Big pharma and medtech companies are increasingly drawn towards healthcare services.  It is not hard to see why.

Rob ten Hoedt, president of Medtronic EMEA and Canada showed a slide at ehealth in Copenhagen earlier in May 2012. This shows a dozen brown and orange blobs on top of a dozen long, green stalks. The orange blobs represent medtech spend per country and the brown pharma spend. The former runs at 2-5% of healthcare expenditure, the latter at roughly 6-12% for the dozen countries. In other words, across Europe, China and the USA healthcare services expenditure runs at around 80% of total national spend.

It is hardly surprising that delegates say ten Hoedt is extremely enthusiastic about building a healthcare services arm!

Nor is he alone. We know of one large pharma group which has tasked a manager with building a healthcare services arm with sales of over $1bn in Europe and Canada in the next three years. Sanofi and Novartis appear on the shortlist of companies interested in buying French diagnostics group Biomnis. Philips has told us that it expects services to be 5% of its European imaging sales in 3-5 years time. We expect GE and Siemens have similar aims.

Several drivers are pushing this.

Firstly, these companies often face static or falling sales in their core markets.

Secondly, they recognise that governments are going to be fixated by cost over the next decade and the big problem is the huge inefficiencies that exist in healthcare service delivery. A more powerful MRI may be nice, but cutting imaging costs by 20% is what will really light up policymakers.

Across Europe we think the real beneficiary of the slump over the next decade will outsourcers who can cut costs without destroying the fiction that healthcare remains a publicly-owned service.

Thirdly, moving into healthcare services will get these companies closer to the customer. Building services around your products is a great way to differentiate yourself from the Chinese and from generic drug makers.

Of course, there are huge barriers. Just because you can build complex products, doesn’t mean you have any expertise in service delivery. For instance, few senior executives with manufacturing backgrounds can cut the mustard as CEOs of service companies. And pharma companies used to net margins of 30-40%+ will find the 2-8% achievable in healthcare services rather difficult to swallow.

Nonetheless, we expect to see action in the next few years.