The Medtronic Effect: 3 Trends for Medical Device Company Diversification

Medtronic, one of the largest medical device manufacturers in the world, made headlines recently with its $200 million acquisition of Cardiocom, a disease management and patient monitoring firm. Though one of the first major medical device companies to move into the patient monitoring segment, Medtronic will certainly not be the last, says Paul Teitelbaum, managing director for Mesirow Financial. He believes the device powerhouse is on the front end of an industry-wide shift toward telemedicine, home healthcare and other revenue expansion investments.

Mr. Teitelbaum has more than 25 years of experience in healthcare investment banking with a focus on medical devices and healthcare information technology. 

Device companies are under pricing pressure, as well as increasing commoditization and scrutiny over utilization, he says. Other companies will soon be following Medtronic's lead of looking for product and service diversification. Here are three trends to expect from medical device companies.

1. Home health. Medtronic's acquisition points to growth in the home health sector, an area most device manufacturers haven't invested in much in the past but which will become increasingly important with the rise of accountable care originations and the implementation of the Patient Protection and Affordable Care Act.

"Providers and payers have an increasing level of interest in having healthcare delivered in the home," Mr. Teitelbaum says. "It's a lower cost setting, and patients with chronic illnesses can be monitored in the home to prevent re-hospitalizations. It's the hospital and re-hospitalizations that are costly and driving up the cost of the healthcare system."

While the U.S. healthcare system has been historically compartmentalized, ACOs will begin to encourage and reward the integrated delivery of care. Home health monitoring will also prevent patients from eventually going to higher cost acute-care settings.

As providers seek home health as a way to deliver the most cost-effective care, medical device companies will look to capitalize on that interest with monitoring devices and other products geared toward improving home health. Such devices may include dialysis machines, sleep apnea management materials, diabetes supplies, cardiovascular and respiratory devices and more.

2. Diagnostic and monitoring devices. It will become increasingly important for device companies to address and capture the opportunities presented by diagnostic devices across therapeutic areas, Mr. Teitelbaum says.

"That's the direction the delivery of care is going in," he says. "They are going to need to address it because that's where customers have insisted on healthcare going."

He expects the market to scrutinize and reduce utilization of costly implantable devices such as total knee replacements, though many implants will always be necessary. However, even for the orthopedic sector, devices will increasingly be implanted in ambulatory surgery centers as opposed to hospital operating rooms.

This shift toward ASCs will increase the demand for minimally invasive devices. Many procedures, such as orthopedic and GI, already lend themselves to minimally invasive techniques and tools. The push will continue. Open procedures will see increased scrutiny and both device companies and physicians will feel pressure to look for smaller incisions and less invasive solutions.

3. Extremities. Devices for large joints and spine are experiencing price compression while extremities are becoming a trendy segment. Mr. Teitelbaum recommends companies that only manufacture and market devices for spine be thinking of other products and services to sell to the same customer base or leverage their manufacturing sales and expertise in areas outside of spine.

"If all you do is spine, then you are in trouble," he says. "Spine is a tough space, even if you stick to cutting costs and innovating, you are potentially exposed to the risk of what happens in that whole marketplace."

Extremities will become a more desirable segment in which to invest because they are experiencing less price compression and more opportunities for growth and expansion.

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