Opportunities Beckon Despite Overwhelming Challenges

MedTech, where the speed of innovation meets molasses of regulatory approval! A sector, which consistently brings science and invention to life.

In India, 2016 was a year of mergers and acquisitions and a launchpad for many new products and pioneering technologies. 2017 promises to be an action-packed year for investors, notwithstanding the headwinds from the government’s recent demonetization move, weak global cues from Brexit and USA, where Donald Trump while being sworn in delivers the most American speech, while the rest of the world prepares for a rough ride.

Medical Buyer foresees a dynamic 2017 for the Indian MedTech industry. An aging population, with the need for cost-effective treatment and persistent innovation, will continue to drive growth in this space. However, the year ahead is not without its challenges and concerns.

So where do the opportunities exist in 2017 and beyond? We highlight a few market trends and themes that will impact the MedTech industry.

Trends that Will Influence the Direction of the MedTech Markets

Private Sector Will Remain the Main Growth Driver

The Indian medical devices market will continue to record high single-digit growth in local currency terms but moderate growth in US dollar terms. The market will benefit from sustained economic growth ahead, likely to gain momentum under the Make in India initiative. The expanding private sector will remain the main growth driver.

The market will register a 2016–2020 CAGR of 9.6 percent in local currency terms and 7.4 percent in US dollar terms, which will rise in value to 36,456.52 crore (USD 5.1 billion) in 2020.

Imports will continue to underperform particularly in the diagnostic imaging product area. Growth rates in US dollar terms will be constrained by a further gradual weakening of the rupee against the US dollar. In the 12 months to July 2016, imports grew by 1.3 percent Y-o-Y, taking the running annual total to USD 2.6 billion, but fell by 1.7 percent Y-o-Y in the final three months.

Despite an improved performance in recent months, headwinds to exports persist with a weak external demand outlook in key markets. In the 12 months to July 2016, exports fell by 7.0 percent, taking the running annual total to USD 1.1 billion, but grew by 7.2 percent in the final three months.

Imports still form 75–80 percent of the total consumption of medical devices, equipment, and consumables in India: – such products with attractive price-performance ratio targeting emerging markets will be a huge opportunity.

The industry will be watching out for the possible creation of a separate ministry, which was hinted at by the government in 2015. The policy will delink the sector from the pharmaceuticals industry and will likely pave the way for greater investment and R&D in the segment. The proposed regulations appear to go against the government’s stated aim of introducing a dedicated medical device regulatory framework to support India as a viable and profitable investment location.

Apart from the policy on medical devices, the industry will also watch out for guidelines on online pharmacy firms that have been receiving funds despite regulatory uncertainty.

The Delhi High Court’s order that overturned the ban on more than 300 fixed-dose combination (FDC) drugs late in 2016, which impacted companies such as Pfizer and Sun Pharma, could also see a challenge from the government.

Bolt-on Acquisitions Continue to Rise

As market pressures have increased, the pace of consolidation in the medical devices industry has been accelerating in the past 5 years. However, the game-changing megamergers may be behind us. The only milestone merger that happened in 2016 in MedTech was Abbott Laboratories’ acquisition of St. Jude for
USD 25 billion. Other key multibillion-dollar deals so far this year have been Canon’s acquisition of Toshiba Medical Systems for USD 5.9 billion, and Johnson & Johnson’s acquisition of Abbott Medical Optics from Abbott Laboratories for USD 4.3 billion. While large, transformative transactions are rare, the trend toward strategic merger and acquisition (M&A) activities at a tuck-in level in MedTech continued in 2016. In fact, medical device companies have demonstrated an increasing appetite for strategic bolt-on acquisitions that would fill their portfolio gaps and subsequently help them establish more comprehensive solutions or expand their geographical reach. For example, Thermo Fisher has been pursuing a steady M&A strategy in its life sciences business and secured a string of bolt-on deals in 2016 alone, including the acquisition of biological analysis toolmaker Affymetrix; leading high-performance electron microscopy provider FEI; and a stem cell and reagent firm, MTI-GlobalStem.

