How would you react if you discovered that your company’s selling expenses were 30 percent, or even 50 percent, higher than those of other companies? And what would you do if you also found that your company had more back-office employees than revenue-generating sales reps, and that it was not benefiting from economies of scale typical of commercial functions in other industries? Finally, what actions would you take if your own team considered your company’s commercial capabilities too immature to meet the rapidly changing demands and buying patterns of key customers?
Before you answer, let this reality sink in: many medical-technology companies spend not 30 percent or 50 percent more, but 200, 300, or even 500 percent more on selling, general, and administrative (SG&A) expenses as a percentage of the cost of goods sold than the typical technology or industrial company. (See Exhibit 1.) At the same time, the majority of medtech companies realize no economies of scale in commercial back-office operations such as marketing, human resources, and finance—meaning that as these companies grow larger, their back offices grow at the same rate. Further, in a recent BCG survey of medtech businesses, the majority of employees assessed their companies’ critical commercial functions as operating at only a basic or an intermediate level of maturity.
These findings may be hard to believe for a healthy industry, but they describe the reality at most medtech companies. Two decades of hard-earned clinical innovation have yielded attractive gross margins, but these margins mask high-cost commercial models and underdeveloped commercial skills when compared with other industries.