"Pulse of the Industry" Medical Technology Report 2016

US medtech companies pull entire industry into the red – pressure to innovate increases further

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For the first time in almost 10 years, worldwide medtech revenues are on the decline. This development is due to US companies, which are currently going experiencing difficulties. Nonetheless, as the latest issue of the EY medical technology industry report shows, there is still investment activity in research and development. Expenditure in 2015 was around 6% higher than in the previous year. The market value of the 500 companies investigated rose by 13% in 2015 and has grown by an additional 15% since the beginning of 2016. In contrast, the number of IPOs clearly declined in 2015 and crashed in the following year. Start-ups provide a ray of hope: in 2015, they raised significantly more money than in the previous year. The EY medical technology industry report depicts a stagnating industry, restlessly seeking innovation.

ZURICH, 19 October 2016 – After years of modest growth, revenues in the global medtech industry shrunk by 1.2% in 2015 to just over USD 337 billion. Developments in the United States and Europe differed greatly, however: while medtech companies in Europe were able to boost their revenues by 21% to USD 129 billion, US competitors saw their revenues drop by 11% to USD 209 billion. Industry-wide cumulative net profit fell by a total of 15% to as little as USD 13.7 billion in 2015.
Despite these declining numbers, the medtech industry was well positioned on capital markets, and remains steadfast in the current year. By the end of 2015, market capitalization at all of the investigated medtech companies had risen by 13% to USD 717 billion. This value had increased more dramatically in previous years, but developments in the stock market values of the most important benchmark indices were far weaker. This all points to a further increase in the stock market value of the industry in the current year: in the first nine months of 2016, the market value has already risen by 14.7% to USD 822 billion.

A record number of transactions
The appeal of medtech companies is also demonstrated by transactions: the mergers and acquisitions market once again performed at record highs compared to the same period of the previous year. Total investments within the timeframe investigated, from July 2015 to June 2016, amounted to USD 77.4 billion, a hike of 28%.

The investments were extremely diverse. Of the USD 77.4 billion, minor deals to a value of under USD 10 billion alone accounted for USD 47.2 billion. This means that in comparison with the previous year, the number of transactions increased by 37% to 213, a record high.

Diversification in financing
It was not a good year for new-comers to the stock market: after 41 IPOs registered between July 2014 and June 2015, a mere 15 medtech companies had the confidence to join the market during the same period in 2015/16. Incomings dropped by 74% to USD 590 million – the lowest value since 2012. By the end of September this year, only two companies in the world dared to be listed.

Financing via the capital market or debt had decreased by the end of June 2016 to USD 20.2 billion – the lowest value in five years – but financing in previous years was largely covered by debt capital: debt financing fell from USD 42 billion (2014/15) to 12 billion (2015/16).

Jürg Zürcher, EY Switzerland’s Medtech Leader, comments: “Medtech companies are failing to generate more growth with their products. They lack the innovation that promises their customers clear added value. For this reason, the industry is undergoing a transformation: while many steer through the competition by focusing on size and the depth of their ranges and looking for takeover candidates, others try to better meet their customers’ needs.”

Conglomerates forfeit revenues after spin-offs
Conglomerates have been particularly hard hit by the loss in revenues. Their total revenues dropped by 6% to USD 143 billion. Traditional medtech companies did generate growth of 2%, amounting to USD 194 billion, but even this result lagged far behind previous years.

“Many conglomerates are going through a shrinking phase, streamlining their portfolio and selling those parts of their businesses they no longer consider their core activity,” Zürcher explains. German group Bayer, for instance, has parted ways with its diabetes division, and American group Johnson & Johnson said goodbye to its medical equipment subsidiary Cordis. Traditional medtechs have seen the opposite development: in 2015, they benefitted from increased revenues due to takeovers executed in the previous year.

Young start-ups in particular able to raise more funds
Investors have also backed young medtech companies, fueling start-ups with more venture capital than ever before (USD 1.7 billion). Start-ups raised considerable funds in the early stage in particular: “It is encouraging that investors are increasingly discovering and fostering young start-ups,” adds Zürcher. “For a long while, investors focused on short-term success, singling out large medtech companies that promised to pay out dividends. This strategy can become dangerous for the industry, however, because this steers funds away from research and development, preventing true innovation.”

Companies look to their research and development departments in particular for innovation, which received USD 15 billion in investments, 6% more than in the previous year. This means that funds available to this area have risen every year since 2009.

Increasing pressure to change
Zürcher believes that medtech companies are now under even more pressure to change and innovate: “The pace of change is picking up. Megatrends, such as big data or digital and mobile technologies, also offer medtech companies great growth potential. Smart medtech devices can connect via the internet and exchange important data. Big data analyses can be used to develop better, more effective treatments for diabetes patients, for example.”

Zürcher expects to see some slight recovery in the industry in the current year and does not forecast long-term stagnation. Revenues have clearly improved again in the first half of 2016 in comparison to the same period of the previous year. Despite this, the challenges remain significant and the transformation mentioned here is still to intensify. “Growth by means of acquisitions was the dominant strategy in the medtech industry over the past few years. That is likely to remain the case, because companies will stay focused on their strategic priorities. In this environment, companies cannot pay out money to shareholders. They have to invest in strategic takeovers and partnerships and conduct research more efficiently in order to develop much needed innovative products.”

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