Heading into 2017, although the new landscape favors large companies that can leverage economies of scale, GlobalData anticipates the calming of the high-profile M&A scene. Instead, the shift to strategic M&A activities at a tuck-in level will continue, as medical devices companies start to reconsider their approach to dealing with execution and synergy capture.

Moreover, the contribution of Asian buyers to M&A in Europe and the US is likely to increase, as Asian players continue to deepen and broaden their exposure to the global market.

Declining Venture Capital Will Limit Some Growth and Innovation

As risks inherent in medical device development continue to persist, more and more venture capital firms may continue to shy away from investing in the MedTech sector in 2017. A steady decline in the number of venture capital deals in the MedTech space over the last three years has been observed. Despite the industry’s focus on innovation, venture capital funding remains elusive for emerging medical device companies in a variety of therapeutic areas. Uncertainties over the economy, especially stemming from seismic events, such as Britain’s impending exit from the European Union; stringent regulatory guidelines; and difficult reimbursement environments lead to investors becoming risk-averse. Moreover, clinicians tend to prefer pharmaceutical and conservative treatment options over device-based invasive interventions. An emphasis on long-term patient outcomes and healthcare expenditure will dissuade both clinicians and payers from favoring treatment options that entail a greater risk of complications.

Small and start-up medical device companies are particularly vulnerable to limited venture capital availability, which can cause crippling delays as they try to launch new products. This lack of funding can adversely affect the broader industry by putting a ceiling on growth and innovation. In the uncertain healthcare environment of 2017, small companies need to solidify their financial resources or be acquired by larger companies to ensure their products achieve market access.

Value-Based Healthcare Will Become a Greater Priority

To cope with rising costs, healthcare reimbursement is moving away from the traditional fee-for-service payment model, in which providers are reimbursed based on the number of procedures performed and patients treated. Instead, healthcare systems and insurers are transitioning into value-based care. In this system, hospitals and physicians are held responsible for the quality of care provided to their patients, and paid in a way that takes into account factors such as patient complications and re-operations, hospital-acquired infections, and readmission rates. Reimbursement can be given in a bundled payment based on the expected cost of a particular care episode, and financial penalties can be administered for excessive costs. This transition presents a variety of challenges for payers and hospital groups, but also a number of hurdles for medical device companies seeking to maintain profitability in the ever-evolving healthcare landscape.

It will soon no longer be enough for medical device manufacturers to simply offer the best-quality implant or most clinically successful instrumentation. Instead, companies will need to reevaluate their offerings and include a range of tools tailored toward physicians and hospital groups, such as applications and services that help physicians monitor patient outcomes, guide hospitals toward cost savings, and assist in improving clinical outcomes. These collaborations with healthcare providers will deliver an edge to manufacturers willing to adapt to providers’ growing needs. Additionally, evidence-based care and treatment paradigms will increase in importance, as hospital purchasing groups seek to lower expenditures. In 2017, data exhibiting cost effectiveness and exceptional clinical outcomes will be paramount, and medical device manufacturers will need to focus efforts on generating effective data in a format that hospitals and physicians find useful.

Novel Technologies Will Make a Splash in the US Cardiovascular Market

2016 has seen some interesting cardiovascular technologies finally begin to make their way to the US. Two in particular stand out: coronary bioresorbable vascular scaffolds (BVSs) and peripheral drug-coated balloons (DCBs). Both have been marketed abroad for several years, particularly in Europe.

Coronary BVSs have been a notable technology for several years in Europe and will continue to be a closely followed story in the US in 2017. The experience of this technology in Europe has admittedly been mixed; early results in the GHOST-EU registry suggested a worrying stent thrombosis rate in some of the early patients implanted with the device. More recent data – particularly in the ABSORB III trial, the US pivotal trial used to achieve FDA approval a few months before the time of writing – have started to alleviate some concerns. However, the technology has not seen particularly robust uptake in Europe. Abbott Laboratories was likely hoping that its Absorb BVS would become more of a workhorse technology at this point. Nevertheless, between the ongoing US launch of the Abbott product and the commercialization of new BVS options in Europe, led by Elixir Medical, this is a dynamic market to watch.

