Leading Medtechs See Organic Growth Across A Market In Flux
Executive Summary
In 2018, the top 100 publicly listed and reportable medical device technology companies had global sales spanning from over $30bn to some $100m in the lower reaches. As the latest In Vivo Medtech 100 ranking shows, many of the major changes in value sales were linked to company restructurings. But there were some impressive organic gains too.
It would be surprising not to say disquieting if, in mature industry sectors, the complexion and composition of the leading companies changed radically year-to-year.
For medtech, a truly unique industry in terms of both the risk assumed by companies and what the ultimate customer – the patient – needs, that would be a pause-for-breath moment. But then, factor in that the medtech industry is itself on the cusp of major disruptive forces, and changes are sure to come as the next decade unfolds.
The consensus is that the industry is readying for the full effects of the digital revolution and potentially new tech industry players; population-based health management, based on big data analytics and patient engagement; alternative methods of paying for innovation based on outcomes; factoring in harder, perhaps much longer regulatory processes during a product’s pre-market journey to commercialization; the market’s ongoing shift towards outpatient and remote home care; and the need to continually address the explosion of chronic conditions.
Routinely, the US leads the way in much of the significant change that the global medtech environment eventually comes to embrace, for instance tackling value-based health care as a long-term need; and restructuring health care buying and delivery structures to prepare for changing demand patterns. The creation of group purchasing organizations (GPOs) as a response to the ongoing consolidation of the US health care industry, and integrated delivery networks (IDNs) that aggregate buying power for hospital groups, are clear examples.
Developments that disrupt the norm put pressure on medtech selling prices and require changed behavior at company level. And add to that the fears (at time of writing) that the temporarily-repealed 2.3% US medical device tax is possibly due to restart in 2020, and it is plain that companies in this market must tread ever carefully to maintain competitive advantage. Good managers may well trade on uncertainty and thrive on unpredictability, but uncertainty for medtechs is everywhere right now, from the EU Medical Device Regulation (MDR), to Brexit, to US/China trade standoffs, to wholesale medtech restructuring.
A Vacancy At Medtech Ranking No. 25
However, in 2018, with isolated episodes of major M&A, the medtech top rankings stayed largely – reassuringly ̶ the same. Absent the acquisition of C.R. Bard by Becton Dickinson & Co. in the dying days of 2017, and the 2018 table lists the same names in the leading 25 companies as in 2017. Robotics pioneer Intuitive Surgical Inc.; Thermo Fisher Scientific Inc., the sixth-largest global IVD player; and Edwards Lifesciences Corp., the heart valve and critical care monitoring specialist, are vying for the vacant slot created by Bard. They all recorded impressive gains in 2018 to reach the level of $3.7bn sales.
None of them used externally added muscle in putting on sales growth of 18.6%, 6.8%, and 8.4%, respectively. They are all at, or ahead, of the average mid- to high single digit-growth of the global market in 2018, which was worth an estimated $425bn (compared with $397bn in 2017; according to Fortune Business Insights).
Fifteen US groups are among the leading 25 medtechs globally, with three from Japan and seven from Europe – across the Netherlands, Switzerland, Spain, the UK and Germany. Their activities span the range of device therapy areas, as shown in our major industry sectors sub-tables, but also extend to dental, ophthalmic, wound care, diabetes and, in the example of Grifols SA, plasma collection and blood diagnostics. In 2018, Spain’s largest medtech player consolidated its top 20 ranking by, among other things, completing the acquisition of Biotest US Corp. Grifols had divisional IVD sales of $829m in 2018, and thus remained outside the IVDs top ten.
Good managers trade on uncertainty and thrive on unpredictability, but uncertainty for medtechs is everywhere right now
The only UK company among the leading 25 medtechs, Smith & Nephew PLC, recently parted company with CEO Namal Nawana after 18 months in the job. He was on a mission to sharpen S&N’s focus and embark on more M&A, but left over remuneration issues. Now in charge is Roland Diggelmann, a former Roche Diagnostics executive, who must decide whether to accelerate Nawana’s policy of deal-making as a way of growing S&N’s ortho recon, sports medicine and wound care businesses. The UK company has lost ground over the years in the ortho segment to other, more adventurous rivals. In spring 2019, reported talks with spinal company NuVasive, came to nothing. It did complete on the smaller M&A transaction, the purchase of Osiris Therapeutics. The UK’s largest medtech group sits at No. 21 in the top 100, the same as last year's ranking, with below-average 2018 sales growth of under 3%. NuVasive, meanwhile, less than a third the size of S&N’s ortho franchise, put on industry average growth of 6.8% in 2018.
