Pulse of the Industry medical technology report 2023
The year in review: accelerating medtech’s digital opportunity
The 17th annual edition of our Pulse of the Industry medical technology report finds the industry in a state of flux. In recent years, the medical technology (medtech) industry has performed very strongly, driven by the COVID-19 pandemic and the associated need for new non-imaging diagnostics and research-related equipment. In last year’s report, we celebrated the industry’s surge of public company revenue to more than a half trillion US dollars, as well as a third consecutive year of double-digit R&D growth. However, we also noted early indications of more challenging conditions ahead, signaled by a muted M&A market and decreasing public market valuations for companies in the sector, as well as a 30% decline in overall industry financing. This financing slump included the disappearance of special-purpose acquisition company (SPAC) deals, a sharp decline in initial public offerings (IPOs), which were down 99% in total value; and venture capital (VC), which saw a 21% drop in funding.
One year later, the head winds that were becoming evident have further intensified. Geopolitical upheaval, slow commercial and supply chain disruption recovery, a shifting regulatory environment and stubborn global inflation all have contributed to the uncertainty affecting the industry. Adding to these factors, questions are emerging around how the rise of GLP-1 (glucagon-like peptide 1) therapies might impact aspects of the sector over the longer term. However, the aging global population and the associated rise in the number of underserved chronic disease patients provide strong fundamentals for long-term growth. Moreover, the acceleration of digitalization across the industry with new advances in the power of data analytics (most notably demonstrated by the rise of artificial intelligence (AI), including the breakthrough generative AI models in 2023) opens new possibilities for the industry’s future.
The convergence of these technological advances with a heightened demand for personalized, flexible approaches to care forms the basis for a new vision of health care for the future, which we have termed the intelligent health ecosystem (IHE), a concept that we’ll explore further in this report. But ultimately, amid the shifting forces affecting the industry and the challenges and opportunities they offer, medtech has undergone a year of reset, with its performance largely returning to pre-pandemic norms. This reset leaves medtech with key strategic questions to answer.
1. How can medtech restore its growth trajectory?
Total revenue for medtech reached US$573 billion in 2022, as growth fell from a post-pandemic high of 16% in 2021 to just 3.5% in 2022, the lowest level since 2015. This slowing trend continued into the first half of 2023, with commercial leader (public pure-play medtechs with at least US$500 million in annual revenue) revenues essentially flat at 0.4% growth compared to the previous year. This continuation of 2022’s pattern suggests that the industry’s strong performance in 2021 could be an outlier; a one-time post-COVID-19 correction rather than a return to the trajectory of the period from 2000 to 2007, when medtech averaged 15% annual revenue growth rather than the 5% average seen from 2008 to 2020.
Figure 1: Macro challenges for the global economy
This graphic shows the pressure points, key events and disruptions, and implications of the convergence of macro challenges for the global economy.
Figure 2: US and European medtech public company revenues, 2013–22
This bar graph shows US and European medtech public company revenues from 2013 to 2022.
2. What can the industry do to increase its attractiveness to investors, particularly in a period of continued uncertainty?
Medtech’s public valuations have fallen in parallel with the sector’s top-line growth. Stock prices for medtech, as with broader indexes, peaked toward the end of 2021. But by midyear 2022, roughly half of the stock price gains the industry made during the pandemic had been wiped out. As of the end of July 2023, growth had flatlined and medtech valuations were just 22% higher than they were in January 2020, in line with the broader indexes. In parallel with this reset, medtech trading multiples also fell back from a pandemic-era peak of 16.3x in September 2021 to 7.3x by the end of H1 2023 (for context, the 10-year average trading multiple for the industry was 8.4x). And according to one recent report, medtech is trading at the lowest sentiment levels seen since the financial crisis in 2008 and 2009.¹
Figure 3: US and European medtech market capitalization relative to leading indexes, 2020–H1 2023
This line graph shows the US and European medtech market capitalization relative to leading indexes from 2020 through the first half of 2023.
