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Medical technology
report 2014
the industry
Differentiating differently
To our clients and friends,
Welcome to the 2014 edition of Pulse of the
industry, EYs annual report on the medical
technology industry.
In the last three issues, we have described old ways of differentiating products
how the drive to value in health care, appear less valuable to customers. This
combined with the growing power of means that medtechs must transition to
patients, is transforming the sector. This differentiating differently, placing greater
year, our opening article, Differentiating emphasis on mechanisms that allow them
differently, focuses on an additional risk to distinguish products based on value
that has emerged: the commoditization and outcomes.
of many medtech product segments.
We recognize that differentiating
For medtech developers, the specter of
differently will require changes to
commoditization upends their business
medtech business models and can only
models and creates a scenario in which
be accomplished in conjunction with
competition is no longer based on
other strategic financial objectives. With
historical value drivers brand, quality and
that in mind, we have drawn linkages,
design but on a single element, price.
where applicable, to noteworthy financial
To understand how commoditization is performance, financing and M&A trends
playing out now and in the future, we that surfaced over the past 12 months.
surveyed medtech companies main As ever, we are grateful for the insights,
customers in four major markets: the US, opinions and perspectives of some of the
the UK, Germany and Spain. Through industrys leading insiders in helping us
interviews and case studies, we also develop this years Pulse of the industry.
explored the various strategies medtech We hope this report offers plenty of food
companies can adopt to differentiate for thought and discussion. We look
their products in an increasingly difficult forward to continuing the conversation
health care market. with you in one-on-one discussions and
via social media. Please visit our blog
Not all of the strategies we outline in
(lifesciencesblog.ey.com) and our Twitter
this report will apply to every company;
feed (@EY_LifeSciences) for more.
nor are any of these strategies mutually
exclusive. What we can say is that the EY Global Life Sciences Sector
Connect with us
@EY_LifeSciences lifesciencesblog.ey.com
Contents
Perspectives
05Point of view: Differentiating differently
11To improve medtech R&D, take a system-wide approach
Dr. Olaf Schermeier, Fresenius Medical Care
14Building a better model for health care
Brent Shafer, Philips North America
Dr. James V. Rawson, Georgia Regents Medical Center
18Collaborative contracting
Mark West, SharedClarity
20 Sea change in Chinas medtech industry
21Why medtech should embrace commoditization
Rob ten Hoedt, Eucomed and Medtronic
22Taking a new approach
Jos Almeida, AdvaMed and Covidien
23Strength, resilience and energy
John J. Greisch, Hill-Rom
24Charting a new course
Joseph M. DeVivo, AngioDynamics
Industry performance
26Financial performance | Holding steady
41Financing | Financing the future
56Mergers and acquisitions | Seeking scale
68 Medtronic/Covidien: Emblematic of what medtech is buying now
Appendix
70 Scope of this report: defining medical technology
71Acknowledgments
72 Data exhibit index
74Contacts
Part 1 | Perspectives
Part 1
Perspectives
Perspectives
Differentiating differently
For several years, we have written about two trends in health care that are transforming the medical
technology business. The first of these an increasing emphasis on value and the concomitant need
to demonstrate improved outcomes was something we explored in our 2011 Pulse of the industry
report. The following year, we discussed the second transformative trend: patient-empowering,
information-leveraging technologies (PI technologies) such as connected devices, smartphone apps,
sensor-embedded objects and social media platforms.
As a result of these two trends, patients process fundamentally changes the IBM sold its PC division to the Chinese
and payers are more influential, and nature of competition in a business manufacturer Lenovo.
companies must respond with new segment. Instead of competing on
approaches and business models to attributes such as brand, quality and To evaluate the extent to which this
succeed. At a minimum, companies design, products in a commoditized dynamic is playing out in medtech, we
must now measure health outcomes and industry compete largely along just one conducted a survey of US and European
demonstrate the value of their products dimension: price. Generally speaking, health care buyers in four major
to payers and providers. To accomplish the journey to commoditization and price markets: the US, the UK, Germany and
this, they may also have to expand their competition takes place in three steps: Spain. In particular, we focused on two
traditional offerings by moving beyond (1) a shift in customer perception; (2) constituencies within these organizations:
the product (expanding into services and lowered barriers to market entry; and practicing physicians and procurement
solutions), beyond the hospital (enabling (3) full-on price competition. officers.1 Providers, of course, have
care delivery wherever patients happen traditionally been the main buyers of
to be) and beyond treatment (providing This process is beginning to play out in medical devices. This remains true even
prevention, remote monitoring and more). medtech, in several ways. in an outcomes-driven world where
payers have more influence and the
But medtech companies strategies will physicians themselves have become
also need to account for an additional risk
A shift in customer perception the salaried employees of health care
emerging from this confluence of trends: The first step to commoditization is for systems. To get a sense of the direction
the threat of commoditization in many products to become undifferentiated and momentum of change, we asked
product segments. How to address this in the eyes of consumers. This can these respondents questions about
challenge is a central theme of this years result when products are functionally buying patterns today as well as their
Pulse report. identical for instance, high octane and perceptions of how buying decisions will
low octane gasoline. But commoditization be made three years from now.
can also occur when products still have
Commoditization distinguishing attributes, but customers The survey reveals some clear attitudinal
become unwilling to pay a premium shifts, with potential implications for the
Commoditization is the process by which price for these features. This happened nature of competition and how customers
products become undifferentiated and in the 1990s with desktop personal perceptions of medtech products will
therefore interchangeable in customers computers. Until the mid-1980s, IBM change. When asked about the biggest
perceptions. For manufacturers, this computers commanded a premium price pressures on their institutions, for
because of Big Blues reputation and its instance, respondents indicated that
long history in computing. Over time, simple cost-cutting issues will become
1 The survey, conducted in August 2014, was the features distinguishing one PC from relatively less important over the next
taken by 162 respondents in total 71 in the another became less and less important three years. Instead, they expect a
US, 33 each in the UK and Germany and 25 to customers, and the market was driven significant increase in the importance of
in Spain. Of those, 85 occupied clinical roles health care reform initiatives focused on
by narrow margins and aggressive price
(chief of cardiology, department head, etc.) and
77 were in administrative or managerial roles competition. By 2004, the industry value and outcomes (e.g., value-based
(purchasing, supply chain, etc.). had become so commoditized that purchasing and pay-for-performance).
Chart 1. Hospitals pressures are shifting from simple cost-cutting to value As shown in Chart 1, 34% of respondents
expect these measures to be among the
Today In three years
three factors placing the most pressure
50%
Declining: Increasing: on hospitals in three years time (up from
44% Simple cost-cutting Value/outcomes 21% today). Meanwhile, respondents
41% 40%
40% expect a relative decline in the focus on
37% 37% 38%
cost-cutting (down from 44% today to 37%
33% 34%
in three years), imaging costs (22% today,
30%
27%
12% in three years) and other such issues.
physicians and surgeons to develop new Instead, respondents expect that reduced total costs of care. Indeed,
variants of products that met the specific measures that target value and purchasers ranked this as much more
needs and preferences of these end outcomes (e.g., data demonstrating important than other factors, including
users. But as individual doctors become clinical outcomes, data demonstrating reduced hospital stays or increased
less influential over the next three years, value, beyond-the-product services, surgical efficiency.
survey respondents expect that features risk-sharing agreements) will become
targeted at these buyers will become less significantly more important influencers For medtech companies, the
important in purchasing decisions. As of purchasing decisions. repercussions are clear: to succeed,
shown in Chart 4, physician preference firms will need to design and market
for specific device, user-friendly And, as we show in Chart 5, when their products to appeal not just to the
design and training in use are all medtech purchasers were asked about preferences of physicians in the field, but
expected to become less important the economic outcomes they see as also to the value-driven considerations
in purchasing decisions. most important when differentiating that are becoming top-of-mind for
new products, the leading metric was administrators and managers.
However, this will not always be easy to Chart 4. Differentiate differently or become commoditized?
pull off, for a couple of reasons. Today In three years
Meeting those needs will require medtech product research and development, he
New bases of competition firms to engage with health care buyers says. Now, it might be 5%, with 3% going
If the old ways of differentiation are on the buyers terms, spending time toward R&D for commercial innovation,
becoming less relevant, companies on-site to understand concerns such as working with our customers to develop
must develop strategies for competition workflow efficiency or the ways in which better solutions that they can implement
on these new bases of differentiation. current devices are used to deliver care. in their protocols for delivering care. (See
Broadly speaking, these tactics fall into Building a better model for health care
This is the path Fresenius Medical on page 14.)
one of four categories:
Care took when it restructured its
1. Achieve superior outcomes via R&D operations in 2013. As Dr. Olaf
Schermeier, the companys Chief Officer 1. Achieve superior outcomes
technological advances
for Global Research and Development, via technological advances
2. Increase scope through services explains on page 11, Fresenius mandated
and solutions that every one of the companys In certain therapeutic areas, it has
engineers spend a minimum of two days become difficult to improve upon existing
3. Increase scope by adding product devices at least in ways that buyers care
annually in the clinic, working alongside
offerings (within a disease area or most strongly about. That said, there are
medical teams to gain a first-hand
across multiple disease areas) green field areas where new product R&D
understanding of how to optimize the
4. Take costs out of the health care delivery for renal patients. can catalyze a new standard of care.
care system
As they reconsider their strategic priorities Second Sight Medical Products Argus
Of course, these strategies will not apply to adopt one or more of the new bases II retinal prosthesis system is a case in
equally to every medtech company. for competition, companies are likely to point. The device a retinal implant
Whether they apply will depend on consider reallocating their R&D spending. accompanied by a wireless processing
a range of factors, including the Philips Healthcare, for example, which unit, glasses and a video camera can
companys therapeutic focus and stage of has embarked on a 15-year project with partially restore vision to people blinded
development. Moreover, to be successful, Georgia Regents Medical Center aimed at by the rare genetic condition retinitis
companies may find it beneficial to improving clinical outcomes, has already pigmentosa (RP). The device was
develop a strategic plan that incorporates done so. Brent Shafer, Chief Executive approved for use in Europe in 2011, and in
multiple differentiation mechanisms. Officer of Philips North America, explains February 2013, it won approval from the
that tackling initiatives such as improving U.S. Food and Drug Administration (FDA).
As medtechs consider which tactics to patient experience requires redistributing
prioritize, one commonality is how each resources. In the past, Philips might spend Sophisticated devices such as Argus II,
helps address the needs of its customers. about 8% of our total health care sales on which represent a technological step-
change, dont come cheaply. As the
companys Vice-President of Business
Development, Brian Mech, told Reuters
in February, getting Argus II to the
To be successful, companies may market took 14 years, US$200 million
and intestinal fortitude. Second
find it beneficial to develop a Sight is now working with insurers, the
US Centers for Medicare & Medicaid
strategic plan that incorporates Services and governments in Europe to
underwrite the devices US$100,000
multiple differentiation mechanisms. price tag. In August, the French Ministry
of Health approved financial support
for the system, which is also available in
Germany, the Netherlands, Switzerland,
Italy, Saudi Arabia and the UK.
