When the human body is the biggest data platform, how will medtech companies capture value? - Pulse of the industry 2018 ey.com/lifesciences
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When the human body is the biggest data platform, how will medtech companies capture value? Pulse of the industry 2018 ey.com/lifesciences
Pulse of the industry 2018
When the human body is the
biggest data platform, how
will medtechs capture value? Pamela Spence
That is a key question that medtech companies must address as they strive to EY Global Life Sciences
Industry Leader
deliver better, more engaging health care to consumers. In particular, as data and pspence2@uk.ey.com
analytics become central to the value proposition, EY believes medical device
companies must adapt their business models to create systems that move beyond
product-centric definitions of innovation to data-centric definitions.
Historically, the medical device industry has threaten their leading positions. However, to
created tremendous value via the creation create future value, medtechs cannot ignore
of therapeutic devices. It is now time for the deals to acquire new digital capabilities.
industry to invest more effort in analytics- Unfortunately, there is little evidence that
based solutions that enable seamless, real- those deals are happening at the scale
time care management. We now have the or speed required for transformation.
technologies to deliver high-quality care when
and where the consumer wants it, not just As we discuss in this year’s report, there are
James Welch
in a traditional office or hospital setting. clear signs of the digital transformation already
Life Sciences Leader,
underway. Artificial intelligence is already
US Central Region
Such rising consumer expectations build more sweeping through the imaging sector and
james.welch@ey.com
urgency for change in the medical device shaping a new generation of smart, robotic
industry. The companies that survive and grow surgical devices, for instance. The 2018
in this dynamic environment will be those that regulatory approval of a fully automated
create personalized products and services that algorithm to diagnose diabetic retinopathy
use data to inform and deliver better outcomes, without physician assistance shows the
with a growing emphasis on coordinated care. rapid evolution of digital diagnostics.
While some medtechs are investing for this For the moment, investor confidence
data-driven future, analysis presented in in medtech is high, driven by a buoyant
the EY 12th annual Pulse of the industry financing climate, including a growing
report suggests most medtechs remain base of private investment capital in
overly focused on investors’ near-term Asia. We believe medtechs have a unique
growth expectations to the detriment of their opportunity to capitalize on the current John Babitt
longer-term ambitions. In 2017-18, medtech digital transformation to get even closer to Life Sciences Transaction
companies continued to use dealmaking to their customers, particularly consumers. Advisory Services Partner, US
create scale in must-win therapy areas, a Sensors in devices and on — or within — the Ernst & Young LLP
necessary first step when reimbursement human body have the power to link data john.babitt@ey.com
remains challenging and new entrants collection to powerful algorithms, which will
transform existing practices and take us
into a new paradigm of individualized care.
Sensors in devices and Harnessing the power of data, the industry
on — or within — the human will reshape itself around the empowered
patient-consumer, rather than forcing the
body have the power to link patient to fit into today’s current industry
data collection to powerful infrastructure. But if medtech companies
continue to underinvest in digital capabilities,
algorithms, which will they could become less important as the
transform existing health ecosystem continues to evolve. Lucien De Busscher
Life Sciences
practices and take us As medtech companies develop new Advisory Partner
into a new paradigm of technologies and new business models,
the global EY organization continues
Ernst & Young Special
Business Services CVBA
individualized care. to track the pulse of the industry. lucien.de.busscher@be.ey.com
CONTENTS
06 | Chapter 01
A new wave of digitization
will reshape the medtech
industry
12 | Chapter 02
Is medtech investing
enough to meet the
future challenge from
the tech sector?
20 | Chapter 03
Advances in imaging and
non-imaging diagnostics
show how the medtech
industry could evolve
24 | Chapter 04
Future success requires
greater participation in
the health ecosystem
28 | Guest perspectives
38 | Databook
57 | Scope of this report
58 | Contacts
60 | Acknowledgments
Connect with us!
@EY_LifeSciences
ey.com/lifesciences
4 Pulse of the industry 2018
Key findings
What the Fourth Industrial Revolution means for the medtech industry
The Fourth Industrial Revolution will permanently change how medical device companies do
business. This is the message that clearly emerges from EY analysis of the industry’s 2018
key performance metrics and discussions with leading medtech executives and thought leaders.
• Data and algorithms are tomorrow’s value- • Advances
► in imaging, diagnostics and diabetes point
creating products: Data will be the engine of the way forward: Medtech companies in the imaging
future medtech growth, and thus, value creation. and diabetes space are investing in new innovations
The growing importance of data and algorithms such as artificial intelligence and consumer-centric
will accelerate a power shift already underway platforms that use data to provide more personalized
in the industry that gives technology and digital health care. In the meantime, investments in
health entrants the advantage. diagnostics, especially the consumer genomics space,
show the growing importance of personalization for
• Medtech leaders are overly focused on the short medtech companies.
term: At present, medtech capital allocation is too
focused on short-term growth. There is too much • Investor confidence in medtech means high levels
emphasis on returning cash to shareholders and not of innovation capital: Investment continues to flow
enough effort devoted to new kinds of innovations that into medtech, with venture and IPO funding buoyant
aren’t product-centric. in 2017-18. Venture investment from China promises
to be a key factor in the industry’s future, with
• Portfolio optimization remains the core driver Chinese capital invested in international medtech
of M&A: Medtech leaders continue to refine their firms and domestic companies seeking to globalize
portfolios, using M&A and divestitures to create scale their innovations.
in must-win therapeutic areas. Given reimbursement
challenges and threats from new entrants this is a • Rethinking the business model is an imperative:
necessary first step to creating agile businesses that To deliver on investor expectations and create value in
can compete over the next 5-10 years. Focusing on this transformative age, medtechs must rethink their
fewer therapeutic areas allows companies to achieve business models, building agile end-to-end services
synergies and deepen customer engagement in these that put their customers at the center. It is not enough
spaces. However, to create future value, medtechs to develop services that are product add-ons. Provider
also need to invest in digital capabilities, and there is and payer customers want new approaches that
little evidence suggesting those deals are currently optimize both the efficiency and outcomes of care;
happening at scale. consumers want individualized solutions personalized
for their specific health needs.