2016 has also witnessed the introduction of peripheral DCBs into the US market. Lutonix, manufactured by CR Bard and co-distributed with Boston Scientific, and IN.PACT Admiral, developed by Medtronic, were launched within months of each other. Both competitors have been dueling over market share ever since. GlobalData expects this market to flourish in 2017 as devices overcome reimbursement hurdles.

Robot-Assisted Procedures Will Flourish

Physicians and patients increasingly prefer minimally invasive procedures over open surgeries due to shorter operative times, lower post-operative complication rates, and quicker discharge times. The introduction of robot-assisted systems provides further impetus for the adoption of minimally invasive surgical procedures in the future. GlobalData estimates the current robotic surgical systems market (excluding ancillary instruments) to be close to USD 1 billion. This space is dominated by Intuitive Surgical, manufacturer of da Vinci Surgical System, commonly used for laparoscopic procedures such as hysterectomies and prostatectomies. The market is expected to expand significantly over the next 5 years for a variety of reasons. Firstly, studies undertaken to evaluate robotic surgeries for numerous indications may yield promising results. If the results of these experiments prove substantial benefits of robotic surgery over conventional interventional procedures, support for the commercial use of these systems will multiply. Secondly, an increasing number of strategic partnerships between established medical device players and startup companies will advance the adoption of novel surgical systems. Examples of these partnerships include the strategic agreement between Medtronic and Israel-based Mazor Robotics in May 2016, as well as the formation of Verb Surgical, a joint venture from Johnson & Johnson and Verily initiated in late 2015.

GlobalData expects strategic partnerships to provide a stronger foundation to the growing market of robotic surgery systems in the long run. In the short term, particularly in 2017, it anticipates that clinical studies and regulatory clearances – primarily from the FDA – for these platforms will be on the rise. The development of more fully working prototypes will be an important milestone in the evolution of robotic surgical systems.

The New Trump Administration May Signal a Potential Boon for the US Medical Markets

Although the total impact on the market remains unclear, it is hoped that Donald Trump’s presidential win becomes a boon for the global healthcare industry. Trump’s vision for healthcare includes a highly competitive, state-centric insurance market, and increased infrastructure for affordable healthcare on the individual level. Proposals such as allowing deductible health insurance premiums from tax returns and creating specialized health saving accounts could encourage individuals to pay for medical care out-of-pocket, while block grants for Medicaid could lower the economic burden on the state level.

The biggest expected benefit for the global healthcare market is Trump’s proposal to grant overseas pharmaceutical companies entry into the US market. Stocks in the pharmaceutical industry have already begun to soar after Trump’s win, and not without good reason. By removing barriers to entry into the US market, foreign companies will have access to one of the largest medical markets in the world. Although Trump has made several statements advocating for greater scrutiny of drug price increases, his policies ultimately center on promoting free trade and the determination of prices through supply and demand.

Bariatric Specialties Will Witness Robust Advances in Minimally Invasive Surgery

Within many medical device markets, such as general surgery, cardiology, and orthopedic surgery, there has long been a trend toward less invasive procedures. This has resulted in an increase in the number of minimally invasive procedures over the past several years. In the field of general surgery, this trend is going one step further with an increase in the number of non-invasive procedures being developed. While they have helped reduce the risk of infections and post-operative complications, non-invasive procedures further reduce the risk of complications that come from incisions and the use of heavy anesthetics, and also reduce hospital stay times and, therefore, costs to the healthcare system. The field of bariatric surgery has been using minimally invasive procedures for several years and is now emerging in the field of non-invasive procedures since the introduction of gastric balloons. The use of gastric balloons is increasing globally, with significant growth in the US since receiving FDA approval in 2015. It is expected that this trend will continue through 2017, within the field of bariatric surgery and throughout other areas in general surgery.

The Internet of Things Will Continue to Accelerate Healthcare Evolution

The Internet of Things (IoT) is an emerging phenomenon where machines are embedded with sensors that allow them to relay data to one another with little to no human involvement. The resulting proliferation of smart electronics in phones and wearable devices creates a large dataset that could be parsed to detect diseases early, reduce public health risks, and improve operational efficiencies in the healthcare industry. An often-cited use case for IoT in healthcare is remote monitoring and communication to keep track of patients as they move through a facility. While promising, IoT will witness slow adoption in healthcare due to regulations around patient data and the length of time it takes to determine the prognostic value of captured data.

