John BabbitPartner, Life Sciences, Transaction Advisory ServicesEY
ProgressionsNavigating the payer landscape
MEDTECH2014
Redefining Innovation in the Face of Healthcare Reform
Global Life Sciences
Report 2014
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A long tradition of industry insights
Progressions 2014Global life sciences reportNavigating the payer landscape
Beyond borders 2014Global biotechnology report
Pulse of the industry 2013Medical technology report
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Headlines
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Global medtech headlines
► The leading challenge facing medtech companies is to find ways to differentiate themselves and their products in an increasingly commoditized market.
► The search for growth takes a few new twists.
► Record fundraising – large debt offerings to fund stock buy-backs, M&A
► Venture backed capital increases and the return of the IPO market
► M&As including megadeals on the rise
► Inversions
► Current market trends point toward sustained M&A activity
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Overview: Follow the money2013 by the numbers
Global market cap
65%
Follow-ons raise
US$9.4b(Second
highest total since 2008)
IPOs raise US$3.5b
(Second only to 2000)
Broader market rally
Product successes
(led by a few US
commercial leaders)
Globalrevenues
10%(best showing
since GFC)
Global R&D 14%
(outpacing revenues for
first time since GFC)
Global net income 15%
Global numbers dominated by strong US performance
In Europe, Canada and Australia product and financing story not as strong; companies more cautious about R&D spending
Variance across key
markets
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Financial performanceBehind the numbers
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Source: Capital IQ and EY analysis
► The medical technology sector is weathering a perfect storm caused by three concurrent trends: the move toward value-based health care, growing regulatory pressures and resource constraints within the industry itself
► Med Tech’s customer base is shifting as payers, health systems and patients become more influential than they have been in the past. This shift undermines Med Tech’s fundamental business model. Companies must find new ways to create, deliver and capture value.
► Unfortunately, companies of all sizes face significant resource constraints precisely when they need to be investing in new kinds of innovation. Financing has become increasingly scarce for small companies.
► Although US continues to dominate the global Med Tech market, China and India have the highest expected growth rates
Global Med Tech/Dx Market TrendsLarge cap Med Tech trends reflect issues faced by pharma more than a decade ago
2007 2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E
8.7%
7.5%
2.4%
4.6% 4.1% 4.5%
1.1%
3.9%
5.3%4.3%
Top 10 Medical device companies revenue growth story
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2012 20130
250
500
750 Chart Title
Employees (000s) +5%
US/EU financial performance Pure-play companies – 2013
2012 20130
5
10
15 Chart Title
R&D expense (US$b) +7%
2012 20130
50
100
150
200 Chart Title
Revenues (US$b) +5%
2012 20130
5
10
15
20 Chart Title
Net income(US$b) +16%
Source: Ernst & Young, Capital IQ and company financial statement data.
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Medical technology at a glance, 2012-13(US$b, data for pure-plays except where indicated)
GSK Q2’13 results
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Selected US medtech public company financial highlights by region, 2013 (US$m, % change over 2012)
GSK Q2’13 results
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US market capitalization relative to leading indices
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M&As in US and Europe
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Portfolio rationalization
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In both the US and Europe, biotech stocks outperformed broader indices► US market capitalization relative to leading indices
► In Europe, a similar trend. Year-over-year market capitalization of European biotechs increased 60% ( as of January 2013)
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Financial performance: The big pictureRevenues near US$100b
In US$b
Beyond borders − EY global biotechnology report 2014
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Financing: The big picture IPOs return to US, Venture holds steady
Beyond borders − EY global biotechnology report 2014
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Innovation capital rebounds in US & Europe
Beyond borders − EY global biotechnology report 2014
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In the US, IPOs bounce back to the future
0
5
10
15
20
25
30
35
40
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
Amount raised Number of IPOs
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Am
ount
rai
sed
(US
$b)
Num
ber
of IP
Os
Beyond borders − EY global biotechnology report 2014
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Mergers & acquisitionsBiotechs buying, pharma in retreat
Beyond borders − EY global biotechnology report 2014
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In US, new drug approvals return to historic average
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Point of viewRedefining innovation
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A perfect stormThree trends are disrupting medtech
The move to value-based health care
Regulatory pressures
Resource constraints
1
2
3
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The move to value-based health care
Escalating costs
Budgetary pressures
Large unmet needs
Value-based health care:
►Comparative effectiveness research
►Health technology assessments
►Accountable care organizations
►Disease management programs
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Regulatory pressures
Proposed PMA process for Class III devices in Europe
US 501(k) process reform
Sunshine Act
Increased uncertainty impact on investment
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Resource constraintsInnovation capital in the US and Europe
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Medtech revenue growth has slowed, dragging down R&D spend…
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…leading to “lost” revenues of US$131 billion…
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…and leading to “lost” R&D spending of US$12 billion
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Healthcare budgets have stagnated for the first time in years
Gre
ece
Irela
ndIc
elan
dEst
onia
Portu
gal
Denm
ark
Spain
Unite
d Kin
gdom
Slove
nia
Czech
Rep
ublic
Italy
Austri
aO
ECDFr
ance
Austra
liaM
exic
oNet
herla
nds
Polan
dBel
gium
Ger
man
yNor
wayNew
Zea
land
Canad
aFi
nlan
d
Unite
d Sta
tes
Hunga
rySwitz
erla
nd
Slova
k Rep
ublic
Sweden
Isra
elJa
pan
Chile
Korea
-15%
-10%
-5%
0%
5%
10%
15%
Average annual growth in health spending across OECD countries in real terms, 2000-2011
2000-09 2009-11
Source: OECD Growth rates for Australia, Denmark, Japan, Mexico and Slovak Republic refer to 2009-10 instead of 2009-11Growth rates for 2009-11 are not available for Luxembourg, and Turkey.Growth rates for Chile calculated using the Consumer Price Index (CPI).