Pulse of the industry 2018 5
1
A new wave of digitization will
reshape the medtech industry
Increasingly, medtech’s future growth will be driven by the ability to connect, combine and share data
quickly and at scale to create secure solutions that deliver clinical and economic benefits. Indeed, to create a
sustainable path for future growth, medtechs must look to capture value not only through the manufacture
and sale of products, but also via the data those devices generate. As Donald Jones, Chief Digital Officer of the
Scripps Translational Science Institute, says, “In this environment, the value is in the clinical insights and trend
analysis that the devices spit out, rather than in the med device itself.“
Increasingly, customers of the medical As peer-to-peer sharing and mobile have Indeed, consumers are already using
device industry — especially payers, transformed the banking, mobility and data to demand greater voice in how
providers and consumers — are defining retail industries, the growing importance their care is delivered, putting pressure
that value in new ways. As presented of data and algorithms will force medtech on providers and payers to adapt with
in Figure 1, future value (FV) for all companies to adapt their traditional data-centric solutions of their own that
stakeholders will come from innovations (I) offerings to create personalized products provide more personalized coaching. In
that unlock the power of data (D) to deliver and services that are person-centric. (See addition, these providers and payers are
personalized health outcomes. Figure 2 and box, “Important definitions.”) also using data to increase the efficiency
and standardization of care delivery,
Ultimately, this emphasis on health As health care budgets tighten across important actions to improve outcomes
outcomes data will lead the industry from all markets, the increased availability and lower health care costs. As these two
a product-centric to a patient-centric and importance of health data skews groups become more sophisticated in
orientation, where digital platforms allow the traditional balance of power within their management and use of data, they
seamless delivery of care. It will also align health care away from traditional medtech will broaden their focus from the sickest
with the rising expectations of medtech’s companies and toward medtech’s core and most costly patients to the general
customers, particularly consumers customers and new entrants. population, enabling improved outcomes
who have experienced the wholesale at scale. (For more see the Progressions
restructuring of other areas of their lives Traditional utilization-based payment 2018 report, “Life Sciences 4.0: Securing
as a result of the democratization of data. models will not survive this power shift. value through data-driven platforms.”)
6 Pulse of the industry 2018
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New thinking for a new age
Important definitions
Figure 1. A new equation for delivering value
• The Fourth Industrial Revolution:
A fusion of the physical, digital and
biological worlds that redefines
innovation and blurs the traditional
lines between industries. This
Data advancement is driven by the ability to
combine a range of new technologies
Future Innovation (Connect + Combine + Share) and the safe and rapid generation and
value Outcomes x Personalization dissemination of data.
• Health ecosystem: A number of
different stakeholders provide goods
or services to consumers in today’s
For people Participatory Data streams Traditional and Platforms networked health environment.
For physicians Precise non-traditional of care
These stakeholders include primary
For payers Predictive partners
For policymakers Proactive and specialty care physicians, public
and private payers, and a range of
technology, retail, telecom, mobility
and life sciences companies.
Figure 2. Changing customer expectations combine with
technological advances to create the the future medtech market • Platform: A mechanism to connect
different stakeholders in order to
combine and share data easily and
What’s now What’s next
securely to deliver a shared goal:
improved health outcomes.
• Power shift: Tightening health care
Payers, consumers and new Super consumers demand
entrants have the power convenient, seamless care budgets, technological disruption
and democratized data change the
traditional power balance in health
care. Life sciences companies may
Connected devices allow New technologies allow “pre-disease” cede power to more informed and
continuous disease management identification and treatment connected payers, providers and
consumers — and potentially to new
entrants who can better meet the
needs of these stakeholders.
Medical devices are the Data and algorithms are the
highest value products highest value product • Super consumer: The empowered
consumer is at the center of the way
companies increasingly do business in
networked, platform-driven markets.
Value is captured by Value is captured by sharing the Able to access goods and services with
owning all the data data with ecosystem stakeholders
minimal frictions, the super consumer
represents a potential disruptive force
in health care markets.
Health ecosystem is static Health ecosystem is a
and well-defined dynamic network
Pulse of the industry 2018 7
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As patients increasingly embrace the increasing evidence to prioritize funding Entrants from the tech sector are already
opportunity to take a proactive role in for tools and technologies that enable eyeing the health space as a fertile area
their own health care, wearables, sensors earlier intervention and prevention. for new growth. In the consumer and
and new digital interfaces will become search spaces, technology companies
critical tools for personal health care As payers, providers and consumers have honed their customer engagement
management. Providers will use these embrace the data and tools to make and advanced data and analytics
data, with workflow-friendly analytics personalized health management a reality, skills, including the ability to acquire
layered on top, to maximize clinical new entrants will gain the opportunity to and securely maintain information, to
insights and deliver optimal and efficient deliver the solutions all parties are seeking. create more satisfying and personalized
care. Payers, meantime, will have greater In particular, technology companies with customer experiences. They can do the
transparency on the benefits achieved expertise in digital platforms and customer same in health care.
for the health care dollars spent. This outreach will be well-placed to capitalize on
information will provide payers with the industry’s shifting balance of power.
Data will drive a health care power shift
Figure 3. Stakeholders empowered by data
As stakeholders acquire, share and utilize data, new ways of delivering personalized health
care emerge, shifting the power away from traditional medtechs.