The Global Top Ten: A Curate’s Egg
Within the top 10 companies, all of which were comfortably in the double-digit billions of dollar-ranked sales, BD was the standout riser in 2018. It added almost a third to its 2017 sales in rising three places to 7th, with 2018 sales knocking on the door of $16bn (including IVD sales, which were up 8.6%). The reason was the $24bn acquisition of Bard, with which BD claims a “unique position in both treatment of disease and processes of care for providers.” Clinician satisfaction in terms of device usage and ease of handling has become a much higher-profile USP for many medtech manufacturers in recent years. (Also see "Data, Data, Everywhere, But How Much Of It Makes A Real Difference? " - In Vivo, 11 Dec, 2018.)
BD will hope that incoming CEO and president Thomas Polen, an internal appointment, will emulate the record of growth under Vincent Forlenza, who is retiring as chair and CEO on January 28, 2020. Recent track records would suggest so: under Forlenza, Polen led the acquisitions of both Bard and, in 2015, CareFusion, which lifted BD into the truly big league.
This pace of growth saw BD rise above Cardinal Health, but still remain $3bn behind 5th-placed Abbott Laboratories Inc., which has also been tearing up the tarmac in M&A in past years. Its 2017 consolidation of St Jude has made it the second-leading cardiovascular group. In 2018, it fully consolidated the October 2017 purchase of diagnostic device and service provider Alere, establishing itself as a leader in point-of-care testing (POCT), and gaining access to new channels and geographies. Overall, it was the second-highest sales climber in the top 10, up by almost 17%. And with its bulked up IVD business – its IVD sales rising by 33% in 2018 ̶ Abbott is now also clearly the second-largest global IVD group by sales. In that industry segment, it sits behind pureplay Roche, whose $13.2bn IVD revenues in 2018 kept it as a top 10 global medtech group.
Fellow European diagnostics player Siemens Healthineers AG made IVD sales of €4.13bn, a rise of 4.3% in the year ended September 30, 2019, and remained the fourth-largest global IVD groups, behind Danaher, in third. Siemens Healthineers’ strong imaging (€8.94bn) and advanced therapy (€1.6bn) revenues helped elevate the German group to sixth-largest medtech group in the current Top 100.
The weakest growth among the top ten came at Cardinal Health Inc., whose merely marginal increase illustrated the “curate’s egg” nature of performances in the top 10. Here, it was a case of timing: in fiscal 2018, Cardinal’s medical segment revenue grew powerfully, with $1.9bn of revenues coming from new acquisitions, primarily the Patient Recovery Business. That cannot be repeated every year, especially once divestitures – in 2018, it sold its China distribution and the naviHealth businesses – are factored in.
Below-Average Growth For Many Leading Companies
The rest of the top 10 saw average or below-industry-average growth in 2018: Stryker Corp., under 5%; GE Healthcare 4%; and Philips, 2.4%. And that also goes for the global leaders Johnson & Johnson, number two in the ranking, and Medtronic PLC, which is number one. J&J’s slim 1.5% medtech segment sales rise in 2018 followed its sale of Codman Neurosurgery to Integra LifeSciences (which increased its sales by 24% and added incremental revenue of $236m). That, plus a loss of spinal market share, led to a 1.9% dip in J&J’s orthopedic sales. Its diabetes sales also dropped, by 37.5% to $1bn, as a result of the divestiture of its LifeScan business in Q4 2018, and the Q4 2017 decision to exit the Animas insulin pump business.
In diabetes, the reverse was the case at global medtech leader Medtronic, which, as signaled last year, became the first global $30bn dollar medtech group – albeit on the strength of a lowly 2% sales rise. Its diabetes business (insulin pumps, CGM, insulin pump consumables and therapy management) led the growth, at 12%, recording a business group total of $2.4bn. Year-end April 2019 growth was assisted by demand for the MiniMed 670G hybrid closed loop system with SmartGuard technology (which mimics some functions of a healthy pancreas and maximizes time in range). Its Guardian Connect CGM system was a brand in high demand.
Next year, Medtronic will be setting group strategy without the deft touch of long-serving CEO Omar Ishrak, whose retirement at the close of the 2020 fiscal year will make way for internal appointee Geoff Martha. The big strategic news for Medtronic in 2018 was its acquisition of robotic guidance systems company Mazor Robotics, for $1.6bn. In 2019, it continued to build its robotics reach.
93% of Leading Companies In Growth
As per the usual form among the flagship companies of the publicly traded medtech industry, very few of the billion-dollar sales groups saw reduced revenues in 2018. Agfa HealthCare was “flat,” following reorganization of distribution channels in China. In Vivo has been unable to establish the reasons for Japanese IVDs company, Miraca, going backwards in both yen and US dollar-converted sales in 2018; or for China’s Shinva Medical Instrument slippage in US dollar sales.
