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  • Alex Hattaway

Pulse of the industry medical technology report 2022

By EY


Year in review


The US and European medical technology (MedTech) industry has performed impressively throughout the COVID-19 pandemic, but it now faces a host of new and emerging challenges as the direct impact of the global pandemic slowly subsides. As the 16th annual edition of our Pulse of the industry medical technology report shows, the industry’s revenues passed the notable milestone of a half-trillion dollars for the first time ever in 2021, driven by the resumption of deferred elective procedures and ongoing sales of pandemic-related products (particularly diagnostics and research-related laboratory equipment). Though many MedTechs have yet to correct their course on their revenue growth trajectory since the pandemic began, the industry’s overall growth returned to levels not seen since we began publishing the Pulse of the industry medical technology report around the time of the global financial crisis in 2007.


But, as the business world continues adjusting to a new post-pandemic landscape that includes escalating regional and geopolitical conflicts, MedTech must confront heightened business uncertainties, including surging inflation and recessionary fears, the impact of continued lockdowns in certain geographies, ongoing global chip shortages and supply chain challenges, a constricted labor market, reduced investment in capital equipment from hospital systems experiencing increased financial pressures and a range of additional factors. The industry recorded 16% revenue growth in 2021 and a double-digit increase in R&D spending – a healthy sign of confidence in, and commitment to, its ability to keep innovating (see Figure 1). Whether MedTech can sustain this impressive performance despite the challenges of 2022 remains to be seen.


Figure 1: MedTech revenue growth reached its highest levels since before the 2008 financial crisis



The industry’s revenue surge in 2021 extended across all product classes. Therapeutic devices – by far, the largest segment – grew 10%, with the five leading therapeutic areas (orthopedic, cardiovascular, dental, ophthalmic and women’s health) all increasing their revenues by at least 16% as relatively normal clinical volumes resumed after a prolonged period of delayed and canceled procedures during the various peaks of the pandemic. The other three industry segments all recorded growth of over 20%, with non-imaging diagnostics leading them all, up 26% (see Figure 2). Consistently among the highest-performing segments in recent years, non-imaging diagnostics have attracted considerable attention as a potential enabler of precision medicine and remote care. However, the segment’s robust performance in 2021 was largely driven by the huge global need for COVID-19 testing capacity. It is not yet clear whether the industry’s outstanding performance in 2021 is a one-off impact of the pandemic or a secure basis for ongoing growth.


Figure 2: US and European revenue growth by product group: Pure-plays



Indeed, analysis of 2022 revenues to date suggests that MedTech’s growth is normalizing toward the historical average, rather than continuing the trajectory distorted by the pandemic. Companies with over US$500 million revenue saw an average growth of 16% in 2021; however, the average increase dropped to over 6% in 2022.


This is one indication that 2022 is presenting more challenging conditions for MedTech. Another is the industry’s stock performance, which peaked toward the end of 2021 (see Figure 3). At the start of 2022, MedTech commercial leaders were up 47% on their composite stock price from the start of 2020, while noncommercial leaders were up 119%. By the end of July 2022, the equivalent numbers had fallen to 14% and 54%, respectively, reflecting broader investor uncertainties amid heightening macroeconomic turmoil.


Figure 3: US and European medtech market capitalization relative to leading indices



The 30% drop-off in total financing levels (which particularly impacts the smaller MedTechs that drive innovation within the industry) also demonstrates how challenging the operating environment has become across the industry. Innovation capital (i.e., the capital raised by companies with less than US$500 million in revenue) fell 35%, or nearly US$10 billion, in the 12-month period ending 30 June 2022 (see Figure 4). In particular, the first six months of 2022 saw a rapid decline in the MedTech IPO market. With special-purpose acquisition company (SPAC) deals significantly slowing, and the largest venture capital investments going to late-stage financing rounds, smaller MedTechs’ access to the public markets looks far more constrained in 2022.


This may increase the appeal of acquisition for smaller companies. However, after a period of sustained activity from the second half of 2020 through the whole of 2021, dealmaking has been somewhat muted in the first half of 2022. Overall, in the 12 months ending 30 June 2022, total M&A spend was up 24% on the previous 12 months, despite a 13% drop in the number of deals signed (252 compared to 288); however, that deal value was heavily concentrated in calendar 2021. John Babitt, Americas MedTech Transactions Leader, Ernst & Young LLP, anticipates that the reduced appetite for dealmaking may well continue into the new year: “Continued uncertainty in the overall financial markets continues to weigh on the M&A appetite; the overall MedTech M&A and innovation ecosystem continues to remain intact, but near-term storm clouds are likely to pause transactions volumes into 2023.” This slowdown, coupled with a tighter financing environment, represents a challenging operating environment for smaller MedTechs.


Figure 4: Innovation capital raised in the US and Europe by year



While these metrics collectively indicate a less favorable environment for the industry in 2022, the MedTech industry has demonstrated its resilience during the pandemic and will undoubtedly navigate upcoming challenges with agility. In the process, the industry will have to adapt to the changing world around it; below, we identify four key focus areas for MedTech:



INNOVATION:


As digital technologies, data science and other fields continue to converge, the nature of MedTech innovation is shifting; to secure their place in the changing ecosystem companies should prioritize using innovation to disrupt before they are disrupted by their competitors.


NEW COMMERCIAL MODELS:


Like other sectors, MedTech is increasingly engaging with its customer base via digital and other non-traditional channels, and the industry must build its capabilities to engage in these ways.


SUPPLY CHAIN TRANSFORMATION:


COVID-19 has accelerated moves to increase supply chain resilience, including through localization and on-shoring, and MedTechs will have to work with policymakers to design supply chain strategies for the future.


TALENT CRISIS:


Recruitment and retention have become a key issue for medtech and many other industries, and companies need to address this challenge to build and retain a workforce that can deliver against their growth strategies. A fresh approach is also needed to support the new types of innovation required across the industry in data, AI and connected devices.

 

To gain deeper insights on where MedTech has been and where it’s headed, download the full Pulse of the industry medical technology report. There you’ll find original perspectives on how MedTech can rethink innovation to address new challenges and opportunities in commercial models, supply chain and talent management. These in-depth analyses include contributions from leading MedTech executives, including Aldo Denti, Company Group Chairman of DePuy Synthes, discussing how Johnson & Johnson’s orthopedics company is taking a leading role in transforming this segment of MedTech; Dan Starck, EVP at Owens & Minor, one of the companies driving the home health care revolution; and Jason Ertel, Vice President of Engineering at Nottingham Spirk, exploring the shifting priorities for MedTech innovation in the present era. In addition to these insights, the full report delivers a wealth of industry data on everything from financial performance to venture and other capital raised, M&A and R&D investment levels, FDA approval trends and more, offering a comprehensive overview of the MedTech industry in 2022 as it seeks to turn the challenges of disruption into opportunities for lasting transformation.







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