Medical-device makers, facing reimbursement and sales pressure in the U.S., are looking to China for opportunities as globalization becomes a key part of their strategy.
Medtronic, the Dublin-based medical device giant, expects to see an annual growth rate in the mid-teens in its emerging markets, and believes the developing world will represent a $7 billion market opportunity by 2019, CEO Omar Ishrak told investors Friday.
Expanding its global business is a key prong of its growth plan, Ishrak added at the Bernstein 31st Annual Strategic Decisions Conference in New York. His remarks come the same week that he told the Wall Street Journal that the device maker is seeking to ramp up sales in China and is looking for takeover targets among Chinese medical device companies.
Medtronic isn't the only one looking east. On first quarter earnings calls, a number of medical device companies reported rapid growth in China, which outperformed the U.S. and Europe. China's growing middle class and aging population makes it an attractive market for the healthcare industry.
Boston Scientific Corp., which saw revenue increase 25% in China, last month became a shareholder in Suzhou, China-based Frankenman Medical Equipment Co., which makes products such as surgical staplers.
“China continues to be our emerging market standout,” CEO Mike Mahoney said on Boston Scientific's first quarter analyst call, adding that Frankenman's local expertise will allow it to reach even more clinicians.
In 2014, medical device companies largely scaled back their M&A activity, publicly disclosing less than 50 deals last year compared with 105 in 2013, according to Modern Healthcare's M&A Watch database. The slowdown came despite easy access to debt and a booming stock market that fueled transaction activity in other healthcare sectors.
The pullback followed several quarters when hospitals reported decreases in surgical volume as part of the larger trend of declining inpatient volume prior to healthcare reform. Government and commercial insurers also have been tightening reimbursement guidelines as new drugs proved just as efficacious.
The CMS has raised the bar for deciding whether to cover new devices and surgical procedures. A February study in the journal Health Affairs found that medical interventions were 20 times less likely to be covered by CMS in the period of March 2008 to August 2013 than between February 1999 and January 2002.
Medical-device makers increasingly need to demonstrate the economic value of their products, Ishrak told investors in New York. Medtronic's stakeholders are no longer just doctors but hospital administrators and insurers, he said.
“We're looking to extend our product portfolio to value products, particularly in emerging markets,” he said. “There is a search for value where the cost and return on investment are linked together. Payment reform is moving in that direction.”
The Affordable Care Act has incentivized insurers and providers to hold down healthcare costs, but innovation in the medical device sector hasn't followed the tide. Many of the newly approved medical devices have been follow-on, “me too” products—which raise prices while only offering incremental benefits to patients, said Lisa Suennen, managing partner at Venture Valkyrie, a venture capital and advisory firm. As a result, investors are losing interest in the sector.
Instead, investors believe the future is in “device as a service,” products like the Apple Watch and Fitbit, which can capture health information and allow patients to share it with their doctors. Those products aren't coming from the healthcare sector but from technology entrepreneurs, said Michael Yang, a venture capitalist at Comcast Ventures.
Medtronic is betting on new value-based products like its LINQ heart monitor, Ishrak said. The device is inserted under the skin in an outpatient procedure and allows doctors to monitor and treat irregular heartbeats in people who have frequent fainting episodes.
While M&A activity remained sluggish in the first quarter of 2015, with just 10 deals tracked by the M&A Watch report, the value of those transactions skyrocketed. The price tags on those transactions tripled year-over-year to $6.2 billion, suggesting that the cautious medical device industry may finally be willing to deploy cash on attractive targets.
China, meanwhile, is in the midst of its own healthcare reform effort that aims to expand health insurance coverage, upgrade healthcare facilities and increase reimbursement in the private sector.
Hospital operating companies—including the founders of Nashville-based hospital giant HCA—also see opportunities in expanding into the Chinese market.