2017 will see healthcare insurance companies tapping into a different application of IoTs. With the preponderance of wearable devices and pricing pressures in healthcare, insurance premiums will be determined by a patient’s lifestyle as recorded on a smartwatch in a usage-based insurance model. This is predicated by car insurance companies, which use odometer readings, mileage aggregated from GPS data, and other driving patterns to determine the risk profile of a client. Although the system is not foolproof, healthcare insurance companies can implement an algorithm that uses daily exercise regimen, eating habits, and vital signs to determine pricing plans.

The concerns resulting from increased connectivity due to IoT demand better emphasis on security and privacy. Unlike current practice, where software companies and big conglomerates frequently lose client information to hackers, policies have to be in place to encrypt healthcare data and decentralize the database, where possible, using new technologies such as the Blockchain.

Personalized Medicine Will Inch Closer to Revolutionizing Diagnosis and Treatment

Recent technological advances have heralded a new age of personalized medicine, shifting away from the traditional practice of identifying therapies that target the majority of the population. Personalized medicine is the tailoring of treatment to a patient’s individual genetic profile, enabling an understanding of disease progression and response to certain treatments. This trend is being driven by improvements in genetic sequencing, such as the rise of next-generation sequencing, as well as advances in systems biology and pharmacology. Together, these technologies enable analysis of the clinical implications of a patient’s genetic profile, which is expected to be a continuing trend in 2017.

Conventionally, a randomized controlled trial is used to gather evidence applicable to a heterogeneous population; personalized medicine has the ability to meet some of the shortcomings of this approach, such as the potential for a certain gene to alter the outcome of a therapy. This was first seen to be the case in 2002, when a genetic link was found to cause a hypersensitivity reaction upon treatment with abacavir. Currently, cancer treatments are being developed alongside companion diagnostics that are able to evaluate the effectiveness of the drug based on the patient’s genetic profile. Furthermore, personalized medicine enables clinicians to determine appropriate drug doses for patients. Determining ideal dosage of warfarin is often challenging due to its narrow therapeutic range, but advancements in personalized medicine have found links to three genes that can better predict patient response, enabling safer prescriptions. In addition to tailoring treatment, personalized medicine is able to identify a patient’s risk of developing certain diseases, including several cancers. The utility of personalized medicine at several major points in the course of a patient’s disease will make this a major trend in 2017, and has potential to revolutionize the diagnosis and treatment of diseases.

With the climbing costs of healthcare services and shortages of healthcare facilities and labor, cost-effective home care devices will be further increasing. Fueled by technological advances and increasing financial incentives, the number, range, and complexity of home care medical devices are surging. Complex therapeutic devices such as infusion pumps, ventilators, and dialysis machines will be used more often in the comfort of patients’ own homes or even be taken with them when they travel. Thanks to advanced wireless technology and powerful database tools, clinicians can oversee patients with the necessary data remotely. In addition to traditional home care devices, healthcare will begin to move into the palms of patients’ hands, providing healthcare management apps on smartphones or tablets, from health monitoring to disease diagnosis. This transformation represents a new challenge to the medical industry, as new entrants push aggressively to provide efficient and personalized solutions to fulfill clinical needs. Steep learning curves and ambiguous reimbursement for these devices may impact the market adoption, but these new care delivery models will likely continue to spread in 2017.

GPOs, Buying Committees, Legislation Continue to Tame Pricing

Unlike most other areas of medicine, the prices of medical devices have actually been growing slower than inflation as a whole (and far lower than other aspects of healthcare). A lot is stacked against a new medical device. Hospitals have boards and buying committees that seek to streamline device purchasing. Many device purchases are made by hospitals are made through group purchasing organizations (GPOs). Value analysis committees, reimbursement reductions to hospital buyers of devices, competitive bidding schemes, and other programs combine to slow pricing growth.