3. How can medtech effectively invest in activities that will drive strategic growth?
In 2022, medtechs rewarded their investors with substantial cash returns to shareholders in the form of dividends and buybacks. The US$27.8 billion returned to shareholders represents the highest level of returns since we began publishing Pulse of the Industry. At the same time, medtech’s investment in growth-oriented activities looked less secure in 2022. Though the industry’s R&D investment reached a record US$24.7 billion, this represented a dip in the three-year uptick in the industry’s R&D spending growth, which reached an all-time high in 2021 but reverted to historical norms in 2022. M&A expenditure, on the other hand, fell 44%, a steep decline in investment in inorganic growth.
Figure 4: US and European medtech commercial leaders spending trends, 2010–22
This bar graph shows the spending trends for US and European medtech commercial leaders from 2010 to 2022.
4. How can medtech enable healthy ongoing investment in the broader innovation ecosystem?
From the onset of the pandemic up through the third quarter of 2023, medtech was the beneficiary of an investment spree driven by the COVID-19 pandemic across the entire health care ecosystem. As the crisis eased and relative normalcy returned, investment in medtech displayed its traditional cyclical pattern, with generalist investors retreating from the sector while rising inflation and other macroeconomic factors hindered growth for many companies. This shift was reflected in a marked tightening in industry financing in 2022.
Though total medtech financing rose 9% to US$32.8 billion last year, this activity largely derived from a 71% jump in industry debt, which rose to US$19 billion; and unlike in previous years, the largest debt offerings did not fund acquisitions, but rather went to repay and refinance existing debt, working capital, stock buybacks and other capital expenditures. Equity financing fell 27% to US$13.8 billion, its deepest point in seven years. This drop reflects a 21% fall in venture financing to its lowest levels since the period from 2015 to 2016, with only 106 venture rounds of US$5 million or higher executed in the 12 months preceding June 2023. In addition, the industry witnessed a near-total disappearance of the IPO market. This fundraising hit will impact the industry’s broader ecosystem of smaller medtechs, which drive innovation but are reliant on financing from the industry’s leaders or from external investors to support their R&D activities.
Figure 5: Equity capital raised in the US and Europe by period, Q3 2019–Q2 2023
This bar graph shows the equity capital raised in the US and Europe by period, from the third quarter of 2019 to the second quarter of 2023.
As financing levels dip, these companies will feel pressure to make an exit via acquisition. However, as noted, M&A in the sector also fell in 2022, with the negative trend continuing into 2023. In the 12-month period ending 30 June 2023, deal values were down 44%, and only the US$16.6 billion Johnson & Johnson acquisition of Abiomed kept values from hitting a 10-year low.²
Figure 6: M&A in the US and Europe by year, H2 2005–H1 2023
This bar graph shows M&A activity in the US and Europe by year from the second half of 2005 to the first half of 2023.
As the medtech industry seeks to answer the aforementioned questions, it should consider its approach in light of the broader changes that are affecting health care and the life sciences sector, bringing the possibility of transformative innovation for the industry in the near future. Rapidly evolving technologies, increasingly sophisticated consumer demand for more personalized and convenient health care, pressure to change payment models due to aging populations and a rise chronic disease incidence are all long-term trends that have unavoidable and significant implications for the industry and will ultimately lead health leaders to rethink how care should be delivered in the future. Our vision for the future direction of life sciences is the technology-driven reinvention of the sector, which we call the intelligent health ecosystem (IHE). The IHE is a blueprint for a smart, connected, personalized, patient-centered health care model for the future. Within this new model, health care will be:
- Built on ecosystem-wide collaboration and frictionless data sharing between parties
- Delivered by a seamless integration of virtual and digital care channels
- Enabled by the convergence of new technologies and data, and capable of delivering value for all stakeholders
Figure 7: The intelligent health ecosystem of tomorrow
This graphic shows the forces that will be at play in the intelligent health ecosystem of the future as health care advances from analog care to digitalized care and ultimately connected care as part of a smart health system.
