We noticed an interesting article in the August 15 issue of American Banker regarding community banks that are forming dedicated healthcare lending teams. In recent years, the healthcare industry had seemed risky to many banks as Medicaid reimbursements have been declining and concerns about the future of the Affordable Care Act (ACA, also known as “Obamacare”) have increased.
But despite uncertainty around these issues, there’s no denying that healthcare spending makes up a sizeable portion of the economy in the United States — approximately 16 percent of the 2016 gross domestic product, up 4 percent from just the previous year. Add to the equation the large number of Baby Boomers who are beginning to have age-related health issues, and it is unlikely that healthcare spending will be decreasing anytime soon.
The market is ripe for loans and other banking services as doctor offices and hospitals look to acquire new or updated medical equipment.
A prescription for growth for medical device manufacturers
There are 9,800 medical device manufacturers in the U.S. with $92 billion in sales and 308,000 employees. A typical medical device manufacturer generates $9 million in annual revenue and has about 30 employees. These companies produce a range of products designed to diagnose and treat patients. Medical devices range in nature and complexity from simple tongue depressors and bandages to complex programmable pacemakers and sophisticated imaging systems like CT or MRI machines.
The use of medical devices and instruments falls into two broad surgical categories:
- An open procedure is a more traditional technique in which the surgeon makes an incision large enough to allow direct visual and physical contact inside the body.
- A minimally invasive procedure uses optical scopes, cameras, and long-handled instruments to enter the body through several small incisions.
Most manufacturers tend to specialize in products in one category or the other.
Medical device manufacturers sell to hospitals, doctors offices, government agencies, home healthcare markets, and other healthcare providers. Most devices are sold through distributors, although some larger manufacturers have their own sales force.
Risk factors to the well-being of the medical device industry
While the growth of the healthcare industry as a whole has created a healthy environment for medical device manufacturers, there are risks to consider. For example:
Group Purchasing Organization (GPO) arrangements: Many devices are sold at a discount under GPO agreements, which negotiate contracts with health product suppliers, such as medical device manufacturers, on behalf of cooperatives of healthcare facilities. The recent recession prompted some hospitals to enact cost-cutting initiatives; this included product procurement.
Complex government regulation: Medical devices are subject to extensive regulation in the United States by the Food and Drug Administration (FDA), and by comparable government agencies in other countries. Failure to comply can lead to manufacturing shutdowns, product recalls, withdrawal or suspension of required licenses, and prohibitions against exporting products to other countries.
Intellectual property and counterfeiting: Although stealing intellectual property rights (IPR) and counterfeiting have not yet become significant problems for medical device firms (as compared to pharmaceutical firms), the sector is beginning to face increased revenue losses due to these activities.
Product obsolescence: Medical technology changes rapidly. Medical device manufacturers must continue to develop or acquire new products and technologies if they are to remain competitive and grow. Most medical device manufacturers are continually searching for new or improved products that deliver clinical superiority, have higher reliability or performance, or include innovative features that enhance patient benefit.
Here are some common financial challenges for medical device manufacturers and solutions for how banks can help:
- Ensuring timely payment from third-party payers and healthcare providers (receivables average 46 to 82 days).
Solutions to consider: Lockbox, ACH services with blocks and filters, merchant services, line of credit - Managing volatile costs for steel, plastic resins, and other raw materials (up to 30 percent of sales).
Solutions to consider: Line of credit, commodity services - Managing cash as reimbursement rates for Medicare/Medicaid are cut and Group Purchasing Organizations demand higher discounts.
Solutions to consider: Line of credit - Funding the cost of investment in product advancements, intellectual property (patents, licenses, and trademark), and compliance with complex regulations.
Solutions to consider: Line of credit, term loans
Time to examine the medical device manufacturing industry?
If your bank is interested in expanding their healthcare portfolio, medical device manufacturers may be a good industry to explore.
As noted in the American Banker article, expertise is crucial when it comes to underwriting within this sector; you will want to have a good understanding not only of the medical device niche but also factors such as how Medicare/Medicaid regulations work within your particular state. This type of industry expertise has the added advantage of setting you apart from your bank competitors.
All of the information about medical device manufacturers within this blog post comes directly from the Industry Profile on medical device manufacturers. Spending even 5 minutes reviewing this profile prior to a call with a company within the medical device sector can boost your knowledge and your confidence about how the industry operates and how you can help the prospect grow their business.
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