Cybersecurity

As devices become more complicated and have components that use the cloud or online reporting, the ability of hackers and criminals to undermine security systems is an increasing concern.

Wearable Features Grow Revenues

From glucose monitors to exercise trackers, devices with a wearable component will experience average revenue growth double the overall device market. The global wearable medical device market is valued at just over 88,450 crore for 2016. The wearable technology industry, in general, is continuing to expand and healthcare is no exception. In fact, healthcare is among the fastest-growing segments for wearables due to the overwhelming need to monitor diseases and aging populations.

Optimistic Device Companies Seek Innovation

A challenging market has only encouraged the industry to keep funding research. Kalorama estimates that medical device companies spend an average of 7 percent of revenue on R&D. This is higher than most industries. A majority of companies in Kalorama’s Bellwether Index of Medical Device Companies increased research and development spending as a percentage of revenue.

United States Still a Focus, Asia Rising

Most revenues from medical devices will still be earned in the United States in 2017, and the world’s largest devices market will be a focus due to the reimbursement challenges in Europe and slightly less growth than expected. China will see far greater growth than the overall market in 2017, as will the rest of Southeast Asia.

Trends Impacting IVD Market in 2017

Core Labs a Focus amid Consolidation

Healthcare organizations are consolidating; it will continue to happen in 2017, and IVD is adjusting to this trend. Healthcare consolidation requires a renewed approach to core lab markets and automation systems targeting the big accounts. There is increasing demand among integrated health networks for greater centralization of diagnostic testing to streamline workflows and steer better healthcare information to professionals.

Major IVD companies launched products this year to enhance workstations. Siemens Healthineers used the AACC Annual Meeting this year to unveil its Atellica Solution for automated core lab testing. Abbott Diagnostics unveiled its Alinity line of harmonized systems across the core lab (clinical chemistry and immunoassays), hematology, point-of-care (POC) diagnostics, blood screening, and molecular diagnostics.

CFDA Approvals Rise in Prestige

In the past 5 years, China has solidified its place as an IVD market, just behind the United States, European Union, and Japan. Outside of US Food and Drug Administration (FDA) approval or European CE marking, China FDA (CFDA) approval has been the next most heralded product development for many IVD companies. Roche issued a 2016 press release for the CFDA approval of its CINtec PLUS Cytology test or immunocytochemistry assay for the detection of human papillomavirus (HPV). Roche also markets a molecular HPV assay that may find greater usage in emerging markets in the coming years after being approved by the US FDA as a first-line HPV screening tool. Qiagen has also targeted the Chinese HPV test market with its CFDA-approved care HPV platform for low-resource settings.

Most surprising in the Chinese market’s ascent has been the prominence of its cancer diagnostics space. China’s research prowess in sequencing and globally significant patient populations in urban markets has created considerable opportunities for overseas IVD companies. Cancer diagnostic specialist Epigenomics of Germany has relied upon China as a principal market for its liquid biopsy colorectal cancer (CRC) test, Epi ProColon. In May 2016, the test was included in Chinese government-administered guidelines for the screening of early CRC. Epigenomics is expected to commence Chinese clinical trials during 2016 to support CFDA approval of its liquid biopsy assay for lung cancer using the methylated SHOX2 gene biomarker. Epi ProColon and other advanced molecular assays for cancer have been designated as innovative products by the CFDA, which can expedite approval processes. Next-generation sequencing (NGS) is the highest area of activity in the Chinese cancer diagnostics market. Driven foremost by demand for non-invasive prenatal testing (NIPT), the clinical sequencer base in China now includes over 40 hospitals in China and other testing institutions that serve at least 70 other hospitals and clinical clients. Cancer testing is the second-largest clinical application of NGS in China. India could well take this challenge and make a similar place for itself.