Patients/consumers Power shift in action
• Nearly 60% of adults consult
Data flow: Acquire Share Share internet first to research health
e
ne fin ne
a
ta at conditions
g
da
d
lized coachin
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rich and ref
i
rich and ref
i
d real world
Shared
ellness
Informed Personalized • 56% of US adults have used some
rich and
decisions
patient health care form of digital technology to
Business model by informed
researches tailors care in interact with care team1
patient and
nd w
care options real time
En
care team • 92% of US individuals want the
En
En
an
na
a
ability to use wearable/sensor
se
ea ic r
so
al
Dis Clin Pe
Learn Learn data to personalize interventions2
Health providers Power shift in action
• Improved AI reduces duplicative
Data flow: Acquire Share Share documentation, creating time for
ne lo
w
fi ne nt ne patient care
kf
e
re
rich and ref
rich and ref
i
i
n managem
clinical wor
• Combining big data with clinical
here care
rich and
Data Data Personalized
optimization consolidation health care evidence to manage patient health
Business model to enhance to standardize tailors care in is top 2018 physician priority3
efficiency care delivery real time
En
• Global virtual care industry will
yw
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An
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grow from US$18.1b in 2015 to
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Imp Learn Po Learn US$41.2b in 20214
1
EY Future of Health Survey, Spring 2018. 2 Tung, J. Y et al. 2018. Accelerating precision health by applying the lessons learned from direct-to-
consumer genomics to digital health technologies. NAM Perspectives. Discussion Paper, National Academy of Medicine, Washington, DC.
3
2018 HealthCare Executive Group (HCEG) Top 10 List of critical opportunities 4 Statista. Global telemedicine market size (2015-2021)
8 Pulse of the industry 2018
Pulse
PULSE 2018
of the industry
1
There are clear signs that leading tech Other technology companies are also even medtech’s leaders can’t match.
companies are moving beyond fitness and developing data-rich platforms that (See Figure 4.) This will be a major
wellness tracking to care management make it easy to share data proactively advantage as companies seek to assemble
using easy-to-use, consumer-facing with consumers and providers to avoid the breadth of talent, technology and
devices. In September 2018, for instance, adverse health events and optimize care expertise needed to take the next steps
Apple announced its newest watch management at the individual level. (See towards personalized health care.
incorporates an electrical heart rate Figure 3.)
sensor that can take an electrocardiogram
(ECG) using an app that has been granted The challenge from tech companies is
1 Press release. “Apple Watch Series 4:
a De Novo classification by the U.S. Food likely to be all the greater given their
Beautifully redesigned with breakthrough
& Drug Administration.1 serious financial firepower. Tech’s biggest communication, fitness and health capabili-
players wield M&A firepower on a level ties,” Apple, September 12, 2018.
Health payers Power shift in action
• Recent deals: CVS/Aetna, Optum/
Data flow: Acquire Share Share DaVita, Humana/Kindred Healthcare
e
ne fin ne
nt
• 90% of payers surveyed by the
e
re
on managem
re
n
rich and ref
i
rich and ref
i
Vertical
r cost of ca
oordinatio
Data Personalized Society of Actuaries say they will
rich and
integration
consolidation health care adopt predictive big data analytics
Business model of care
to standardize tailors care in tools in next five years5
delivery and
care delivery real time
En
insurance
ec
• Insurers invest in mobile tools to
En
En
we
ati
ar
C help consumers manage disease
Lo
p
ul
Po
Learn Learn and wellness
New entrants Power shift in action
• Smart phones track sleep, fitness
Data flow: Acquire Share Share
ne • Apple/Stanford launch heart
ne fi ne
w
lo nt
study; Amazon pilots diabetes
f
e
k
re
rich and ref
rich and ref
i
i
n managem
clinical wor
management as Alexa skill
here care
rich and
Personalized
Wellness Care
health care • Amazon/JPM/Berkshire Hathaway
Business model tracking via management
tailors care in
mobile via IoT devices partnership
real time
En
yw
En
En
•
tio
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An
pu
la
ov
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Imp Learn Po Learn
5
Survey by Society of Actuaries. 2017 Predictive analytics in HC Trend Forecast.
Pulse of the industry 2018 9
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Data will replace devices as Figure 4. New tech and consumer entrants have dealmaking
medtech’s key value driver firepower that medtech can’t match
In today’s rapidly changing environment, Medtech: pure-play Medtech: conglomerates Disruptors
medtech companies have no choice but
to use data to deliver improved outcomes 2,000
and a better customer experience to
consumers, providers and payers.
1,600
Multiple medical device manufacturers are
already incorporating digital capabilities
Firepower (US$b)
into their products. For instance, many 1,200
medical devices are connected to the
Internet of Things (IoT), potentially
allowing continuous disease monitoring 800
and management. Unfortunately, these
efforts tend to be wrap-around services
400
that don’t necessarily position new
connected technologies and the data they
generate at the heart of the medtech
0
company’s strategic business goals. And, 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 H1 2018
because investments are made in isolation
from each other rather than across a The disruptors include Alphabet, Amazon, Apple, CVS Health, Intel, IBM, Microsoft,
Samsung, Verizon and Walgreens Boots Alliance. Sources: EY and Capital IQ.
business portfolio, medtechs are at risk
of underinvesting in the technologies that
Instead, medtechs understand how entrants will have to adapt to the stricter
could drive future top-line growth.
to operate in complicated, regulated regulatory environment in health care to
Near-term digital opportunities worthy of markets and develop sophisticated clinical succeed. As Anand Iyer, Chief Strategy
greater medtech investment include: evidence to support regulatory approval. Officer of the digital health company
Welldoc observes, “Digital health solutions
• Collecting
► and managing growing If medtech companies can not — or need to meet the same standards as
volumes of patient data in the cloud: choose not to — accelerate their digital traditional drugs and medical devices.”
patient data remains a largely untapped agendas, it is likely that new market But if technology companies can meet
source of value and one of the biggest entrants will benefit from, and capitalize this benchmark, they have every chance
near-term opportunities for the industry on, the data-driven transformations of the of challenging the market position of
if they can create secure systems to Fourth Industrial Revolution. These new medtech incumbents.
manage and use it.
• Building
► analytics into care Questions for medtech companies to consider
management algorithms using AI.
