Six Ways to Recession-proof Your Medical Device Business

As we exit the COVID-19 pandemic, businesses and enterprises are rebounding, but many worry that a recession is on the horizon. A recession is two or more consecutive quarters of economic decline or decreased growth rate of gross domestic product (GDP). This downtrend slows production, employment, spending, and household income.

Below are six areas that medical device companies can address to ensure their continued stability and growth amid periods of economic uncertainty:

1. Procedure Volume Volatility
   A decline in economic activity has a direct causal relationship with employment. During an economic downturn, companies encounter dwindling sales and revenue. As debt increases, many organizations start to lay off workers to cut costs. Since almost 55% of Americans get their medical insurance from an employer¹, most unemployed workers would face a reduction in or a complete loss of their coverage, directly impacting their ability to seek essential medical treatment, inpatient care, and elective services. Even when reduced coverage is provided, most patients tend to postpone elective medical care and focus on temporary relief via medication instead of expensive elective procedures.

   The impact of a recession is not limited solely to patients. An economic downturn affects hospitals and health systems as well. Reductions in charitable giving and less funding from local, state, and federal governments hinder their ability to provide care to everyone who needs it. Increased outstanding accounts receivable due to patients’ inability to pay medical bills on time further increase revenue pressure on healthcare providers. 

   Ambiguity around economic recovery and patients’ willingness to postpone elective care create procedure volume volatility. Since joblessness tends to peak later and persist well into the recovery phase, procedure volume volatility lingers even after the economy has rebounded.

   Procedure volume volatility directly impacts a medical device sales organization. National sales target volume is disrupted across the portfolio, cascading down to individual field quota attainment and incentive compensation. In addition, procedure volume volatility hamstrings the organization's ability to accurately forecast sales for upcoming years due to artificial fluctuations in current-year baseline sales.

   What can MedTech companies do to address the impact from a commercial operations perspective?

   Based on the amount of lead time the finance department needs to react and gain corporate approval on potential decreases in sales, there may or may not be an impact on the field quota. Three scenarios can occur:
   

   • Finance receives approval for sales reductions in time to adjust budgets (and quotas) without impacting the field.

     • In this case, quotas are reduced, and incentive target earnings are unaffected (lower quota to attain target).

   • Finance receives approval only for future months.

     • In this case, the sales teams will carry any field quota shortfalls up to this point. Quota attainment can be somewhat affected.

   • No changes to the financials.
     • The field takes the onus of the pre-recession budget and can fall well behind on its attainments.
       
       

   In scenarios 2 and 3 (since scenario 1 has little to no fall-out), the concern is field force motivation. There is a chance that as attainments fall throughout the cycle, the field members could slow down their sales efforts, thinking that they will benefit the following year from a lower quota or that there is no way to catch up. Attrition is also a concern, as field members could move to more recession-proof companies. Companies must motivate field reps to avoid a complete field shutdown. A low-cost contest where a product or therapeutic area focuses on a limited number of winners can help. 

2. Surge in Mergers and Acquisitions (M&AS)

   During times of recession, cash-strapped healthcare providers look for buyers who can reinvigorate their business, while more financially stable healthcare providers look to consolidate market share or expand into new product segments. When these M&As occur, communications operations (Comm Ops) teams must support the following transitions:

   • System Integration

     • Integrating multiple sales forces that use different systems (customer relationship manager, over-the-counter, systems applications and products, etc.) can be challenging and take years to complete. It takes a strong partnership between Comm Ops and information technology to plan and execute the migration.

   • New go-to-market (GTM) strategy

   • Integration of commercial operations

     • Each company has processes to address specific aspects of its GTM strategies. After the merger and acquisition, and when the new corporate entity has defined its unified GTM strategy, it is time to align the commercial operations with the new approach.

   • Roster and alignment: Commercial operations leaders and sales leadership must define the new sales structure and hierarchy best suited to address their new GTM. Most often, leaders run into the following challenges:

     • Which sales reps should be kept when the field forces of both companies come together?
     • Which rep is the right one for a territory, or which territory is suitable for each rep?
     • Duplicate accounts: remove the duplicates and align unique accounts to the new set of geographies.
     • Revisit incentive compensation plans that meet the new GTM.
       
       

   • Reporting

     • Unify reporting platforms and templates to reduce complexity and drive simplicity.

   • Training

     • It will be a significant change for most of the reps.
     • Train and handhold them each step of the way.

      

3. Reduced Funding

   When the economy faces a downturn, decreased private equity funding is the most potent and immediate effect. Personal investors will reduce or completely withdraw their contributions during the stock market decline, causing companies to look at cost-saving measures to help improve their situation until the downturn reverses. This can include closures, reductions in research and development, manufacturing facilities, layoffs, and the discontinuation of less profitable product lines.

