CIO Insights Special - Medical technology: digitalization meets demographics - March 2019 - Deutsche Bank Wealth Management
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CIO Insights Special
Medical technology: digitalization meets demographics
March 2019
CIO Insights Special
Medical technology: digitalization
In Europe, Middle East and Africa as well as in Asia Pacific this material is considered marketing material, but this is not the case in the U.S. No assurance can be given
meets demographics
that any forecast or target can be achieved. Forecasts are based on assumptions, estimates, opinions and hypothetical models which may prove to be incorrect. Past
performance is not indicative of future returns. Investments come with risk. The value of an investment can fall as well as rise and you might not get back the amount
originally invested at any point in time. Your capital may be at risk.
CIO Office, Deutsche Bank Wealth Management, Deutsche Bank AG - Email: WM.CIO-Office@db.com 1CIO Insights Special
Medical technology: digitalization meets demographics
Authors:
Ivo Višić
Senior Investment Officer,
01 Summary
04 Digitalization will require a
different focus
CIO Office Europe
Matt Barry
Investment Strategist,
02 Medtech and the medical
device sector now 05 Change deferred? Recent
industry trends
Americas
Editor:
Sebastian Janker
03 Demographics create
challenges and opportunities 06 Investment outlook: risks and
opportunities
Head CIO Office Americas
Introduction
Medical technology (medtech) is on adding to shareholder value. Firms that
the cusp of a period of great change as put an emphasis on the status quo and
multiple forces drive a transformation short-term growth may find it difficult to
of the entire health care value chain. justify their valuations in the future and to
Digitalization is helping to move the defend their market positions against new
medical devices sector (still the main route entrants, especially from the technology
Christian Nolting to investing in medtech) from a product- space. Firms will also have to be flexible
Chief Investment Officer centric to a client-centric approach, in a geographic context, as the U.S.
creating a huge potential for companies market’s dominant position will continue
in numerous care areas. The creation of to be eroded by likely rapid growth of
holistic care platforms and solutions should the Chinese and Indian markets – at the
allow for a cost-efficient delivery of high- same time that these two countries are
quality care across ageing populations also becoming increasingly important
suffering from multiple chronic conditions, innovation hubs and technologically-
in emerging as well as developed markets. leading producers too.
Because of this potential for change, Technology has formed the core of our
from an investor perspective it will long-term investment themes for several
become increasingly important to identify years, and I think that medtech is a key
medical device companies which are area where technological change can have
embracing and are able to ride the wave immediate and beneficial implications. But,
of digitalization. Success here is likely to as this report points out, it is particularly
involve investments into new technologies important to realise that investment
such as artificial intelligence, as well opportunities due to the sector’s growth
as firms acquiring new capabilities for and transformation will be accompanied
example in behavioral science and data by a number of risks – as is common in
analytics. To do this, medical device firms any sector undergoing change. Active
will have to collaborate with a range of stock selection and management may
stakeholders, ranging from digital entrants be necessary to fully capitalize on future
or tech companies to payers and providers. opportunities, as we expect that only
Those medical device firms that make the companies which are fully embracing
right technological investments and strike the digitalization wave will maintain a
the right partnerships will find new ways to competitive edge and thus a justification
build sustainable businesses as the health for valuation premiums in the future. But,
care ecosystem continues to evolve. with an effective investment approach, the
opportunities are likely to be considerable.
In this changing environment, enhancing
customer experience will be key to
In Europe, Middle East and Africa as well as in Asia Pacific this material is considered marketing material, but this is not the case in the U.S. No assurance can be given
that any forecast or target can be achieved. Forecasts are based on assumptions, estimates, opinions and hypothetical models which may prove to be incorrect. Past
performance is not indicative of future returns. Investments come with risk. The value of an investment can fall as well as rise and you might not get back the amount
originally invested at any point in time. Your capital may be at risk.
CIO Office, Deutsche Bank Wealth Management, Deutsche Bank AG - Email: WM.CIO-Office@db.com 2CIO Insights Special
01
Medical technology: digitalization meets demographics
Summary
Medical technology (medtech) is mainly At the same time, digitalization is These trends could benefit some firms
investable in via the medical devices encouraging a shift in the industry’s focus, in the medium term but may also create
sector which has global revenues of with individual devices complemented by some risks, given strong valuations and
around USD370bn per year which a more holistic approach to care. marked outperformance relative to the
corresponds to ~5% of the total health broader market over the past two years.
care market worth USD7tr. This is likely to attract tech firms and
other digital entrants: existing firms in Over the longer term, however, we
The U.S. is currently both the biggest the sector may need to collaborate to see significant opportunities as the
market for medical devices (43%) and access a range of skills. changes wrought by digitalization and
the domicile of the majority of the demographics encourage growth and the
sector’s big players, but demographics At present, U.S. medical device firms’ provision of new high-quality services.
are helping to boost the importance of current focus seems however to be on
emerging markets. short-term growth, with medtech-related
M&A currently at low levels.