Esoteric LDT Companies Prosper

An emerging dynamic is major cancer-focused US LDT companies’ penetration of the EU market. Myriad Genetics, Genomic Health and Foundation Medicine have pursued different strategies to introduce their LDTs to the EU market. Foundation Medicine has a strategic partnership with Roche for the international sales and marketing of the FoundationOne and other comprehensive genomic profiling (CGP) tests. The company will also begin operations at a centralized lab for its European market LDTs in Penzburg, Germany. Myriad Genetics complemented their reference lab in Munich, Germany, with the acquisition of a German clinic known as an MVZ or multidiscipline ambulatory care center. Operating an MVZ, Myriad Genetics will be able to open direct reimbursement negotiations with insurance providers and contract with physician network and hospital clients. Genomic Health has an appreciable LDT business in Europe (international markets were
14 percent of the company’s 2015 revenue), but performs all testing at its Redwood City, CA, facility from its CE-marked sample collection kit. The rising profile of LDTs in the EU market may limit growth opportunities for the EU molecular cancer diagnostics market. Wider availability of CE-marked molecular cancer kits has not translated into robust growth in the IVD market segment in recent years. The outlook for the regional market segment is improved, however, by returned political stability to the region, more favorable economic conditions, and rising demand for advanced LDT services (in turn driving sales of related reagents and instrumentation). Globally, a high-growth market segment, molecular cancer diagnostics in the EU is expected to grow at approximately only 4 percent due to market maturity (relative to ROW markets) and reimbursement limitations (relative to the US market with its more diversified payer system).

Watch Urgent Care, Retail Clinics

The proliferation of urgent care centers as well as retail clinics has made systems that can deal with the workflows associated with these clinics a priority. Urgent care centers provide walk-in, extended hour access for acute illness and injury care that is either beyond the scope or availability of the typical primary care practice. UCCs differ from traditional physicians’ offices with procedure rooms for lacerations and fractures, radiology department for X-ray services, and in some cases a laboratory. High visibility and adequate parking is part of their business model; thus centers are usually located in freestanding buildings, though they can be located in strip malls and in some cases they may be within a hospital complex but a separate entrance and convenient hours are a key strength of urgent care centers. Retail clinics differ from urgent care centers in that they are smaller, are encased within a retail setting, provide a limited menu of services and usually are staffed by one practitioner or two.

No Slowdown in M&A

Companies need many parts to succeed in IVD, and so we expect merger activity, as well as partnerships and other arrangements to be robust in 2017. It was so in 2016. Some M&As allow larger companies to acquire new technologies but there is a distinct move for globalization of IVD knowledge. LabCorp purchased Sequenom. Abbott’s buyout of Alere for USD 5.8 billion, Bio-Techne acquired ACD for USD 250 million, marks Bio-Techne’s entry into the genomics field and market. Cepheid was purchased by Danaher Corporation. ACD’s technology, RNA-ISH is a technology facilitating and improving the monitoring of gene expression patterns at the single cell level – while retaining the morphological context of the tissue being analyzed. Oxford Immunotec Global PLC, a global, high-growth diagnostics company focused on developing and commercializing proprietary tests for the management of immuneregulated conditions, acquired substantially all of the assets of Imugen, Inc., a Massachusetts-based clinical laboratory focused on developing and performing specialized testing for tick-borne diseases. Luminex acquired Nanosphere and their Verigene platform and seeks to benefit from their broad menu, and strong presence in the molecular microbiology market. According to the companies, Nanosphere’s Verigene technology leads in the high-growth bloodstream infection segment and complements Luminex’s current infectious disease portfolio.

Way Forward

In 2017, the MedTech industry will begin to lay down new paths to a more connected, transparent, convenient ecosystem of care. High-profile M&A scene will settle down, even though the industry favors large companies that can leverage economies of scale. As medical companies start to reconsider their approach to dealing with execution and synergy capture the shift to strategic M&A activities at a tuck-in level will continue.

MedTech companies will need to re-evaluate their offerings and include a range of tools tailored toward physicians and hospital groups, such as applications and services that help physicians monitor patient outcomes, guide hospitals toward cost savings, and assist in improving clinical outcomes.

Furthermore, the climbing costs of healthcare services and shortages of healthcare facilities and labor will drive demand for cost-effective home care devices. This is indicative of the changing technological landscape of medical devices which sees advances in technology as well as higher user adoption of home care medical devices.