Fresenius Medical Cares success is based on great inventions. for example, are unwilling to use bulky
and complex clinical machines. We have
Polysulfone fiber, for example, was key to creating the first truly
to understand that we cannot simply take
effective dialyzer. This kind of innovation was driven by creative a clinical system, adapt it slightly and
engineers, many of whom are still with the company, and this is assume the patient will be happy to have
stillone of our biggest assets. it in his or her home. What is the impact
on patients flexibility? Can they use the
system when they travel? How simple
As engineers, we have long been of the overall treatment, not just the cost is the user interface? These are huge
accustomed to innovating by looking of a specific product. Thus, reducing decision points for all home patients,
at individual products the best-in- the overall cost of therapy must be one and our engineers have to incorporate
class dialyzer, for example. But we now of our key innovation targets. Vertical this kind of thinking in the product
understand that even more value is integration from a complete renal development process.
created when we try to improve a specific product portfolio to owning the dialysis
The renal care space is still growing,
therapeutic system in its entirety, by center network has been a clear benefit
but the logical question is, where to go
taking a more holistic view of a therapy. for Fresenius Medical Care, not only in
from here? Many of our patients have
We now ask: What is the outcome for developing new products but also for the
comorbidities: more than 40% of dialysis
patients? What is the reimbursement overall economies of scale.
patients have diabetes, 70% have high
structure? What kind of therapy can I
A key differentiator for Fresenius Medical blood pressure, and nearly all have some
apply, and how can I make it as cost-
Care is the way that R&D interacts kind of cardiovascular disease.
effective as possible?
with the clinical part of the business.
For us, this is clearly an opportunity
This approach goes beyond individual Our 3,200 dialysis centers not only
to expand our services into chronic
products. It clearly represents the biggest provide an incredible data pool, they
care coordination, by incorporating
innovation potential in dialysis. also offer an opportunity for our R&D
elements of general practice, cardiology,
engineers to visit a clinic, where they
The various elements of Fresenius diabetology and even psychology to
can get an in-depth understanding of the
Medical Cares portfolio dialysis improve our overall patient care. This
optimization potential that can then be makes sense not only from a service
machines, disposables, drugs, dialyzers
addressed in the technology and in the perspective, by making use of our clinical
and IT solutions all interact with each
development process. In fact, every one infrastructure, but also from a product
other to create value and improved
of our engineers worldwide is required and technology perspective.
therapies for end-stage renal disease
to spend a minimum of two days per
(ESRD). A good example is our Online
year in a clinic, observing therapies and
hemodiafiltration (HDF) therapy. HDF
processes and discussing them with clinic
is based on the ultrafiltration of large
amounts of plasma across the dialyzer
staff and patients. This enables them
to get an in-depth understanding of the
Key decision-makers
membrane. The removed volume is
then replaced by ultra-pure substitution
optimization potential they can address in are increasingly
new technology developments.
fluid. Developed by engineers working
very closely with medical doctors, basing their
Our clinics treat around 280,000 ESRD
Online HDF therapy is a big advance in
care that provides clear advantages to
patients worldwide, three times per decisions on the cost-
week, and we conduct regular surveys to
patients. Asa result, many countries
learn how we can help to improve their effectiveness of the
haveincreased their reimbursement for
this specific therapy.
quality of life. On questions of care, the
patients play an increasingly important
overall treatment,
When it comes to reimbursement, the key role in the overall decision-making
process. Therefore, it is crucial for us to
not just the cost of a
decision-makers are increasingly basing
their decisions on the cost-effectiveness understand their needs. Home patients, specific product.
To date, the companies that have company that offers services such within the current budgetary cycle. By
embarked on the most ambitious as hospital infrastructure design and establishing relationships with fewer
attempts to own more of the bundle are equipment management. suppliers, these health care buyers can
the largest medtechs. The big imaging begin to address the issue, negotiating
specialists such as Philips and GE new payment contracts that provide
Healthcare led the way, in part because
3. Increase scope by their organizations with improved pricing
they had to. They were among the first to adding product offerings around the total cost of care.
come under pressure from cost-conscious
The move from volume to value means The deeper a medtech supplier is in a
hospital systems given the centralization
medical technology firms that offer health therapeutic area, the more development,
of big capital equipment purchases.
care buyers an end-to-end solution in a regulatory and marketing costs it can
Therapeutic device companies are given disease area may have a competitive leverage across its various departments.
now moving in this direction as well. In edge. By having a suite of offerings Further out, one can imagine how these
December 2013, Stryker bought Patient designed to address the continuum of care deep relationships might shift, such
Safety Technologies for US$120 million in a given disease area, medtechs provide that a medtech developer contracts to
in order to gain access to traceability their customers additional value in two provide devices for a fixed fee, whether
software and hardware that reduce the related ways. First, by providing a full range the device is a simpler hip joint or a more
possibility of post-surgery complications of clinically tested products, medtechs complicated total hip replacement. Such
caused by medical errors. assist in ensuring provider groups can innovative contracts are, for now, just
meet important care metrics that are talk, but senior medtech executives should
Meanwhile, Medtronics US$200 million now a necessary precursor for their own start to understand how owning a disease
acquisition in 2013 of Cardiocom, a reimbursement. Second, by offering a could enable their companies to move
telehealth company that provides home spectrum of solutions in a given disease away from unit-based pricing to a payment
monitoring, shows how Medtronic is area, medtechs with the right portfolio of system that enables market access.
expanding its cardiovascular franchise offerings can help simplify the contracting
beyond implantable devices to the complexity health care buyers face. In many ways, the service-plus
provision of services. Just a month after relationships struck by Philips Healthcare
the acquisition, Medtronic established Surveys of health care payers and and Fresenius illustrate how increasing
a new business unit, Medtronic Hospital purchasers we conducted in 2014 suggest product scope (broadly defined) might
Solutions, to partner directly with that they have so many strategic priorities facilitate new commercial models
hospitals to increase the quality and to accomplish in the near term that they that are less transactional at the unit
efficiency of service delivery. And in dont have the bandwidth to engage with level and more relationship-driven.
August this year, the company pushed multiple medical technology makers in The question is how such a model will
further into the hospital sector when meaningful conversations about value be applied in the therapeutic device
it acquired NGC Medical, an Italian especially if that value wont be realized category, especially implants.
Building a better
model for health care
In 2013, Philips Healthcare and Georgia Regents Medical Center entered into a 15-year, US$300
million agreement to improve outcomes and deliver care more efficiently to patients. Here, Brent
Shafer, Chief Executive Officer of Philips North America, and Dr.James Rawson, Chair of Radiology
atGeorgiaRegents, discuss the rationale behind the deal, and its ambitions.
Weve partnered with many hospitals with Cerner to integrate electronic medical
around the world, but those partnerships records. And third, we will work on our
have been based more on managed hospital-to-home strategy, developing and
equipment services. This is different. It has deploying remote monitoring capabilities
a managed services component, but it is and other solutions for home care.
also tied in with a very strategic risk-sharing
component and other financial factors. Philips is in a good position to tackle these
initiatives. Its just a matter of how we
Under the terms of our relationship, the want to use our resources. In the past,
first thing Georgia Regents was able to Philips might spend about 8% of our total
do was reduce their cost of procurement. health care sales on product research
They didnt have to bid for equipment and development. Now, it might be 5%,
Brent Shafer with three different vendors; they didnt with 3% going toward R&D for commercial
Chief Executive Officer innovation, working with our customers
have to schedule on-site visits. And we
Philips North America
manage all the equipment, whether to develop better solutions that they
its our equipment or a competitors. can implement in their protocols for
Philips alliance with Georgia Regents We guarantee certain performance deliveringcare.
leverages our joint strengths Philips metrics, but at the core of the risk-
equipment, services and revenue cycle sharing component of the relationship, We want to establish many more of these
management and Georgia Regents our common goals are improved patient partnerships, but they wont necessarily
ability to serve patients and provide outcomes, shorter length of stay and work everywhere. We have to look at what
better outcomes. With Georgia Regents, greater patient satisfaction. is in the best interests of the customer and
we were looking at a partnership from in the best interests of Philips, and at what
a much broader perspective than just Our contract is for 15 years. There strengths we hope to achieve through a
a hospital entity. We were able to bring are three areas of focus tied to patient partnership. Our relationship with Georgia
Philips whole portfolio, from dental care satisfaction. The first is based on Regents means that we can do what we
to lighting, not just to the hospital and the patients experience once they get to the do best innovate, deliver and manage
university, but also to the community. institution. Second, we are partnering equipment capable of gauging, diagnosing
and recording everything from a patients
vitals to remarkably detailed images, giving
the clinicians more time to deliver expert
one-on-one care for each patient.
The success of the partnership, in my Were both learning from each other,
view, is working with a partner on the from our patients and from our staff.
good days and the bad days, helping to Georgia Regents was an early pioneer in
move the ball forward to improve health. patient- and family-centered care. Welook
Its no longer about being sold a piece of at new equipment from an efficiency and
equipment or a technology. I no longer care delivery point of view, but also from
look at projects as being completed; I the patients perspective. How do we
look at them as journeys. We installed a make getting a scan a good experience
new Philips IntelliSpace PACS system for for the patient, and how does that fit into
storing and viewing and processing image a larger context of the patients overall
data six months ago, and we continue to experience in our hospital? Because we
innovate and improve that process. It is have Philips and our patient advisors
Dr. James Rawson now hard-wired into our operations. The sitting at the design table with us, I think
Professor and Chair of Radiology,
Georgia Regents Medical Center time we used to spend on buying and were able to make much better decisions.
selling equipment we can now reinvest
into innovation and improving the care We went live in January with the first
The relationship between Georgia phase of the PACS project, and were
given to each patient.
Regents and Philips is based on common continuing to improve that workflow.
values. When we compared our priorities, When we installed the PACS system, Entering year two, we plan to accelerate
we saw an overlap in the areas of we decided this was not going to be a the pace of innovation. As we keep at this
improving patient health, lowering costs radiology project, but an enterprise-wide for the remainder of the 15 years, we are
and increasing efficiency. We both wanted project. We thought a great deal about creating a very different model of care
to build a better model for health care. the methods our physicians would use delivery in which innovations are built
to access images in the hospital, in the on previous learnings. We expect this to
One challenge we had was in teaching
clinic and at external locations, and how lower costs and to improve outcomes,
people that this wasnt just a big
easily they needed to be able to interact efficiency and, most important, the
equipment deal, but something very
with that image data to make patient care patient experience.
different. But it is now part of our day-to-
decisions. It was about changing the way
day operations across the organization,
images would move in the entire health
not the responsibility of a single team.
system for everybody.
What Philips saw in us was alignment. In
many hospitals, there is a lack of alignment
between hospital staff and physicians.
In our case, rather than having different
departments fight over types of equipment
Because we have Philips and our
to be used, or workflow, our departments patient advisors sitting at the design
work collaboratively and have done so
for decades. In that type of environment, table with us, I think were able to
Philips doesnt get stuck in the middle of a
debate between what the doctors want or make much better decisions.
what different specialists want.
Creating scope in a In some cases, the push to add product and diabetes markets, while Covidien
single disease area scope may turn buyers into sellers. As we specializes in hospital supplies. Together,
have witnessed in the pharma business, the combined entity will be one of the
Two deals in the 12-month period ending
or with Johnson & Johnsons divestiture leading medtech distributers in six of the
30 June 2014 showcase how therapeutic
of its Ortho-Clinical Diagnostics division, top 10 hospital purchasing categories,
device companies are broadening the
larger companies may realign their according to Medtronic.
scope of their product offerings.
portfolios to create fewer business units
with competitive scale. (See Seeking The addition of Covidien broadens our
The first is Zimmer Holdings proposed footprint, Medtronic Chairman and
acquisition of Biomet; the second is the scale on page 57.)
