Medical Devices Promising Despite Challenges

Favorable market conditions and an increasing U.S. aged population have led to considerable growth in the medical device industry, even as other high tech sectors have continued to struggle. However, competition in the global marketplace and the influence of managed care may create obstacles to the industry's future growth.

The changing demographics of the U.S. will play a major role in the growth of the medical devices industry. As the vast baby-boomer generation ages, the country's senior population (65 and over) will continue to increase. Seniors now account for almost half of the nation's total healthcare expenditures. The U.S. Census Bureau estimates that by 2020 the population of seniors, currently 13% of the total U.S. population, will grow to 17%*. This severe demographic shift, the "graying of America", will increase the demand for healthcare products. However, as the senior population grows and the number of Medicare recipients increases, there will be proportionately fewer working Americans to pay for healthcare programs funded by tax payers. Budgetary constraints may have an affect on the medical devices industry if seniors are unable to afford healthcare services and government funding falls short.

The relatively small size of the medical devices market has also contributed to the steady growth of the industry. The cost of research and development for medical device products, which averages almost twice that of other types of research and development, as well as the long FDA approval process, has created significant barriers to entry that have severely limited competition in the medical device marketplace. This limited competition has proven beneficial for existing companies and attractive to potential investors, especially as most research and development efforts have enjoyed a strong rate of commercial success. Companies are preparing to introduce new products in cardiology, orthopedics, oncology, and specialized surgical markets.

The increase in managed care will have a significant impact on the industry. HMOs, PPOs, large hospital consortiums, and government agencies oversee over 60% of all medical device purchases, and the rate is expected to climb to 80-90% by 2005*. Managed care can reduce the industry's income and profits through increased bulk purchasing, therapeutic substitution for treatment (using treatment methods in which devices are not used), and strict screening of incoming patients, which often results in services that do not require the use of devices. However, managed care plans usually cover senior adults for most inpatient and outpatient services, while conventional Medicare plans may have limited coverage.

Cardio market poised for growth

Manufacturers of heart devices have reported particularly favorable earnings. Heart disease remains the leading cause of fatality in the US The demographic increase in older Americans will likely expand the number of potential users of heart devices. The demand for cutting-edge products, such as implantable cardiac defibrillators (ICDs), coronary stents, vascular sealing, external defibrillators and pacemakers is predicted to escalate. Sales of cardiology products rose by 9% in 2002, and are forecasted to grow another 17% by 2003*, partly because of Johnson and Johnson's 2003 launch of the Cypher drug-coated coronary stent. Stents are tiny wire mesh tubes inserted into an artery to prop it open after angioplasty. Drug-coated stents are expected to drastically cut down on the number of repeat procedures, and eventually replace metal stents in the market. Such innovative products are predicted to fill the huge untapped market for heart treatments and stimulate significant sales growth. Another sector that has been performing favorably, mostly due to the increase in the aged population, is orthopedic products such as hip, knee, and shoulder replacements. This market is estimated to grow 7%-9% in the next few years.

International trade - the next frontier

Despite the fact that the United States is the world's leading producer of medical device products, the majority of sales last year were domestic. According to Jeffrey Gren, Director of the Office of Microelectronics, Medical Equipment and Instrumentation (OMMI) in the International Trade Administration, the rate of overseas activity could be greatly increased. Gren works with the OMMI to help the mostly small and medium-sized U.S. medical device companies increase their export activity.

"Because we have the most advanced medical products, and a tremendous international cooperative spirit between industry and regulators, we view the U.S. as being in a very strong position to increase export activity to enable major growth," says Gren. "Currently, the higher growth rates are occurring in the overseas markets. The mature markets, like the U.S., Europe, Japan, and Canada, have annual growth rates in the 5-6% rate, whereas many Latin American and Asian economies have growth rates in double digits, 12-18%. So over time, unless U.S. companies focus on export opportunities, they're going to lose market share. A lot of the exporting being done currently is by the larger companies, and smaller and medium-sized companies are not as actively involved as they could be. Much of that is because they're not aware of opportunities and exporting procedures."

Gren states that some countries have far more friendly regulatory policies than the U.S., and that there are challenging bureaucratic procedures in the United States that discourage companies from entering foreign markets. The OMMI works to address this disparity by informing companies whether or not its products are a good match for the foreign marketplace, what the expected competition will be like, and what the regulatory conditions are in each country.

"The major regulatory systems in the world do provide adequate safeguard protection for medical devices, but there are two risks that a regulatory system has," Gren says. "One is the risk of having review procedures that are so rigorous that medical technologies that will save lives or improve the quality of lives are not allowed in the marketplace. The other risk is having a system that is too lax, where unsafe products are allowed in the marketplace. The role of a regulator is then a balancing act, because lives are lost and saved, and quality of life is impacted either way, by having unsafe products in the market or by denying access to safe products in the marketplace."

Coming May 1st, Larta's Economic Research Briefing and white paper on the medical device industry.

by Wendy Hall, Larta Staff Writer

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*Source: Standard & Poor