The medical technology industry put more into share buybacks and dividends to investors than it spent on R&D last year and that’s not good for its long-term prospects, according to a new report from Ernst & Young.
The advisory firm’s 12th annual “Pulse of the Industry” report looked at therapeutic device, diagnostic, drug delivery and analytical/life sciences tool companies in the U.S., Europe and Israel. Results were presented today at the Medtech Conference in Philadelphia.
Although revenues rose for the sector compared with the prior year, it was the 10th consecutive year of single-digit growth, coming in at $379 billion, up 4% – a far cry from the 15% average annual growth rate logged from 2000 to 2007, according to the report.
Although the industry spent $15.9 billion on R&D last year, it returned $16.4 billion to investors in buybacks and dividends. That’s not likely enough to withstand the disruption that’s in store from the well-heeled tech sector and its newfound eye for the healthcare market.
“A group of 10 disruptors, some of which have already entered the medical device or health market, possess nearly double the dealmaking firepower of the entire US and European medtech industry,” according to the report, comparing tech’s $1.9 trillion war chest with medtech’s $990 billion.
Outside of investments in diabetes and heart disease, medtech isn’t putting enough into digital technologies that can compete with Silicon Valley. That’s evidenced by pre-market approval data from the FDA, which show that only 37% of the 43 PMAs accepted by the agency since 2017 began included a digital component.
Instead, the industry put its efforts into building scale with smaller acquisitions in the $1 billion to $10 billion range in what the report called “must-win therapeutic areas.” There were no mega-deals of more than $10 billion, unlike the previous few years and the total value of M&A transactions fell -56% to $44 billion; deal volume fell -42% to 101, according to the report.
Financing, a bright spot, showed an increase in so-called “innovation capital” – raised by companies with less than $500 million in sales – accounted for $22 billion of the $37 billion total, the third most raised since the report’s 2006 inception. Early-stage companies raised $3.3 billion from venture capital sources, the report found.
And initial public offerings soared, raising $9.1 billion for medtech companies since July 2016 – more than the combined total during the prior decade. There were 28 public flotations in 2017-2018, including the largest-ever $5.2 billion IPO for Siemens Healthineers in March.
“Medtechs continue to use conventional strategies, such as buybacks and tuck-in acquisitions, to create scale in must-win therapeutic areas to grow. However, as the shift of power from providers and payers to patients and consumers continues, this business-as-usual approach no longer works. Medtechs must invest in new data and customer-centric capabilities to build stronger ties with consumers or risk being ousted by technology companies and other entrants from outside the sector,” global life sciences leader Pamela Spence said in prepared remarks. “To succeed in the digital future, medtechs will be judged not only on the safety and efficacy of their devices and tests, but on their ability to capture and deploy insights from these products to inform care delivery, with a growing emphasis on coordinated care.”
“Medtechs have a unique opportunity to capitalize on digital transformation. As many devices are increasingly connected, they have a built-in advantage. They also have strong connections with other health care ecosystem stakeholders and are aligned with their objectives, so they are well-placed to develop new business models and their value in the future. What they don’t have is in-house capabilities to develop personalized health care offerings,” added life sciences advisory partner Jim Welch. “To change this, medtechs need to continue to be efficient with their capital, and prioritize shedding non-core assets. They must also invest more in digital collaborations that expand their customer experience and data and analytics capabilities so that they can get even closer to patients.”