02
Medtech and the
medical device sector
now
Most recent data shows that the medical Figure 1: Global medical device market share by region in 2016
device sector, the key implementer of Source: MedTech Europe, The European Medical Technology Industry – in figures 2018. Data as
“medtech” (medical technology), has of February 2019.
revenues of around USD370bn per year,
hence accounting for ~5% of the entire
50%
43%
health care market which is worth USD7tr. 40%
29%
The medical device market is expected 30%
to double by 2030 at a compound annual 20% 11%
growth rate (CAGR) of more than 5%, 10%
7% 6% 2% 1% 1%
according to KPMG, one of the “big four”
0%
audit and advisory firms which has done U.S. Europe Japan China Canada Brazil Russia Other
extensive research on this subject. This
compares to a CAGR of ~3% at which
aggregate revenues of the S&P 500 have to a dominating position in the global the USD370bn worth global market for
grown 2008-2018. medical device industry. Today, the vast medical devices (Figure 1). With a market
majority of associated companies which share of 29%, Europe is the second largest
For over half a century, the U.S. has generate annual revenues of more than single market – whereas Germany (28%),
provided an ideal innovation ecosystem USD 1bn are based in the U.S. Moreover, France (15%), UK (12%), Italy (10%) and
that has fostered significant advances the U.S. is the largest single market Spain (6%) are the biggest markets in the
in medical technology which has led having accounted in 2017 for 43% of European Union.
In Europe, Middle East and Africa as well as in Asia Pacific this material is considered marketing material, but this is not the case in the U.S. No assurance can be given
that any forecast or target can be achieved. Forecasts are based on assumptions, estimates, opinions and hypothetical models which may prove to be incorrect. Past
performance is not indicative of future returns. Investments come with risk. The value of an investment can fall as well as rise and you might not get back the amount
originally invested at any point in time. Your capital may be at risk.
CIO Office, Deutsche Bank Wealth Management, Deutsche Bank AG - Email: WM.CIO-Office@db.com 3CIO Insights Special
03
Medical technology: digitalization meets demographics
Demographics cause
challenges and
opportunities
Growing and aging populations
as growing and aging populations cause
Just as digitalization is promising to a rise of chronic diseases and further
revolutionize medical technology and pressure global resource constraints.
thus the medical devices sector, society The world population will reach 9.9bn
is itself is in the midst of one of the most by 2050, up 2.3bn or 29.4% from an
challenging times in health care history, estimated 7.6bn people now, according
to projections by the United Nations, with
Africa and Asia predominantly driving this
Figure 2: World population development 1960-2050 in million trend (Figure 2).
Source: United Nations Populations Division, World Population Prospects. Data as of February 2019.
12,000
Looking at the global population, the share
of adults aged over 65 rose from 5.1%
10,000
in 1960 to 8.3% in 2015 and is expected
to surge to 15.8% by 2050 (Figure 3),
8,000
with the fastest growth happening in the
age bracket over 85 years. The share of
6,000
children (ages 0 to 14) is falling, from
37.1% in 1960, to 26.1% in 2015, with a
4,000
projected decrease to 21.3% by 2050.
2,000
These trends challenge the entire health
care value chain, from research and
0
development to product supply as well as
‘60 ‘70 ‘80 ‘90 ‘00 ‘10 ‘20 ‘30 ‘40 ‘50 business models.
Africa Asia Europe Latin America and Northern Oceania Driven by sustained GDP growth,
the Caribbean America and a rising access to healthcare for
Figure 3: Age distribution development of world population 1960-2050
Source: United Nations Populations Division, World Population Prospects. Data as of February 2019.
100%
80%
60%
40%
20%
0%
‘60 ‘70 ‘80 ‘90 ‘00 ‘10 ‘20 ‘30 ‘40 ‘50
Ages 0-14 Ages 15-24 Ages 25-64 Ages 65+
In Europe, Middle East and Africa as well as in Asia Pacific this material is considered marketing material, but this is not the case in the U.S. No assurance can be given
that any forecast or target can be achieved. Forecasts are based on assumptions, estimates, opinions and hypothetical models which may prove to be incorrect. Past
performance is not indicative of future returns. Investments come with risk. The value of an investment can fall as well as rise and you might not get back the amount
originally invested at any point in time. Your capital may be at risk.