   The remediations an organization can take during periods of economic downturn are many. Sales forces can be optimized, or territories can be rebalanced to ensure the key accounts get the attention they need for the required sales growth.

   Assess lifecycles to ensure the new, innovative, or highest revenue-producing products get the lion's share of promotional activities. On the other hand, delegate mature products to inside selling teams. Along with these changes, restructure the field incentive plans to align with the new marketing schemes. This can include developing contests to help the field focus on which products are the most important to the corporate portfolio.

4. Purchasing Capital Equipment

   Any delay in purchasing capital equipment can be a significant challenge for organizations. However, there are several strategies that can address this challenge. One possible approach is to move toward offering customers the option to lease rather than buy capital equipment. This approach can help organizations reduce their upfront costs and provide them with more flexibility in pricing strategies, such as per-use or other pricing models.

   Another option is to promote a "sales and leaseback" strategy, where hospitals sell their medical equipment to a financial leasing company that rents the equipment back to the institution. This strategy can provide hospitals with much-needed cash without requiring them to sell their equipment outright.

   Furthermore, organizations can explore new pricing strategies to address their customers’ delays in capital equipment purchases. This approach can include bundling equipment and services together, providing financing options, or offering other customers incentives.

   Commercial operations leaders can also play a critical role in addressing delayed capital equipment purchases. They can update incentive compensation plans to include all types of capital sales models and incentivize the field force(s) to focus on pipeline development during this phase. Additionally, leaders can encourage reps to provide more product demos and training to potential customers, which builds stronger relationships and increases the chances of a sale.

5. Product

   Changing how products are marketed based on their life cycle can be beneficial during a recession. Focusing on new and emerging products will keep healthcare providers (HCPs) interested and engaged when economic spend is at a premium. During these periods, it is best to refrain from promoting end-of-life products since market share will dwindle as new and novel products capture the limited market.

   A recession is also a time to test new pricing strategies to determine what a down-market will accept. Based on the type of device, there may be more price elasticity based on its uniqueness in the market and the overall need for the product. It’s also essential to watch the competition’s response to the market. If competitors are lowering prices, there may not be any option but to follow suit.

6. Optimization
   

   Improving internal processes and optimizing resources is a well-tested method of fighting the challenges posed by a recession and ensures the staff's optimum utilization and apt motivation.

   • Virtual Teams

     • The COVID-19 pandemic brought virtual meetings to the forefront. Inside sales teams have used these types of interactive conversations for years. However, in-person initiatives are no longer guaranteed, so sales teams regularly use these interactions. Virtual meetings are cost-effective, as there are no travel expenses, and they allow for more meetings since travel time is no longer a concern.

   • Engage with a limited number of HCPs based on the number of elective surgeries they perform.

     • Selecting the right HCPs for a call plan, based on the type of surgical procedures they perform, is critical during a recession. Physicians who usually perform more procedures will have more time to study until the economy improves, so they will be interested in new and novel approaches. Similar to using virtual teams, choosing the best meeting venue can help ensure a greater share of voice that ultimately assures higher sales.

   • Track attrition and search the secondary market (i.e., eBay, Craigslist).

     • A medical device company's most significant asset is its installed base, the foundation of continued revenue. To ensure a fluid revenue stream, a company must be wary of the “leaky bucket” syndrome, where customers sell or stop using their equipment (or both) at a pace that weakens the repetitive revenue stream. Aside from checking in with current customers to confirm their continued usage, looking at secondary market sites like eBay or Craigslist is advantageous. Sometimes, instrumentation will be listed on these market sites. The product description often contains the instrument's serial number, which can easily be used to track who is selling and allows you to bring that customer back online. Based on dwindling purchase rates, reviewing purchasing patterns by instrument or account usually tells when an instrument is taken out of commission. 

CONCLUSION

During a recession, several factors can impact the stability of a medical device company. Delayed capital equipment purchases, fewer procedures performed, and increased M&As can make navigating the MedTech market a challenge – but preparing for an economic downturn by implementing an agile framework to address revenue shortfalls can help ensure long-term stability. Quickly adopting new technology that overcomes distance, focusing on your best customers, and maintaining an awareness of the secondary market can be critical to the company's future success.

REFERENCES

1. Vankar P. Percentage of U.S. population with employment-based health insurance 1987-2021. Statista. September 15, 2022. Accessed September 18, 2023. https://www.statista.com/statistics/323076/share-of-us-population-with-employer-health-insurance/