Medical Technology Industries Set to Make Full Recovery

The medical technology industries in the U.S. and Europe are steadily recovering from the recession, with income, investments and deals on the rise, according to a new report.

Medical technology companies in the United States and Europe have posted strong performance in recent years, with annual growth rates accelerating since 2009 and numerous indications that recessionary effects are wearing off. However, the industry also faces a challenging regulatory and pricing environment, as well as mounting pressure to find new methods for innovation.

According to Ernst & Young’s latest annual Pulse of the Industry report, released last month, net income for non-conglomerate med tech companies in the U.S. and Europe totaled $17.4 billion in 2010, up 43 percent from 2009. Much of the gain was due to large, one-time charges, without which net income would have risen 9 percent. Revenues for med tech companies reached $315.9 billion, a 4 percent increase over the prior year.

U.S. and European med tech firms raised capital worth $23.6 billion last year, up 66 percent from 2009, although most of the increase derived from major companies tapping into low interest rates to issue debt. Minus debt transactions, the amount of capital raised actually fell by 7.7 percent. In the first half of 2011, financing totals reached $10.1 billion.

Meanwhile, venture funding for med tech companies declined by 15 percent in the U.S., dropping to $3.5 billion in 2010, while increasing 4.7 percent to $707 million in Europe. Initial public offering (IPO) activity rebounded slightly in the same period, with nine med tech companies in the U.S. and Europe completing IPOs (worth a combined $568 million), compared with just two IPOs in 2009.

Med tech mergers and acquisitions (M&As) are on a major upswing. Total M&A value in the U.S. and Europe rose to $30.6 billion in 2010, nearly double the $15.7 billion total in 2009. Last year, there were 201 deals, with value averaging $245 million, up from 171 deals worth an average of $175 million in 2009. The trend is accelerating this year. In the first half of 2011 alone, there were 135 M&A deals announced, worth a combined total of more than $47.3 billion and with an average size of $351 million.

“We expect there to be fairly meaningful consolidation over the next 12 months. There are a number of assets between $1 billion and $10 billion in the public arena that are trading at a 20 percent discount to where they were a few months ago,” John Babitt, Ernst & Young’s med tech leader for the Americas, told Bloomberg News. “[Johnson & Johnson's] acquisition of Synthes set the stage — the large med tech companies need to do acquisitions that are going to move the needle to be important.”

Despite the recent growth in net income, revenue, investment and M&As, however, the med tech industry faces a wide range of long-term challenges deriving from the public and private sectors, as well as internal barriers to developing new products successfully.

“From increased payer pressure to demonstrate value, heightened regulatory scrutiny, a continued tight funding climate and a rapidly changing customer base, the industry’s ability to innovate is under increasing strain,” Babitt said in an announcement of the findings. “To respond effectively, companies will need to expand beyond the products they have historically offered to solutions built for an increasingly outcomes-focused system.”

Today, med tech companies are under mounting pressure not simply to sell products, but to prove how their products improve health outcomes relative to cost. This is largely due to health care reform measures and widespread cost-cutting efforts on the consumer side of the medical device industry.

“Government and private insurers’ efforts to rein in health care costs are straining hospital budgets, prompting a harder look at the value of comparable treatments. Hospitals are also standardizing purchasing decisions and relying less on physicians’ preferences for one brand of device over another in their efforts to cut costs,” Reuters explains. “At the same time, regulators are stepping up their scrutiny of new product applications, and patients are taking a more active role in choosing among treatment options.”

According to Ernst & Young, the new outcomes-based system will likely require an overhaul of the med tech business model. Companies will need to: seek more revenue from sources outside their product offering, such as subscriber information services; shift sales and marketing efforts toward demonstrating value to decision-makers; and develop research and development methods from more widely distributed information networks.

“Med tech companies have always taken on substantial risk to innovate new products and technologies,” Glen Giovannetti, Ernst & Young’s global life sciences leader, said. “However, risk now stems not only from product development, but also from a host of other pressures. To respond, companies will need to innovate new business models. If risk has moved beyond the product, so too must innovation.”

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