Medtech Industry Faring Well in Tough Global Economy

Net income at U.S. and European medtech firms grew 14 percent last year despite a sluggish global economy that soon could slip back into recession, a new analysis has concluded.

The gains in 2011 represent the third consecutive year of double-digit growth, swelling to a total of $19.9 billion, according to an annual report compiled by global professional services firm Ernst & Young. Revenue for American and European non-conglomerates rose 6 percent to $319.9 billion.

“The medtech industry continues to show impressive perseverance and resilience in weathering the challenging global economic climate,” Glen Giovannetti, Ernst & Young’s Global Life Sciences leader, said in releasing “Pulse of the industry: Medical technology report 2012,” the company’s fifth annual synopsis of the sector’s overall financial health.

“Longer-term, many in the industry will face significant challenges to find sustainability against the headwinds of rising pricing pressures, expanded use of comparative effectiveness, and the ongoing efforts to find new efficiencies in the global healthcare system. To meet these challenges, companies will need to be as innovative in the development of new business models as they have historically been in product development.”

Ernst & Young’s “Pulse of the industry” report was one of the most highly-anticipated (and crowded) plenary sessions this past week at AdvaMed 2012 The Medtech Conference in Boston, Mass. As in years past, the session was populated with a standing-room only crowd that eagerly snapped up copies of the 46-page report.

While the analysis commends the medtech industry for its resiliency to a tough economic climate, it notes that companies nevertheless are operating in a “new normal” environment predicted by past “Pulse” reports. This “new normal” environment is characterized by restrictive capital markets, hospital mergers, pricing pressures, increasingly challenging health technology assessments in European countries, and potential restrictions to the U.S. Food and Drug Administration’s (FDA) 510(k) process.

Key findings in the report include:

• Debt financing drove most funding deals. For the 12-month period ended June 30 (2012), U.S. and European public medtech firms raised $27.4 billion, a 26 percent increase compared with the period ended June 30, 2011. But 80 percent of the capital raised in 2011-2012 came from debt through a relatively small number of companies. Funding from non-debt sources fell 22 percent compared with 2010-2011.

• Venture financing rose slightly. Venture capital investment climbed 8 percent to $4.3 billion in the year ended June 30, 2012. Most of the increase originated in the United States, where venture funding jumped 11 percent to $3.7 billion; the remaining $676 million came from Europe and represented a 5 percent decrease compared with the year ended June 30, 2011.

• Deal-making remained steady. Merger and acquisition activity among U.S. and European medical technology companies was valued at $35 billion in the year ended June 30, 2012. Though the figure is well below levels seen over the last two years, analysts note that both time periods (2009-2010 and 2010-2011) were driven by two “megadeals” of more than $10 billion.

• The number of commercial leaders continued to grow. The medtech industry has experienced a number of high-profile acquisitions of commercial leaders in recent years (companies with revenues exceeding $1 billion), including the purchase of Beckman Coulter Inc. by Danaher Corp. and Kinetic Concepts Inc. by a consortium of private equity firms last year. Yet new commercial leaders continue to emerge to replace those that no longer exist. Commercial leaders boosted their ranks by three companies last year alone, and the total number of firms has jumped 25 percent since 2007, going from 36 companies five years ago to 45 companies in 2011.

• U.S. therapeutic device companies posted solid growth. The combined revenues of U.S. therapeutic device companies totaled $76 billion in 2011, a 5 percent increase compared with the previous year. The revenue accounted for nearly 60 percent of all U.S. pure-play company revenue.

• The largest disease categories generated significant growth. All six of the largest disease categories increased their top lines in 2011, as did 14 of the 16 total disease categories. Among the top six, orthopedic generated the largest top-line expansion of $1.7 billion (a 9 percent growth rate). The increase largely was driven by Stryker Corp. and the impact of its purchase of Boston Scientific Corp.’s neurovascular group early last year. Cardiovascular comprised 86 percent of the overall therapeutic device increase, and nearly all of that resulted from various impairment, transaction and litigation charges that had negatively impacted Boston Scientific in 2010.

• Acquisitions boosted growth among Europe’s top revenue-generators. Organic growth may be the secret to success in American medtech, but acquisitions considerably have bolstered growth in Europe. Germany’s Fresenius Kabi has increased revenue by 19 percent over the last five years, going from $2.78 billion in 2007 to $5.5 billion in 2011. ELEKTA and Qiagen have grown their revenues 16 percent during that same time period, while Denmark’s William Demant Holding and French ophthalmic optics company Essilor International each boosted revenue 10 percent. Smaller companies, such as Germany’s Stratec Biomedical AG, Austria’s Sempermed AG and the Netherlands’ Qiagen bolstered revenue organically.

Besides assessing the medtech industry’s overall health last year, Ernst & Young’s report also discussed a new dynamic that is poised to disrupt the sector’s traditional business model.

The cost of providing healthcare is increasing at an unsustainable rate globally, and this increase is forcing medtech firms to prove the both the efficiency and effectiveness of their products. But the industry’s role in this outcomes-focused healthcare ecosystem also is being impacted by the emergence of a new class of medical technologies defined in the “Pulse of the industry” report as “PI” (patient-empowering and information-leveraging) technologies. These nascent advancements, which include smartphone apps and social media platforms to sensor-enabled smart devices, can potentially reinvent healthcare by providing real-time insights to patients’ health. These PI technologies also may possibly disrupt much of the traditional medtech industry due to their ability to vastly improve efficiency.

As one example, Ernst & Young cites an ingestible sensor developed by Proteus Digital Health of Redwood City, Calif., and approved by the FDA in July. When incorporated into a pill, the sensor can track data on drug adherence and “other key health indicators over time.”

Health IT and medical devices/diagnostics historically have existed as two distinct domains. But new developments that incorporate aspects of both are creating a convergence that is blurring the lines between the two realms. Products that incorporate the best of both worlds potentially could extract costs from the current healthcare delivery model.

“It would be easy for medtech companies to discount the emergence of PI technologies as having little competitive impact on their business but the history of disruptive technologies in other industries shows that they would do so at their own peril,” said John Babitt, Ernst & Young’s Medtech Leader for the Americas. “Companies that will be leaders in the outcomes-focused industry of tomorrow will be the ones that utilize these technologies to become more patient-centric and payer-savvy, are bold with their investment in new business models, and keenly focused on the question of how they can change the value proposition for the customer.”