While the medtech sector saw a downturn in merger and acquisitions (M&A) due to COVID disruption, medtech valuations performed stronger than most life sciences sectors throughout 2020. With the sector recovering quicker than expected in the first months of 2021, more investors are returning to the medtech space — with top targets including sub-sectors like diagnostics and remote patient monitoring.
As pressure builds on global health ecosystems to meet the pandemic and face the growing demands of an aging population, medical technology will prove vital for years to come. By creating innovative new products that can improve health data, support remote care, and digitise workflows, the medtech sector is a huge area of opportunity for private and venture capital.
According to Bernard Ross of Sky Medical Technology, “the medtech sector has seen substantial growth in recent years and that trend is expected to continue — the European medical technology market is estimated to be worth more than €120bn [£102.5bn or $141bn], with Germany, France, and the United Kingdom leading the way in research, development, and implementation of new medical devices.”
Indeed, prior to the pandemic in 2019, the total annual revenue of the global medtech industry stood at $510bn (£370.9bn or €434.4bn) — representing an increasingly substantial share of the overall global healthcare sector. By 2025, the global medical devices industry is expected to reach a valuation of $612.7bn (£440.5bn or €521.8bn), growing at 5.4% CAGR.
There are several drivers for this growth. Firstly, a substantial portion of global healthcare spending has been diverted to directly combat the pandemic, including the purchase of medical technologies for hospitals. Secondly, the challenges of ageing populations and a greater prevalence of chronic health conditions necessitate the need for accessible, cost-effective digital health solutions.
Finally, innovation in medtech — particularly in fields such as AI, machine learning, mobility, and the cloud — is speeding ahead at breakneck pace to meet these demands. Taken together, these trends make medtech an area ripe for future investment.
In this article, I’ll explore the medtech sector in further detail and look at opportunities for investment in 2021 and beyond.
The state of the medtech sector
While medtech encompasses an increasingly large share of the global healthcare market, it is far from a monolithic block. Broadly speaking, the sector can be divide into five core segments. These are:
- Medical equipment (e.g. MRI and ultrasound machines)
- Medical devices (e.g. artificial joints and stents)
- Medical consumables (single-use products such as bandages or PPE)
- In-vitro diagnostics (IVDs — tests used on biological samples of human blood or body tissue)
- Life science tools
Currently, the medtech market is highly fragmented. With the opportunity to buy and merge multiple companies and achieve revenue growth through cost synergies, such fragmentation is an attractive proposition for private equity investors. According to the BGG website, the ten largest medtech companies collectively hold only about 40% of the market in aggregate, while no company generates more than 8% of the overall revenue.
As for employment, the figures suggest that the industry has weathered the COVID-19 storm relatively well. In the United States, for example, >106,000 people currently work in the medtech sector — recovering from a slight downturn in 2020 to exceed 2019’s figure. Taken over the last five years, this represents a 31% increase in employment since 2016. In Europe, the medtech sector directly employs over 730,000 people across 32,000 companies (Medtech Europe).
By mid-century, there will be an extra 8.6 million people aged 65 and over in the UK -- roughly equivalent to the population of London. Globally, it is estimated that 1 in 6 people on Earth will be retirement age by 2050.
An ageing population has huge implications for healthcare. More people will rely on healthcare, but there will be a smaller pool (proportionally speaking) of health workers to provide it. There will also be fewer people in employment to pay for these growing health demands.
This trend was already well underway before COVID-19 struck, and the pressures long exerted on healthcare systems across the globe were almost pushed to breaking point by the pandemic.
Of course, an ageing population means a concomitant rise in the prevalence of chronic illnesses such as diabetes or heart disease — creating an urgent demand for innovations that can improve the diagnosis and treatment of such diseases. By facilitating a drive towards bespoke, personalised care and more targeted treatments, medical technologies (e.g. wearables or smart inhalers) are critical to helping people live longer, healthier lives. In the process, they also contribute to an improved quality of life for patients.
Moreover, medtech can also boost efficiencies and sustainability in global healthcare systems that until now have been beset by fractured care pathways and rely upon finite resources. With greater demand for medtech products from both medical professionals and patient-consumers, there is a huge opportunity for investment in the medtech market — particularly in emerging markets.
Medtech offers an innovative solution to some of the main problems in healthcare. With increasingly innovative technologies at their disposal, medtech organisations can develop cheaper and more efficient products that address more niche health demands.
The medtech industry is one of the most innovative in STEM. In 2019, nearly 14,000 medical technology patents were filed with the European Patent Office (EPO) — 7.7% of the total number of applications. Of all technical sectors in Europe, medtech is second only to digital communication for patent applications. Indeed, medtech applications were more than double that for biotechnology and far surpassed pharmaceuticals.
Though the initial shock from COVID saw a downturn in patent applications, the response to the pandemic — coupled with medtech’s capacity to solve urgent problems — has seen the industry continue to lead the way for innovation. According to more recent EPO data, in 2020, medical technology was the leading field for inventions in terms of volume.
The European medtech sector is in a healthy place, but the U.S. is leading the way for innovation in the space. Of the 10,480 medtech patents granted by the EPO in 2019, 4,300 (41%) of successful applications came from the United States.
With innovation accelerating due to the pandemic — including efforts to produce vaccines and testing while pivoting to artificial-intelligence-based and remote care — many medtech companies have seen their share prices climb substantially.
Medtech stocks such as Stryker (SYK), Abbott Labs (ABT), and Owens & Minor (OMI) have seen their valuations soar over the last year. Indeed, over the course of 2020, the MedTech 100 Index (made up of the world’s largest medtech companies) grew from a total of $86.86 to $104.55. This represented an increase of 20.4%.
All in all, these trends suggest an upward trajectory for the industry. Despite strong growth, there are some small areas of concern for investors.
Pricing pressure is arguably the most notable sticking point, especially as the rise in government spending on healthcare products and services demonstrates the unsustainability of fiscal trends. In seeking to reduce such high spending, governments and payers are increasingly demanding proof of value to see how a product or services differentiates from cheaper alternatives.
That said, such challenges also present opportunities for medtech. As stated by BCG, “rather than primarily selling products on a per-unit basis, forward-thinking companies are developing more comprehensive solutions (including services) that can create value throughout a patient’s journey.” Despite having a higher pricing point, such models can save money in the long run by optimising operational efficiencies in hospitals and other healthcare facilities.
What medtech investors are looking out for
“For private equity investors, the medical technology industry holds significant promise, with a record of strong profitability, resilient demand, and encouraging growth prospects.”
With investment carrying an element of risk, the drivers for investment in medtech are slightly different to the main drivers of market growth outlined earlier. According to BCG, there are six specific themes things that private equity investors look out for in a medtech company. These are:
- The delivery of superior outcomes, e.g. flagship products that can significantly improve quality of life for patients.
- A focus on innovation.
- Ownership of the patient journey, particularly for those with ongoing chronic conditions.
- The ability to capitalise on the consumerisation of health, e.g. patient monitoring apps within the diabetes segment.
- The development of high-quality, value-priced products.
- Improved efficiencies to bring down the high cost structure in medtech.
For medtech companies, demonstrating differentiation by ticking the boxes above will help them stand out to potential investors. For investors, understanding the dynamics that continue to shape the industry — and its future — is imperative for success.
For more on the healthcare and technology trends that are driving innovation in medtech, read our article, Medtech 2021: What the future holds for the medical devices industry. For more on the ever-changing worlds of medtech and STEM, stay tuned to the SRG blog.