L E K . C O ML.E.K. Consulting / Executive Insights

EXECUTIVE INSIGHTS VOLUME XVI, ISSUE 30

INSIGHTS @ WORK®

Service Expansion Opportunities for MedTechs: A European Perspective

Six Minutes with Nicole Mooljee Damani and Massimiliano Rubin

Partners in L.E.K. Consulting’s European MedTech Practice

Service Expansion Opportunities for MedTechs: A European Perspective was written by Nicole Mooljee Damani and Massimiliano Rubin, Partners in L.E.K. Consulting's European MedTech Practice. Please contact medtech@lek.com for additional information.

L.E.K.'s Executive Insights "Beyond The Product: Service Expansion Opportunities for MedTechs" outlined the possibilities for ex-

panding into broader services, given hospitals' need for cost containment and integrated support. L.E.K. MedTech Partners Massimil-

iano Rubin and Nicole Mooljee Damani give their perspective on the dynamics of this sector in Europe.

What do you see as the main challenges that MedTech providers face in Europe right

now?

In Europe, much as in the U.S., MedTech companies know they need to move into the services business if they are to pursue a

growth agenda. Europe's economic crisis means the drive towards cost containment is already further under way than it is in the

States, with systems in place to cut costs or find added value. Last year, for example, the sector grew by one percent in the U.S.,

while in Europe it was flat. Intensifying the cost containment effect is the state-dominated nature of European healthcare, which

brings a uniform and inflexible character to the austerity drive.

Having tried to reduce prices and having looked at ways to demonstrate the value of existing products and services, MedTech execu-

tives now need to think creatively about other ways to stay competitive, such as transforming themselves from providers of products

to providers of integrated products and services that encompass more of the patient journey or present an innovative solution that

offers a step-change in efficiency.

How does Europe's MedTech landscape shape its challenges?

A market of 28 nations is bound to be fragmented, but all the E.U. member states share a need to continue providing quality medi-

cal care at a time when both costs and expectations are rising. Europe's divisions present a challenge in that MedTech companies

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still have to handle approaches at a national level, though there is increasingly talk of "platforms" that might allow cross-border

coordination.

Historically, European MedTech prices have been lower than in the U.S., sometimes by as much as 80 percent. With products start-

ing from lower price points, with smaller margins, and being further squeezed by competition from low-cost Asian device compa-

nies, there's real pressure to introduce more innovative products or to add value through building integrated services around core

products.

When you look across the European landscape, where do you see opportunities for

growth?

MedTech companies can move into the service provider role by expanding into operations efficiency services or clinical care de-

livery services, or by providing wrap-around care on either side of the hospital stay. For instance, across Europe there's a growing

trend of providing patients with out-of-hospital care in their homes. The Nordic countries are a particularly innovative example of

how this space presents opportunities for MedTech companies. With their small, thinly-scattered populations, Scandinavians have

been pioneers in using telecare, which requires IT and various other services, as well as core MedTech products.

While we think the greatest potential lies in embracing the role of service provider, there are still opportunities for product spe-

cialists to achieve growth by commanding a leadership position in a particular therapeutic area. With an aging population and

increasingly squeezed public health budgets, MedTech companies need to help lower life-time medical costs. This may mean

providing higher quality products that might cost more up-front, but which will eventually deliver savings. By way of example, take

replacement hips: with people living longer, the chances are that many won't just need a single new hip, but two of them, perhaps

even more than once. As a result there's a race on to find innovative solutions for hips that will last for 20-30 years rather than the

standard 10-15 years, using advanced materials such as titanium or mesh. The Italian medical device company Lima Corporate has

used a technique known as "Electron Beam Melting," using laser beams and 3D printing to cut prostheses for hips, shoulders and

knees. Lima has invested in creating lines of interchangeable prosthetic modules that they can adapt over time to a patient’s needs,

cutting surgery time and making rehab easier.

But even for product specialists, the smart money is on adding services to complement product leadership, creating a longer and

tighter relationship between them, their customers and their patients. Product-only companies can achieve growth through contin-

uous innovation, but the revenue and market opportunities are increasingly limited.

How should these opportunities and challenges be viewed by MedTech companies?

With cost containment requiring European hospitals to look to MedTech companies for service solutions rather than simply specific

products, this provides opportunities for creating new customer models. There's also a real opportunity to kick-start a cycle of

innovation in Europe by putting funds into R & D, accessing adjacent markets through acquisition, devising ways to partner with

other companies, or even setting up internal business units to run entire hospital departments. An example of this is the U.S. firm

Medtronic, which is currently trialling its "Hospital Solutions Business," a unit managing cath labs for hospitals. It's a fertile moment

– and for many companies, a defining one. What we see before us is a battle: some companies will be super-innovative, and others

won't. Those who don't will end up struggling.

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Larger or particularly nimble MedTech players may have the capital and infrastructure to act as innovation catalysts. For smaller

companies in the European sector, that's a challenge, because many cannot afford innovation. A number of European MedTech

firms are still family owned and thus reluctant to put the family jewels on the line. And yet, there's a serious risk of fundamental

decline if they can't get it right. For small and mid-sized companies without the money to experiment, the risk is that they'll be

subsumed by larger organisations within three to five years.

Transforming an organization from a product to a service orientation is not without its challenges and MedTechs will need to look

at new business models that facilitate partnerships, risk-sharing and innovative commercial arrangements with customers. The

global heart failure and arrhythmia assessment and management company Sorin CRM has recently launched its pioneering “Risk

Sharing Program,” with hospitals. If Sorin’s pacemakers or ICDs don’t perform properly, resulting in, say, hospital readmission, the

company rebates the hospital part of the cost of the device. It’s a smart move, particularly when hospitals are increasingly being

judged on outcomes.

What would be your advice to the European MedTech executive who’s unsure

how to expand?

MedTech companies considering their next steps first need to make some positioning choices – they need to decide where they

want to play. Our recently published Executive Insights on U.S. MedTech service expansion opportunities outlined the main areas

of opportunity for MedTechs and this structure is also true in Europe. This should be closely followed by some specific activation

choices – they need to understand their attitude to risk and how their capabilities, organisation and relationships enable them to

capture these opportunities. And, of course, they need to quickly identify the gaps and develop a strategy to fill them, be it through

organic development, acquisition or partnership.

The entire healthcare sector is maturing: there's a trend in hospitals to outsource more, from back office admin to managing

patients. There's a real opportunity here, particularly if you look to the value chain as longer than simply a hospital stay – one that

starts at prevention and continues through hospital treatment to after-care. In this brave new world, he who gets closest to the

patient before and after he becomes a patient, wins.

The companies that are starting to lead in out-of-hospital monitoring and prevention are the tech providers, like Apple and Google,

because they are the interface between customers and the world. Earlier this year, Google unveiled a contact lens that can revolu-

tionize diabetes by monitoring glucose levels, which was dazzling to an industry where most other players were looking at insulin

delivery. A chip and a glucose sensor are sandwiched between contact lens material, measuring glucose in tears and sending the

data to a mobile device. The smartest thing MedTech companies could do is partner up with these huge tech companies, who

have the cash and the customer connections. Last year, Google set up a new company, Calico, headed up by Apple and Genentech

chair Art Levinson, to develop technologies designed to deal with health issues related to aging. That's the sort of innovative part-

nering we'll see in the future and one of the strategies we at L.E.K. see as a potential path for European companies.

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