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Profitable Innovation: Medical Device Business Model for Growth
The medical device industry thrives on the innovations generated by its large base of privately held start-ups and small companies with less than 50 employees. Eighty-five percent of new medical product introductions come from these businesses, according to the Medical Device Manufacturers Association (MDMA), yet profitability seldom occurs until after a company’s first $100-150 million in revenues.
After passing this size, many companies struggle to attain and maintain profitable growth due to product and operational complexities as well as regulatory, legal, and financial risks. This is further hampered in companies operating with an R&D-driven business model, which, as they grow from a start-up, tend to add on functions in a disjointed manner and without integrated information systems. In the U.S. profitability will be further constrained by the 2.3% sales tax on medical devices, which is scheduled to go into effect in 2013 as part of the recent U.S. Health Care Reform legislation.
Most of the profitable medical products firms have grown by acquiring smaller innovative companies, outsourcing much of their operations, and expanding into emerging international markets. While the larger companies dominate in revenues, they represent less than 1% of the industry, which is listed as 8,000 businesses by the U.S. Department of Commerce. Even among this top tier not all have consistent profits. For example, Boston Scientific turned a profit in 2010 after four years of losses.
Despite the long-standing partnership with seasoned venture capital investors, many device companies fail to break free of their R&D-focused culture as they grow into full production, multiproduct-line growth businesses. This can seriously impact their long-term performance. To achieve profitable growth, they must review and, in some cases, restructure their business and deploy the new processes and integrated systems across the entire company—not just R&D—to accommodate growth complexities and manage risks.