CIO Office, Deutsche Bank Wealth Management, Deutsche Bank AG - Email: WM.CIO-Office@db.com 4CIO Insights Special
Medical technology: digitalization meets demographics
their growing middle-class on top of
healthcare reforms and local government Figure 4: Healthcare expenditures as percentage of GDP in %
incentives – we believe that overall Source: OECD Statistics. Data as of February 2019.
healthcare expenditures in China and
20%
India will continue to increase in future.
There is considerable room to catch up
with developed market countries which 15%
currently spend at least double as much
of their GDP on healthcare (Figure 4).
Accordingly, it should be just a question 10%
of time as to when the two most populous
countries will start to dominate the medical
5%
device market, and not just in terms of size.
Global medical device revenues may 0%
more than double by 2030 ‘00 ‘01 ‘02 ‘03 ‘04 ‘05 ‘06 ‘07 ‘08 ‘09 ‘10 ‘11 ‘12 ‘13 ‘14 ‘15 ‘16 ‘17
As populations age and chronic diseases France Germany United States China India
become commonplace, it is generally (estimates) (estimates)
accepted that healthcare will require a
larger share of GDP. This will in itself
have implications for spending on Figure 5: Global medical device market share by region in 2030
medical devices and could spur on the Source: KPMG, Medical Devices 2030. Data as of February 2019.
implementation of medical technology.
900
According to KPMG revenue forecasts the 795
800
global medical device market is anticipated
to grow at a CAGR of over 5% to reach 700
617
approx. USD 800bn by 2030 (Figure 5). 600
500
483
.2%
China and India already growing at 371 CAGR 5
400
twice the pace of the overall market
300
The U.S. is expected to maintain its 200
leading position in the medical device 100
industry by 2030 with revenues exceeding 0
USD300bn. But according to KPMG 2015 2020e 2025e 2030e
forecasts the top five markets in terms
of revenue volume will include China
and India at the end of the next decade Figure 6: Global medical device market share by region in 2030
(Figure 6). These two markets could Source: KPMG, Medical Devices 2030. Data as of February 2019.
together account for almost a third of the
total market with both markets already U.S. 38%
growing at double-digit rates. China 26%
China and India are also fast becoming France 7%
innovation hubs. China’s expertise Global medical
concerning artificial intelligence and
Germany 7%
device market
genomics, among other cutting-edge India 5%
areas, suggest that its innovators might
share
overtake the U.S. and European medtech Japan 4%
leaders in implementing new solutions. UK 3%
Whereas India is a hotspot for what is
known as “frugal engineering”, meaning Other 10%
the manufacture of low-cost tools that
appeal to customers far beyond their local
market and that in some cases can be
quite sophisticated.
In Europe, Middle East and Africa as well as in Asia Pacific this material is considered marketing material, but this is not the case in the U.S. No assurance can be given
that any forecast or target can be achieved. Forecasts are based on assumptions, estimates, opinions and hypothetical models which may prove to be incorrect. Past
performance is not indicative of future returns. Investments come with risk. The value of an investment can fall as well as rise and you might not get back the amount
originally invested at any point in time. Your capital may be at risk.
CIO Office, Deutsche Bank Wealth Management, Deutsche Bank AG - Email: WM.CIO-Office@db.com 5CIO Insights Special
04
Medical technology: digitalization meets demographics
Digitalization will
require a different
focus
Leveraging data for a more client- products & services to enjoy a competitive medical data and individual personal
centric approach edge, thereby increasingly emphasizing on data, leaving a broad front which is a
coordinated care. From our point of view potential target for cyber attacks. Hence
Going forward, industry research suggests the medical device industry has the unique cybersecurity which has been regarded
that the ability of processing, combining opportunity to capitalize on digitalization to as a clear and specifically “IT problem”
and sharing data for the purpose of get closer to customers (buyers of good or will emerge as another strategic area of
developing secure and reliable solutions service) as well as to consumers (users of focus. Cybersecurity has been named a
that provide cost-effective clinical goods and services). “shared responsibility” by regulators. In
advantages will be what determines the parallel, regulators have started to realease
success of companies operating in the Applications that run on smartphones guidance papers on how medtechs can
medical device industry. Companies will keep being used to track and observe deal with associated risks.