• How will medtechs leverage data to improve outcomes for all stakeholders
• Recognizing
► that the clinical insights in the health ecosystem?
captured in connected devices will • How are medtechs moving from selling devices and tests to monetizing
increasingly be the real source of data and algorithms?
value — rather than the device itself.
• Are medtech C-suites and boards strategically thinking about and
Historically, these skills have not been planning for digital change, or simply reacting?
medtech companies’ core capabilities.
10 Pulse of the industry 2018Pulse
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“In this environment,
the value is in the
clinical insights and
trend analysis that
the devices spit out,
rather than in the
med device itself.“
Donald Jones
Chief Digital Officer
Scripps Translational Science Institute
Pulse of the industry 2018 112
Is medtech investing enough to meet the
future challenge from the tech sector?
Based on a number of annual metrics that EY tracks, there are signs that the industry, in aggregate, is
overinvesting in short-term business activities to the potential detriment of its long-term growth. Over-
emphasis on returning cash to shareholders at the expense of R&D spending leaves the industry with a looming
“innovation gap.” While medtech companies continue to develop new generations of products, these are,
increasingly, niche additions that do not offer sufficient or lasting new market opportunities for companies to
sustain their historic growth rates.
This is particularly true for companies top-line growth and capital allocation At first glance, the medtech industry
developing therapeutic devices, which practices raises important questions appeared to deliver a healthy performance
generate the majority of the industry’s about the long-term sustainability of the in 2017 and the first half of 2018. A closer
total revenue. Although the industry’s industry given the technological changes analysis of indicators such as revenue
2017 aggregate revenues hit a new high of the Fourth Industrial Revolution. (See growth and R&D spending, however,
of US$379.1b and medtech valuations “The Pulse of the industry data book,” raises questions about opportunities for
outperformed the industry’s broader page 38.) future growth.
indices, a deeper analysis of medtech’s
For instance, the industry’s 2017 4.0%
New products aren’t enough growth rate suggests that it has reached a
Medtech companies that for medtech companies to new equilibrium of solid, if unspectacular
fail to adopt data-driven return to growth single-digit growth. However, this rate
compares poorly with the 14.9% average
strategies may find it Medtech companies that fail to adopt annual revenue growth rate achieved in
increasingly difficult to data-driven strategies will find it the 2000–07 era. (See Figure 5.)
mount the kind of returns increasingly difficult to post the returns
necessary to remain top performers. In part, this decline reflects rising payer
necessary to remain top An analysis of a number of key metrics skepticism. As a senior medtech executive
performers. suggests this hypothesis. told EY, “Investors talk about the four
12 Pulse of the industry 2018Pulse
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Figure 5. Industry growth pre- and post-2007
Revenue R&D
30% 24%
Pre-financial crisis Post-financial crisis
25% 20%
Annual revenue growth (percentage)
R&D growth rate (percentage)
20% 16%
15% 12%
10% 8%
5% 4%
0% 0%
–5% –4%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Source: EY, Capital IQ and company financial statement data.
Ps: patient, physician, provider [i.e., Van Sickle and other health care leaders of capital allocation trends suggest
hospital system] and payer. When we believe digital therapeutics that capture medtechs are caught squarely in the
started out, we didn’t worry about the last data about the way patients use their conundrum of balancing short-term
one. That was the least of our problems. products, as well as real-world outcomes, investor expectations with longer-term
Now it’s number one.” are critical as value-based reimbursement growth needs.
becomes more important in health
Payers’ demands to demonstrate the value markets around the globe. “The more
of new, expensive devices or tests are not that this information gets wired into
Growth in R&D spending
receding. Hit hard by budgetary pressures billing and health care delivery systems, continues to decline, raising
linked to aging populations and the rising the more the model will evolve from unit questions about future
incidence of chronic diseases, payers sales to companies providing therapeutics
must make hard decisions about what
medtech innovation
as a service to the organizations,” says
to cover — and what to deny. As a result, Van Sickle. In an industry built on constant
they have developed more sophisticated innovation, R&D spending is a key
mechanisms to determine whether new However, most leading medtechs struggle parameter defining future growth.
innovations merit reimbursement. As to transition from selling products to Alongside M&A, organic investment
David Van Sickle, Co-founder and CEO selling outcomes. Part of the issue is critical to creating the next wave of
of the digital health company Propeller is the needed capital investments innovations that will return revenue
Health, observes in an accompanying to properly capture and proactively growth to double-digit levels. Importantly,
guest perspective, “Payers don’t want use such outcomes data come at the as digital technologies are embedded in a
to buy medicines; they want to buy the cost of satisfying short-term investor wider array of products, medtechs must
outcomes the medicines bring about.” expectations. Indeed, an analysis develop capabilities that enable them to
Pulse of the industry 2018 13Pulse
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keep pace as product cycles compress Figure 6. US and Europe medtech commercial leaders spending trend, 2009–17
and connected devices and analytics
grow in importance. M&A expenses R&D expenses Cash returned to shareholders
Cash returned to shareholders as a percentage of total R&D and M&A spending
Yet, despite the urgency to invest in
new capabilities, medtech companies 100 75%
in aggregate are under-investing in
R&D. Year-over-year investment in
Percentage of total R&D and M&A spend
R&D held steady in 2017, but — as with 80 60%
revenue growth — the longer view shown
in Figure 5 reveals that the rate of
R&D investment growth has dwindled 60 45%
in recent years, declining to 4.7% in
US$b
2013–17 from an average of 15.5% in
2000–07. 40 30%
Meantime, capital allocation strategies
align closely to historical trends,
20 15%
with an emphasis on returning cash
to shareholders. In 2017, medtech
companies rewarded their shareholders
0 0%
with share buybacks and dividends 2009 2010 2011 2012 2013 2014 2015 2016 2017
worth US$16.4b, more than the total
Sources: EY, Capital IQ and company financial statement data.
amount invested in R&D activities
during the same 12-month period. The
question is, where will future growth Figure 7. FDA premarket approvals (PMAs) and 510(k) clearances, 2013–18
come from if companies don’t invest
Number of 510(k) clearances Number of PMA approvals
more aggressively in new innovations?