CEO Omar Ishrak told an interviewer
Medtronic/Covidien megadeal, which is after the announcement of the merger.
an even more ambitious effort to create Creating scope in
The value proposition of Covidiens
scale across multiple disease areas. multiple disease areas technology is primarily to deliver hospital
If the Zimmer/Biomet and Danaher/ efficiency, while Medtronics chronic
The US$13.4 billion Zimmer/Biomet deal
creates an orthopedic player with the Nobel Biocare mergers are motivated by disease therapies deliver value in post-
critical mass to rival Johnson & Johnsons deepening product scope, Medtronic/ acute settings. When these two are
DePuy Synthes. As Pulse went to press, Covidien takes the argument to a new combined, in a world in which integrated
European regulators were assessing the level. In essence, executives championing health franchises will be more common,
anti-trust implications of the Zimmer/ that megamerger argue that depth in we become a very attractive partner
Biomet deal. Assuming it proceeds, the one particular disease area is no longer we can deliver value in the hospital, in
transaction will combine the number sufficient. To change conversations a measurable fashion, and value that is
two orthopedics player by revenue with hospital purchasers, especially realized outside the hospital.
(Zimmer) with the fourth-ranked firm as vendor consolidation continues,
medtech developers must have breadth In an era when health care buyers are
to create a new entity with revenues of
across multiple disease areas. Call it the inundated with must-dos, it may well be
nearly US$8 billion. Importantly, the deal
ber-scope approach. that the scale of a Medtronic/Covidien
promises to position Zimmer as a leader in
makes such entities more attractive
the musculoskeletal sector, with particular
Its too soon to say whether the suppliers during contract negotiations.
depth in knee and hip implants. Biomets
Medtronic/Covidien transaction will have Indeed, the emergence of a new initiative
sports medicine products, meantime,
a positive impact on the ways in which the in the US, SharedClarity, which is
will give Zimmer additional depth in the
combined entity brokers contracts with sponsored by the payer UnitedHealth
trauma market, an area where Johnson &
hospital purchasers, or whether scale at Group in conjunction with multiple provider
Johnson currently dominates because of
this level is required to achieve greater groups, underscores why medtech
its 2011 megadeal with Synthes.
leverage with health care buyers. That executives see scaling their businesses as
The Zimmer/Biomet transaction is said, there is no doubt that Medtronic/ an important strategic priority.
expected to trigger even more deal- Covidien has already altered the
The dearth of comparative data has long
making in the orthopedic space, as conversation about the role of medtech
vexed medtech customers who argue the
smaller firms seek scale to remain M&A in creating entities that can survive
rate and volume of the research hasnt
competitive. Moreover, we may see in todays tougher health care climate.
kept pace with the introduction of new
similar deals to deepen product offerings
in other therapeutic areas especially As we note on page 68, the US$42.9 billion products. SharedClarity was created at
those with an abundance of competitors. merger joins two leading medtech least partially to rectify that situation,
Indeed, as we were writing Pulse, news companies to create a new entity that as well as to deliberately correlate
broke that Danaher was to acquire will rival Johnson & Johnsons medtech existing research with value claims. As
Nobel Biocare Holding for US$2.2 billion division in annual sales. Medtronic and SharedClaritys President, Mark West,
to create the leading dental-focused Covidien offer complementary product explains on page 18, the company recruits
medtech based on sales of consumables portfolios: Medtronic supplies a range physicians from its member hospitals
and equipment. of devices for the cardiology, neurology to review the published literature and
establish which technologies provide Medtronic/Covidien is better positioned to about clinical outcomes and impact on
better health outcomes. SharedClarity negotiate those purchasing agreements the patient with every new technology
then takes the process one step further: because its economies of scale mean it Ive assessed, says Georgia Regents
its sourcing group also negotiates can be more disciplined about its own Rawson. For the most part, vendors have
purchasing agreements with product costs, thereby passing along price savings not had the answers to those questions.
manufacturers based on the evidence to customers like SharedClarity while still
amassed. In March 2014, SharedClarity maintaining reasonable margins.
4. Take costs out of the
announced the results of its first review
and awarded contracts for drug-eluting Success in one purchasing negotiation is health care system
and bare metal stents. likely to breed further success, not simply
with the original buyer but with other Recognizing that commoditization is a
Apart from offering benefits to purchasing organizations. Thus, medtechs fait accompli in certain disease areas,
purchasers, the SharedClarity model that have participated, and won contracts, medtechs could also go on the offensive,
presents opportunities for medtech with groups like SharedClarity develop devising products or technologies that
companies. The first is the most relationships as trusted partners, setting provide better value because they remove
obvious a stable channel to the market. the stage for further positive negotiations. costs from the system. There are two
The second advantage is validation by ways to achieve this. First, companies
an independent third party. The final For medtech companies, achieving this can reduce their costs of production, for
advantage is the goodwill that results trust is no small matter. Customers are instance by engineering a simpler, lower-
from cooperatively participating in increasingly demanding more data before tech device or by manufacturing the
the negotiation process. Presumably, they commit to a purchase and are not product more cheaply, and passing the
a company the size of a combined necessarily getting it. Ive been asking savings on to the customer.
Collaborative
contracting Mark West
President, SharedClarity
The advent of SharedClarity is a very clear indication of the push Our credibility with device manufacturers
is based on the fact that the physicians
that weve seen for some time now toward outcomes and value
are engaged not only in the process
within health systems. of evaluating the product, but also in
its implementation. We dont charge
administration fees, and we are not
The concept stemmed from business diagnosis to procedure to after-care. structured like a group purchasing
reviews carried out by UnitedHealthcare What differentiates us is that we have the organization. And we have a committed
the largest commercial payer in the US data that follow that longitudinal activity. model. When our supplier for drug-eluting
and Dignity Health. The theme of medical stents signed the contract, they notified us
devices kept coming up, in particular We recently completed the clinical review it was the largest committed contract in the
the lack of independent knowledge of and contracting process for our first three United States that they remember signing.
how these products perform, and their products drug-eluting stents, bare metal
affordability. I was head of supply chain stents and peripheral stents a process Something I didnt expect is that we are a
at the Cleveland Clinic and was asked that took six months. Clinical review change management company, too. We
to develop some business models, one teams first look at existing research on are changing the processes and culture
of which is SharedClarity. Over the last the product. They survey specialists who administrative and physician engagement,
four years, we have taken the concept to use the product to get input on product joint decision-making within our health
business plan, to investment, to operations, attributes and performance. Then we see system members and the medical device
and now we are achieving results. if theres consensus on how the products community.
perform. If there isnt, we ask: why not?
The business model is two-fold. One What information and data are lacking? Suppliers are in the process of trying to
side of it is understanding how medical What holes in our clinical knowledge base figure out the model of the future, and who
devices perform, and the other is do we need to fill? This could lead us to they should partner with. Their relationship
collaborative contracting within our own more surveys, more reviews of existing with physicians has changed. They realize
membership, which now includes Baylor research or a customized study. that payers play an important new role, and
Scott & White Health, Advocate Health they are working out how to engage with
Care and McLaren Health Care, as well as Once the clinical review team has done its them. That is one reason why we have built
UnitedHealthcare and Dignity. work, we go to a collaborative contracting a process that engages not only the payers
process on behalf of our members. Here, but the providers, and creates an easy
On the clinical side, we have identified our strategy is simple: first, we take the entry for them that way. They have been
30 product families on which to focus output from the clinical review teams very receptive to what were doing, and we
high-cost, high-technology, high-clinical- and their findings. Second, our members see ourselves as their future partners.
impact products, such as pacemakers, commit to purchasing a significant portion
defibrillators, stents, knees, hips and of their volume off SharedClarity contracts. Our growth opportunities are global.
urological slings. Together, these 30 And third, we use the findings of our UnitedHealthcare bought Amil [Brazils
product families account for about clinical review team to help us to rationalize largest insurer and hospital operator]. This
US$35billion a year in the US market. the number of products that we use. represents a fascinating opportunity
We assign those products a clinical Amil is using some products that arent
review team, and we go through a The clinical review and contracting approved for the US. Its good to gain
structured clinical product review for process went very well for our first three some intelligence on those products,
each. We also tap into Optum, which is products. Every one of our members and to have an opportunity to do global
owned by UnitedHealth, for comparative achieved double-digit cost savings on the contracts for medical devices. I think well
effectiveness work. We believe that if you contracts it was the type of quantum see more globalization of products, and
really want to understand how a product leap of improved affordability that we the more options and competition we
performs, you have to follow the patient, were hoping for. have, the better it is for patients.
and you have to have data that go from
The second way is predicated on taking create a socialized health care system for to developing messages that emphasize
costs out of the system. In this scenario, 1.5 billion people is the largest opportunity their customer-centricity, reliability and
how the actual medical technology is in the world for medtech firms, says Rob partnering capabilities. In essence, this
priced isnt the main focus; what matters ten Hoedt of Eucomed and Medtronic. beyond-the-product style of branding
most is whether the product results in is a natural evolutionary step in an
credible cost offsets that reduce the total As companies redesign and adapt environment where the differences
cost of care. their portfolios to develop products between individual products are
for emerging markets, they may take perceived to be small or non-existent.
This is the bar Johnson & Johnsons advantage of this reverse product flow
Ethicon division is hoping to clear with to build no-frills, lower-cost products for Moving forward, it will be interesting to
Sedasys, its computer-assisted anesthetic use in developed markets. Thats what see how or if medtechs will position
delivery system for colon cancer and Smith & Nephew is doing via Syncera, an themselves as brand builders. In other
upper gastrointestinal screenings. orthopedics-focused pilot that reduces words, can the medtechs, via their
Given the sophisticated automation the need for on-site technicians and other products and services, help providers
underpinning Sedasys, the instrument can services associated with two key hip and achieve top-quality care metrics that allow
be used to deliver the anesthetic propofol knee replacement products. As a result of these care teams to attract more patients
in the absence of an anesthesiologist. these changes, Smith & Nephew believes and build share in their own respective
(The gastroenterologist conducting the it can reduce implant costs by as much markets? By directly empowering care
exam would oversee the drugs delivery.) as 50%. The company first introduced providers, medtechs that enhance the
Johnson & Johnson estimates this will the Syncera pilot in emerging markets; bottom lines of their customers give those
allow health care groups to cut colon in August 2014, it launched a similar buyers a very compelling reason to be
cancer screening costs significantly, experiment in the US. loyal to specific medtech brands.
from an estimated US$600-US$2,000
to around US$150. Uptake of Sedasys, At the time of the US launch, CEO Olivier When it comes to charting a new course
which launched in early 2014, has Bohuon told investors that the ultimate to differentiation, medtech companies
been modest, in part because Ethicon idea behind Syncera was to maintain have a range of options to consider, and
has deliberately chosen to make sure margins by reducing prices on its a growing number of peers to emulate.
physicians are properly trained in how and orthopedic products in tandem with less Whatever strategies for differentiating
when the device should be used before intensive marketing, a process that was differently companies ultimately adopt,
rolling it out more broadly. expected to play out over at least a year. they need to give themselves time to
So far, health care buyers are responding assess and analyze not just the nature of
Creating a new device like Sedasys positively to the experiment: Bohuon changing purchasing habits in their core
requires companies assume significant noted that several customers were poised markets, but the implications of those
manufacturing, engineering and R&D to sign multi-year Syncera contracts, changes for their products.
costs it took over a decade to develop
despite its relative newness. If you take
the instrument. But medtechs can also The strategies we have set out here
a hospital that has 700 implants a year,
either refine their engineering processes offer a good starting point for medtech
over the three-year contract this hospital
to create simpler products that can be companies as they consider the next steps
will enjoy net cash flow benefit of well
sold more cheaply, or shift manufacturing they should take to grow their markets.
over US$4 million, he said.
to markets where labor costs are lower. If their products already demonstrate
In fact, such cost-saving strategies are superior outcomes, for example, there is
already in evidence in India and China, less pressure to embark on strategies that
where both domestic and multinational
The shape of increase scope, whether that is through
medtechs are devising lower-cost, things to come additional products or services. Note that
affordable products to treat the new superior outcomes alone may no longer
and rapidly growing middle class in each In an effort to stave off commoditization, be enough to sway buyers especially
country. (See Sea change in Chinas companies must also rethink their if the innovation does not also fulfil a
medtech industry on page 20.) The fact branding strategies. They will need to purchasers key objective to take costs
that the Chinese Government wants to move beyond product-specific branding out of the system.