will have to build future value not solely the wellbeing of patients, but dedicated
through the manufacture and sale of medical devices are indispensable to Ultimately, the emphasis on the customer
products, but also via the data that improve our understanding of the human experience will be the core determinant
those devices gather. In this changing body and to provide treatment for a for the future success of medical device
environment value creation will be variety of ailments. Sensors in devices players. Therefore, it will be imperative that
closely linked to the clinical insights and and on or even within the human body new technologies are flexible enough to fit
trend analysis which devices generate have the potential to link data streams to naturally into patients’ lives, rather than to
(Figure 7), rather than driven mainly by sophisticated AI-based algorithms, which create an array of different solutions that
the medical device itself. Future value for have the power to transform existing solve specific problems – but do not work
all stakeholders is expected to come from practices and take society into a new era well together. In this regard, the internet of
innovations that leverage the power of of personalized healthcare. This trend will things (IoT) offers an enormous potential.
data to increase efficiency. Moreover, the certainly help to satisfy rising consumer IoT has numerous applications, ranging
concentration on individualized health expectations, particularly of those who from remote monitoring to smart sensors
outcomes data will push the industry from have experienced the reshaping of many and medical device integration. Connected
a product-centric to a more client-centric other areas of their lives via targeted data health solutions which integrate, collect,
orientation, where digital platforms allow utilization – as in retail consumption, for combine and deliver quality data for
for a seamless and cost-efficient delivery of instance. actionable insights can certainly help
healthcare to the broader population. to improve patient outcomes, reduce
However, the implied data democratization costs and widen access to quality care.
In this dynamic environment, we expect – which suggests that data should be Lastly, it is worth pointing out that the
companies which are able to adapt their accessible to everyone in a given system combination between drugs and devices
business models towards individualized – will further blur the line between pure will be increasingly important for medical
treatments of any type.
Figure 7: Fields where digitization of data will contribute to improved patient outcome Industry 4.0 – a term used to refer to
Source: Deloitte, Medtech and the Internet of Medical Things, amended by Deutsche Bank the next stages of data exchange and
Wealth Management. automation – will open up new possibilities
on the basis of new manufacturing
Decreased costs Improved diagnosis processes but also require new business
and broader access and treatment models. It carries the potential to ease
previous efficiency and economic
constraints if innovative firms can integrate
Enhanced
patient Improved patient Improved
disease
it to redefine the care environment.
experience
outcomes management In a nutshell, digitalization has a deep
impact on the entire value chain – ranging
from individual products to digitizing
Remote monitoring Improved workflows in companies and at the same
of chronic diseases drug management time connecting them with clients and
service providers.
In Europe, Middle East and Africa as well as in Asia Pacific this material is considered marketing material, but this is not the case in the U.S. No assurance can be given
that any forecast or target can be achieved. Forecasts are based on assumptions, estimates, opinions and hypothetical models which may prove to be incorrect. Past
performance is not indicative of future returns. Investments come with risk. The value of an investment can fall as well as rise and you might not get back the amount
originally invested at any point in time. Your capital may be at risk.
CIO Office, Deutsche Bank Wealth Management, Deutsche Bank AG - Email: WM.CIO-Office@db.com 6CIO Insights Special
Medical technology: digitalization meets demographics
Regulator actions acknowledge a product itself which still is the FDA’s digital health revolution seriously and
impact of digitization wave practice concerning traditional medical are acknowledging that their current
devices. Under the pre-certification processes do not stack up to the current
U.S. premarket approval trends reveal program, the manufacturers of software- pace of innovation in the market.
that medical device have yet to fully based medical devices will receive a Streamlined regulatory supervision
embrace new digital capabilities. Looking certification for demonstrating a healthy would allow smaller and more agile
at the premarket approval applications quality assurance system and appropriate companies to compete with bigger and
(PMAs) accepted by the U.S. Food & organizational structure. Manufacturers better-capitalized peers in order to deliver
Drug Administration (FDA) in 2017, that have been pre-certified will be solutions that have a significant impact
only the minority include any digital allowed to sell low-risk products without on patient care. It can take years to bring
health component. For this reason, in the need for a prior review by the FDA, new medical devices to marketability due
the same year the FDA has embarked all while still being classified as adhering to the regulatory requirements affecting
on a Software Pre-Certification Pilot to the safety and quality standards their manufacture, marketing, and sale.
