Medtech facing strong headwinds—a need for a new support model
The last 5 years haven’t been the easiest for the medical technology (medtech) industry. A time period characterized by flat revenue growth and an unsustainably high cost structure is paving the way for a change in how they sell to and support their customers.
The current medtech support model
The medical device industry’s sales approach has remained virtually unchanged since almost the beginning of time. It is based around the notion that relationships are the cornerstone of effective selling, and that good relationships are built through regular in-person customer visits. This is sound logic, but what if the healthcare environment had changed when nobody was looking and relationships no longer got you as far as they once did? This is the situation that we are seeing today and it is forcing medtech companies to address the immediate problem of an unsustainably high cost of doing business.
An outdated and costly sales and support model
We only have to look at the current medtech customer support model to see where the problems lie. Today, the medical device rep is physically present in the operating room (OR) to support the surgeon and his/her OR team as required throughout a surgical procedure.
This is the status quo for the vast majority of surgical procedures that require an implantable medical device. This high-touch sales model is sub optimal for both the hospital and the manufacturer. The manufacturer is hit by an unprecedentedly high SG&A (sales, general and administrative) expense, and the hospital is hit because this expense is essentially passed on to them—baked into the selling price of each device.
A recent report by PWC (PricewaterhouseCoopers)1 stated that SG&A (Selling, General & Administrative) has been showing a declining trend in performance between 2005 and 2011, driven for the most part by the implantable medical device segment. The main culprits are cardiothoracic, spinal and orthopedic surgeries, which all involve a significant service component (provided by the medical device rep) to not only support the OR team, but to also maintain large volumes of inventory in the field. In fact, the seven largest orthopedic companies spent more than 43% of the cost of an implant on SG&A expenses, whereas COGS (Cost of Goods Sold) was less than 30%2.
This model is costing the device industry “an arm and a leg” (quite literally in the case of orthopedic surgery), with an estimated $35B per year being spent on sales support alone. Compared to other industries, medtech firms can spend up to 500% more on SG&A than the typical high tech or industrial firm, according to a recent BCG report3.
Misalignment with hospital purchasing priorities
So what has changed between yesterday and today’s model? In a word, the customer. The pressures of healthcare reform have resulted in hospitals taking a far closer look at their margins. Clinical effectiveness is no longer looked at in isolation, but must be delivered economically and in a way that can be quantified. As a result, purchasing decisions fall into the laps of “value analysis committees” instead of physicians, and those devices that don’t make the cut are put out to pasture.
We are currently in a time when the medtech industry can no longer get away with significant price increases for products with incremental improvements—this means that medtech companies are struggling more than ever to realize a return on their investment in innovation. Furthermore, “hospital demand letters” are challenging their pricing and forcing them into volume-value deals in order to avoid losing key contracts to competitors.
Reinventing the Customer Support Model
But there are steps that can be taken. Those companies that will rise to the top will be the forward-thinking medtech companies that realize that the quickest fixes are to spend less and to spend smart.
Nurep believes that the medtech industry should focus its attention on the following critical success factors if they are to develop a commercially sustainable customer support model that recognizes the shifts in healthcare that are currently effecting their business:
- Invest in productivity levers that make customer service and support a differentiator
- Focus on efficiencies that are effective and sustainable—not just cost cutting measures
- Effectively demonstrate value to the customer that combines both clinical and economic value
- Benchmark by looking at success in other industries that have effectively contained SG&A
1 PWC Report: Operating performance in the Medtech industry—Trends and imperatives (Oct, 2012)
2 Orthopedic Network News (July, 2010)
3 BCG press release (Oct 2012)
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