Global medtech industry emerging from global recession
- Yet longer-term challenges abound for many in industry in sustaining innovation
MOSCOW, NEW YORK, 27 SEPTEMBER 2011 – Publicly traded medtech companies in the US and Europe turned in a solid performance in 2010, outpacing 2009 growth rates in each of the major financial indicators and providing further evidence that the impact of the global recession on the industry may be lessening. However, persistent funding challenges for many companies combined with regulatory and pricing pressures and fundamental changes in global health care will require companies to find new ways to sustain innovation in the future. These and other findings are highlighted in Pulse of the industry: medical technology report 2011, EY’s annual report on the industry’s performance, released today at AdvaMed 2011.
“The medtech industry delivered an impressive performance in 2010 in the face of continued strong economic headwinds, but a closer look beyond the numbers shows that deep challenges remain for most industry members,” said John Babitt, EY’s Medtech Leader for the Americas. “From increased payer pressure to demonstrate value, heightened regulatory scrutiny, a continued tight funding climate and a rapidly changing customer base, the industry’s ability to innovate is under increasing strain. To respond effectively, companies will need to expand beyond the products they have historically offered to solutions built for an increasingly outcomes-focused system.”
“In Russia, we expect that the demand for high-technological medical equipment will rise considerably in the near future. This is due to the fact that the Government has launched regional programs for the modernization of healthcare. The programs are aimed at improving the quality and availability of medical aid to the public and implies that each Russian region will develop a program with measures to upgrade the technical base of regional medical facilities, increase the level of professional qualification of medical workers, minimize the flow of paper documentation and concentrate the attention of medical workers on the needs of patients. It has been announced that the state will spend over USD15b to finance this program during 2011-2012. This initiative will certainly increase interest and demand in medical equipment among regional authorities,” added Dmitry Khalilov, Head of the Pharmaceutical Group in the CIS.
Key industry findings described in Pulse of the Industry include:
- Net income rises sharply. Net income for non-conglomerates in the US and Europe totaled US$17.4 billion, a 43% increase from 2009. This increase was primarily the result of large, one-time changes in 2009, without which net income growth would have been 9%. Revenues for all public medtech companies totaled US$315.9 billion an increase of 4% from the prior year.
- Financings surge – for some. Capital raised by US and European companies in 2010 totaled US$23.6 billion, a 66% increase over 2009. However, this increase was driven by a handful of mature companies that took advantage of historically low interest rates to issue debt. Excluding debt transactions, the amount raised fell by 7.7%. This financing environment has continued in the first six months of 2011, with financing totals reaching US$10.1 billion.
- Venture financing drops. Venture capital investment fell 13% in 2010 compared to the prior year, though the amount raised is still consistent with levels seen in 2005 and 2006 - years at the height of the “easy money” era. Venture funding fell by 15% in the US, to US$3.5 billion, while in Europe venture investment was up 4.7% to US$707 million.
- IPOs rebound slightly. After more than two years of sluggishness, IPO activity picked up in 2010, but at a significantly slower pace than in the years prior to the global recession. A total of nine medtech companies in US or Europe completed IPOs in 2010 compared to two in 2009, grossing a total of US$568 million.
- Deal making returns. The total value of mergers and acquisitions (M&As) in the US and Europe rebounded to US$30.6 billion in 2010, up from an historically low US$15.7 billion in 2009. The average deals size increased from US$175 million to US$245 million.
- Investors become more cautious about growth. EY has found a growing disconnect between the performance of the medtech industry and investor perceptions. While the median earnings per share of the largest US non-conglomerates have grown steadily over the last decade, the median P/E ratio of these companies has declined over that same time.
Medtech’s new challenge: Demonstrating health outcomes
The Pulse of the industry report finds that the medtech industry has become further challenged by the continued lack of sustainability of the global health care system which has led policymakers, payers and regulators to focus not only on reining in costs but to increasingly realign incentives around improvements in health outcomes. As a result, a company’s success or failure in the medtech industry of the future will not be based simply on how many products they sell but on their ability to demonstrate how they are improving health outcomes. In addition, companies will need to adapt to a fundamental shift taking place in health care whereby previously passive patients will become engaged and empowered “super-consumers” to whom companies will increasingly need to target their offerings rather than simply focusing on physicians.
The continued evolution toward this outcomes-focused ecosystem will require medtech companies to fundamentally reinvent core parts of their business model, including what they sell, how they sell it, and how they develop these new offerings. Key challenges and opportunities as part of this business model reinvention highlighted in the report include:
Given the increasing payer demands in the new ecosystem, In the new outcomes-focused ecosystem, companies will need to capitalize on new revenue sources beyond just their products. As a result, more firms may consider expanding from products to solutions and seek new ways to extract value from the information they have. New business models could even involve giving away the product to sell a subscription to an information-based service.
Sales and marketing
As sales decisions increasingly shift to hospitals and patients, companies will need to revamp the sales and marketing end of their business model. As certain product segments shift to a less scientifically aware customer base, companies may also need to increase the levels of information and education they provide. As payers become more important as a customer base, companies will need to focus on demonstrating value to these decision makers. Finally, communicating with these stakeholders in new channels such as social media will require meaningful engagement and the ability to provide relevant information at the right time.
Innovation in medtech has historically taken place at the bedside, with physicians providing feedback on how to improve the next generation of products. With new sunshine laws that could potentially curtail this process, companies will need to better capitalize on opportunities to mine new product ideas from more widely distributed information networks that will be part of the health care ecosystem of tomorrow.
“Medtech companies have always taken on substantial risk to innovate new products and technologies,” said Glen Giovannetti, EY's Global Life Sciences Leader. “However, risk now stems not only from product development, but also from a host of other pressures. To respond, companies will need to innovate new business models. If risk has moved beyond the product, so too must innovation.”
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