The medical-device industry is facing challenging headwinds. As governments and health insurers worldwide implement measures to control costs, public hospitals are operating on tighter budgets, while private facilities are receiving lower reimbursements. These measures are triggering a transformation of the purchasing process that will change the way that medical products are bought and valued.

In the developed world, decisions that used to be the sole preserve of doctors are now also made by regulators, hospital administrators and other non-clinicians. This broader set of influencers comes with different objectives (for example, the prioritization of cost effectiveness or even just costs). The result of this phenomenon is a shift from individual outcomes to a focus on population-level effectiveness, such as the overall improvement seen within a population for a given level of spending. Meanwhile, emerging markets, once seen as a safe haven for premium products thanks to their growing middle classes and rising investments in healthcare, are leapfrogging developed economies and introducing cutting-edge purchasing processes and pricing mechanisms.

At the same time, the medical-products industry has become more competitive. Established blockbuster categories such as wound care, coronary stents, and orthopedic devices are becoming more crowded as they mature. As high-impact scientific innovation in these categories has become harder to identify, smaller companies, such as Draco in Germany, are gaining market share by offering very low prices and innovative business models. The greater price transparency enabled by the growing use of tenders in Europe and the United States is giving an advantage to low-cost players like these.

All these trends are combining to create demand for products that are “good enough” and competitively priced. Estimates indicate that this new segment is growing twice as fast as the industry as a whole in some categories. Aware of the emerging opportunity, global medical-product manufacturers have been looking to capture it and protect themselves from disrupters that could eventually move upstream—for instance, Mindray in China. However, few have yet managed to build a sustainable business around the new segment while protecting their premium offering. Indeed, in some markets, manufacturers have offered heavy discounts without sufficiently differentiating their premium offerings, leading to double-digit-percentage annual declines in pricing in some categories such as stents.

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