Program for the purpose of simplifying required for traditional medical devices. The related costs could be transferred to
existing regulations, something that will Nine companies have been selected as the purchaser which would drive the costs
be necessary in order to allow further pilot participants for the initial model of these devices significantly. If medical
digitalization in healthcare. In this context of the program – including prominent software is subject to lighter regulation,
the FDA takes an ISO certification names in the technology space. The the speed of bringing new inventions to
stance. The new approach applies to the launch of the Pre-Cert pilot program market could be increased, benefiting
manufacturer of a software and not to underlines that regulators are taking the patients and reducing healthcare costs.
05
Change deferred?
Recent sector
trends
U.S. medical device revenue growth into new data and customer-centric
below pre-GFC average capabilities to build stronger ties with
consumers, thereby avoiding the risk of
Aggregate revenues and earnings of being ousted by technology companies
the S&P 500 Health Care Equipment & and other entrants. Technology and
Supplies Index (which is broadly used as a retail companies have the ability to
reference for the medical device sector in significantly disrupt the sector through
the U.S.) anticipated to hit new record highs acquisitions or partnerships as they
in 2018. At USD 306 per share, blended possess considerable firepower – by far
revenues increased by 6.9% YoY (Figure exceeding the means of entire U.S. and
8) – the 10th consecutive year of single- European medical device sector. Some
digit revenue growth which is rather lower have already entered the medtech or
than the ~13% average annual growth rate health space.
achieved over 2000-2007 before the start
of the global financial crisis (GFC). Despite the urgency of investing in new
capabilities the emphasis in terms of
Sector focuses buybacks and capital allocation within the medical
dividends not R&D device sector currently seems clearly to
be on returning cash to shareholders.
As we have noted, the medical device While the aggregated dividend payout
sector in our view needs to invest ratio of the S&P 500 Health Care
In Europe, Middle East and Africa as well as in Asia Pacific this material is considered marketing material, but this is not the case in the U.S. No assurance can be given
that any forecast or target can be achieved. Forecasts are based on assumptions, estimates, opinions and hypothetical models which may prove to be incorrect. Past
performance is not indicative of future returns. Investments come with risk. The value of an investment can fall as well as rise and you might not get back the amount
originally invested at any point in time. Your capital may be at risk.
CIO Office, Deutsche Bank Wealth Management, Deutsche Bank AG - Email: WM.CIO-Office@db.com 7CIO Insights Special
Medical technology: digitalization meets demographics
Equipment & Supplies Index reached activities. Hence, it appears that the
new record levels in 2017 and 2018, majority of the industry today focuses
remaining well-above its long-term on short-term growth by utilizing
median since 2012, investments into conventional measures as “tuck-in”
research and development (R&D) as acquisitions (acquisitions intended to be
proportion of revenues lingers slightly merged into a division of the purchasing
below the long-term rate. As a result, company) to create scale, at the expense
index constituents in recent years of R&D and longer term growth needs.
returned more to investors in buybacks This of course may create short-term
and dividends than they invested in R&D selective opportunities for investors
but the long-term growth outlook of
some firms could be at risk due to i)
Figure 8: S&P 500 Health Care Equipment & Supplies Index revenues & EPS (earnings underinvestment in digital capabilities, ii)
per share) competition from new entrants outside
Source: Bloomberg Finance LLP, Deutsche Bank Wealth Management. Data as of February 2019. the sector, and iii) the growing need to
350 35%
demonstrate better outcomes. Simply
focusing on the status quo could make it
300 30% difficult for some players to retain their
elevated valuations going forward.
250 25%
M&A is also subdued
200 20%
In terms of M&A deal volume, 2018 has
150 15% been weakest year in the medtech sphere
since 2013. On top of that the fewest
100 10%
deals have been closed than at any point
since 2009, in the wake of the global
50 5%
financial crisis. Aggregated medtech-
0 0%
related deal volume reached USD 27.4bn,
‘00 ‘02 ‘04 ‘06 ‘08 ‘10 ‘12 ‘14 ‘16 ‘18 a sharp decline from previous year’s figure
of almost USD 100bn (Figure 10). The fact
S&P 500 Health Care S&P 500 Health Care S&P 500 Health Care that four of the top ten transactions were
Equipment & Supplies Equipment & Supplies Equipment & Supplies private equity buys additionally underlines
Index EPS per share in Index revenues per share Index revenue per share an apparent lack of interest in large and
USD (RHS) in USD (LHS) growth (RHS) transformative deals.
