Downward trend halted: medical technology sector growing again

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  • In 2016, medtechs in the US and Europe increased their revenue by 5%, to over USD 360 billion
  • Growth driven by record M&A amount of USD 96.1 billion
  • ConvaTec IPO sets a new USD 2.6 billion record for volume
  • Confidence in the sector: young startups obtaining more money than ever

ZURICH, 29 SEPTEMBER 2017 – Medical technology firms in the US and Europe have seen the end of their downward trend for now: in 2016, their revenue collectively rose by 5% to over USD 360 billion. The sector has not experienced this kind of growth since before the financial crisis in 2008. In the prior year, the medtechs on both sides of the Atlantic had even shrunk by 1%, after years of low growth. Meanwhile, medtechs have also significantly increased their profit: collectively they earned USD 16.4 billion, which was 17% more than in the prior-year period. Net profit had at that time declined by 15.5%. These are the results of the “Global Medtech Report 2017” from auditing and consulting firm EY.

The boost in growth was especially driven by the comeback of US medtech firms: while their revenue increased by 6% (prior year: -11%), the revenue of European medtechs only rose by 3%, representing a clear step backward from the increase of 21% in the prior year. However, growth in the sector is less due to organic growth than to substantial acquisitions – overall, M&A expenditure between July 2016 and June 2017 increased by 40%, to reach a record of USD 96.1 billion.

Better financing situation
The financing situation also improved considerably in comparison to the prior year. Overall, between July 2016 and June 2017, the sector attracted financing of USD 43.9 billion, which was around double the amount in the prior year and the second highest amount in the last 10 years. This has given many companies in the medtech sector more leeway to further invest in the acquisition of suitable companies and also finance urgently needed innovations.
Jürg Zürcher, Partner and Medtech Leader at EY, comments: “After a difficult period, the medtech sector recovered and experienced a new boom in 2016. It remains to be seen whether this will last or will soon recede. The sector’s M&A strategy remains decisive for its success. With little organic growth in recent years, companies have been making further acquisitions. These purchases are now yielding the first positive results, which are also reflected in the balance sheets.” In the highly competitive medtech sector, many companies have aimed to survive through size. One example is the (not yet completed) mega-deal worth USD 25.2 billion in which the French ophthalmics company Essilor is set to acquire the Ray-Ban manufacturer Luxottica, thus forming the largest ophthalmics company worldwide.

Thomas Gees, Business Director Life Sciences at EY, points out that, in addition to growth, there is now also a growing focus on portfolio adjustment. “Companies are selling off units that no longer form part of their core business. They are currently finding a lot of capital on the market, due to the continuing low-interest rate environment and sustained investor interest, and this drives up prices, certainly also contributing to the large total amounts.”

Conglomerates growing more slowly than “pure plays”
This applies all the more for conglomerates that do not only focus on medical technology, and which aim to streamline their portfolio. With growth of 3% to USD 152.7 billion, the revenue of conglomerates thus grew at a considerably slower rate than that of “pure plays”, i.e. companies that concentrate exclusively on medical technology. These latter companies achieved growth of 6%, reaching USD 211.7 billion.

Gees is hopeful that the past year’s growth will not prove a one-off effect. “It’s a good sign for the future that the financing situation improved in all areas. This demonstrates the confidence of the market in the sector and makes further innovation more probable.”

ConvaTec IPO results in record IPO amount
Among IPOs, that of the Bristol-Myers-Squibb spin-off ConvaTec stood out, with a value of USD 2 billion. This IPO was almost the sole reason for a new total IPO record amount of USD 2.6 billion that was more than four times the amount in the prior-year period. However, in a difficult market environment for IPOs, the sector otherwise remains reticent.

From July 2016 to June 2017, the venture capital amount also rose considerably in comparison to the prior year, by almost a quarter, to reach USD 7.7 billion, which included the three largest financing operations since the medical technology report was first published: Grail obtained financing of USD 900 million, while 800 million went to Verily (which belongs to the Google parent company Alphabet) and 360 million to Guardant Health.

Young startups obtaining more money than ever
Grail and Verily are also cases of early-stage financing. It is not just the amount of relevant mega-deals that demonstrates a strong confidence in innovation and the sector’s future sustainability. In addition, more money than ever – nearly USD 4 billion overall – has been invested in the early stages. This has enabled very young startups to obtain over half of the entire venture capital pie.

“The strong early-stage financing is a good sign,” says Jürg Zürcher. “This shows great confidence in the innovative capability of companies. Medical technology is subject to enormous upheaval. New technologies such as additive manufacturing, robotic systems and augmented reality allow for better and more customized medical products. Companies have to implement these new possibilities in novel and successful products so as to continue growing organically in the long term. Over time, it will prove insufficient and also impossible to generate growth through acquisitions alone. Innovation therefore remains the key to success.”

 


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