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Implications for the Life Sciences business model
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Life Science’s "new" customers:an expanding customer base
► Value-based health care► New incentives Payers
► Greater financial risk► More control over health
decisions
► Consolidation► Centralized purchasing
decisions
Patients
Hospital systems
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Expanding beyond traditional product offerings in three new ways
Beyond the product
► Services and solutions► Standalone offerings or
complementary to existing products
Beyond treatment
► Across the cycle of care► Prevention,
disease management, remote monitoring, etc.
Beyond the hospital
► Mobile products and services that keep patients out of the hospital
► "Health care everywhere"
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Expanding beyond traditional business models
Beyond the product
Beyond the hospital
Beyond treatment
GE Healthcare’s Transforming Cities campaignWorking with providers, payers and patients to monitor and improve health outcomes in selected cities’ populations
Baxter/Chinese National Institute for Hospital AdministrationDeploying sustainable care and delivery models for dialysis patients Medtronic/Cardiocom (acquisition)Medtronic’s moves into services by acquiring a telehealth devices company Covidien’s Sandman programImproving sleep disorder treatment with patient education and encouragement GE Healthcare’s Get Fit campaignVia behavioral economics, urging patients to adopt healthy lifestyles Medline’s Advancing Health Together programTools, services and education to help nursing facilities improve quality Proteus Digital HealthIngestible sensor inside pill to monitor adherence and key health indicators Cardiio Smartphone app that monitors heart rate using camera
Source: Ernst & Young, media reports
The pace of change
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The pace of change is accelerating
3-5 years ago Today 3-5 years from now
Early debate, uncertainty about move to value
Sweeping reforms in US, Germany, France, UK, others
P4P spreads to other markets; specialty drug prices pressure on drug costs increases
Most people had never heard of “big data”
Growing number of analytics initiatives with large amounts of diverse data
Real-world data, prescriptive analytics pharma’s ability to control message
PI technologies were novelties
Increasingly common;Unobtrusive, non-invasive; payers starting to pay
Drugs increasingly competing with non-drug interventions, e.g., PI technologies
Much data opaque (cost, quality, relationships, clinical trial data)
Transparency (apps, govt. initiatives, “Bad Pharma”, industry responses)
Transparency scrutiny, pressure; Trust a source of competitive advantage
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smart cards
What’s ahead?In 3-5 years, health care could look significantly different
big data
optimal treatments
specialty drug costs
Value-based pricing
variation in care
transparency
pressure from payers
Consumerization
Even after the European economic crisis recedes, the pressure from payers will continue to increase. There simply isn’t enough money to pay for health care in theways of the past.Eduardo Sanchiz, Almirall
Value-based pricing and formal HTA processes are going to become much more visible in Switzerland.Thomas Szucs, Helsana Group
Payers may challenge today’s pricing environment, which allows for annual price increases on products.Adrian Thomas, Johnson & Johnson
Formularies will be replaced by “Population Health 2.0,” where new tools and big data will match individual patients to optimal treatments at the time of diagnosis.Colin Hill, GNS Healthcare
The drive for transparency will accelerate dramatically. Many are unprepared or simplyhoping it won’t happen, but it will — and it’s a game-changer.Jack Bailey, GlaxoSmithKline
Significant variation in care leading to poorer outcomes is just not going to be acceptable.Paul Bleicher, Optum Labs
US specialty drug costs — accounting for only 4% of spending today, but growing at 20% annually — will face unprecedented scrutiny.Robert Galvin, Equity Healthcare
Consumerization is coming sooner than most expect. More and more US employers are going to put workers on insurance exchanges, motivating patients to become engaged consumers.Romesh Wadhwani, Symphony Health Solutions
In the Netherlands, decisions that factor in cost-effectiveness — so far, a politically touchy matter — will become unavoidable and very real.Martin van der Graaff, Zorginstituut Nederland
For the first time, US patients will carry smart cards with all their health information on them — making it easy for providers to quickly access their medical histories.Rita Shane, Cedars-Sinai
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Non-Traditional Healthcare Player Transactions / Alliances
Broad TechnologyDiversified / Government /
Business ServicesMedia/Communications /
Information Services
Sele
ct
Pote
nti
al
Bu
yers
Str
ate
gic
R
ati
on
ale
Sele
ct
M&
A
/ P
art
ners
hip
s
EY
P
ers
pecti
ve
► While strategies may vary significantly, most broad Technology leaders are either actively trying to continue to build existing healthcare platforms or are evaluating the sector to determine appropriate entry point
► Leading multi-national / Diversified / Government companies will continue to view healthcare as a critical end market and should be active in evaluating acquisitions to further build their businesses