Further down the listing, Japan’s Konica Minolta, Swiss drug delivery company Ypsomed, Stratec Biomedical, and Endologix saw lower sales for different reasons in 2018.
Konica Minolta’s health care business sales dip was blamed on the discontinuation of sales of certain purchased products. In Stratec’s case, it was due IVD launch postponements, and lower sales volumes from established systems, parts, consumables and services. Endologix has been restructuring its US and European sales teams, and coping with field safety notices (for its AFX System and Ovation System), and lower sales of the Nellix endovascular aneurism sealing system. Ypsomed said its sales would have been up by 24%, if its 2018 dispute with Insulet Corp. over the mylife OmniPod distribution agreement, leading to arbitration proceedings, been excluded from consideration.
Even so, 93% of the top 100 reported sales growth in FY 2018.
Trading Places
While at the top of the industry, Medtronic is recording sales upwards of $30bn, the threshold for top 100 status in our listing of publicly-held, reporting companies has dropped again, by some $40m, reflecting the ongoing consolidation of the industry. Refractive surgery implantable lens maker Staar Surgical is newly admitted to the In Vivo top 100, on the strength of a 2018 sales rise of 36%, despite competition from laser vision surgery, where Novartis (Alcon), J&J (AMO), Bausch Health Companies and Carl Zeiss Meditec AG have major strengths. Bespak’s drug delivery technologies recorded a small rise in US dollar sales, and franchise owner Consort Medical (UK) was elevated to top 100 status in 2018, as was Swedish imaging IT and digital pathology company Sectra, on the back of a 17% rise in 2018-19 local currency sales.
Making way for these new entrants, besides Bard and Alere, was Analogic Corp, which in 2017 was a $475m revenue group, and remains active in ultrasound, advanced imaging and real-time guidance technologies. In 2018, it was acquired by an affiliate of Altaris Capital Partners, and, now privately held, has been delisted from NASDAQ, and is no longer eligible for inclusion in these tables.
Secular trends are being driven by changing demographics and increased preventive health care , exploiting them is seen by the broader industry as a key way of anticipating changing health care demand and remaining competitive.
Next year, besides BTG, the US orthopedic and sports medicine group DJO Global will also be a name – if not brand ̶ consigned to league table history. The $1.2bn revenue group was acquired by Colfax Corp for $3.15bn in November 2018 (completed February 2019). DJO will help make Colfax a higher-margin, faster-growing and less cyclical company, says Colfax, which plans to bring DJO within its “CBS” culture ̶ a business management system that uses repeatable, teachable processes to “drive continuous improvement and create superior value for customers, shareholders and associates.”
Longer term, Colfax envisions DJO as the foundation of a new growth platform in the $21bn high-margin orthopedic solutions market. In DJO, it sees a business that is well-positioned to benefit from “secular trends that are being driven by changing demographics and increased preventive health care.” Exploiting these trends is seen by the broader industry as a key way of anticipating and meeting changing health-care demand in the future, and remaining competitive.
Fast-Riser Club
Other eyecatchers in the lower rankings include human tissues supplier CryoLife, whose 39% rise in sales included a full year of revenues from Jotec, a German endovascular and surgical products company. However, the bottom line was a net loss of $2.8m, due largely to the financing needs to integrate that very acquisition.
Microport Scientific’s revenues in 2018 were also acquisition-enhanced, growing by 49% (32%, excluding the impact of foreign exchange). Expanded sales on the global market and an improved orthopedics portfolio were augmented by the positive effects of the acquisition of LivaNova’s CRM business.
On the contrary, Cardiovascular Biosystems’ 14% sales rise (peripheral and coronary products) originated in increased customer accounts, growth in hospital and office-based lab sites, international expansion, and additional product offerings ̶ and all against what it said were modest average selling price declines.
But the Blue Riband for 2018 sales growth should go to IVD company Quidel, whose 2018 revenues increased by 88% to well over half a billion dollars, due primarily the acquisition of the triage and BNP Businesses from Alere in fall 2017. The acquired business represented 51% of Quidel’s 2018 revenues.
Colorectal cancer diagnostics company Exact Sciences, not in the 2018 listing based on a large element of its sales coming from performing tests, merits a mention in this context. In 2014, the Cologuard test maker posted sales on $1.8m. In 2018, that had risen to $454.4m, an impressive 71% up on the previous year, due to more tests being carried out and increased commercial insurance coverage for Cologuard. The company launched a partnership with Pfizer in 2018. In March 2019, former US Health and Human Services secretary Kathleen Sebelius joined the board of Exact Sciences. In fall 2019, the test was expanded by the US FDA for use in 45+ year-olds. One to watch in 2020.