However, M&A remains a core tool for
Figure 9: S&P 500 Health Care R&D vs. dividends as % of revenues the sector to accelerate growth and to
Source: Bloomberg Finance LLP, Deutsche Bank Wealth Management. Data as of February 2019. create shareholder value. While small and
70% 12%
midsize players usually try to compete with
industry leaders by consolidating, the big
60% players continue to reach new markets
10%
through smaller, niche acquisitions. In
50% recent years, megamergers have created
8% giant corporations that are seeking
40% early stage acquisitions. The aim is to
6% gain access to companies that provide
30% new, cost-effective solutions that tackle
4% a meaningful unmet medical need. If
20%
risks (in terms of intellectual property,
2%
regulatory approach and patient adoption)
10%
to groundbreaking innovations by smaller
players have been widely eliminated, larger
0% 0%
‘00 ‘02 ‘04 ‘06 ‘08 ‘10 ‘12 ‘14 ‘16 ‘18 companies are usually willing to acquire
them at a notable premium. They possess
S&P 500 Health Care Equipment & Supplies Long-term median R&D expenditures as large amounts of cash which in the current
Index R&D as % of revenues (RHS) percentage of revenues (RHS) low-interest environment is predominantly
S&P 500 Health Care Equipment & Supplies Long-term median payout ratio (LHS) regarded as a nonperforming asset.
Index dividend payout ratio in % (LHS) Thus, investing into durable growth
In Europe, Middle East and Africa as well as in Asia Pacific this material is considered marketing material, but this is not the case in the U.S. No assurance can be given
that any forecast or target can be achieved. Forecasts are based on assumptions, estimates, opinions and hypothetical models which may prove to be incorrect. Past
performance is not indicative of future returns. Investments come with risk. The value of an investment can fall as well as rise and you might not get back the amount
originally invested at any point in time. Your capital may be at risk.
CIO Office, Deutsche Bank Wealth Management, Deutsche Bank AG - Email: WM.CIO-Office@db.com 8CIO Insights Special
Medical technology: digitalization meets demographics
assets is critically important to the future new technologies and solutions and Strong venture capital interest
performance of sector’s big names. As organize business accordingly. M&A in supports sector’s long-term
a consequence the average premiums the context of a shifting the business perspective
have increased since the beginning of mix towards new offerings beyond
the decade, whereas the number of deals traditional devices will require some Although slightly down on 2017,
worth between USD 100m-1bn bracket rethinking of business development venture capital (VC) investment
has remained remarkably steady in the capabilities as well as ensuring whether volumes into U.S. medical device
same time period (Figure 11). necessary skills and tools to source, and supplies companies remained
evaluate, and integrate deals of all strong in 2018. Big venture rounds
Going forward the industry will have to shapes and sizes are available. of non-imaging diagnostics and
work out how to select and implement digital health companies underscore
the immense opportunities linked
to data and an improved consumer
experience as well as the growing
Figure 10: M&A volume in the medtech industry in billion USD importance of these areas for the
Source: Evaluate MedTech, Deutsche Bank Wealth Management. Data as of February 2019 future development of the sector.
Three of the top five largest venture
140 300
financings in 2017-2018 referred
to consumer diagnostics and digital
120
250 health companies which we believe
is a positive sign for the long-term
100 health of the sector. Going forward
200
venture investment from China
80 promises to be a key factor for the
150 sector with Chinese capital invested
60 in international and in domestic
companies which are seeking to
100
40 globally scale their innovations.
50
20
Figure 12: VC investment volume
into U.S. medical device & supplies
0 0
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 companies in billion USD
Source: NVCA Venture Monitor, Deutsche
Aggregate deal volume in billion USD (LHS) Number of deals (RHS) Bank Wealth Management. Data as of
February 2019.
6
Figure 11: Number of medtech M&A deals by size bracket (only includes deals with
known value)
Source: Evaluate MedTech, Deutsche Bank Wealth Management. Data as of February 2019.
5
100
80 4
60
3
40
2
20
1
0
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
0
Volume USD 0-100m Volume USD 100-1bn Volume USD 1bn+ ‘09 ‘10 ‘11 ‘12 ‘13 ‘14 ‘15 ‘16 ‘17 ‘18
In Europe, Middle East and Africa as well as in Asia Pacific this material is considered marketing material, but this is
not the case in the U.S. No assurance can be given that any forecast or target can be achieved. Forecasts are based
on assumptions, estimates, opinions and hypothetical models which may prove to be incorrect. Past performance
is not indicative of future returns. Investments come with risk. The value of an investment can fall as well as rise
and you might not get back the amount originally invested at any point in time. Your capital may be at risk.