Case study
A sea change is occurring in Chinas revenues in R&D. Time Medical Systems, and knee implant business of Tennessee-
medtech industry. Since 2008, the meantime, is a pioneer in the development based Wright Medical Group, and
Chinese market for medical devices has of high-temperature superconducting announced that it would base its global
nearly doubled in size, and at US$16.1 (HTS) coil technology for use in clinical orthopedic business in Tennessee.
billion is now second only to the US. MRI scanners, while MicroPort is
Double-digit growth rates for medtech developing its own drug-eluting stents. Dr. Olaf Schermeier, Chief Officer for
sales have put China at the forefront Global R&D at Fresenius Medical Care,
of multinational medtech companies These companies, and a growing number understands the potential risks to his
strategies. But their enthusiasm comes of others, offer stiff competition for business model. We are one of the
with a note of caution: an evolving multinational companies products largest renal care product providers
regulatory environment and government in China and not just in terms of in China, but competition will certainly
policies aimed at boosting the domestic product sales. They are actively seeking come, he says. We should never
industry mean that the path to market M&A opportunities, both at home and underestimate local [Chinese] engineers.
already complicated is not likely to internationally, in order to boost the
quality of their product lines. In June But equally, the skills learned by
become simpler. Meanwhile, many
2013, Mindray acquired California multinational companies in developing
Chinese medtech companies have
company Zonare Medical Systems, an low-cost products for the Chinese
stepped up their investment in innovation,
ultrasound technology specialist in the market and the agility they have had
with an eye on the global market.
high-end radiology segment with sales to maintain in keeping up with policy
High-end in vitro diagnostics specialist teams in the US, Canada, Scandinavia and changes will also add value in their
Mindray Medical International, for Germany. In the same month, MicroPort home markets, where health reform and
instance, invests around 10% of its Scientific acquired OrthoRecon, the hip commoditization are now facts of life.
Why medtech
Rob ten Hoedt
should embrace
Chairman, Eucomed
Executive Vice President & President EMEA & Canada, Medtronic commoditization
Commoditization is a natural trend in any technology-based industry. in the delivery of care so that we can
guarantee that those other activities are
But the medtech industry should not regard it as a threat. I would
done properly and the maximum benefit
rather ask: How will medtech benefit from the opportunities this of our technology is realized. Not only do
trendis creating? we need to collect and share data, but
we must also find ways to ensure that the
appropriate care is delivered.
Western Europe currently spends may not be accepted because it slightly
We can only achieve this if there is
110billion on health care. It has become increases the cost of care in the hospital.
complete trust in what we do, among
clear that growth in health care spending
Clearly, debate and discussion need to policy makers, payers, providers and
cannot continue to outpace the growth
happen between the medtech industry patients. It is important for Eucomed to
of gross national product. If we dont find
and health care providers to make sure work with the European Commission to
a way to provide care in a completely
that we are all focused on the total cost of make sure that regulations for medtech
innovative way, fewer people will have
care. As an industry, we cant expect care optimize the quality of the technologies
access to adequate care.
providers to simply pay for the technology that come to market, but dont stifle
The drive to value in health care is behind and then figure out themselves where innovation, which would be equally
the commoditization of medtech. And the benefits will fall. If we are convinced devastating for patients.
while only a small portion of spending of the benefits of our technologies, we
As people start to pay more out of
currently goes to medical devices, the may have to guarantee those benefits up
their own pockets for health care,
medtech industry will soon have a major front with a risk-sharing agreement. That
they will demand more in return, at
role to play in care delivery if the drive will dramatically change our traditional
higher quality. Although we believe
to value transforms care in the way it business model, but it will also open up
that patients should have a bigger say,
should. There is massive potential in a much larger portion of the market and
medtech industry business models
remote patient management, using improve patients access to therapies.
are predominantly focused on care
smart IT and decision-making platforms
Were an engineering-driven industry, providers, payers and regulators. One of
to allow patients to live a healthy life at
and that spirit needs to stay alive. If you our objectives at Eucomed is to create
home. There are opportunities in data
only take economic values into account, a dialog with patients so that we can
management and analysis to improve
you will never end up with something build relationships, understand patients
the consistency and quality of care.
truly innovative. But the moment that expectations and understand the
There are opportunities to incorporate
technologies are created, all companies language that we as an industry should
robotics and nanotechnology. We can
whether they are small, medium or start to use to communicate with patients.
now deliver technologies and drugdevice
combinations at very small levels to large medtech firms need to initiate
precisely the places they are needed. discussions about value.
A healthy environment for medtech is
crucial for these developments.
If we in medtech are to genuinely improve
delivery of care, we need to move beyond
We need to provide
We need to provide technologies that the transactional model and take more technologies that
have clear health benefits, but we also responsibility for patient outcomes.
have to prove that they have clear We should get paid when the desired have clear health
outcome is achieved. The device is only
economic benefits. There is growing
awareness that medical technology can part of the total solution for the patient. In benefits, but we
offer value across the health system, but diabetes, for example, patients may need
an insulin pump, insulin, exercise and a
also have to prove
health care systems themselves have
difficulty dealing with that. A product healthy diet in order to get well. We need that they have clear
may be shown to decrease the cost of to do more than just supply the insulin
care after a patient is discharged, but it pump. We need to become more active economic benefits.
Innovation has long been a hallmark of the medical technology to US$200,000 per year through a
sharedsavings arrangement whereby
industry. The groundbreaking products created by entrepreneurial
our sales reps for select product areas
device and diagnostics companies have led to remarkable serve as utilization managers. Under this
improvements in patient outcomes over the last several decades. program, payment for our offerings is
Fueled by research and development budgets that are more than twice based on appropriate utilization, not just
on the amount sold.
the average for other US industries, the device industry continues to
frequently bring new and improved iterations of products to market. These approaches recognize the shifting
challenges facing providers today, and
the results are positive for all parties. For
While innovating to save and improve lives foresight to leverage its strengths in new such partnerships to work, however, all
will always be a central focus, economic ways to partner with payers and provide stakeholders must be willing to look beyond
pressures on providers, payers and other value in a wider sense. their traditional roles and experiment with
stakeholders are increasing, and the new ways of collaborating. In addition to
medical technology industry must find At Covidien, for example, we are piloting finding new ways to use the information
ways to reach beyond its core strengths several new approaches to help health care we get from our day-to-day interaction
of developing next-generation treatments systems meet the challenges of todays with providers, there is an opportunity for
and cures if it is to continue thriving. highly dynamic health care environment. medical technology players to create value
by helping patients make better-informed
Change has been rapid and sweeping. One is our Project CARES (Covidien care decisions. Covidien is partnering
The Patient Protection and Affordable Analytics to Reduce Episode Spend) pilot with United Healthcare on a pilot initiative
Care Act, growing pressures of cost program, which leverages the analytics to help patients in our workforce better
containment, provider consolidation expertise of our medical affairs team to understand the advantages of minimally
and other market forces are working help hospitals better understand why invasive surgical approaches. We aim to
to fundamentally alter the landscape. health care providers spend different see if this information incents patients to
Changing incentives are prompting payers amounts of money to care for patients choose providers who have proven results
and providers to explore new payment with the same disease. Most hospitals do in these approaches, which often have
mechanisms such as accountable care not have the data analysis infrastructure better outcomes at lower costs.
organizations, bundling and pay-for- and specialized capabilities to identify
performance that place a premium on and address this cost variation or the These programs and others that are
delivering high-quality patient care with reasons behind it. By providing detailed beginning to emerge are just a start,
greater efficiency and lower costs. No analysis of a hospitals end-to-end cost but they show what might be possible.
less important, todays patients armed of care, Project CARES helps institutions The challenge ahead will be to think of
with the latest online intelligence and identify opportunities to capture value innovation in a way that looks beyond the
demanding the best modern care has to through improving episode performance; next breakthrough product to additional
offer are taking a more proactive role in benchmark how they are performing ways that medical technology companies
their health care decision-making. relative to their peers; and pinpoint areas can partner with all stakeholders
with the largest potential for improvement. patients, physicians, health care systems
To meet these many challenges, medical and payers to develop solutions that will
technology companies need to take a new Covidien is also looking at ways to help enhance care while benefiting the overall
approach. Other than working to secure identify unnecessary variation in resource health care system.
positive coverage policies, our industry utilization. For example, in a pilot program
has not traditionally engaged deeply with conducted with Fairview Health Services
payers. Yet, we are uniquely positioned to in Minneapolis, we were able to develop
partner with both payers and health care appropriate standards and best practices
systems to redesign care, eliminate waste for utilization of our products. Through
and improve patient outcomes. I believe this program, we have been able to help
our industry has both the ability and Fairview save a projected US$100,000
Strength,
resilience
John J. Greisch
President and Chief Executive Officer, Hill-Rom and energy
In 2014, goalie Tim Howard and the US Mens Soccer Team captured providers track and record hand washing
opportunities and measure compliance
the hearts of Americans and soccer fans around the globe in an
based on existing hygiene protocols.
exciting bid for the World Cup. Here in Chicago, the 1July2014 game The data can be viewed in real time at
with Belgium drew 28,000 fans to a viewing event at Soldier Field! the individual, unit or hospital level to
facilitate infection control.
