Biotech Values

[DewDiligence]

Medtronic CEO Sees 2-3% Price Deflation in Medical Devices

[You would have to be living under a rock to not know that med-device prices have been falling, especially for big-ticket items; the only thing here that’s newsworthy is the magnitude of the decline.]

http://www.reuters.com/article/idCNN1319220920100913

›Mon Sep 13, 2010 6:46pm EDT
By Susan Kelly

CHICAGO, Sept 13 (Reuters) - The medical device industry is entering a period of deflation after years of rising prices for medical innovations such as heart defibrillators and spinal implants, said the chief executive of Medtronic Inc (MDT), the world's largest maker of medical devices.

The deflationary outlook represents a shift for the industry after years of modest overall pricing gains, Medtronic Chief Executive Bill Hawkins said.

He predicted the device sector on average would see product prices decline 2 percent to 3 percent in the near term as the weak economy stalls demand and health reform sharpens the focus on cost savings.

Hawkins said Medtronic still expects to offset price pressures to some extent through new product introductions, particularly in the area of heart devices.

He believes the company will be able to maintain its margins.

"We have adjusted our business model" Hawkins said. "We've got certain cost reduction programs that have enabled us to manage our margins pretty well in this environment, and even with a 2 to 3 percent sort of decline going forward, we think we can maintain our margins."

Pressure on prices for medical devices comes as hospitals step up efforts to reduce costs by working more closely with the physicians who select the devices they will use to treat patients, said Hawkins, speaking to a Morgan Stanley investor conference that was webcast.

Hospitals, in some cases, are buying out physician practices, especially in cardiology and to a lesser extent in spine surgery, Hawkins said.

"As they now own these physician practices, they are getting physicians to really work with them at what products they're going to use and also what prices they're going to pay," Hawkins said.

"The power is shifting a bit from the physicians who have always been our customer," to the people in hospitals responsible for purchasing, Hawkins said.

The Minneapolis-based maker of spinal, heart and other medical devices last month reported revenue that fell short of Wall Street's expectations and cut its full-year outlook for revenue growth of 2 percent to 5 percent from the 5 percent to 8 percent it forecast in June [#msg-53677867].

Demand for many medical procedures once thought to be relatively insulated from economic forces has slowed as patients react to higher insurance deductibles by postponing or going without treatment.

The end of COBRA health insurance subsidies to help the newly unemployed pay for coverage has further weakened demand, Hawkins said.

COBRA (the Consolidated Omnibus Budget Reconciliation Act) allows workers who lose their jobs to continue group health insurance provided by their former employers for limited periods. Government subsidies to help pay for COBRA insurance have expired.

At the same time, hospitals are anxious about the outlook for government reimbursement under health reform and are preparing for potential reductions in funding with a more cautious approach to purchasing products and approving procedures.

In some cases, less expensive products are being substituted, he said.

With certain surgeries such as spinal procedures, Hawkins said, a surgeon might opt to take a less aggressive approach initially and wait to see if a follow-up procedure is necessary.

Medical device makers historically have passed on price increases by introducing new and improved products that could command a higher price tag.‹