The world is in the grip of an economic downturn. So how is the healthcare sector faring? In the first of a new series of articles looking at the future of medical technology, On Target performs a health check on the European medtech industry – and finds the patient is in surprisingly good health. This first article surveys the geography of the healthcare market.
At the beginning of this year, analysts predicted that the European medical device industry would grow by almost 10% in 2008. This growth, it was claimed, would be fuelled by ageing populations across Europe, increased spending on medical technologies and the accession of more fast-developing, former Eastern European states into the EU. As 2008 draws to a close, the world finds itself blighted by an economic downturn of seemingly gargantuan proportions. The double-digit growth forecast at the start of the year appears, at best, optimistic. In fact, such is the volatility of the markets at present that growth of any kind seems to be the exception rather than the rule. Despite this, the outlook for the medtech sector appears much more encouraging than that for many other global business sectors.
A recent report by management consultancy McKinsey states that the European medical technology market is growing at a rate of 5–6% each year – a model of consistency in an otherwise turbulent economic climate. Espicom Business Intelligence, a leading provider of independent market information, is even more bullish, predicting that the 11 main medical device markets in Western Europe will grow by over 40% within the next five years. Its report The Outlook for Medical Devices in Western Europe forecasts that the medical device market in these 11 key regions will reach a collective value of US$82.4 billion by 2013 – which is US$24.1 billion greater than its current position.
A recent report by management consultancy McKinsey states that the European medical technology market is growing at a rate of 5–6% each year – a model of consistency in an otherwise turbulent economic climate.
A societal challenge
The main driver for this growth is simple: demand. With or without an economic downturn, populations are ageing and patients are requiring longer and more intensive treatments. By 2025, it is predicted, the EU will have over 10 million people under the age of 20 and over 40 million retired people over the age of 60. The resultant pressures on healthcare budgets across Europe will undoubtedly be significant – but regardless, the demand for medical products will increase. Also, in the era of the ‘informed patient’, both clinicians and patients will demand access to the latest treatments. As technology advances and health outcomes improve, these societal challenges are exacerbated.
The combined impact of demand and technological advancement is creating an environment of challenge and opportunity for the medtech industry. With demand comes growth – but as healthcare deficits across Europe soar and governments battle to maintain healthcare provision in a manageable, cost-effective fashion, new healthcare policies are evolving and the medical device sector will need to operate against the backdrop of an increasingly regulated environment.
What does all this mean in practice? Where are the growth opportunities in the European market, and what challenges can companies expect along the way? John Wilkinson, former Director General of the ABHI and now Chief Executive of Eucomed – the trade association for European medtech companies – believes the industry can make a major contribution to meeting the societal challenges ahead, but that much of it will be shaped by evolving healthcare policy. “Broadly speaking, we can see a bright future for the industry,” he told On Target in an exclusive interview this month. “Demand continues to grow at a pace, largely due to demographics but also due to some new technologies that allow you to do things that couldn’t be done before. I don’t think the demand is going to go away, so there will be growth. But we are also seeing a changing policy environment: a lot more pan-European policy initiatives and subsidiarity of health to national governments. It’s clear that the Commission and parliaments are responsible for opposing strands of policy that impinge on health. A good example of that is the health technology associations, where there’s an increasingly active network of policy units around Europe, getting together to talk about shared issues.”
In addition to this, the medical technology industry in Europe currently finds itself under intense regulatory scrutiny. The effects of this will certainly influence growth. “The regulatory environment continues to evolve,” says John Wilkinson. “There’s a constant stream of either vertical regulations relating to the industry or horizontal regulations that impinge on the industry, and we need to keep our eyes on these. Specifically, the whole medical devices regulatory regime is under major strategic review by the Commission at the moment.” On Target will explore the evolution of the regulatory environment and its impact on the medical devices sector later in this series. For now, however, we take a look at the European market as a whole.
The European market
The European medical technology market is diverse and fragmented (see Figure 1). It is currently valued at €63.6 billion (2007). Germany represents the biggest market within Europe by some distance, with a 31% market share. Behind it are France (16%), Italy and the UK (both 11%) and Spain (9%), meaning that over three-quarters of the European medical devices market is concentrated into just five countries. New EU member states – Poland, the Czech Republic, Slovakia, Hungary, Slovenia, Estonia, Latvia, Lithuania, Malta, Cyprus, Romania and Bulgaria – collectively total 5% of the market, while the remaining EU 15 plus Norway and Switzerland have a combined 17% of the market – of which the Swiss market (2%) is the most mature. The medtech sector employs more than 435,000 skilled workers in Europe, comprising over 9000 companies involved in the design, manufacture and supply of medical technology. 80% of these companies are small to medium-sized enterprises (SMEs).