(See Figure 6.) 3,500 50
Recent numbers for FDA premarket
approvals (PMAs) and 510(K) clearances
are another sign that it is time to 2,800 40
rebalance R&D investment and cash
Number of 510(k) approvals
Number of PMA approvals
returned to shareholders. Premarket
approvals hit a high in 2017, but to date, 2,100 30
2018 results have been less impressive.
(See Figure 7.) There were just 21
PMAs through 31 August 2018, and the
1,400 20
number of 510(k) clearances issued in
the first half of 2018 declined as well,
despite steps taken by the U.S. Food &
700 10
Drug Administration (FDA) to improve
the efficiency of the medical device
approvals process.
0 0
2013 2014 2015 2016 2017 2018*
Number of 510(k) clearances are shown through 30 June 2018. PMAs are shown through 31 August 2018.
Source: US FDA.
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Figure 8. M&A in the US and Europe by year, July 2013-June 2018
Megadeals (>US$10b) Other M&A Number of deals
125 200
100 160
Total deal value (US$b)
Number of deals
75 120
50 80
25 40
0 0
7/2013– 7/2014– 7/2015– 7/2016– 7/2017–
6/2014 6/2015 6/2016 6/2017 6/2018
Chart includes deals ≥US$5m (medtech deal where either acquirer or target is located in the US or Europe).
This lackluster performance sharpens investment), up 64% against the five-year status quo and will have to resort to
the question over whether companies average. (See “The Pulse of the industry inorganic means to maintain growth.
are investing sufficiently in R&D to data book,” page 38.) Historically, the industry has used M&A to
secure their future revenue growth. bolster near-term revenue growth, and as
Note also that most of the new wave of However, medtech companies still face Figure 6 shows, medtech M&A investment
approvals make little or no use of digital fundamental challenges as they try to was solid in 2017.
technologies or data analytics: only 16 maintain growth. As markets become
of the 43 therapeutic devices approved more crowded with competing products Most of this 2017 total went to two
between January 2017 and June 2018 and payers become increasingly cautious major deals: BD’s purchase of Bard and
include any digital health component. about reimbursement, there is simply the pending Essilor-Luxottica business
This shows that these pivotal new less scope for the kind of product-centric combination. Between July 2017 and
capabilities are yet to be embedded in growth that fueled the industry in past June 2018 there were no additional
medtech innovation. years. The devices that medtechs have megadeals, defined as transactions
depended on for revenue growth, from valued greater than US$10b. As a result,
Perhaps the relatively low PMA numbers stents to knee and hip implants, are now the deal value for 2017–18 looks modest
are not yet a cause for concern. They mature, and there are diminishing returns compared with the previous 12 months,
may partly be explained by the FDA’s for next-generation successor products. falling 56% to US$44.1b. This total was
October 2017 simplification of its De For the leading players, traditional spread across 101 deals, itself a 42%
Novo review process, which provides product-focused R&D may no longer be decline versus the previous 12 months.
novel products with an alternative path to enough to achieve revenue growth in line (See Figure 8.)
market without PMA or 510(k) approval. with these companies’ current sizes.
Moreover, the amount of venture capital More important than these fluctuations
raised by earlier-stage medtechs means is the overriding question of where the
Is medtech M&A overly M&A spend is being directed. The data
the industry has high levels of funding that
can potentially support future innovation.
focused on business as usual? suggest that in 2017–18 medtech’s
Financing reached record levels in The ongoing under-investment in R&D commercial leaders focused on tuck-in
2017–18, with US$21.7b of innovation suggests some medtechs could struggle acquisitions that added scale in areas of
capital raised (US$8.2b of venture to innovate their way out of the current therapeutic interest.
Pulse of the industry 2018 15Pulse
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Figure 9. Tuck-in acquisitions and divestitutes by select medtechs, 2011–H1 2018
Imaging Non-imaging diagnostics ROE Services & other
TD — cardiovascular TD — multiple TD — ophthalmic TD — orthopedic TD — all other
60
50
40
30
US$b
20
10
0
-10
-20
Abbott Becton Danaher Essilor Johnson & Medtronic Stryker Thermo Zimmer
Dickinson Johnson Fisher Biomet
The values of acquisitions are shown on the positive y-axis; values of divestitures are shown on the negative y-axis. The figure includes previous M&As of
companies that were later acquired. The therapeutic device (TD) category was subdivided by relevant therapeutic area. TD - multiple refers to deals that
include assets from multiple therapeutic areas. TD - all other refers to a deal in a single therapeutic area that is not cardiovascular, ophthalmic or orthopedic.
Sources: EY, Capital IQ and company financial statement data.
This relatively defensive approach to Having commercial scale not only A necessary first step for some
M&A is not surprising, largely because it improves a company’s capital efficiency by companies, therefore, is to shed non-
is the early days for the digital revolution building expertise in specific therapeutic core assets or business units, either
and many C-suites may question the areas, but also gives companies the ability through spin-offs or divestitures.
wisdom of spending significant cash on to deepen their offerings by, for instance, Johnson & Johnson was among the
unproven technologies that can’t help building value-added services and forming most active in this regard in 2017–18,
bolster the top-line any time soon. It closer relationships with end-users to selling its LifeScan and Advanced
is also true that before companies can improve product development. These Sterilization Products business units to
adequately invest in digital technologies efforts allow organizations to build end-to- private equity groups. (See Figure 9.)
that will drive future growth, they must end capabilities that will derive maximum
first build scale in the therapeutic areas benefit when digital and data-centric skills
that are top priorities. are fully embedded.