In the Belgium contest, Tim Howard made the premier reason we exist to improve
Exhibit leadership. In this challenging
a World Cup record-setting 16 saves. His the lives of patients and caregivers
landscape, leadership and management
performance, gritty determination and through our innovative technologies. If
will separate successful medtech
commitment to the game and to his we keep our focus where it should be,
companies from the pack. The voices
team made for great drama. Howard the associated metrics on cost, quality
speaking about health care are many and
has a reputation for playing through (including patient engagement and patient
varied, and all have important messages.
pain; his resilience, strength and energy satisfaction) and outcomes are likely to
As an industry, we must redouble our
serve as a metaphor for what it will take be more easily addressed. For example,
commitment to aggressively and distinctly
for medical technology companies to numerous studies show that encouraging
speak to the important contributions
succeedin the future. patient mobility not only helps improve
medtechs make, not only for patients,
patient outcomes, but also has a positive
The environment for medical technology but also as engines for economic growth.
effect on a hospitals bottom line. At
companies continues to be challenging. We must continue to work toward an
Hill-Rom, weve designed a progressive
The uneasy global economy and volatile environment that promotes investment in
mobility program to help make it easier
health care market mean our customers innovation and job creation.
for hospitals to get ICU patients moving
face unprecedented pressure. as quickly as possible. The program is In short, inspired by this summers
built on the most recent clinical evidence, performance by Tim Howard and his
In our more mature markets, hospitals
checked by national thought leaders, and team, well need to play through a bit of
everywhere are looking for ways to
provides the practical tools necessary to pain. The medtech industry will need to
reduce costs. More than ever before,
hospitals are being thoughtful about the improve patient mobility. call upon similar strength, resilience and
level of service they want to provide, energy to successfully navigate todays
Empathize with the customer. The
deciding what is essential and what isnt; health care environment. In particular, we
reimbursement landscape has changed
they are looking for what truly will make need to focus on patients and caregivers,
fundamentally. Hospitals and clinicians
a difference in outcomes, and discarding respond to our customers and lead to
everywhere resonate with the mantra of
what will be merely incremental. In the last whistle.
doing more with less. In more developed
developing markets, the circumstances
markets, the payment incentive structure
are different, but governments and
emphasizes quality, access and choice
payers are asking the same question: How
but generally not volume. This paradigm
can they deliver optimal care to the most
shift is taking place where the difference
people for the least cost?
between victory and defeat is a margin Governments and
of 2% or less, so workflow efficiency
To be successful in the coming years,
the medical technology industry must is a key area of strategic focus. Today, payers are asking
be laser-focused and bring the strength,
resilience and energy Tim Howard
more than ever, medtech partners
will distinguish themselves by fully
the same question:
embodies to the health care arena. In appreciating, articulating and responding
to their customers needs. One big need:
How can they deliver
particular, we must:
reducing hospital-acquired infections, optimal care to the
Retain strong focus on whats best which in the US are estimated to cost
for patients and caregivers. Intense up to US$45 billion annually. To help most people for the
business and regulatory pressures can hospitals, Hill-Rom has created a software
sometimes divert our attentions from program using locating technology to help least cost?
This year, one of the largest medical device deals in history, Zimmer/Biomet, was followed by the largest-
ever medical device deal, Medtronic/Covidien. While the industry has seen megadeals before, I believe recent
deals like these are signposts of the medical technology industrys future, potentially charting a new course in
medical device M&A.
I believe this activity illustrates the The answers to these questions, though, outcomes. More than ever, we need
industrys attempt to rebalance the have enormous implications for medical effective clinical and economic trials
bargaining power payers and providers device companies now and in the future. that clearly demonstrate that our new
have gained during the last decade. Whatever the outcome, we need to be technologies achieve these results within
Previous unions have been driven by prepared for a new paradigm. Do we align the current budget cycle. If we accomplish
cost savings and call-point synergies, but with other like companies to provide new this within our focused segments, we will
the megadeal activity over the past year bundles? Do we consider smaller-scale always have a vital role to play regardless
seems to signal that product line breadth service models to help our customers of the model that emerges.
and market leverage are the strengths take out cost? Do we ignore the trend
executives seek in todays market. altogether and go about our business? While our industry has arrived at a
Do we pretty ourselves up for sale to be a crossroads, our customers values have
Will this activity mark the nascent stages part of an ultra-scale world? not changed. I believe the market has
of a mass consolidation similar to what proven it demands technologies that
happened in the pharmaceutical industry In the face of this change, I believe mid- both improve outcomes and reduce
in the early 1990s, resulting in a few sized companies like AngioDynamics must costs. Strategies to expand market share
ultra-scale companies? If so, how will identify how they thrive in this emerging are important, but ultimately, for our
these ultra-scale companies leverage paradigm. If we are moving down the industry to advance, we must also invest
their breadth to bundle diverse products? path of Big MedTech, I believe mid-sized in innovation.
Will we witness the re-emergence of companies are presented with an even
anticompetitive practices that were greater opportunity to drive disruptive It is time to focus our considerable energy
challenged by the Senate Judiciary innovation into the marketplace, because and knowledge on those innovations that
Committee or will new business often, the casualty of scale is focus. bring clinical and economic improvements
models emerge in which medtechs to the health care system. That is
combine products, services and analytic Within our targeted segments, we must medtechs winning one-two punch.
capabilities along the continuum of care leverage our focus to develop disruptive
to help providers deliver better results? technologies that meet customers needs
Given the breadth and scope, the latter is while simultaneously reducing overall
a very good possibility. health care costs and improving patient
Holding steady
In the 2013 edition of Pulse, we outlined the storms buffeting the medical technology sector, including
the shift to value-based health care and growing regulatory pressures. Over the course of 2013,
these headwinds didnt abate. Still, based on the annual financial performance metrics we collect,
the medtech industry, while not pressing full steam ahead, has maintained course amid changeable
commercial seas.
Whatever the metric, the medtech sector Chart excludes companies that are cash flow positive. Numbers may appear to be inconsistent due to rounding.
has always been populated by haves
Source: EY, Capital IQ and company financial statement data.
and have-nots. That trend continued to
hold true in 2013, particularly in terms of
cash on the books. (See Financing the
future on page 42.)
An analysis of the US medtech sector European public medtech cash index, 201113
shows that in 2013, a growing number More than 5 years 35 years 23 years 12 years Less than 1 year
of companies populated either end of the
spectrum e.g., those with more than 100
14% 12% 11%
five years of cash or those with less than
11% 9%
one year of cash. Indeed, the pool of US 80 9%
companies with more than five years 6% 11% 14%
of cash expanded 42% year-over-year 60 17%
Percentage
55%
In Europe, the opposite was true, as the 20 44% 40%
number of companies in the middle pools
those with two to five years of cash grew
0
compared to those at either end of the 2011 2012 2013
spectrum. Indeed, 49% of all publicly
Chart excludes companies that are cash flow positive. Numbers may appear to be inconsistent due to rounding.
traded European medtechs fall into this
category compared to 45% a year ago. Source: EY, Capital IQ and company financial statement data.
This increase in R&D spend was likely The increase in R&D spend was
partly driven by a more challenging
regulatory and pricing environment. Based likely partly driven by a more
on our analysis of regulatory submissions
for premarket approval (PMA) or 510(K) challenging regulatory and
clearance, there were 43 original device
PMA submissions in 2013 compared to
pricing environment.
$12
A rising tide
$10 lifts all medtechs
US$b
What drove the growth? US market capitalization relative to leading indices, 201214
EY US medtech industry Russell 3000 NASDAQ Composite Big pharma
For starters, investors had extremely
80%
low expectations for the group, given
the potential impact of the US medical
device tax on the bottom line and ongoing 60%
reimbursement pressures. These low
expectations, coupled with positive
financial turnaround stories of players 40%
such as Boston Scientific, helped build
a case for an undervalued medtech 20%
sector in 2013. As the calendar flipped
to 2014, a bolus of late-stage products
fueled optimism that 2014 would result 0%
in an emerging pipeline story that would
drive top-line growth for years to come.
20%
The end result: in the medtech space, 2012 2013 2014
the market capitalizations of US and EU Chart includes companies that were active on 30 June 2014.
commercial leaders increased 30% from
Source: EY and Capital IQ.
2012 to 2013, while smaller players
enjoyed a 34% uptick.
0%
40%
2012 2013 2014
That research and other equipment European market capitalization relative to leading indices, 201214
companies drove shareholder returns in the EY European medtech industry CAC-40 DAX FTSE 100 Big pharma
medtech sector in 2013 isnt too surprising.
Given this group sells products directly to 80%
other life sciences companies, which are
themselves trying to improve their R&D
60%
efficiency, it is easy to see how read-through
from the biotech boom positively impacted
investors perceptions of these companies. 40%
Among the biggest gainers: Thermo Fisher
Scientific, which showed itself to be a top
20%
player and boosted its reach and product
offerings via its US$13.6 billion purchase of
Life Technologies. Investors also rewarded 0%
Illumina, which posted strong revenue
growth, growing margins and a solid cash
position, sending its market capitalization up 20%
2012 2013 2014
US$19.2 billion since the beginning of 2012.
Chart includes companies that were active on 30 June 2014.
100%
by companies 40%
and other 0%
equipment
20%
2012 2013 2014
United States
Financial performance
The 2013 financial performance of US public companies closely resembled the financial performance of the sector
overall. While no major acquisitions skewed the numbers, a stronger US dollar negatively affected the results state-
side by approximately 1.5%. Thus, adjusting for currency fluctuations, 2013 revenues would have increased 5.5%.
Although this growth rate is below the industrys average prior to the great recession, it is a solid result, suggesting
US medtechs are holding steady in a challenging reimbursement and pricing climate.
commercial leaders. Similar to 2012, Source: EY, Capital IQ and company financial statement data.
the other category, which includes all The other companies, however, Market capitalization was the only metric
pure-play medical technology companies reported a 79% increase in net loss in which the other medtech companies
with revenues less than US$500 million, and pulled back by 3% in their R&D kept pace with the commercial leaders.
underperformed the commercial leaders in investments. Note that the performance Both groups saw very healthy increases
all categories except market capitalization. of the other category was not materially in market cap, symptomatic of 2013s
Indeed, revenues of US commercial affected by the movement of Thoratec broader market rally and investors
leaders grew 5% year-over-year, while the and Masimo to the commercial leaders enthusiasm for health-care-related stocks.
other group saw its revenues shrink category. Had they remained in the
2% in the same period. A similar trend other category, an analysis of the NuVasive, the San Diego, CA-based
was also seen for net income and R&D. normalized data shows all the financial developer of spinal products, topped the
Commercial leaders reported net income metrics for this medtech segment would list of fastest-growing US medtechs as
gains of 40% in 2013 even as they upped have remained the same. measured by five-year compound annual
their R&D spend by 8% over 2012. growth rate (CAGR). Eight of the top 10
Market
Number of capitalization Cash and cash
Region Revenue companies 31 Dec 2013 R&D Net income equivalents Total assets
$32,500 27 $83,434 $2,328 $28 $8,928 $74,476
Massachusetts
5% 4% 62% 4% 99% 155% 5%
companies in this category expanded Finally, we note that in contrast to 2012, benchmark in 2013. It is yet another data
primarily via organic growth, compared when all 10 of the fastest-growing point demonstrating top-line growth is
to six in 2012. New to the list were Align companies expanded revenues by more difficult to achieve given the medtech
Technology, maker of the Invisalign more than 20%, just five exceeded that industrys current business challenges.
clear aligner orthodontics system, Natus
Medical, developer of tests to screen,
treat and monitor common medical
ailments, and AngioDynamics, producer Selected fast-growing US medtechs by revenue growth, 200813
of minimally invasive technologies to treat (US$m)
cancer and peripheral vascular disease.