CIO Office, Deutsche Bank Wealth Management, Deutsche Bank AG - Email: WM.CIO-Office@db.com 9CIO Insights Special
06
Medical technology: digitalization meets demographics
Investment
outlook: risks and
opportunities
Stable earnings expectations may be the 20 year historical average and is
supported by health care spending near the highest premium over that
trends time period: markets will need to remain
convinced that market trends justify it.
Longer term, given the factors
mentioned above, fundamentals remain It should also be noted that Health
supportive of the medical device Care Equipment and Supplies is a high
sector. First, the aging demographic Beta play (solely the S&P 500 sector
population and increased health care “InfoTech” has a higher beta). In other
spending should continue to support words, it is a sector that is generally
innovation and be a key driver for the expected to move, up or down, by more
space. This should provide increased than the overall market. At the time of
exposure for the sector and drive both writing, the equity market (as measured
earnings and revenues going forward. by the S&P 500) is up strongly from its
In the near term, while 2019 S&P 500 December 2018 low. But, given that a
earnings expectations have fallen ~5% number of outstanding risks (i.e. slowing
over since end-June 2018, Health Care global economic momentum, China
Equipment and Supplies have had more trade conflict) remain, a consolidation or
stable earnings expectations and have stall in the equity market rally in the near
fallen only 1% over that time period. In term may occur given the sharp recent
addition, quarterly consensus earnings upward move in equities.
for the Health Care Equipment and
Supplies space are expected to outpace Stagnating Sino-U.S. trade talks may
the broad S&P 500 in all four quarters be a headwind for industries that have
in 2019. Widening out the time horizon, significant revenue exposure to China.
Health Care Equipment and Supplies While 53% of revenues for the Health
earnings are expected to outpace the Care Equipment and Supplies industry
S&P 500 on an annual basis in both emanate domestically in the U.S., China
2019 (+8.2% YoY expected) and 2020 is the second largest geographical
(+11.4% YoY). exposure at over 6%.
Market trends to watch Overall, however, we think that the
future development of medtech and thus
Despite this generally supportive the medical devices sector – driven by
backdrop, we think that there are several the twin pressures of digitalization and
market trends to watch over the short demographics – will create significant
and medium term. First, the strong opportunities for investors, particularly
outperformance of the sector over the via an active management approach.
last two years (beating the S&P 500
by 2585 bps over that period) has left
valuations at high levels. The NTM PE
for S&P 500 Health Care Equipment
and Supplies is currently well above its
20 year historical average and near its
highest level in 15 years. The Health
Care Equipment and Supplies index is
trading at over a 45% premium to the
S&P 500. This premium is well above
In Europe, Middle East and Africa as well as in Asia Pacific this material is considered marketing material, but this is not the case in the U.S. No assurance can be given
that any forecast or target can be achieved. Forecasts are based on assumptions, estimates, opinions and hypothetical models which may prove to be incorrect. Past
performance is not indicative of future returns. Investments come with risk. The value of an investment can fall as well as rise and you might not get back the amount
originally invested at any point in time. Your capital may be at risk.
CIO Office, Deutsche Bank Wealth Management, Deutsche Bank AG - Email: WM.CIO-Office@db.com 10CIO Insights Special Medical technology: digitalization meets demographics Glossary Deloitte is a professional services company and one of the “Big Four” auditors. Earnings per share (EPS) are calculated as a companies’ net income minus dividends of preferred stock all divided by the total number of shares outstanding. The Food and Drug Administration (FDA) is a federal agency of the United States Department of Health and Human Services responsible for protecting and promoting public health. The Global Financial Crisis refers to the crisis of 2007-2008. Gross domestic product (GDP) is the monetary value of all the finished goods and services produced within a country’s borders in a specific time period. Industry 4.0 is a name given to the combination of manufacturing automation and data exchange seen as fostering a fourth industrial revolution. The Internet of Things (IOT) is comprised of computers and other devices with embedded electronics that allow them to collect and share data. KPMG is a professional service company and one of the “Big Four” auditors. Mergers and acquisitions (M&A) are two key methods of corporate consolidation: A merger is a combination of two companies to form a new company, while an acquisition is the purchase of one company by another in which no new company is formed. The Organisation for Economic Co-operation and Development (OECD) has 35 member countries and