16 Pulse of the industry 2018Pulse
of the industry
2
Can digital deals close the of alliances and acquisitions from life records, are more novel and will require
sciences company financial statements medtechs to think about how to use data,
innovation gap for medtech?
and press releases. not devices or tests, as their primary
Even if consolidation is entirely rational, currency for reimbursement.
it doesn’t eliminate the need to invest For the purposes of this analysis, EY
in data-centric capabilities. Since many has defined digital to include a range Despite the growing strategic importance
medtechs lack the in-house capabilities of technologies, including: digitally of digital technologies, medtech
to develop personalized health care enabled devices (e.g., wearables and companies have not been particularly
offerings, there is even more need to implants); software applications that active dealmakers in this space. From
acquire these skills via dealmaking. provide physician or consumer support; the beginning of 2014 to the end of June
Unfortunately, EY analysis suggests that in telemedicine infrastructure; and analytics 2018, life sciences-focused companies
terms of dollar values and deal numbers, capabilities that use AI to support signed 292 alliances or acquisitions to
most medtechs have yet to make such diagnosis and care management. access digital technologies, with building
digital collaborations a significant part of capabilities in monitoring, refining R&D
their dealmaking agendas. Some of these capabilities (for instance, and accessing data the most common
the use of wearables) are natural goals. (See Figure 10.) Of this total,
To better understand how medtech extensions of the kinds of products medtech companies were responsible
companies use business development medtech companies have historically for just over a quarter (76) of the
to create digital capabilities, EY has developed. Others, such as the integration transactions, including 13 acquisitions.
constructed a proprietary data base of non-medical data into electronic health
Figure 10. Understanding the drivers of life sciences digital dealmaking
Broad purpose of all life sciences digital deals Most active medtech companies
Monitoring Philips
77 21
Improving R&D Medtronic
55 14
Data access Smith & Nephew
49 5
Physician support Siemens Healthineers
47 4
Platform Becton Dickinson
29 4
Virtual care Abbott
22 3
Breakthrough innovation GE Healthcare
10 3
Patient support Boston Scientific
11 2
Zimmer Biomet
2
Because some digital deals were motivated by more than one driver, numbers in the analysis exceed the
total number of deals in the data set. Sources: EY, Capital IQ and company financial statement data.
Pulse of the industry 2018 17Pulse
of the industry
2
Because companies disclosed deal values Players such as Philips and Medtronic, for
for very few of these arrangements, instance, may have a greater opportunity Questions for medtech
the overall level of investment is hard to secure their position in the ecosystem
to gauge. However, the lack of digitally given their investments in digital, data-
companies to consider
targeted M&A — and the undisclosed driven business models. (See Figure 10.) • Are medtechs investing for the
nature of the financial transactions Companies pursuing these strategies may future or just consolidating for
involved in the digital deals that have also find greater collaborative synergies the short-term?
been announced — suggest that overall, with each other in the future. Philips and
• As health care evolves, what
medtech companies’ interest in this Medtronic, have for example, entered
innovations give medtechs a
space has been limited compared to into a business relationship to develop
lasting edge?
their investment in traditional sources and commercialize the LungGPS Patient
of innovation. Management Platform, a comprehensive • Is your company right-sized
patient and data management platform and focused on its core areas
Some companies appear to be paying designed to streamline the management for value creation?
more attention to digital deals, particularly of lung nodule patients from identification
in certain therapeutic areas such as through diagnosis, treatment, and long-
diabetes and cardiovascular disease. term survivorship.
(See sidebar, “Using technology to create
high touch chronic disease management.”)
“The more that value-
based reimbursement
gets wired into billing
and health care
delivery systems,
the more the model
will evolve from unit
sales to companies
providing therapeutics
as a service to the
organizations.”
David Van Sickle
Co-founder and CEO
Propeller Health
18 Pulse of the industry 2018Using technology to create high
touch chronic disease management
EY analysis suggests that most medtechs have focused their digital efforts in chronic
diseases such as diabetes and cardiovascular disease, areas where the need to improve the
consumer experience through data-driven approaches is more pressing. Indeed, since 2014,
23 of the 48 therapeutically-focused medtech digital deals with a defined therapeutic area
focus address these conditions. (See Figure 11.)
Diabetes, the principal target for medtech’s digital by demonstrating outcomes that are better than more
deals, has been the testing ground for the pure digital standard therapies. (See “Scientific rigor will drive
solutions that may be central to medtech’s future digital health success,” a guest perspective by Anand
growth. Predictive analytics and customer-facing Iyer, Chief Strategy Officer of Welldoc.)
software are beginning to supply diabetics with the
personalized treatments and high-touch engagement As tools for mobile monitoring, smart delivery and
tools that over-stretched physicians cannot. Indeed, real-time analytics converge, fully automated diabetes
some studies estimate that diabetics spend just six management will become a reality. Medtronics’
hours a year in face-to-face interactions with their MiniMed 670G system, launched in 2017, still requires
care teams. For the remaining 8,730 hours in a year, the consumer to manually enter dietary data, but its
these individuals must cope on their own. ability to automatically adjust insulin dosages based
on predictive analytics suggests that the ”artificial
This is where digital technology can make a major pancreas” is nearer to reality than before.
difference. By focusing on user experience, digital
devices can get much closer to the patient, and provide
continuous effective care management. As Welldoc’s Figure 11. Diabetes and cardiovascular disease
Anand Iyer says, “When solutions are intuitive and dominate medtech digital dealmaking
fit into clinical workflows and daily life, higheruser Diabetes
engagement can result” — even without the human 15
touch of a clinician closely overseeing the patient.
Cardiovascular
The rapid rise of smart insulin delivery pens and 8
automated continuous glucose monitoring (CGM)
Oncology
systems have allowed patients to better monitor
5
themselves on a daily basis and take control of their care.
Software applications from Livongo, Onduo and Welldoc Orthopedic
have also been an important step forward. These 4
solutions allow individuals to better integrate diet, weight
All others
and blood sugar metrics with medication schedules,
16
allowing consumers to better manage their condition.