Companies 2008 2013 CAGR
Interestingly, five of the 10 fastest- NuVasive $250 $685 22%
growing companies on the 2013 list are Danaher Life Sciences & Diagnostics and Dental $3,277 $8,951 22%
developers of either diagnostic tests or Corning Life Sciences $326 $851 21%
research and instrumentation equipment Intuitive Surgical $875 $2,265 21%
used by life sciences companies. Illumina $573 $1,421 20%
These companies sell products to
Cepheid $170 $401 19%
biopharmaceutical players who, as we
Volcano $171 $391 18%
wrote in our 2014 biotechnology report
Align Technology $304 $653 17%
Beyond borders: unlocking value, are
interested in increasing their use of Natus Medical $162 $344 16%
Europe
Financial performance
As was true in the US, currency fluctuations impacted the financial performance of European medtechs. While
revenues expanded 4%, in line with results achieved in the US, these results were boosted 3% by the strong dollar.
Normalizing for local currencies, revenue growth for European medtechs was just 1%. In terms of top-line growth,
pure-play medtechs outperformed conglomerates by three percentage points.
nearly double the increase seen in Net income (loss) $(0.2) $0.0 588%
Market capitalization $15.7 $11.3 39%
the US. In another positive, European
Number of employees 22,500 20,900 8%
companies also increased investment
Commercial leaders are pure-play companies with revenues in excess of US$500 million.
in personnel, expanding their employee Numbers may appear to be inconsistent due to rounding.
base by 3% over the year. Market capitalization data is shown for 31 December 2013 and 31 December 2012.
Source: EY, Capital IQ and company financial statement data.
In terms of market cap, medtech remains again, smaller companies were hit harder performances of a few players, especially
a tale of two continents. Market cap by the continents austerity measures, Mazor Robotics, LifeAssays and Alpha
growth in Europe was half what was particularly in terms of device pricing Helix Molecular Diagnostics.
observed in the US (17% versus 37%) and and delayed payment cycles. That said,
below the 26% increase seen in 2012. in 2013, smaller European medtechs In terms of the R&D spend/revenue ratio,
increased their revenue and R&D spend European companies arent investing as
As was true in the US, commercial leaders by 4% and 8%, respectively, over 2012. heavily: European commercial leaders
in Europe contributed significantly to And while smaller companies saw a big spent 5.2% of revenues on R&D and
the overall performance of the medtech year-over-year drop-off in net income, other European medtechs spent 9.4%,
companies in that region. While Europes they did outpace the commercial leaders while their respective US counterparts
18 commercial leaders account for on market cap and number of employees. spent 7.3% and 14.4% of revenues on
only 12% of the total number of public The sharp increase in the market cap pipeline development.
companies, they generated 89% of the of the European other companies
revenues, 104% of the net income and appeared to be driven by the strong
82% of the R&D dollars invested. Once
Market
Number of capitalization Cash and cash
Country Revenue companies 31 Dec 2013 R&D Net income equivalents Total assets
$10,280 2 $31,351 $512 $1,710 $1,890 $20,144
Ireland
3% 0% 13% 6% 11% 3% 10%
In Europe, 60% of the fastest-growing Selected fast-growing European medtechs by revenue growth, 200813
companies as measured by five-year (US$m)
CAGR grew by acquisition. This was
Companies Location 2008 2013 CAGR
in contrast to the US, where 80% of the
Syneron Medical Israel $115 $257 17%
fastest-growing companies achieved their
rise organically. Novartis: Alcon Surgical Switzerland $2,881 $6,388 17%
Merck KGaA: EMD Millipore Germany $1,602 $3,514 17%
Israel-based Syneron Medical won Elekta Sweden $800 $1,587 15%
bragging rights as Europes fastest- Stratec Biomedical Systems Germany $91 $170 13%
growing company over the past five
Sonova Holding Switzerland $1,131 $1,937 11%
years. Fueling the upward trajectory was
Semperit: Sempermed Austria $356 $578 10%
Syneron Medicals broad range of medical
DiaSorin Italy $360 $578 10%
aesthetic solutions, which are sold under
the brand names Syneron and Candela. Ambu Denmark $155 $246 10%
William Demant Holding Denmark $1,060 $1,640 9%
Four new players joined the ranks of
Companies in italics made significant acquisitions between 2008 and 2013.
Europes fastest-growing medtechs: CAGR = compound annual growth rate
Stratec Biomedical Systems, which
Source: EY, Capital IQ and company financial statement data.
manufactures fully automated analyzer
instruments for clinical diagnostics and
biotechnology applications; DiaSorin,
maker of in vitro diagnostic reagent
kits; Ambu, developer of diagnostic and
life-supporting equipment solutions; and
William Demant Holding, a Danish firm
developing hearing devices.
Positive financial indicators included follow-on Thermo Fisher Scientifics just 14 commercial leaders raised 68%
the resurgent market for initial public US$2.5 billion offering in the 12-month of the total debt dollars (US$13.2 billion)
offerings, a marked year-over-year uptick period ending 30 June 2013 and there were seven debt financings
in venture dollars in Europe and, for dramatically impacted the 201314 result. worth more than US$1 billion. In the
larger medtechs, continued access to Normalizing for this exceptional financing, prior 12-month period, 17 commercial
cheap capital via the debt markets. Still, funding associated with follow-ons actually leaders garnered 58% (US$13.5 billion)
while venture dollars have held steady in increased 18% year-over-year in 201314. of the debt financing and six deals
recent years, the pool of capital available eclipsed the US$1 billion mark. Notable
to smaller medtechs is significantly debt deals in 201314 included Thermo
smaller than before the recession, raising Debt-heavy Fisher Scientifics US$3.2 billion offering,
important questions about how the which helped fund its acquisition of
medical technology industry will finance An uptick in follow-ons, together with
Life Technologies, and Medtronics
future innovation. the 600% increase in IPO financing from
US$2 billion deal, which was intended for
201213 to 201314, sounds like the
general corporate purposes, including
The 2013-14 period was also a tale of two makings of a brighter financing story. Still,
dividends and stock buybacks.
continents. Funding in Europe increased its important to note that roughly 71%
81% year-over-year, reaching US$5.1 of medtechs total financing during the While Thermo Fisher Scientific used its debt
billion, with percentage increases across 12 months ending 30 June 2014 came offering to fund its biggest acquisition ever,
all types of funding. In contrast, in the US, from the debt markets. Indeed, 201314 most of the proceeds from the debt raised
funding in three different categories marked the third year in a row where debt in the 12 months ending 30 June 2014
venture, follow-on and debt declined, financing contributed more than 70% of were not used to fund growth activities
resulting in a 23% decrease (US$6 billion) the total financing dollars. such as acquisitions or investments in
in financing from 201213 to 201314. early-stage companies. Instead, based on
As has also been true in years past, debt
EYs estimate, at least 60% of the debt was
The biggest declines were seen in dollars in 201314 disproportionately
used to refinance existing obligations or
follow-on public offerings, which slid flowed to the commercial leaders, defined
restructure balance sheets.
52% from US$4.2 billion in 201213 to as those companies with revenues greater
US$2.0 billion in 201314. One mammoth than US$500 million. Indeed, in 201314,
Follow-on and other $2,112 $1,807 $2,250 $2,390 $1,004 $4,205 $2,010
Numbers may appear to be inconsistent because of rounding. PIPEs included in follow-on and other.
Source: EY, BMO Capital Markets, Dow Jones VentureSource and Capital IQ.
Such data, in conjunction with the While the double-digit percentage growth Europe in 2013-14, the dollars generated
US$16.7 billion in cash returned to in innovation capital in 2013-14 was a via IPOs comprised just 5% of the total
shareholders during the same period positive development, it also shouldnt be financing dollars for the 12 months, a
and the sectors modest year-over-year viewed as proof that financing for smaller 4 percentage point drop compared to
increase in R&D spend, reinforces the companies particularly emerging, 2007-08. Similarly, venture commitments
notion that larger medtechs are acting venture-backed firms was once again and follow-on offerings also made up a
more cautiously in investing in traditional flowing freely. In part, thats because the much smaller percentage of the total
product innovation. (See Holding prior 12-month period was particularly financing picture in 2013-14 than six years
Steady on page 27.) As we discuss in dismal for innovation capital: just prior, when venture rounds and follow-on
this years Point of view, this retreat is US$6.0 billion, 19% of the total dollars offerings accounted for 39% and 16% of all
at least partially due to the rapid shift in raised, funded innovation-stage medtechs medtech financing dollars, respectively.
the medtech commercial landscape and during 2012-13. Moreover, the 2013-14
companies realization that the emphasis financing data mark the fifth 12-month If this is the medtech industrys new
on health care outcomes requires them to period in a row in which commercial normal, early-stage companies have
differentiate their products in new ways. leaders have commanded more than no choice but to squeeze further
With clear definitions of what constitutes two-thirds of all the medtech financing. efficiencies out of their R&D efforts, while
value changing and the need to satisfy Thats very different from 2007-08, simultaneously searching for creative deal
shareholders during a period of low when total dollars for innovation capital structures and new kinds of investors
industry growth, companies have prioritized exceeded those for commercial leaders by to finance their efforts. That fact in
the return of capital to shareholders. US$2.3 billion and made up nearly 60% of turn leads to some serious questions
all medtech financing. about the medtech industrys future
prospects. In particular, how will the
Early-stage medtechs The numbers reinforce the notion that biggest players continue to grow if their
the 2008 recession dramatically redrew traditional wellsprings of innovation
continue to struggle the medtech financing picture. Even with smaller, VC-backed medtechs remain
30 new medtech listings in the US and underfunded?
Even as fund-raising totals have jumped
in recent years, the majority of this
capital windfall has gone into the coffers Driven by the resurgence of IPOs,
of medtechs commercial leaders. The innovation capital swelled in the US and Europe
12-month period ending 30 June 2014
Innovation capital Commercial leaders
was no different. Commercial leaders
generated 72% (US$19.6 billion) of the 35
total funding raised in 2013-14, mostly
via large debt deals. 30
12 months prior.) Source: EY, BMO Capital Markets, Dow Jones VentureSource and Capital IQ.
2014, it fell even further to just 6.7%. (In The share of early-stage venture investment in the
Europe, the trend is just as pronounced: US and Europe reached its highest point in four years
total venture investments in European Late stage Early stage
start-ups reached a seven-year high in
100%
2013-14, but medtechs portion of the
capital deployed sank precipitously to 90%
70%
Given VCs relative withdrawal from
medtech investing in 2013-14, one 60%
Number of deals
2013-14, 15 companies called the US 1.0 25
home and another 16 were located in 0.8 20
Europe. Still, in terms of capital raised,
0.6 15
it was the US companies that brought
home the lions share of the capital: of the 0.4 10
US$1.4 billion raised via medtech IPOs
0.2 5
in 2013-14, 69% was concentrated in the
US. Indeed, the European medtech cohort 0 0
raised just US$444 million, and a third of
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the capital markets in Europe remain very The 2001-02 totals exclude Nestls spin-out of Alcon, worth US$2.3 billion.
challenging for early medtech entities
Source: EY, Capital IQ, BioCentury and Dow Jones VentureSource.
seeking financing.
Fourteen companies in the 2013-14 an average of 32%. Vital Therapies, maker oversight associated with a public listing.