has the objective of encouraging economic progress and world trade. The S&P 500 Index includes 500 leading U.S. companies capturing approximately 80% coverage of available U.S. market capitalization. The S&P 500 Health Care Equipment & Supplies Index includes medical device and equipment stocks in the S&P 500 Index. These companies are all part of the broader S&P 500 Healthcare Sector. Venture capital (VC) is a type of private equity financing, typically to small, early-stage, emerging firms. In Europe, Middle East and Africa as well as in Asia Pacific this material is considered marketing material, but this is not the case in the U.S. No assurance can be given that any forecast or target can be achieved. Forecasts are based on assumptions, estimates, opinions and hypothetical models which may prove to be incorrect. Past performance is not indicative of future returns. Investments come with risk. The value of an investment can fall as well as rise and you might not get back the amount originally invested at any point in time. Your capital may be at risk. CIO Office, Deutsche Bank Wealth Management, Deutsche Bank AG - Email: WM.CIO-Office@db.com 11
CIO Insights Special
Medical technology: digitalization meets demographics
Contacts CIO Wealth Management
Christian Nolting1 Regional CIOs International locations
Global Chief Investment Officer (CIO) Deepak Puri3 1. Deutsche Bank AG
Global Head Wealth Discretionary Interim CIO Americas Mainzer Landstrasse 11-17
60329 Frankfurt am Main
Tuan Huynh5 Germany
CIO Emerging Markets
2. Deutsche Bank AG, London
Strategy Group Zig Zag Building
Gerit Heinz1 70 Victoria Street
Chief Strategist Germany London SW1E 6SQ
Chief Investment Office UK
Dr. Helmut Kaiser1 Markus Müller1
Chief Strategist Germany Global Head CIO Office 3. Deutsche Bank Trust Company
Ivo Visic 345 Park Avenue
Daniel Kunz7 10154-0004 New York, NY
Senior Strategist Europe Graham Richardson2 United States
Financial Writer, CIO Office
Matt Barry4 4. Deutsche Bank Securities
Strategist Americas Sebastian Janker3 1 South Street
Head CIO Office Americas 21202-3298 Baltimore, MD
Khoi Dang9 United States
Jason Liu6 5. Deutsche Bank AG, Singapore
Head CIO Office Emerging Markets One Raffles Quay, South Tower
048583 Singapore
Jürg Schmid7
Head CIO Office Europe 6. Deutsche Bank AG, Hong Kong
1 Austin Road West
Eirini Pournaras Hong Kong
Regional Heads Wealth Discretionary Enrico Börger Hong Kong
Deepak Puri3 Joshua Lister
Head WD Americas 7. Deutsche Bank (Switzerland) Ltd.
Alisa Spital1 Hardstrasse 201
Tuan Huynh5 Team Head Germany 8005 Zurich
Head WD Emerging Markets Switzerland
Gundula Helsper
Marcel Hoffmann1 Konrad Aigner 8. Deutsche Bank (Switzerland) Ltd.
Head WD Germany Thomas Teufel Place des Bergues 3
Ursula Morbach 1211 Geneva 1
Switzerland
9. Deutsche Bank Trust Company
National Association
5022 Gate Parkway,
Suite 400, 32256 Jacksonville, FL
Contact us on WM.CIO-Office@db.com United States
In Europe, Middle East and Africa as well as in Asia Pacific this material is considered marketing material, but this is not the case in the U.S. No assurance can be given
that any forecast or target can be achieved. Forecasts are based on assumptions, estimates, opinions and hypothetical models which may prove to be incorrect. Past
performance is not indicative of future returns. Investments come with risk. The value of an investment can fall as well as rise and you might not get back the amount
originally invested at any point in time. Your capital may be at risk.
CIO Office, Deutsche Bank Wealth Management, Deutsche Bank AG - Email: WM.CIO-Office@db.com 12CIO Insights Special Medical technology: digitalization meets demographics Important Note General This document may not be distributed in Canada or Japan. This document is intended for retail or professional clients only. This document is being circulated in good faith by Deutsche Bank AG, its branches (as permitted in any relevant jurisdiction), affiliated companies and its officers and employees (collectively, “Deutsche Bank”). This material is for your information only and is not intended as an offer, or recommendation or solicitation of an offer to buy or sell any investment, security, financial instrument or other specific product, to conclude a transaction, or to provide any investment service or investment advice, or to provide any research, investment research or investment recommendation, in any jurisdiction. 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In Europe, Middle East and Africa as well as in Asia Pacific this material is considered marketing material, but this is not the case in the U.S. No assurance can be given that any forecast or target can be achieved. Forecasts are based on assumptions, estimates, opinions and hypothetical models which may prove to be incorrect. Past performance is not indicative of future returns. Investments come with risk. The value of an investment can fall as well as rise and you might not get back the amount originally invested at any point in time. Your capital may be at risk. CIO Office, Deutsche Bank Wealth Management, Deutsche Bank AG - Email: WM.CIO-Office@db.com 15
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