Sources: EY, Capital IQ and company financial statement data.
They are also beginning to rival traditional therapeutic
interventions. Welldoc’s BlueStar, for instance, has
won FDA approval and reimbursement from payers,
Pulse of the industry 2018 193
Advances in imaging and non-imaging
diagnostics show how the medtech
industry could evolve
The most obvious signs of the growing importance of digital capabilities, especially AI-enabled analytics, are
apparent in the imaging and non-diagnostic imaging segments. While AI enables medtechs to extract more
value from imaging and other data, innovations in non-imaging diagnostics allow medtechs to build data-rich
profiles of individuals, not just in a formal clinical setting, but in the real world. Indeed, diagnostics represent an
opportunity to get close to the patient and provide the customized high-touch care individuals want to better
manage disease symptoms and overall health.
AI is already reference the growing importance of processing speed in tens of thousands of
big data, AI and deep machine learning. imaging devices globally. However, while
transforming imaging
Products such as Siemens’ Biograph imaging has been a valuable test case for
Among the most striking developments Vision PET/CT scanner are marketed as AI in medtech, its potential is far wider,
in 2018 was Siemens Healthineers’ initial precision medicine-enabling technologies opening up every area of medical data to
public offering (IPO). Raising US$5.2b, built on AI algorithm-driven software. systematic analysis. (See the perspective,
the Siemens Healthineers flotation was “How AI-powered imaging can help build
the largest IPO in the medtech industry’s A number of other companies are also precision health.”)
history, and boosted the total value of IPO exploring AI’s potential in imaging. GE
transactions since July 2016 to US$9.1b — Healthcare, which announced in June As McGuinness says, the “mountain of
more than the previous decade’s 2018 that it would spin off from its parent data” already generated by the health
combined total IPO value. (See Figure 12.) General Electric, and Philips are both care system has traditionally been an
making major investments in this arena. underused resource. “Less than 3% of
Investors’ appetite for the Siemens health data is actionable, tagged or
Healthineers’ IPO underscores the As Tom McGuinness, President and CEO of analyzed. That equation changes with
potential of digitally enabled monitoring GE Healthcare’s US$9b Imaging business AI, which can augment human decision-
and diagnosis tools to personalize notes, GE Healthcare is already using making to scale the delivery of improved
health care. Siemens’ own statements AI to accelerate image acquisition and outcomes,” he says.
20 Pulse of the industry 2018Pulse
of the industry
3
Figure 12. IPO deal numbers and cumulative value July 2003-June 2018
Capital raised Number of deals
7.5 50
6.0 40
Capital raised (US$b)
Number of IPOs
4.5 30
3.0 20
1.5 10
0 0
7/2003– 7/2004– 7/2005– 7/2006– 7/2007– 7/2008– 7/2009– 7/2010– 7/2011– 7/2012– 7/2013– 7/2014– 7/2015– 7/2016– 7/2017–
6/2004 6/2005 6/2006 6/2007 6/2008 6/2009 6/2010 6/2011 6/2012 6/2013 6/2014 6/2015 6/2016 6/2017 6/2018
Sources: EY, Capital IQ, BioCentury and Dow Jones VentureSource.
Algorithms revolutionize The implications of the IDx product are may be determined not by their robotic
profound. In the past, physicians would hardware but by the level of learned
diabetic retinopathy diagnosis
have studied patients’ retinal images surgical expertise in their algorithms.
An important bellwether signalling the to detect disease symptoms, requiring
growing importance of AI is the FDA’s screening by ophthalmologists. With In order for AI and deep learning
April 2018 approval of IDx’s proprietary IDx-DR, scanning for diabetic retinopathy capabilities to become mainstream in the
algorithm IDx-DR, a new tool to diagnose can now be automated and managed by medical device industry, however, more
diabetic retinopathy. IDx’s product is non-specialists in primary care and retail flexible regulatory processes that promote
the 13th AI-based algorithm to win FDA clinics. Those at greatest risk would be the continuous improvements required for
approval since Arterys’ MRI cardiac identified for a follow-up consultation with software will be critical. (See sidebar, “To
imaging interpretation became the first in a specialist. augment AI, the industry must focus on
January 2017. regulatory flexibility and security.”)
The machine learning capabilities seen
But IDx-DR differs from the previous in the IDx-DR product are early signals of
approved algorithms in that it is the the impact AI will have in medtech. This
first ever to make screening decisions technology has potential to improve areas
without the need for any additional human of care delivery ranging from remote
interpretation. Supporting the higher monitoring to complex surgery. Next-
level of evidence required, this is also the generation robotic surgical platforms
first algorithm to be approved based on 1 Michael D. Abràmoff, et al. Pivotal trial of an
from Verb Surgical and Versius are autonomous AI-based diagnostic system for
a prospective clinical trial. In IDx’s pivotal incorporating AI so that systems can learn detection of diabetic retinopathy in primary
trial, the algorithm showed more than 87% to optimize their performance. The relative care offices. npj Digital Medicine, volume
sensitivity and 90% specificity, beating value of surgical systems in the future 1, Article number: 39 (2018). https://www.
pre-specified primary endpoints.1 nature.com/articles/s41746-018-0040-6
Pulse of the industry 2018 21Pulse
of the industry
3
Diagnostics drive industry Color raised some of the largest US recognize that these products in isolation
venture rounds observed in 2017–18. no longer have the same value-creating
growth as personalized health
(See “The Pulse of the industry data potential they once did. To create more
becomes more important book,” page 38.) These companies have value in the future, therapeutic devices will
In the past, diagnostics may have seemed the ability to generate unprecedented have to continue to focus on building the
like a peripheral value stream for the amounts of personal data while data capture and analysis capabilities that
medical device industry. Today, however, simultaneously empowering consumers are already altering medtech’s diagnostics
they hold the potential to transform health in their health care. Though companies and imaging segments.