Pulse cohort priced within their expected of a bioartificial liver support device, and For a number of reasons, in 2014 that
IPO price range, and one, Foundation BrainCool, which as its name suggests is dynamic appears to be changing. First,
Medicine, actually priced US$2-a-share using therapeutic hypothermia to treat the lower amounts of investable capital
above its expected range. Foundation stroke and cardiac arrest patients, were at many medtech VC firms mean IPOs
Medicine was the only medtech to price its among the best-performing medtech are an important fiscal alternative to
IPO above the expected range since 2009. stocks: since their IPOs, the share prices raising another equity round. Second,
of these companies increased 127% and given that US-based medtechs raised
Share prices of newly public medtechs 101%, respectively. close to US$70 million on average via
also held up well in the aftermarket. public listings in 2013-14, the amount
Eighteen medtechs saw their share prices Historically, medtechs, and the VCs garnered through an IPO is likely to be
go up in the months between their listings who back them, havent aggressively more generous than what the company
and 30 June 2014: the share prices of pursued IPOs. Thats because acquisitions could raise via a late-stage round, often
the 10 US-based medtechs increased by typically provided early-stage medtechs resulting in less dilution to current
an average of 43%; share prices of the with a faster path to exit, allowing them investors. The extra financial runway
eight European companies also rose, by to avoid the expense and regulatory enables medtechs to launch products in
multiple markets simultaneously, thereby
increasing revenues and potential exit
valuations should acquirers materialize.
US and European IPO pricing by year
Below range Within range Above range Capital raised That said, even in 2014, there are
30 1.8 still certain key criteria that medtechs
need to be able to cite if they want to
25 1.5 have successful public offerings. FDA
approval, or the promise of such shortly
Capital raised (US$b)
Source: EY, Capital IQ, BioCentury and Dow Jones VentureSource. Going forward, it remains to be seen
whether the strong IPO market of
201314 can galvanize venture financing
to help create future innovative products.
Even in 2014, there are still certain As weve shown, corporate venture
capital has filled and will continue to
key criteria that medtechs need to fill an important gap in catalyzing the
development of privately held companies.
be able to cite if they want to have Yet there remains a dearth in ignition
United States
Financing
In 201314, USbased companies raised US$22.2 billion, the thirdhighest total since 200708. With the exception
of IPO financing, which increased 550% compared to 201213, all other sources of financing declined, including a
24% drop in debt offerings. Even so, 201314 marked the fifthstraight 12month period in which large debt offerings
by the industrys commercial leaders made up the vast majority of total funding. Similar to 2012-13, debt offerings
constituted nearly 75%, or US$16.2 billion, of the US industry total in 2013-14.
15
Indeed, in 2013-14, more than 60% of
US medtech venture financing went to
10
later-stage firms, including 13 of the 14
richest venture rounds. (The diagnostics 5
roll-up play Maravai Life Sciences was the
lone example of an early-stage deal.) 0
Jul 2007 Jul 2008 Jul 2009 Jul 2010 Jul 2011 Jul 2012 Jul 2013
Jun 2008 Jun 2009 Jun 2010 Jun 2011 Jun 2012 Jun 2013 Jun 2014
Source: EY, BMO Capital Markets, Dow Jones VentureSource and Capital IQ.
5 15
Total amount raised (US$b)
4 12
Average deal size (US$m)
The companies
commanding
3 9
investment
2 6
were primarily 1 3
later-stage 0
Jul 2007
Jun 2008
Jul 2008
Jun 2009
Jul 2009 Jul 2010
Jun 2011
Jul 2011
Jun 2012
Jul 2012
Jun 2013
Jul 2013
Jun 2014
0
medtechs.
Jun 2010
Source: EY, BMO Capital Markets, Dow Jones VentureSource and Capital IQ.
As we noted, the one financing category that saw year-over-year growth in 2013-14 was the IPO sector, thanks to new listings by 15
US-based medtechs which raised US$1 billion. In terms of deal volume and dollars raised, the 2013-14 window was the strongest since
2006-07, when 15 companies also went public, raising approximately US$1 billion.
Source: EY, BMO Capital Markets, Dow Jones VentureSource and Capital IQ.
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Source: EY, BMO Capital Markets, Dow Jones VentureSource and Capital IQ.
The Massachusetts and Southern Capital raised by leading US regions excluding debt, July 2013June 2014
California totals were buoyed by debt Northern California Southern California Massachusetts Minnesota
offerings in excess of US$1 billion. New Jersey New York Pennsylvania Texas
Medtronics US$2 billion offering,
meanwhile, made up the majority of
2
Minnesotas financing. When removing
Total equity capital raised (US$b)
Source: EY, BMO Capital Markets, Dow Jones VentureSource and Capital IQ.
Europe
Financing
Total funding of European medtech companies soared 81% to US$5.1 billion in the 12-month period ending 30 June
2014. Although the amount represented just a quarter of what US-based medtechs raised during the same period,
it was the largest sum procured by the industry since 2003-04 and was fueled by year-over-year growth across all
four funding categories. Debt financing spiked 81% from 201213 to US$3.2 billion and made up 63% of Europes total
annual financing. Meanwhile, venture funding jumped 60% to just over US$1.0 billion, and followon offerings increased
21% to US$414 million, a fiveyear high. As in the US, IPOs made big headlines in Europe. As of 30 June 2014, funds
raised through IPOs made up 9% of the 201314 financing dollars, jumping 789% yearoveryear to US$444 million.
Overall, early rounds accounted for European venture capital achieved levels not seen since the financial crisis
Total amount raised Average deal size
approximately 45% of all European
venture rounds and 33% of the venture 1,200 6
dollars. In terms of deal volume, that
1,000 5
compares well to 2007-08, when
Average deal size (US$m)
Total amount raised (US$m)
Source: EY, BMO Capital Markets, Dow Jones VentureSource and Capital IQ.
Source: EY, BMO Capital Markets, Dow Jones VentureSource and Capital IQ
500 15
US-based companies raised through
Number of deals
their IPOs. As in the US, most of the IPO 400 12
activity occurred in 2014, with 11 of the
16 companies debuting in the six months 300 9
100 3
0 0
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As in the US,
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headlines in
Europe.
54 EY | Pulse of the industry
Financing EU
Only one of the 16 European companies that went public, Lumenis, priced below its expected range. In the aftermarket, eight
companies have seen their share prices decline, including nine of the 11 that debuted after 1 January 2014.
Source: EY, BMO Capital Markets, Dow Jones VentureSource and Capital IQ.
A country-by-country analysis of Europes Capital raised by leading European countries excluding debt,
2013-14 funding shows France led the July 2013June 2014
continent in total funding with US$2.3 billion.
Finland France Germany Israel
The Netherlands (US$761 million) and Germany
(US$471 million) rounded out the top three. Netherlands Sweden Switzerland UK
700
Israel once again enjoyed the top spot as
the country attracting the most venture 600
dollars, raising US$241 million, more than
Total capital raised (US$m)
Seeking scale
In 2013, all signs pointed to increased medtech merger and acquisition activity. With venture
dollars scarce and the public markets only beginning to rebound, smaller players looked for exits via
acquisitions. Meantime, larger medtechs indicated their belief in M&A as the most expedient route to
revenue expansion, even as the pool of potential buyers continued to multiply.
Promise became reality in the 12-month M&As in the US and Europe by year
period ending June 2014. The total
Megadeals (>US$10b) Other M&As Number of M&As
value of M&A involving a US or European
medical technology company jumped 90 180
135% to US$85.6 billion, reaching a
five-year high. Admittedly, just one 75 150
deal Medtronics mammoth take-out of
Total deal value (US$b)
Number of deals
the total deal value. Excluding megadeals,
dollars spent on medtech M&A increased 45 90
Carlyle Group US District of Columbia Johnson & Johnson (Ortho-Clinical Diagnostics) US New Jersey $4,150
From 200814, private equity buyers Although the dollar values are small, and bundled payments require them
were consistently in the mix, spending the buyer category that has grown to look beyond the pill for innovation.
12% to 14% of the total medtech M&A the fastest from 2008 to 2014 is the Neurostimulation, especially to treat
dollars on acquisitions. Conglomerates, pharma category. The dollars spent by conditions such as epilepsy, migraine
meantime, have retreated from the pharmas on medtech acquisitions from pain and depression, which are
deal-making table at least relative July 2012 to June 2014 have increased frequently resistant to medication, is
to their activity in the 2008-10 time more than 900% compared to the same one area commanding the attention
period, when 35% of merger dollars came two-year period beginning in 2008. Just of pharmaceutical companies. So are
from this buyer category. Still, recent as medtech has come under pressure to diagnostic capabilities. Of the 10 pharma-
deals like Danahers two dental-focused identify new mechanisms of growth, so has medtech transactions announced during
acquisitions (Dux Dental and Vettec) and pharma. Certain pharma companies are the 12 months ending 30 June 2014, four
Bayer HealthCares bid for Conceptus responding by expanding into therapeutic involved non-imaging diagnostics players.
show conglomerates remain interested in devices or diagnostics, arguing the rise
medtech acquisitions. of comparative effectiveness research
Pharmas are not the only ones pushing Top deal-making by disease area and market segment
for this convergence of business models.
Certain medtech players are also looking To assess which medtech categories purchase of Covidien and Zimmers
to adjacent sectors for opportunities. were associated with the greatest take-out of Biomet, therapeutic devices
In June 2014, Fresenius Medical Care number of deals, we also analyzed share of the total M&A dollars increased
announced its US$600 million buyout of deal flow by disease area and market to 92% in the 12-month period ending
Sound Inpatient Physicians, a provider segment. Unlike our deal value analysis, 30 June 2014. Thats an increase of 29
group representing 1,000 physicians where only deals with disclosed values percentage points from the 2009-13 time
practicing at more than 100 hospitals were included in the data set, this data period. The totals for these megadeals
and acute care centers in the US. The set includes all publicly announced also meant no other medtech category
dialysis player also announced its mergers, whether or not a dollar value garnered more than 3% of the total M&A
acquisition of MedSpring Urgent Care, for the acquisition was disclosed. dollars during the 12 months ending
which operates 14 urgent care centers 30 June 2014.
in Illinois and Texas. These deals show With 105 acquisitions from 1 July 2013
how Fresenius Medical Care aims to to 30 June 2014, the therapeutic device Within the therapeutic device category,
extend its service model beyond its core sector once again took top honors as the orthopedic deals dominated in terms
businesses of dialysis clinics, vascular medtech category with the most deals. of total deal value as a result of the
care centers and renal pharmaceutical Deal volume in therapeutic devices has aforementioned Zimmer/Biomet
products to gain additional expertise in remained constant: since July 2009, megadeal. Cardiovascular mergers were
arenas such as care coordination and roughly 50% of all the mergers have also numerous. With 21 acquisitions
patient-centered care, which have become been in this space. Thanks to Medtronics from 1 July 2013 to 30 June 2014,
important in the post-health care reform
environment. (See To improve medtech
R&D, take a system-wide approach on
page 11.) Analysts had been expecting Selected M&As by segment
Fresenius to make a move like this since
Jul 2009Jun 2013 Jul 2013Jun 2014
mid-2012, when DaVita, a competing
dialysis services provider, acquired the Segment Number Value % of total Number Value % of total
of deals (US$m) deal value of deals (US$m) deal value
physician group HealthCare Partners for
Therapeutic devices 457 $120,149 63% 105 $67,315 92%
US$4.4 billion.
