Pulse of the industry - Home - MedTech · 2015-10-21 · Source: Ernst & Young, Capital IQ and...

The MedTech ConferenceOctober 2015

Pulse ofthe industry

Medical technology report 2015

Pulse of the industry| Medical technology report 2015

Mega trends are disrupting health care andmedtech business models

Value-basedhealth care

1.5 billionover-65sby 2050

By 2040, non-communicablediseases costUS$30 trillion

Greatertransparency

Changing customerexpectations

Increasedefficiency

► New delivery models and care bench marks

Medtech growth challenges

Changing demographics Life style diseases Digital and mobile

80% of globalsmartphone usersinterested in usingphones to interactwith HC providers


The pace of change is accelerating…

5yearsago

Today3-5

yearsfromnow

Debate and uncertaintyabout move to value

Most people had neverheard of “big data”

Digital and mobiletechnologies werenovelties

Data opacity is the norm

Sweeping health carereforms balance costand access

Growing number ofanalytics initiatives

Digital and mobile helpengage patient

Transparency is the newbuzz word

New payment, financingmodels enable access

Analytics drive deviceusage, Dx priorities

Shift from engagementto outcomes

Trust a source ofcompetitive advantage


…but medtech revenue growth is not.

Source: EY, Capital IQ and company filings.

$-

$50

$100

$150

$200

$250

$300

$350

2007 2008 2009 2010 2011 2012 2013 2014

US$b

Non Conglomerate Conglomerate

US and European revenue growth, 2007-14

2%4%2%1%2%5%11%


Looking for growthPulse of the industry


Storm clouds are emerging…

►A new normal of single-digit top & bottom line growth

►Dwindling interest from a shrinking venture capitalcommunity

►Eroding early-stage venture capital threatens thefuture of medtech’s innovation ecosystem

► Innovation capital drops


…but there are reasons for optimism.

►Smaller medtechs deliver stronger performance

►Booming M&A market: Result of tepid growth &historically low cost capital

►A blockbuster year in financing: IPOs & debtofferings deliver all-time highs

►R&D investment rises for 5th straight year while cashreturned to shareholders decreases

►Medtechs once again outperform the broader publicmarkets


0

250

500

750

2013 2014

Market cap (US$b) +21%

Looking for growthUS and European pure-play performance – 2014

0

5

10

15

2013 2014

R&D expense (US$b) +6%

0

50

100

150

200

2013 2014

Revenues (US$b) +5%

0

5

10

15

20

2013 2014

Net income(US$b) +4%

Source: Ernst & Young, Capital IQ and company financial statement data.


A blockbuster year for US & European IPOs43 medtechs raised US$2.3 billion

0

10

20

30

40

50

0.0

0.5

1.0

1.5

2.0

2.5

Jul 2014 -Jun 2015

Jul 2013 -Jun 2014

Jul 2012 -Jun 2013

Jul 2011 -Jun 2012

Jul 2010 -Jun 2011

Jul 2009 -Jun 2010

Jul 2008 -Jun 2009

Jul 2007 -Jun 2008

Jul 2006 -Jun 2007

Jul 2005 -Jun 2006

Jul 2004 -Jun 2005

Jul 2003 -Jun 2004

Jul 2002 -Jun 2003

Jul 2001 -Jun 2002

Jul 2000 -Jun 2001

Num

bero

fdea

ls

Capi

talr

aise

din

IPO

s(U

S$b)

Capital raised Number of deals

Source: EY, Capital IQ, BioCenutry and VentureSource.


Debt bonanzaUS & European innovation capital fell for the 2nd year in a row

0

10

20

30

40

50

Jul 2008 - Jun2009

Jul 2009 - Jun2010

Jul 2010 - Jun2011

Jul 2011 - Jun2012

Jul 2012 - Jun2013

Jul 2013 - Jun2014

Jul 2014 - Jun2015

Commercial leaders Innovation capital

US$

b

Source: EY, BMO Capital Markets, Dow Jones VentureSource and Capital IQ.Innovation capital is the amount of equity capital raised by companies with revenues of less than US$500 million.


The ugly truthEarly-stage venture capital financing continues to stagnate

0%

5%

10%

15%

20%

25%

0

20

40

60

80

100

120

140

Jul 2007 -Jun 2008

Jul 2008 -Jun 2009

Jul 2009 -Jun 2010

Jul 2010 -Jun 2011

Jul 2011 -Jun 2012

Jul 2012 -Jun 2013

Jul 2013 -Jun 2014

Jul 2014 -Jun 2015

Perc

enta

geof

VCin

vest

men

tgoi

ngto

early

-sta

gem

edte

chs

Num

bero

fear

ly-s

tage

roun

ds

Number of early-stage VC rounds >US$5 million Percentage of VC investment going to early-stage medtechs

Source: EY, Dow Jones VentureSource and Capital IQ.Early-stage rounds are seed-, first- and second-round VC investments.