Germany is the third largest medical device market in the world (behind the US and Japan), with an estimated 2008 value of US$12.4 billion. Despite its size, it does not have the highest number of medtechrelated companies in Europe, sitting behind the UK in this list. According to Espicom’s 2008 report The Outlook for Medical Devices in Western Europe, domestic production of medical equipment in Germany continues to grow, but at a much slower rate than before. In 2001 domestic production grew by 12%, but by 2005 this had dropped to 3.8%. Conversely, the proportion of domestic production that has been exported has remained roughly constant: 81.9% was exported in 2001, while by 2005 this had grown to around 85%. Consequently, Germany is both the biggest exporter (€14 billion) and the biggest importer (€9.2 billion) of medical technologies. As in much of Europe, healthcare deficits in Germany are rising. In 2003, it had a healthcare deficit of €3.5 billion.
France is the fourth largest medical device market in the world behind the US, Japan and Germany. It is Europe’s second largest exporter of medical technology, while its imports in 2006 reached US$8.1 billion. However, not all of these imported products are destined for the domestic market. According to Espicom, the French medical device market is increasingly supplied by the foreign sales subsidiaries of multinational companies – several of which manufacture within France, having acquired smaller indigenous fi rms. Rather like Germany, France is plagued by a significant healthcare deficit – in 2003, this totaled €11.5 billion – and this has brought about a series of new health reforms under the Presidency of Nicolas Sarkozy. More specifically, recent new measures to control spending on medical devices are such that business analysts predict only moderate growth for the French market. Espicom forecasts that the sector will be valued at US$9.75 billion in 2012 (from US$7.52 billion in 2007).
Italy, alongside the UK, is the third largest medical device market in Europe by market share. Italy has over 500 medical device and in vitro diagnostics companies employing more than 30,000 people, with a combined turnover of roughly €7 billion. Around a fifth of the total turnover is generated by manufacturers with production located in Italy. Most medical device companies in Italy are SMEs (over 70%), with a combined turnover of less than €20 million. The Italian healthcare system, originally based on the UK’s NHS model, has recently benefited from a large-scale investment programme as it endeavors to thwart rising healthcare costs. In 2003 its healthcare deficit rose to €5.4 billion, from €3.2 billion twelve months earlier.
The UK, like Italy, has an 11% share of the European medical device market. The UK market was valued at US$9.9 billion in 2008, and is the joint third largest domestic market in Europe behind Germany and France. In fact, the UK is home to the largest number of medical device-related companies in Europe, with 20% of European companies operating from Britain. Despite this, the UK industry is heavily reliant on imports. According to Espicom, the UK medical equipment and supplies market is undergoing an importled increase. “The value of imports (US$7.4 billion) was greater than exports (US$6.9 billion) in 2006 for the fifth time in as many years,” it says. “The UK market is proving to be a good opportunity for importers as the majority of domestic manufacturers are small and undercapitalised. This has led to inelastic domestic supply as manufacturers are unable to respond to a change in demand.”
Spain is the fifth largest medical device market in Europe and the ninth in the world. It has a strong manufacturing base, centered largely around Barcelona and Madrid, though the companies are generally small and concentrated at the low-to-medium technology end of the market. In 2006, net production was valued at US$1.5 billion, of which exports totaled US$1.1 billion. Most of the Spanish market is supplied by imports, largely from other EU 15 countries. Imports to Spain totaled US$3.2 billion in 2006, a 13.9% rise from 2005.
Central and Eastern Europe
The growth of the wider European market has, of course, been accelerated by the recent enlargement of the European Union. In 2004, eight countries from Central and Eastern Europe became full members of the EU; they were joined in 2007 by Romania and Bulgaria. The accession of these countries has not only brought in standardised regulations and opened up new markets for medical device manufacturers across the region, but has also provided them with new, attractive destinations for offshore production. According to industry analysts Frost & Sullivan, price sensitivity in the major markets is tilting the balance in favour of lower-cost products; and as prices and profit margins are squeezed, cost containment during the production phase has become very attractive. This has made the Eastern European market even more appealing. In addition to being promising markets, many Eastern European countries are also emerging as cost-effective manufacturing bases.
Russia, Poland, the Czech Republic, Hungary and the Ukraine are the five largest markets within Central and Eastern Europe. Russia has perhaps the most growth potential due to the size of its population, but its health expenditure remains low. The Czech Republic, on the other hand, has one of the highest per capita expenditures in the region, which has led to the establishment of a medical device market recently valued at US$1.2 billion. Likewise, Poland has developed an impressive market which, at US$1.8 billion in 2008, places it in the world’s top 20. Growth in Poland is expected to remain at a consistent 9% in the next few years. In Central Europe, Hungary’s medical device market currently stands at US$746 million; and with heavy investment in equipment promised, it is expected to top the US$1 billion mark within the next five years.
What the future holds
The impact of the current liquidity crisis on the medical device sector remains unpredictable. While it appears unlikely that the market will emerge unscathed by the global downturn, the European market as a whole appears well positioned for future growth. Success will, of course, depend on its collective ability to adapt to a changing regulatory environment – and crucially, its ability to provide innovative solutions to the ongoing demands of the ageing patient population. Next month, On Target will look at current therapeutic challenges and how the medtech industry is helping to overcome them.
Some of the data within this article was sourced from Eucomed (www.eucomed.org) and Espicom Business Intelligence. For further information on Espicom’s report The Outlook for Medical Devices in Western Europe, visit www.espicom.com.