Ophthalmic 29 $42,902 22% 5 $1,674 2%
Medtronics US$200 million acquisition of Orthopedic 81 $22,842 12% 21 $15,719 21%
the disease management firm Cardiocom Cardiovascular 70 $16,748 9% 21 $2,433 3%
in August 2013 is another example of how
Respiratory 17 $1,147 1% 3 $10 0%
medtech business models are shifting. The
Non-disease specific 77 $4,922 3% 16 $826 1%
all-cash deal helped position Medtronic
as a player in monitoring and caring for Multiple 27 $2,476 1% 11 $44,686 61%
chronically ill patients who may not need Hematology/renal 19 $6,939 4% 3 $286 0%
the device companys costly implants. Wound care 31 $10,520 6% 5 $664 1%
Oncology 11 $1,229 1% 1 $15 0%
Deal volume
All others 95 $10,424 5% 19 $1,002 1%
Research and other 91 $37,338 20% 26 $1,225 2%
in therapeutic
equipment
Non-imaging diagnostics 168 $23,060 12% 39 $1,557 2%
1.5 30%
The decreasing value in milestone
payments could be due to a variety of
factors. Given rising medtech market 1.0 20%
capitalizations and a strong field of
acquirers, would-be buyers have less
0.5 10%
negotiating power and may have to pay
closer to full value up front to bring
desired assets in-house. In addition, 0 0
Jul 2009 Jul 2010 Jul 2011 Jul 2012 Jul 2013
acquirers during the 201314 period
Jun 2010 Jun 2011 Jun 2012 Jun 2013 Jun 2014
have looked to create economics of scale
via bigger deals. Milestones typically Source: EY, Capital IQ and Thomson ONE.
Number of deals
30 60
deal total up to US$47.4 billion.
In terms of deal volume, the number Chart includes deals with disclosed values and in which the acquired entity is a US medtech company.
of mergers involving a US medtech Source: EY, Capital IQ and Thomson ONE.
increased from 63 to 72 in 2013-14.
Thats largely in line with the previous
four-year average of 74 mergers. With
European M&As by year
seven deals during the 12 months ending Total deal value of megadeals (>US$10b) Total deal value of other M&A Number of M&As
30 June 2014, Stryker was the US most
active buyer. For the five mergers for 60 60
which deal terms were disclosed, the
orthopedic firm spent US$2.3 billion.
40 40
Europe
Total deal value (US$b)
Number of deals
than the year before, but in line with the Source: EY, Capital IQ and Thomson ONE.
previous four-year average of US$8.1 shows just how important markets like bid for Trauson Holdings commanding
billion. The number of M&A transactions China, India, Brazil and Turkey have price tags of US$816 million and
with announced deal terms declined 8% become for medtechs based in the US and US$764 million, respectively.
year-over-year in 2013-14, but remained Europe. There were just 35 mergers from
higher than the previous four-year 2008 to 2011 in South America, Asia and Both the Medtronic/China Kanghui
average of 39. Russia, and the largest publicly disclosed Holdings and Stryker/Trauson Holdings
deal was Hospiras purchase of Indias mergers took place in the 12-month
Outside Covidiens purchase by Orchid Chemicals & Pharmaceuticals. period ending 30 June 2013 and
Medtronic, notable acquisitions of Europe- In contrast, from 2011 to 2014, there underscore how leading orthopedic
based medtechs included Covidiens were 80 deals in these regions of the players hoped to expand their footprint in
deal for Given Imaging, Grifols purchase world, with the two largest publicly China. Although the total dollars spent on
of Novartis diagnostics division and disclosed deals Medtronics purchase China-based medtechs fell considerably in
Cooper Companies acquisition of Sauflon of China Kanghui Holdings and Strykers 2013-14 there was just one merger with
Pharmaceuticals.
Emerging markets
In our 2013 Pulse report, we discussed Medtech company acquisitions in select developing markets
how market pressures in the US and Jul 2008Jun 2011 Jul 2011Jun 2014
Europe have pushed Western medtechs
to look for growth in other geographies, 50
most notably China. As we write in this
years Pulse report, the commoditization
of devices means, increasingly, that 40
a disclosed deal value of US$3.2 million of Orchid Chemicals & Pharmaceuticals, France-based eye company was the most
the number of deals in this market kept other notable deals in India included active of the US and European medtech
pace with prior 12-month periods. There Smith & Nephews 2013 deal for Adler acquirers. (PerkinElmer, which acquired
were five China-based deals in 2013-14, Mediequip Private and its suite of four medtechs based in emerging
down from eight the year prior. Indeed, orthopedic trauma assets and William markets during this same time period,
of the emerging markets analyzed, China Demant Holdings 2012 acquisition of was the next-most active buyer.) Essilor
remains the hot spot for deal-making Otic Hearing Solutions Private. Essilor International currently holds 40% of the
activity, with 42 acquisitions signed since International was the most active acquirer market for prescriptive corrective lenses,
July 2008. (Note, more than half that of Turkish companies during the six-year making it the global leader in this product
deal volume 26 acquisitions occurred time span, inking five deals. Notable category. Expanding to emerging markets
since July 2011.) Essilor transactions included its 2012 has been a key part of the companys
partial acquisitions of Yeda Tora Optik business strategy: having penetrated
Deal activity in Brazil was also robust and Opak Optik. most of the Western-based markets, it has
from 2008 to 2014. There have been actively sought to purchase distributors
35 acquisitions of Brazilian medtechs Essilor International wasnt only focused in other parts of the world where a rising
since July 2008, with 71% of the volume on Turkish medtech acquisitions. With middle class and the need for vision
coming in the past three years. Since 21 acquisitions in various emerging correction offer the opportunity for
2011, numerous acquirers have sought markets over the preceding six years, the double-digit revenue growth.
deals in this South American country,
including Essilor International (four deals)
and General Electrics GE Healthcare
division (two deals). In emerging markets,
deal terms arent often publicly disclosed.
The largest publicly announced deal
of a Brazilian medtech was Straumann
Holdings partial acquisition of the dental
implant maker Neodent for US$277.4
Case study
Medtronic/Covidien
Emblematic of what medtech is buying now
The scope and scale of the Medtronic/ hospital purchasers remains to be seen. Many company executives (in medtech
Covidien transaction make it impossible to If the combined companys additional heft and other industries) argue the American
ignore. But its also worth understanding improves its contracting capabilities, it is tax code should be overhauled to level the
as a signpost of future medtech M&A and highly likely the deal will put pressure on playing field for multinational companies
the ways in which device companies see other medtechs to pursue mergers with headquartered in the US, as they face a
deal-making as a key strategy in creating equals as a relatively quick way to gain competitive disadvantage compared to
entities that are well positioned to meet the scale required to remain competitive firms headquartered in countries with
the demands of the rapidly changing in the marketplace. lower tax rates. However, as Pulse went
health care climate. to press, the U.S. Treasury Department
issued new guidance to make it harder
One of the largest medtech-specific A financial rationale and less profitable for companies to
deals ever announced, the Medtronic/ In addition to showcasing the strategic accomplish these so-called inversions. The
Covidien merger, which is valued at imperative of scale, the Medtronic/ new rules, issued 22 September 2014,
US$42.9 billion, surpasses Novartis 2010 Covidien deal also highlights the were effective immediately and applied
purchase of Alcon and Boston Scientifics importance of financial considerations in to all transactions including Medtronic/
2005 acquisition of Guidant. The tie-up an environment where it is increasingly Covidien that hadnt yet been finalized.
joins two leading medtechs to create difficult to demonstrate regular top-line Its unclear how Medtronic will respond.
a new entity with combined revenues growth. (See page 27 for Holding steady, A clause in its contract the Covidien
nearing US$27 billion, rivaling Johnson & which reviews the medical technology material adverse effect clause appears
Johnsons medtech division in annual industrys 2013-14 financial performance.) to allow Medtronic to end the deal in
sales. (Analysts estimate nearly half that exchange for a break-up fee. In public
revenue will be generated outside the US.) As a result of its purchase of Covidien, statements, the company has only said
Medtronic will be domiciled in Ireland, that it is studying Treasurys actions.
Based on company press releases, and the combined company will be able to
strategic and financial concerns, not lower its overall corporate taxation rate. It
the potential for cost-savings, were will also be able to access cash generated
Future priorities
the primary drivers of the deal. The from overseas operations to make Prior to the merger, both Medtronic
companies offer complementary product additional US-based investments without and Covidien were active acquirers,
portfolios: Medtronic supplies a range incurring taxes there. especially of start-ups with promising
of devices for the cardiology, neurology technologies. In the near term, it
and diabetes markets, while Covidien Medtronic is hardly the first life sciences seems likely that the combined entity
specializes in hospital supplies. Together company to pursue a deal target based, will prioritize integrating the various
the combined entity will be one of the in part, on the potential tax advantages businesses. That said, Medtronic has
leading medtech distributers in multiple of an inversion, in which companies publicly stated its intention to spend an
hospital purchasing categories. This reincorporate overseas in order to additional US$10 billion over the next 10
means it will have the scale required to reduce the tax burden on income years on US-based investments, including
improve its contract negotiations with earned abroad. Other mergers driven acquisitions and R&D. Moreover, despite
health care buyers at a time when those at least partly by the this strategy have the scale of the transaction, bolt-on
purchasers are looking to streamline their included AbbVies proposed purchase acquisitions that further deepen the
vendor relationships. of Shire, Mylans acquisition of Abbotts combined entities commercial offering in
Developed Markets branded generic a given therapeutic sector or geography,
Just how a newly bulked up Medtronic/ pharmaceuticals business and Pfizers especially in rapidly growing emerging
Covidien engages with providers and recent bid for AstraZeneca. markets, shouldnt be ruled out.
Acknowledgments
Health care purchasers prioritize devices that reduce the total cost of care 8
Change in US and European therapeutic device companies revenue and net income by disease category, 2013 vs. 2012 28
Since 2010, medtechs are returning more cash to shareholders than they are investing in R&D 32
Driven by the resurgence of IPOs, innovation capital swelled in the US and Europe 43
The share of early-stage venture investment in the US and Europe reached its highest point in four years 45
US financings by year 50
US IPOs by year 51
European venture capital achieved levels not seen since the financial crisis 53
Capital raised by leading European countries excluding debt, July 2013June 2014 55
Portfolio rationalization 60
While the number of deals using milestone payments holds steady ... 64
US M&As by year 65
Contacts
Global Life Sciences Leader Glen Giovannetti glen.giovannetti@ey.com +1 617 585 1998
Deputy Global Life Sciences Leader Patrick Flochel patrick.flochel@ch.ey.com +41 58 286 4148
Global Life Sciences Assurance Leader Scott Bruns scott.bruns@ey.com +1 317 681 7229
Global Life Sciences Advisory Leader Kim Ramko kim.ramko@ey.com +1 615 252 8249
Global Life Sciences Tax Leader Mitch Cohen mitchell.cohen@ey.com +1 203 674 3244
Global Life Sciences Transaction Advisory Services Leader Jeff Greene jeffrey.greene@ey.com +1 212 773 6500
Czech Republic Prague Petr Knap petr.knap@cz.ey.com +420 225 335 582
Notes
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How EYs Global Life Sciences Center can help your business
Life sciences companies from emerging to multinational
are facing challenging times as access to health care
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increasing, alternative business models are manifesting, and
collaborations are becoming more complex. At the same time,
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