US and European early-stage VC rounds >US$5 million


A solid M&A marketDriven by tepid growth and historically low cost of capital

0

20

40

60

80

100

120

140

160

180

0

10

20

30

40

50

60

70

80

90

Jul 2007 -Jun 2008

Jul 2008 -Jun 2009

Jul 2009 -Jun 2010

Jul 2010 -Jun 2011

Jul 2011 -Jun 2012

Jul 2012 -Jun 2013

Jul 2013 -Jun 2014

Jul 2014 -Jun 2015

Num

bero

fdea

ls

Tota

ldea

lval

ue(U

S$b)

Total deal value of mega deals (>US$10b) Total value of M&As Number of M&As

Source: EY, Capital IQ and Thomson ONEChart includes deals with value disclosed


The capital allocation balancing actHow US & European medtechs have deployed their cash

0

5

10

15

20

25

30

35

40

2009 2010 2011 2012 2013 2014

Cash acquisitions Cash returned to shareholders R&D expenses

Annu

alsp

end

(US$

b)

Data shown for US and European public pure-play companies for which data were publicly disclosed. Cash returned to shareholders includes total dividends paid and stock repurchased.Source: EY, Capital IQ and Thomson ONE.

Differentiating differently

CommoditizationHow does it play out in medtech?

Shifting customer perception

Lower barriers to market entry

Full-on price competition

► Move downstream or upstream► Create stickiness by rebranding

Strategies against commoditization

What do medtech purchasers value?

Procurement► Hospital managers and administrators — not physicians — are key influencers► Centralized procurement models

Research and development► Real-world data, beyond-the-product services important to purchasers► Iterative innovations matter less

Contracting models► Value-based purchasing, pay-for-performance are more important► Simple cost-cutting is less important

Pharmacoeconomic outcomes► Total cost of care the most important outcome► Reduced hospital stays, improved surgical efficiency less important

What’s on medtech purchasers’ minds?Pressure points are shifting

44%

41%

37%

33%

22%

37%40%

38%

27%

12%

Cost-cutting Cost ofupgrading/maintaining IT

systems

High-end medicaltechnology costs (non-

imaging)

Rising drug costs Imaging costs

Today In three years

21%

34%

Healthcare reforminitiatives (e.g. value-based

purchasing, pay-for-performance)

Declining: simple cost-cutting Increasing: value/outcomes

Source: EY Hospital survey 2014.

What’s on medtech purchasers’ minds?Medtech’s customer base is changing

Physicians are becoming less important as influencers of purchasing decisions

2.4

1.7 1.6

0.2

1.9 1.9

1.7

0.5

Physicians CFO Finance department Procurement Purchasingdepartment

Payers Insurers

Today In three yearsR

anki

ng

Source: EY Hospital survey 2014. Higher scores indicate influencers who are more influential in hospital purchasing decisions.

What’s on medtech purchasers’ minds?The old rules count for less

Priceremainsthe topfactor

Old ways of differentiationare losing relevance

55%

32%

22%27%

22%18%

Physician preferencefor specific device

User-friendly design Training in use

Today In three years

51%

27%31%

6%

62%

35% 35%

25%

Data demonstratingclinical outcomes

Data demonstratingvalue

“Beyond the product”services (e.g. patient

support)

Risk-sharingagreement

Differentiation will have to bebased on data and value

Price of device

77% 77%

Source: EY Hospital survey 2014.

Implications for medtechNew bases for competition

Achieve superior outcomes via technological advances► Buyers care less about iterative innovations► New product R&D can catalyze new standards of care

Increase scope through services and solutions► Medtechs can “own” more of the bundle► Solutions must focus on health care buyers’ needs

Increase scope by adding product offerings► End-to-end solutions have an edge in value-driven care► Opportunity for contracts around total cost of care

Take costs out of the health care system► Demonstrate that products result in cost offsets that

reduce total cost of care

2

1

3

4

Achieve superior outcomes via technologicaladvances1

Look for areas where R&D can catalyze new care standards

STRATEGY 1:Traditional medtech innovation

► Highly specialized, sophisticated devices (e.g.,EndoChoice)

► Superior outcomes

► Novel approaches to unmet medical needs can appeal topayers

Achieve superior outcomes via technologicaladvances1

Look for areas where R&D can catalyze new care standards

STRATEGY 2:Leveraging the internet of things

► Patient-empowering, information-leveraging (PI)technology

► Regulator-approved products that can be bought byconsumers (e.g., AliveCor)

► Change care delivery paradigm

Increase scope through services andsolutions2

As bundled payments become increasingly common in health care,companies can try to own more of the bundle

► Successful components:► Customer-centric► Focused on partnerships – not transactions► Emphasis on improving patient outcomes

► May require new capabilities or technologies► e.g., data analytics, remote monitoring, etc.

► Examples:► Philips/Georgia Regents Medical Center► Medtronic/Diabeter/Cardiocom► Fresenius/Several acquisitions in the provider space

Increase scope by adding product offerings3Companies that offer end-to-end solutions may have an edge in

value-driven health care settings

STRATEGY 1:Create scope in a disease area

► Example: Zimmer/Biomet

STRATEGY 2:Create scope in multiple disease areas

► Example: Medtronic/Covidien

Take costs out of the health care system4If commoditization is a fait accompli… recognize that medtechs can

provide value with products that take costs out of the system

STRATEGY:Reduce cost of production &pass savings on to customers

► Engineer simpler, lower-tech devices► Manufacture more cheaply

► Example: Smith & Nephew’s Syncera pilot

Moving forwardKey questions for medtech companies

How do you think about your contracting and commercialcapabilities?

How do you allocate your R&D spending to create products that willhave value in the marketplace?

How can you boost your data/analytics capabilities to better provevalue to health care buyers?

How do you develop truly customer-centric solutions?

How do you create a brand that extends beyond the product?


Thank you and stay tuned!

ey.com/vitalsignsey.com/medtech http://ow.ly/NTufL

Pulse of the industry - Home - MedTech · 2015-10-21 · Source: Ernst & Young, Capital IQ and...

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