Figure 8: Smart devices will become just one component in care delivery within an intelligent ecosystem: orthopedic devices example
This graphic shows how post-operative personalized care will evolve as health care advances from analog care to digitalized care and ultimately connected care as part of a smart health system.
The rise of these new technologies in the medtech industry is widely reported, with big data, artificial intelligence (AI), cloud computing, sensors, virtual and extended reality systems, and fifth-generation broadband all recognized as future drivers for the industry. Amid a generally slow year for the industry, the pace of innovation for these cutting-edge technologies continued to accelerate. One example of this growth was in the applications of AI in the sector, with at least 91 new algorithms gaining FDA approval in the first 10 months of 2022, making an immediate impact in the diagnostics and imaging diagnostics markets. And while venture financing dropped during this period, some potentially transformative new innovations were attracting capital, including Alphabet’s Verily Life Sciences, which raised an additional US$1 billion in September 2022 to support its efforts in real-world evidence generation and health care data platforms.³ In addition, the cardiac diagnostic developer HeartFlow attracted US$215 million for AI-powered software that maps the coronary arteries and any potential blockages through a 3D CT scan.
Figure 9: FDA approvals for AI algorithms, 2007–October 2022
This line graph shows FDA approvals for AI algorithms from 2007 to October 2022. It is accompanied by a description of three FDA approvals for AI algorithms in 2022.
Innovations like these — a few examples among many across the medtech ecosystem — bring the prospect of new breakthroughs and new approaches to care in the sector, driven by advances in data and technology. Medtechs need to continue to embrace these innovations, seeing them not as potential bolt-ons to existing offerings, but instead as keys to unlock a bolder strategic vision. Within the IHE, these rising technologies will ultimately converge, forming a smart infrastructure for care delivery anytime and anywhere, beyond legacy institutional care channels. As medtechs seek to adapt to this changing operating environment, they must evaluate and redesign their business models on an ongoing basis, as explained in a recent EY article, “Redesigning operating models to drive life sciences excellence.”
In this report, we explore the drivers that are pushing the industry away from its current norms toward a qualitatively different future approach, evaluating the challenges and opportunities the sector will face as it attempts to bridge the gap from the present to the IHE. In particular, we will take a deep dive into the following opportunities and challenges:
- The rise of digitalization across the value chain and the opportunities it unlocks for medtechs
- The emergence of powerful new technological modalities, focusing on generative artificial intelligence (GenAI) and its implications for the industry (including the potential administrative and other operational efficiencies the technology could help deliver)
- The opportunities to use digital technologies and data to improve supply chains and other business functions
- The changing nature of customer demands with a growing emphasis on ambulatory care and other care delivery outside the traditional institutional channels
- The complex geopolitical situation, particularly the challenges in China, one of medtech’s key markets and a geography in which a fast-evolving operational landscape is driving the industry’s push to rethink its operations and processes
As always, the report also includes several guest perspectives from medtech leaders on a host of top-of-mind subjects. First, we’ll hear from GE HealthCare and Siemens Healthineers on how digitalization, including AI, is creating significant shifts in health care. And last, we spoke with Johnson & Johnson MedTech about the opportunities and challenges for medtechs in China.
- “JPMorgan says time to buy MedTech based on past,” MSN website, https://www.msn.com/en-us/money/markets/jpmorgan-says-time-to-buy-medtech-based-on-past/ar-AA1fWQGc, 29 August 2023.
- “Johnson & Johnson Completes Acquisition of Abiomed,” Johnson & Johnson website, jnj.com/johnson-johnson-completes-acquisition-of-abiomed, 22 December 2022.
- “Alphabet’s Verily raises $1 bln in funding round,” Reuters website, https://www.reuters.com/technology/alphabets-verily-raises-1-bln-funding-round-2022-09-09/, 9 September 2022.
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