Value creation capabilities based solely on R&D investment are not generating as much growth as they used to. According to PwC’s “Operating performance in the Medtech industry: Trends and imperatives” report, which studied the performance of 56 global medtech companies, the impact of R&D on revenue growth declined at an average annual rate of 10% and the return on invested capital declined at a rate of 2% between 2005 and 2011. The impact on growth is evident by revenue growth rates declining at a rate of approximately 12% per year.
Medtech companies appear to have compensated for the decline in revenue by focusing on increasing operational efficiencies. Gross and operating margins improved slightly at an average annual rate of 1% and 2% respectively between 2005 and 2011.
Unfortunately, improvements in operational efficiency have been insufficient to compensate for the decline in innovation-led growth. A closer look at the performance of these leading medtech companies shows an average market capitalization growth rate of only 3.9% CAGR over the past decade.
Increasing pressure to innovate
Competition from emerging markets is also becoming increasingly aggressive. For example, annual medtech patent publications in China grew at an average annual rate of 21% between 2001 and 2011 compared to only an average annual grow rate of 5% in the US (Source: WIPO Statistics Database). In addition, PwC’s Medical Technology Innovation Scorecard report found that China, India and Brazil will experience the strongest gains in medtech innovation over the next 10 years.
Regulatory reforms and demographic changes globally are reinforcing the focus on value rather than volume. The demand for value is accelerated by regulations to reimburse based on outcomes and by consolidation of payers and providers into Accountable Care Organizations. According to the “Growth and Dispersion of Accountable Care Organizations: August 2013 Update” report by Leavitt Partners, there were 488 ACOs in the US as of July 2013, more than double the number from June 2012 (Leavitt Partners’ Center of Accountable Care Intelligence). Moreover, aging populations, longer life-spans and increasing prevalence of chronic diseases are forcing healthcare systems around the world to reassess their resources and ability to meet these growing needs, and are subsequently forcing companies to find new ways to create value in the system.
Disruptive social, mobile, analytics, and cloud (SMAC) technologies are requiring companies to respond with new digitally innovative operating and business models or face becoming irrelevant. Value propositions have to change from focusing on volume to delivering value; care delivery models need to shift from physical places to online spaces; solutions need to be more customized to the individual; greater portability, security and access are required as we migrate from analog to digital; and the shift from institutions to individuals as the primary customer requires businesses to provide more freedom, transparency and choice.
Venture capital funding has also shifted in response to the disruptive technologies shaping the industry. According to PwC’s Money Tree Report Q1 2013 biotechnology and medical devices funding dropped 28% in just Q1 of 2013. In contrast, digital health funding was up 12% in the first half of 2013 (Rock Health, 2013 Digital Health Funding Report: Midyear Update).
Changing the way we create customer value
In response to the changing healthcare landscape, there is an increasing focus on innovation by leaders globally. The 2013 PwC Report “Unleashing the power of innovation”, which polled 246 CEOs from around the world, found that approximately two-thirds of CEOs now view innovation as important as operational effectiveness. This is the first time that innovation has shared this level of priority.
However, it is important to realize that innovation and operational effectiveness require very different supporting organizational structures and practices to produce their very different results. Operational effectiveness focuses on the short-term, is organized in hierarchical structures, applies lean six sigma efficiency, and produces incremental improvement and incremental innovation; conversely, innovation has a longer time horizon, emerges by disciplining chaos and serendipity, requires fast, frequent frugal failure that looks wasteful, and can produce breakthrough and radical innovations that disrupt the status quo. The diametric contrast between operating efficiency and innovation creates powerful tensions between running the business of today and creating the business of tomorrow. Few leaders, and consequently, few organizations, have proven they can ambidextrously apply both disciplines at the same time. Yet the dynamic nature of technologies, markets and business demands ambidextrous leadership.
Becoming ambidextrous is not merely focusing on innovation by simply investing more money in R&D. Successful innovators invest in transforming their entire innovation cycle and operate in all phases of the innovation lifecycle throughout their organization – they get innovation into the DNA of all their employees.
It is important to realize that it is possible to turn innovation from a serendipitous occurrence into a systematic process.
In our experiences with leading medtech companies, we have found that those that can systematically connect their innovation business strategy with their operational strategy are the ones that are ultimately successful. We have been able to break down this process into discrete steps – first, a company needs to identify what type of innovation it is seeking, whether it is incremental or radical innovation; and secondly, the company must methodically align its businesses to this innovation goal across portfolios, funding, organizational structures, resources, ecosystems, governance, processes, cultures, metrics, and leadership.
Upcoming release of one of the most comprehensive studies on medtech innovation
Naturally, innovating is easier said than done. What does innovation actually look like, how do we know whether innovation has been achieved and who is on the cutting edge of innovation?
In 2011, PwC conducted a global benchmarking study of healthcare innovation at the country-level and created a Medical Technology Innovation Scorecard to systematically identify and measure key components of countries’ capacities to innovate. We presented the findings from this study two years ago at the MedTech Forum. Since then, the concrete metrics developed through this survey have helped inform decision-making by top industry, regulatory and political figures in their efforts to achieve medtech leadership.
In this year’s upcoming MedTech Forum, we will present the findings of one of the largest benchmarking studies conducted on medtech innovation. Focusing at the company-level, this latest PwC study will reveal the innovation strategies, processes and challenges of the leading medtech companies as well as those of new entrants to the market that are disrupting the traditional healthcare model. From this survey we identify leading industry practices that deliver greater innovative outcomes.
This study is based on qualitative interviews with leading industry executives and subject matter experts as well as extensive quantitative research. Key dimensions evaluated include leading medtech companies’ ambitions for growth, appetite for innovation, innovation strategy and structure, collaborative endeavors, utilization of SMACtechnology and challenges encountered in making innovation happen.
We will also be hosting a workshop at the MedTech Forum to provide a forum for participants to explore examples of innovative business models and determine how the study’s findings can facilitate their company’s ambitions for growth and innovation.
Thorough in scope and objective in evaluation, this scorecard is a tool for medtech executives to assess their position in the industry and help them systematically raise the bar for innovation in their companies. In order to not only survive but to thrive in this rapidly changing market, medtech companies and leaders must innovate. In order to win, companies and leaders must change the way they create customer value.
– Chris Wasden, Managing Director, PwC and Brian Williams, Director, PwC.