care delivery. In the digital era of medtech, must remain vigilant about the security
wearables that funnel data directly to the and privacy of personal data, creating the
cloud decouple the acquisition of medical tools to build that data is nevertheless an
data from traditional office visits to care important advance in the diagnostics field. Questions for medtech
providers. Built-in AI analytics, meanwhile, companies to consider
Over the course of 2017-18, data-rich,
mean these data become highly
non-imaging diagnostic companies were • How will medtechs use
meaningful and actionable in real-time.
increasingly important acquisition targets. diagnostics and AI-driven
Key metrics from 2017–18 underscore Twenty-three percent of the 2017-18 analytics to achieve better
the growing importance of non-imaging total M&A spend was dedicated to the therapeutic outcomes for
diagnostics to the medtech industry’s acquisition of diagnostic assets. That is their customers?
future performance and overall growth. a considerable jump from the 9% 5-year • How will medtechs use data to
For instance, non-imaging diagnostic average observed from 2013–17. deepen their relationships with
companies accumulated 38% of the consumers and providers?
US$14.4b venture dollars invested in At the same time, therapeutic devices’
share of medtech’s total M&A spend fell • As connectivity becomes
medtech between 2016 and 2018.
from a five-year average of 77% to only standard, what steps are
In particular, venture investors see major 53% in 2017–18. This suggests that even medtechs taking to secure their
opportunities in the consumer genomics though traditional therapeutic devices are devices — and patient data?
space. Helix, Counsyl, 23andMe and still the mainstay of the market, acquirers
“Less than 3% of health
data is actionable,
tagged or analyzed.
That equation
changes with AI,
which can augment
human decision-
making to scale the
delivery of improved
outcomes.”
Tom McGuinness
President and CEO, Imaging
GE Healthcare
22 Pulse of the industry 2018To augment AI, the industry
must focus on regulatory
flexibility and security
As Dr. Simon Kos, Chief Health Officer of Microsoft notes in an accompanying perspective,
“We are at a point in medical history where we have more data than human beings can
process, and at a critical time when technology can help make sense of that data.” (See guest
perspective, “Creating the health infrastructure to massively improve health outcomes.”)
To make sense of the data, AI-driven algorithms will be essential. That need creates
regulatory hurdles, too. To work with these new products, regulators need to build flexible
and intelligent frameworks that optimize the use of data in health care while minimizing risk.
Traditional regulatory bodies treat devices as at Action Potential Venture Capital. A steady trickle
unchanging products requiring a single assessment of negative headlines in 2016 and 2017 linked to
before entering the market. This approach, the hacking of insulin pumps and vulnerabilities
however, does not capture the reality of how self- in implantable cardiac devices continues to
learning algorithms work, constantly improving create anxiety.
and updating themselves. Given the rate of AI’s
evolution, new technologies that rely on the As yet, no hacker has attempted to corrupt a medical
capability have the potential to be reviewed and device to inflict individual harm,but that doesn’t mean
updated on a continual basis. As Scripps Translational medical devices and the data they generate aren’t
Science Institute’s Jones notes, “The challenge valuable targets. Microsoft’s Kos notes that health
medtechs have now is managing these overlapping care organizations are “more at risk than many other
business cycles so that hardware advances remain industries due the age, number and complexity of
aligned with software developments.” hospital systems.” Based on Microsoft’s analysis of
which data are most valuable to cybercriminals, Kos
believes “cybercriminals are aware that health data is
The cybersecurity opportunity considerably more valuable than financial data alone.”
Continuous upgrading is not only necessary to
maintain software efficacy, but to maintain safety. Moreover, as digital technology enables the rise of
Indeed, one of the central challenges as AI is personalized health care, it also blurs the boundary
embedded in more and more medtech products is between medical data and individual personal data,
creating systems that are robust enough to resist leaving a broad front for medtech to defend against
emerging cyber terrorist threats. cybersecurity vulnerabilities. What companies
have traditionally seen as a distinct IT problem will
“Cybersecurity is one or two headlines away” from increasingly become a necessary strategic focus for
becoming the primary focus of the media and medtech development.
consumers, contends Juan-Pablo Mas, a partner
Pulse of the industry 2018 234
Future success requires greater
participation in the health ecosystem
The promising developments in the imaging and non-diagnostics segments offer a glimpse of how new thinking and
new technology could transform the medtech industry’s fortunes. Current high valuations for medtech companies
suggest that investors are optimistic for the industry’s future. To justify this positive sentiment and position
themselves to create future value, medtech companies must embrace digital technologies and increase their data
and analytics focus. Above all, medtechs will have to work with their partners in the broader health ecosystem to
rebuild health care around the patient-consumer, if they are to achieve better outcomes for all stakeholders.
Can medtech continue to in revenue, and non-imaging diagnostic models, much of the industry is still
companies led the valuation surge. focused on “business as usual.” That
outperform the broader indices
Indeed, valuations for these two emphasis on the status quo may make it
using the usual formula? subgroups increased 92% and 82%, difficult for some companies to continue to
In 2017–18, the medtech industry respectively. Investor confidence was justify their high valuations in the future.
outperformed the broader indices, with partly driven by growing investment in
valuations across the industry soaring the non-imaging diagnostics space and
continued refinement of chronic disease
To create future value,
50%. Medtech’s smaller companies,
businesses with less than US$500m management. A more transparent US medtechs need to embed
regulatory process, including continued themselves in the health
evaluation of a digital health software ecosystem
Medtechs that embed precertification program, removed
Success for medtech in the future
uncertainties that weighed down investor
their devices, services expectations in previous years. means abandoning the business as
and solutions in the health usual approach that has yielded solid if
Yet, as we have noted, there are also uninspiring growth via bolt-on M&A and
ecosystem’s workflows consolidation. Medtechs may hold unique
warning signs on the horizon. While
can exploit the power of certain companies have started to expertise in manufacturing devices,
the network. embrace digital, data-rich business but if data and algorithms become the
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