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BIGGER ISN’T ALWAYS BETTER: ‘BEST OF BREED’ MEDICAL TECHNOLOGY COMPANIES FOCUS ON CATEGORY DEPTH, NOT BREADTH, TO DRIVE PROFITABILITY

Bain & Company’s Category Leadership Index(SM) reveals critical insights that can inform a company’s portfolio, M&A and R&D prioritization strategy

New York – Feb. 19, 2015 – In many industries scale delivers a competitive advantage, with a clear correlation between size and profitability, as larger companies tend to wield more influence with customers and have a greater ability to maintain pricing discipline. However, medical device manufacturers who pursue breadth at the expense of depth do so at their peril.  New research from Bain & Company, The Power of Focus: In the medical device industry, category leadership is the key to profitability, unearths the reality: profitability in the medtech sector stems from category leadership – a deep understanding of the competitive market and clear depth in a specific category, rather than breadth across multiple categories.

Recent healthcare trends, such as consolidation among hospitals, increasingly sophisticated consumer buying behaviors and the emergence of new business models, all add up to increased pricing pressures on medical device vendors.  Common wisdom suggests these challenges can be addressed with a ‘bigger is better’ strategy.  Bain’s research finds that the medtech companies best positioned for success are not always the biggest. To test this theory, Bain developed the Category Leadership Index(SM) (CLI) score, which quantifies leadership levels across categories.

The CLI score is derived from the weighted average of a company’s relative market share in the categories in which it conducts business, weighted by its percentage of total revenues in each category.  For example, the CLI puts Zimmer at the middle of the pack in terms of its overall share of the medical technology market; however, the company leads several of the categories in which it competes and enjoys some of the highest EBIT margins in the industry as a result.  In contrast, other companies may be the largest in absolute terms, but their category positions are comparatively weak, reflected in their relatively lower margins.

“We have yet to find an example where a ‘one-stop-shop’ offering beats ‘best-of-breed’ company,” said Tim van Biesen, a Bain partner and co-author of the report.  “The current clinical, customer and competitive landscapes are not suited to delivering an industry advantage across a broad portfolio.  As a result, category leaders enjoy benefits that their followers simply can’t match.” 

Bain’s research finds category leaders, unlike companies stretched too thin across multiple categories, enjoy better brand recognition, deeper clinical expertise, greater knowledge of physicians’ needs and the clout to reshape the categories in which they compete. They are also better positioned to compete for category-specific requests for proposals (RFPs) and tenders and have first rights when it comes to acquiring new, related assets.

A deep understanding of a company’s CLI score also has critical implications for its leadership team when it comes to portfolio, M&A and R&D prioritization strategies:

• Portfolio strategy – CLI scoring forces companies to acknowledge where they are strong and weak within defined categories; it can lead to trade-offs and possible divestitures in markets where they have little chance of becoming leaders
• R&D prioritization – By assessing their CLI score, companies can determine where they will get the biggest bang for their R&D dollar, and where it might be wasted
• M&A choices – CLI scoring can help companies determine how well a target fits with the acquirer and how the proposed deal will enhance category leadership and profitability

“Developing a leading value proposition within a specific category is a tremendously valuable and attractive approach that can lead to both superior clinical results and defensible economic returns,” said van Biesen.

To receive a copy of report or arrange an interview with its authors, contact:  Dan Pinkney at dan.pinkney@bain.com or +1 646 562 8102

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