are now expanding their services to also include online diagnostics, online pharmacy, and electronic health record services. With the expanded basket of offerings, digital players are transforming themselves into omni-channel platforms, garnering a higher share of wallet from patients and also enhancing their stickiness/preference by serving as a one-stop solution.

Overall, both physicians and patients are more confident in using digital services, but the government needs to strengthen its policy support format. While the government had earlier given a broad set of approvals for telemedicine practice, the National Accreditation Board for Hospitals and Healthcare Providers (NABH) has initiated work on digital health standards for accreditation of telehealth providers.

In the endeavor to provide access to quality diagnosis and treatment options at the right cost, AI-powered technology interventions have witnessed progress and early success. There are AI-enabled handheld and point-of-care breast cancer and cervical cancer screening devices, imaging-based AI algorithms that help in faster screening of abnormalities, AI-based digital pathology, especially in complex departments, such as hematology and histopathology, and AI-based speech-to-text technology for faster creation of patient medical records. The role of AI has expanded well in the field of healthcare and various pilots and proof-of-concept studies are constantly being undertaken. The emergence of partnerships currently as well as in the future between various ecosystem players including governments, private/trust-based healthcare providers, insurance companies, and health tech players to leverage AI-powered technologies for improved access, enhanced quality, and reduced cost of care.

Will the MedTech M&A market still be a seller’s market in 2023?
In order to provide the best expertise, however, it is necessary to fully understand the trends affecting healthcare investments. A quick glimpse at JP Morgan data seems to indicate that the current MedTech industry investment is down, and technically it is compared with 2021. But it is important to note that last year set a healthcare financing record, thanks mainly to the continued convergence of consumer health and medical technologies. (Alphabet has partnered with Novartis on smart contact lenses, Dexcom on miniature and disposable glucose monitors, and Johnson & Johnson on surgical robots).

Compared to past years, though, 2022 investments are at historically average levels – meaning MedTech industry financing remains strong. In fact, given worldwide population demographics and the market opportunities being created by the consumer health sector, the macro future appears brighter than ever.

But that does not mean all companies will benefit from the robust financing environment. There will certainly be winners and losers, with a few heritors becoming the next health technology unicorns and some companies dropping out completely from the market (similar to a survival of the fittest tenet).

Many companies will survive through consolidation because the market is not large enough to accommodate every new telemedicine upgrade, patient engagement app, electronic health record breakthrough, or wearable monitor. While the industry needs such minor incremental innovation in order to grow, the influx of these seemingly minor technologies create an investment imbalance – resulting in a glut of new players with more market opportunities in their investor decks than the market can support. Consolidation is an inevitable consequence in this set of circumstances, steering the commercial middle class to M&A (the rare unicorns and near bankrupt firms are exempt from this phenomenon).

Whether or not this investment imbalance drives MedTech M&A in 2023 remains to be seen. To determine the market’s path forward next year, it is crucial to examine the trends that have impacted healthcare financing in 2022.

Similar to overall healthcare industry investments, healthcare M&A remains historically strong in 2022. Information from Pitchbook’s Quality of Healthcare M&A Report (based on data through June 30) reveals a similar superficial dichotomy in year-over-year financing totals. Not surprisingly, this year’s sums are lower than 2021’s record highs, but investments are not down compared to historical levels.

So, if investments this year are not diving off a cliff, does that mean M&A will continue to blossom in the next 12 months? Well, crystal ball is as cloudy as everyone else’s; there are many factors to consider, including the still-knotted supply chain, runaway inflation, geopolitical unrest, and pricing pressures. Nevertheless, we predict M&A will remain relatively strong in 2023 for two reasons – industry consolidation and the amount of available cash for investing. Let us take a look at both of these market drivers in more depth.

Consolidation on the cards. Significant investments over the last decade in digital and consumer health technologies have left too many players vying for the same proverbial pot of gold at the end of the market opportunity rainbow. Although the overall market is expanding, there are only a limited number of pie shares up for grabs and too many hungry stakeholders. The companies able to obtain a piece of the market pie will cut their own path forward either on their own, through an initial public offering, and/or by acquiring other firms to fulfill their industry and stakeholder objectives. However, some companies will forge a path to future success via strategic partnerships or acquisitions (becoming the M&A target rather than orchestrating a deal).

Cash available for investment. Besides emerging technology growth companies driving M&A, traditional deals for established MedTech companies will remain strong in 2023. The mom-and-pop medical companies that have been an ongoing concern for the past 30 or 40 years are still highly sought-after assets. Those shop owners ready to sell in the next 12 months will find plenty of takers for their business.

What drives confidence? Simple cash economics and market segmentation.
There are huge amounts of capital available for M&A. According to S&P Capital IQ, there is USD 3.7 trillion in cash and equivalents held by S&P 500 companies (as of December 2021). Additionally, there was USD 948 billion in cash in private equity funds as of June 2022, according to Prequin. The good news for potential sellers is the fact the MedTech market is a highly sought-after sector by both industry strategists and private equity firms. Periods of macro uncertainty or recession have traditionally been good for healthcare investments, because of the market’s resiliency. As unfortunate as it may sound, medical conditions – particularly among the aged – are profitable for companies (cancer, for example, never bows to recession). Some sectors may lose value in a downturn but the MedTech industry usually experiences a cut in growth of investments rather than an actual market value reduction.

So what markets will be primed for growth in 2023? Manufacturing, supply chain, telemedicine (due to Covid-19), robots, home care, artificial intelligence, machine learning, and healthcare staffing are predicted.

2023 should produce consistent M&A activity levels due to buyers/investors moving to more stable industries, like MedTech, earlier stage companies moving from fundraise mode to M&A, and more strategic partnerships and/or distribution deals.

Basically, 2023 should be a seller’s market for quality healthcare companies developing/commercializing products that sold a market need. There are likely to be plenty of competitive buyers looking to spend their available cash on the next unique innovation. May the best seller (and the buyer) win!

Looking ahead to healthcare in 2023
The pandemic years have brought both obstacles and opportunities to medical devices companies. While venture capital investments in MedTech reached all-time highs in 2021, devices companies also struggled to cope with massive supply chain disruptions, a rocky talent market, and a customer base preoccupied with treating large numbers of extremely ill patients.

As the world enters the maintenance phase of the pandemic, all of that economic inertia is catching up. Recession seems imminent as global manufacturers continue to fall short of demand and inflation accelerates at record rates.

Even though medical devices companies produce essential products and are, therefore, relatively shielded from the worst the economy can throw at them, executive leaders are still looking for ways to trim excess spending, secure their supply chains, and continue to win regulatory approvals in a timely manner.

To achieve these goals, companies need to have the data-driven strategies and technologies in place to clearly and thoroughly demonstrate their value to potential investors, new clients and eagle-eyed regulators in a highly competitive market.

With no room for error, medical devices companies must make shrewd decisions about how to navigate this uncertain economic environment while maintaining the pace of innovation and continuing to bring vital technologies to the patient care environment. If the industry continues to showcase its potential to deliver better clinical and financial outcomes, 2023 and beyond will remain the age of the MedTech. 

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