► Strategic approach to the healthcare sector has varied as large media / communication / information companies have been both sellers (e.g. Thomson / Walters Kluwer) and buyers (e.g. Verisk / Experian / Harris) in recent years
► IBM / Wellpoint’s JV to leverage Watson to develop evidence based protocols
► GE / Microsoft’s JV focus on healthcare infections and chronic case management
► Oracle’s acquisition of Phase Forward (2011)► Google’s failed Google Health initiative and
success with Google Flu trends► Lawson’s acquisition of Healthvision
Solutions (2010)
► Technology leaders with size and scale see the fragmented, high growth HCT industries as very attractive adjacencies
► Overlap with existing technology applications / capabilities coupled with expertise in technology service and consulting related solutions provide synergistic cross selling opportunities
► Healthcare remains an attractive market for traditional multinational / industrial companies due to growth dynamics relative to more mature business segments
► Businesses with strong service capabilities (e.g. BAH, SAP, Deloitte) are attracted to healthcare due to ability to utilize core consulting expertise to impact the highly complex and inefficient healthcare end market
► Media / Communications companies have traditionally viewed the healthcare sector as a natural end-market for their core businesses (e.g. Reed Elsevier, Thomson)
► Information Services companies have recently been aggressive in building healthcare segments via acquisition (e.g. Verisk, Experian)
► Verisk’s acquisitions of Bloodhound Technologies (2011) and MediConnect (2012)
► Experian’s acquisition of Medical Present Value (2011)
► Harris Corporation’s acquisition of Carefx (2011)
► Reed Elsevier’s acquisition of MEDai (2008)
► Multi-nationals have large healthcare IT segments built in part through acquisition:
► GE’s acquisition of IDX Systems (2005)
► Philips’ acquisition of VISICU (2007)
► Other Diversified / Government focused companies remain active healthcare acquirors:
► General Dynamics’ acquisition of Vangent (2011)
► ADP’s acquisition of AdvancedMD (2011)
Surveying the payer landscape
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Understanding payers
Payers want cost containment and budgetary certainty
… they are less interested in outcomes-based approaches
but
Drugs are 10% of health care spending
… payers see drug costs as the biggest problem
but
Pharma is generally well aligned with payers on data and CER measures
… there is a disconnect on comparative trials
but
Payers are preoccupied with implementation challenges and need help
… pharma has a trust deficitbut
…
…
…
…
Payers want cost containment and budgetary certainty
… but they are less interested in outcomes-based approaches
…
Drugs are 10% of health care spending
… but payers see drug costs as the biggest problem
…
Pharma is generally well aligned with payers on data and CER measures
… but there is a disconnect on comparative trials
…
Payers are preoccupied with implementation challenges and need help
… but pharma has a trust deficit
…
88%
78%
57%
47%
43%
20%
15%
13%
42%
67%
75%
67%
67%
50%
50%
25%
Drug prices are a major driver of health care cost increases
Boosting drug adherence is critical for lowering health care costs
Pharma companies have data that is vital for measuring and improving outcomes
With beyond-the-pill services, pharma companies can be trustworthy partners
Pharma companies have data that is credible for measuring and improving outcomes
Pharma products are significantly differentiated from the standard of care
With beyond-the-pill services, pharma companies can be unbiased between their products and those of competitors
Pharma companies bring affordable products to market
Payers Pharma
Source: EY Progressions 2014 Payer Survey. Length of bars indicates percentage of respondents who strongly or somewhat agree with each statement
Navigating through complexity
A complex and fragmented landscape
The devil in the details► Different standards and implementation► Behavioral attributes
It’s all relative► Disease segments► Product types► Influence of other KOLs
We’re all payers now► Coverage Pricing Prescription► New “payers”: providers, employers, patients
The challenge: understanding and strategically approaching a large, fragmented market
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Personalized medicine
Value dossiers
AdherenceDecision support
m-healthPrescriptive
analyticsCapitated models
Drugs/devices Services and solutionsHealth care
delivery
Universal adoption Ad-hoc experiments Little/no activity
Where’s pharma/medtech?
Payers and health care systems are changing rapidly. Focus on where the ball is going to be, not where it has been.
Make the right comparisons1
A complex, rapidly changing payer environment demands a strategic and comprehensive approach.
Approach payers strategically and comprehensively2
Build the complete picture, target the small share of patients driving the bulk of costs.
Develop data-driven insights and interventions 3
Payers want solutions that look across disease franchises, span the cycle of care and are unbiased between the products of different manufacturers.
Create customer-centric solutions4
Without trust, pharma’s data and solutions will get little traction with payers.
Rebuild trust through transparency5
Guiding principles for navigating the payer landscape
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Thank you
Stay tuned!
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Pulse of the industry 2014:October 6th @ AdvaMed 2014
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