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Deloitte's Life Sciences & Health Care Blog

Portfolio optimization could help medtech navigate a perfect storm

Years of growth through acquisition has resulted in a number of large players in the medtech space. Many companies that didn’t appropriately integrate the acquired companies (or their products) are now finding it difficult to effectively manage their extensive and complex product portfolios, which could be restricting their margins and their ability to invest and innovate. We recommend that companies thoroughly analyze their portfolio to figure out which products are most profitable and strategic, and then prioritize support for them. For less profitable products, companies should determine if they should be repriced, standardized, or discontinued.

With less capital to invest in research and development (R&D), this type of analysis can help device manufacturers innovate and keep pace with a health care industry that is transitioning to new payment models that reward lower costs and better outcomes. Moreover, optimizing the portfolio can help companies reduce operational and manufacturing costs while supporting R&D and regulatory compliance.

Large waves are beginning to hit medtech

Medtech companies are sailing into a perfect storm made up of waves coming in from several directions:

  1. New payment models: Large health systems, which have enormous purchasing power, are transitioning to a value-based care model. This change is often putting more pressure on medtech companies to demonstrate the operational, and financial, benefits of their products. Among many device manufacturers, there is a sense of urgency to change the direction of their R&D. Medtech companies should develop digital devices that can gather data to demonstrate their effectiveness, or find other ways to collect real-world evidence. Medtech leaders understand the need to move in this direction, but they often don’t know where to start, or they lack the funding needed to change course. Companies that are unwilling or unable to invest in a digital strategy could fall behind leaner and more agile competitors.
  2. Competition from consumer electronics companies: Along with competitive pressure from small and nimble medtech startups, large and deep-pocketed consumer electronics companies are beginning to integrate medical technologies into their products and indirectly competing with medtech companies. Case in point: In September, Apple, Inc. announced that its latest Apple Watch would include an EKG sensor that can alert the wearer to irregular heart rythms.1 Also in September, Fitbit and Humana Inc. said they would expand their partnership to include health coaching for the health plan’s chronically ill members. Fitbit has relationships with more than 100 other health plans. Some consumer electronics companies have tremendous reach and are sometimes able to launch new products every few months. A medtech company, by contrast, might need two or three years to develop and launch a new product.
  3. Shrinking corporate and venture capital investors: Financial pressures generated by health care reform, the transition to value-based care, and tougher insurance coverage and regulatory requirements for medtech innovations have deterred some corporate and VC investors, according to a recent Deloitte report on investment trends in early stage medtech innovation.

Strategic portfolio management could shore up capital

Medical device manufacturers have historically operated under the premise that more products translate to more profitability. While that generally is no longer the case, medtech leaders often don’t know which of their devices are profitable, and which ones are losing money. It’s not an easy question to answer.

Consider this: ABC Medtech develops a surgical device that is used for a specific type of operation. In some countries, surgical devices must comply with various regulations, so ABC develops a variation of the device that satisfies each country’s unique rules. In the end, the company might have 10 or 20 variations of the same device. While this strategy expands the market for the device, the margins might not offset the manufacturing and operational costs to support a complicated portfolio.

In this scenario, ABC Medtech’s executives should look beyond the number of units sold when managing the company’s portfolio. They also should determine how the device performs in each market. While the company might be not be selling a large number of devices in one country, the margins could be 50 or 60 percent. Conversely, competitive pressure or low-paying government contracts could make the device a revenue loser, despite high sales volume.

A medtech company might have multiple variations of products for distinct groups of patients. Some medical devices, for example, are tailored to a particular type of patient. A surgical tool for pediatric patients will be different than the device used for adults. A tall adult might require a device that is different from the one used for a shorter adult. Companies might be reluctant to eliminate some of these tailored products even if they are unprofitable.

Many medtech companies have seen their portfolios grow without bounds for years. Companies should assess the lifecycles—and the financial returns—of their products to determine which ones are becoming obsolete. If a company understands the profitability of each variation of a device, it can eliminate the unprofitable ones. If one variation of a product isn’t profitable, maybe there is a functional equivalent that can be used. We see this strategy as optimizing—rather than cutting—the product portfolio. The medical necessity of products should allow the manufacturer to continue to reach 95 percent or more of its patient base while improving profitability.

For medical technology, traditional cost-saving efforts to free-up capital have run their course. Large and complex product portfolios typically leave little revenue for R&D. If companies can free up internal costs, that revenue can be reinvested in new product innovation. This approach, while effective, can require company leaders to change the way they make decisions about their products.

Author bio

Luis is a senior manager with more than 15 years of experience in solving complex supply chain and network operations challenges primarily in the Life Sciences industry. Prior to joining Deloitte, Luis worked in the high-tech industry managing research and development of next-generation products from innovation to market launch. Luis’ clients include large biopharmaceutical and medical device companies, as well as technology and consumer products companies. Luis holds a Ph.D. in Chemical Engineering from the University of Colorado at Boulder.

 

Mark is a principal and a leader in Deloitte’s Supply Chain and Network Operations practice and focuses on portfolio management and complexity management. Mark has more than 25 years of experience in strategy, operational effectiveness, and digital analytics consulting. He has served many medtech global clients as well as other Fortune 200 companies enabling him to bring cross-industry learnings. Prior to consulting, Mark worked at Boeing and NASA as Director of Operations and Program Management of the 777 Program. Mark holds an MBA from the University of Chicago, and an MS and BS in Aerospace Engineering from Penn State University.