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Executives who work for health care and life sciences organizations typically make strategic decisions based on where they expect to get the best returns for their investments. This strategy has been challenging due to growing pressures on pricing and declining returns.

Although diversification is often held up as the touchstone for decision-making, in this sphere, an emphasis on specialty-focused organizations may be wiser.

Return on capital (ROC) measures how efficient a company is at turning investments into profits. It is the ratio of earnings before interests and taxes to capital employed. Two of my colleagues at Deloitte and I recently analyzed the average ROC across seven health care and life sciences sectors — medical technology, biopharmaceuticals, drug wholesalers, pharmacies, pharmacy benefit managers, health plans, and hospitals/health systems — between 2011 and 2017.


Return on capital declined across all sectors during this period. However, organizations that had a specialty focus tended to see significantly higher returns than their more diversified counterparts.

Return on capital in life sciences and health care sectors


Sector Business type ROC in 2017
Biopharmaceuticals Specialty-focused pharma 17%
Diversified pharma 9%
Medical technology Specialty-focused medtech 11%
Diversified medtech 9%
Hospitals Heart focused 31%
Surgical focused 30%
Diversified hospitals 6%

Specialization could translate to bigger returns

Despite an overall decline in ROC, companies with some specialty focus had higher returns than average — ranging from 10% to 30% — depending on the focus. Specialty-focused organizations tended to be more nimble than larger and more diversified organizations. Here’s a look at some of the return on capital trends we identified:

Hospitals and health systems. Hospitals and health systems are the most capital-intensive organizations in the health care sector, and have the lowest ROC levels, though returns remained relatively stable over the past few years. Decreased losses from bad debt due to expanded health insurance coverage through the Affordable Care Act and consolidation contributed to relatively stable returns. Between 2011 and 2017, the average return on capital for this sector hovered between 6.1% and 6.7%. Some specialty-focused hospitals and health systems, however, had substantially higher returns.

We identified about 100 hospitals and health systems with a special focus, such as cardiovascular disease, surgery, and orthopedics. They outperformed general acute-care facilities. In 2017, hospitals focused on cardiovascular disease and surgery had average ROCs of 31% and 30%, respectively.

Size also appears to be a factor. In 2017, the average return on capital among five of the nation’s largest health systems by revenue was double (12.3%) the average ROC for the rest of the hospitals and health systems we studied.

Our findings indicate a bifurcation in hospital settings. The growth of specialty hospitals will likely accelerate as more routine care moves to ambulatory settings, and more expensive, specialized care takes place at specialized hospitals. These hospitals tend to have high margins and a better ROC than more traditional facilities.

Biopharmaceutical companies. The productivity of research and development appears to be a major driver of overall declines in return on capital across the biopharma industry. Growing pricing pressure and patent cliffs also appear to have had negative effects on it. While the ROC among all biopharmaceutical companies stood at 11% in 2017, it declined for the seven-year period we evaluated. Companies that specialize in oncology, musculoskeletal diseases, disorders of the central nervous system, or antiviral agents, however, had an average ROC of 17%.

Annual revenue among these specialized companies grew 15% annually between 2011 and 2017, compared to just 2% growth among diversified companies. Recent political pressure to reduce drug prices could be placing financial strain on many drug manufacturers. But this pressure isn’t limited to pharmaceutical companies. It resonates across the entire health care and life sciences ecosystems. If biopharmaceutical companies can reduce the cost of doing business, they have the potential to unlock value.

While large and diversified biopharma companies typically had lower ROCs than smaller and specialty-focused competitors, they might be able to unlock value by moving some of their higher-cost business model components to lower-cost environments. This strategy could potentially reduce prices and increase value.

Medical technology. The medtech sector had a return on capital of 10% in 2017, down from 14% in 2011. While R&D productivity is likely one reason for the sector’s falling ROC, another key factor is pricing pressure from health systems. Some medtech companies are making incremental changes based on select physician preferences, which has led to some deterioration in return on capital. Pricing pressure is also compounded by the fact hospitals increasingly leverage procurement experts, rather than clinicians, to make purchasing decisions.

Specialized medtech companies, however, fared better than diversified firms. Among companies specializing in robotic surgery, for example, the average ROC was 21% in 2017.

The bottom line

Return on capital is an equation. The only way to improve it is to increase the numerator (earnings) or decrease the denominator (investment capital). Several ways to increase earnings is to shift to a specialty, diversify revenue streams, and take steps to improve the use of data to improve the health of consumers and demonstrate value.

Organizations might be able to reduce their capital investments by aligning operations costs with business requirements. They might also consider new models to extract value from diversified portfolios.

Teresa Leste is a principal in the strategy practice at Monitor Deloitte and the U.S. leader for Deloitte’s Life Sciences mid-cap clients. Peter Baxendell is senior manager of life sciences at Monitor Deloitte.

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