European Slump

28 March 2009 (Last Updated March 28th, 2009 18:30)

The global financial crisis and therefore a lack of funding is having a debilitating effect on medical technology. John Wilkinson of Eucomed tells Steve Coomber how his organisation believes the industry should be boosted and how it will cope until the economy improves.

European Slump

In 2009, economies around the world seem destined to endure a severe financial downturn. Not even emerging markets look set to escape the effects of the credit crunch, and the impact in the developed economies is likely to be even greater. So far the focus of attention, both in terms of faltering growth, business failures and redundancies, as well as financial aid and bailouts, has been the banking and finance sector, and to a lesser extent the automobile industry and retailers.

Yet, as John Wilkinson, CEO of Eucomed, the European medical technology industry association, explains, many other important industry sectors will suffer as the impact of this financial crisis reverberates throughout the global economy during 2009.

Storm clouds on the horizon

Wilkinson has a number of concerns for Europe's thriving medical device and technology industry, in terms of the impact on day to day operations, but also, as importantly, in terms of the strategic long-term perspective.

Traditionally the medical device and medical technology sector, while not immune from the economic cycle, tends not to suffer from widely fluctuating peaks and troughs. A fairly consistent fundamental underlying demand for medical technology, leads to a comparatively smooth business cycle.

On this occasion, however, says Wilkinson, it is a far more acute down cycle, threatening to lead to a significant downside impact.

"If the US market comes under pressure, then companies across Europe will as well, as the US is such a huge chunk of the global market."

"Already, in a comparatively short space of time, we are seeing what seems to be a reduction in elective procedures in certain areas," he explains. "Consumable products continue to be used, as patients continue to need treating, although they may not necessarily be treated at the same rate as before. Plus there is a tendency for capital expenditure to be deferred in these situations – which is not good news in the long run."

"Other areas that will be impacted include elective activity which is paid out of the patient's pocket. While this constitutes a relatively small amount in Europe, in the US there is still quite a lot of self-pay. Inevitably, if the US market comes under pressure, then companies across Europe will as well, as the US is such a huge chunk of the global market."

Non-acute activities which can be more easily deferred are likely to be more affected than other areas. Where the public sector is the dominant provider of care, that impact will, initially at least, be much less acute than in the private sector or where the health system involves an element where people are paying out of their own pockets.

More broadly, though, points out Wilkinson, when governments are borrowing the sort of sums that they are at the moment, in order to attempt to shore up the banking system, and avoid a long-lasting and severe economic depression, there will inevitably be impacts on public spending in the future.

Indeed governments, such as that in the UK, are already considering how to replenish the coffers after bailing out the financial system, and against a difficult economic background, including rapidly rising unemployment. Therefore, all aspects of public sector spending are going to come under scrutiny again. This is borne out by speculation in the media in the UK over whether government hospital building projects will be a casualty of the credit crisis, for example.

"When we have seen that previously, we have seen rather short-term, often rather poorly considered decisions intended to save money. Instead of re-engineering the way care is delivered, there is a tendency to go out and institute measures to squeeze suppliers, which is probably not helpful in the long run, to either party."

Wilkinson also anticipates a degree of consolidation in the market in 2009. Companies are under operational pressure, and consolidation is a way of becoming more efficient as an industry. It is also the case that companies are valued at attractive levels compared to historical valuations at the moment, so cash-rich companies are able to exploit the circumstances for strategic gain.

However, the industry goes through periodic phases of consolidation and this does not tend to diminish the long-term value or contribution of the industry. A far more serious concern is that investment in research and development at a corporate level will slim down. Perhaps even more importantly, it is becoming almost impossible for early-stage companies to raise capital in the markets at the moment.

"This is an industry built prominently around innovation derived from the ideas of doctors in hospitals," says Wilkinson.

The vast majority of groundbreaking early-stage research and development takes place in the small and medium-sized enterprises sector. Funding for that activity is very thin at the moment. As a consequence the European market will be starved of these emerging companies in years to come.

"If these companies cannot raise capital – typically they are pre-profit for several years – if funding dries up, then these types of companies will not be formed, and those that were viable two to three years ago, and on track to generate good profits, will fail. That is a real concern."

Action required

With this kind of breakdown in the market mechanism for funding, urgent action is required, from a policy perspective, by the EU commission and national governments across Europe.

"Governments around Europe are making announcements about supporting industry, but they have to be selective in targeting support of industries which are going to produce sustainable jobs in the future and sustainable jobs for Europe," says Wilkinson. "This sector is among the best suited to generate those jobs in the future.

"A serious concern is that investment in research and development at a corporate level will slim down."

"If you look at the aggregate funding of medical technology research and development around Europe, it is a very large number and a large proportion of that comes from the public sector. If you do not have an industrial machine at the end of that research and development, then a lot of it will be wasted, because most medical developments today, in terms of treating patients, have a high technical component."

There is no question that adversity often provides opportunities. The current financial crisis is no exception. Europe has the opportunity of leveraging investment in medical research and development and turning it into products and services that can benefit trade and employment in Europe. If this does not happen in Europe, countries elsewhere in the world will seize the opportunity, and other parts of the world will benefit from European medical research and development spending.

Another potentially damaging impact of the downturn, says Wilkinson, is that a lot of blame has been laid at the door of regulators for the current crisis.

"There is no doubt in my mind that we are heading towards a world where there is increasing pressure for regulation and increasing pressure for protectionism, both of which can be catastrophic for our industry, and the global economy," he says.

This highlights the potential changes that were planned for the regulatory environment in the EU in 2009 via the recast of medical device Directives. It appears now that the recast will be postponed for the time being. However, Wilkinson believes it is worth reiterating Eucomed's position on this.

"For much of what was proposed by the Commission with regard to the recast, and in terms of a number of areas identified as needing improvement, you would find that the industry is in broad agreement," he says.

"That said, the regulatory environment in Europe for medical devices has been a profound success. Medical devices are safe in Europe. If you look at the number of adverse incidents, there is no evidence to suggest that the European environment is any less safe than any other regulatory environment in the world. It has also been cost effective – allowing products to come to market safely and effectively."

What is required, however, is a substantial and considered strategic discussion on the issues. The picture in 15–20 years is more difficult and complex than the European Commission may be aware. There are increasingly convergent technologies, increasingly challenging technologies, coming in the future, and the regulatory framework needs to evolve to reflect those changes.

"Already, we are starting to see governments cutting their health budgets, such as Poland which recently announced a €85m reduction of its budget."

"We want our industry to be part of the solution for these and other challenges facing national health systems," Wilkinson adds. "We want to work together with policy makers to better understand the real public health and economic challenges ahead and putting a strategy in place. It is our view that this type of exercise is an absolute must if we are to prepare properly for the way ahead and cater for the pressures facing all of us.

"Furthermore we think that such an exercise is a necessary prerequisite before we should or can embark on a recast. Otherwise we risk not solving the real issues that face us ten to 20 years in the future. This does not mean delaying the recast but simply doing some proper thinking first and then acting.

"There is some concern that going into 2009 there is the potential for governments, national and supra-national, to take short-term cost saving measures which will actually cost patients and the healthcare systems money in the long run," says Wilkinson. "Already, we are starting to see governments cutting their health budgets, such as Poland which recently announced a €85m reduction of its healthcare budget.

"As an organisation we will be working hard to try and encourage people to see that medical technology has the potential to completely reform the way healthcare is delivered, and re-establish the value proposition. It can help to increase the efficiency and effectiveness of health systems.

"If we are going to have a strong sustainable industrial base in Europe then medical technology is one of the very best area is to focus on and it needs specific attention."