Accelerated by the response to the global coronavirus pandemic, technology has radically prompted healthcare disruption in fundamental ways. Technology is drastically changing how healthcare is delivered to patients and creating new business models for innovative organizations. Never has the medical technology industry been so attractive to investors. Medtech businesses show outsized potential for profitability, resiliency, and growth, fueling an investment bonanza from private equity investors.
Size. With total annual revenue of $510 billion in 2019, the medtech industry is increasing its share of the whole healthcare pie. We look at this industry as forming five primary areas: Medical equipment, medical devices, medical consumables, in-vitro diagnostics, and life science tools. With success also come challenges. Pre-COVID, the medtech industry faced pricing pressure, maturing products, and increased pressure to show differentiation. Investors looking at these businesses would be wise to evaluate forecasted growth in the face of these potential headwinds.
Components. While we primarily view medtech around the five areas as mentioned above, it nonetheless remains highly fragmented. For PE investors, fragmentation is attractive, as it offers the possibility to buy and combine multiple companies and achieve revenue growth and cost synergies. Together, the 10 largest medtech companies have only about 40% of the market, and no single company generates more than 8% of revenue. Meanwhile, large organizations can create value through scaling. Therefore, the biggest companies in the industry are looking to get bigger. This is achieved through M&A initiatives to generate scale efficiencies, acquire R&D, and access growth segments. In addition to the large companies, the industry also has many small and midsize companies that can provide value in different segments, regions, and specialties.
Demographics. Demographic trends such as the aging first world population and increasing chronic lifestyle illnesses like diabetes translate to greater demand for medtech products. Emerging markets where access to care is growing can offer a significant source of growth.
Change. Healthcare and healthcare services are also changing dramatically. Treatments are moving from traditional settings like doctors’ offices and into patient homes, with consumers paying a more prominent role in their care. This change is increasing the opportunity to create new markets, as technology enables new business models with the potential to create growth.
Procurement. Today, the procurement function is centralized at a high level, so medtech companies need to offer more significant discounts to gain a smaller number of large accounts. Rather than primarily selling products per-unit, innovative companies develop solutions to create value in the patient journey.
Four core investment trends in 2021 will support increased value creation in the medtech industry, including innovation, patient journey, consumerization, and efficiency. These can offer investors a more strategic way to think about the opportunities in the marketplace.
Innovative Technologies. The technology available allows companies to develop unique products that are cheaper to create and more efficient to operate. For example, 3-D printing technology can develop robotic surgery infrastructure or investigate products to address unmet needs in certain areas. Medtech is the innovative solution to the problem.
Evolving Product Models. Moving far past its traditional role, healthcare is creating opportunities for medtech companies to develop new product models. For example, a company can sell its clinical products to both physicians and healthcare facilities, as well as directly to patients. These types of new product offerings are pushing many medtech companies to evolve beyond traditional transactions.
Consumers in Control. Consumers are getting more individual control over their care. For example, diabetes patients have always needed to monitor their insulin levels, and new technologies are emerging to give them better tools that make it easier. Many companies offer mobile apps to help patients by sending data securely to doctors and sending alerts in situations requiring more support.
Operational Optimization. The industry has historically had high-profit margins, but it has needed to become more operationally efficient as of late. Medtech has a much higher cost structure than other sectors, which shows there is area for improved optimization. For instance, to increase efficiency, some companies could benefit simply from outsourcing production, while others could improve procurement by consolidating their supplier network.
According to a recent E.Y. report, the dearth of medtech deals in 2020 combined with the huge pile up in cash reserves among leading strategic players and interest from PE shows promise for a healthy 2021. While in 2020, non-emergency procedures were deferred, a backlog of activity should power a growing quarter over quarter and year over year performance base for medtech businesses. With the IPO window wide open and a frothy stock market, mainly driven by special purpose acquisition corps, or SPACs, growing medtech businesses have prospects for dual-track exit processes.
We think medtech is ripe for significantly increased M&A and investment activity and deal flow in 2021. By understanding the dynamics shaping the industry and applying the relevant trends, entrepreneurs should be navigating towards successful liquidity events, and investors can ensure success.
Legal and Policy Issues
The global pandemic response brought renewed urgency to policy issues facing medtech businesses in 2020 and should hasten legislative and regulatory responses in 2021.
Infrastructure. Our healthcare system’s fragmented nature in the United States serves as a block to healthcare delivery, while the decentralized payor system and comprehensive technology solutions offer new solutions. We expect new initiatives to strengthen infrastructure and support diagnostic testing, vaccination, and healthcare delivery. While these efforts will initially be designed to respond to COVID-19, these same initiatives should remain in place to deliver any healthcare service, which could be a massive opportunity for medtech businesses.
Access. In the United States, the disproportionately negative impact suffered by the minority, immigrant, and lower-income communities highlights the problem of access to healthcare for all. With waves of pandemic contamination impacting regions and populations, healthcare access becomes critical to contain the spread and maintain economic output. We expect that federal, state, county, and city initiatives to allocate capital to increase access, initially through telehealth services, will augment access for all.
Clinical trials. As the COVID-19 coronavirus mutates and new strains have different responses to approved vaccines, clinical trials will be necessary for both vaccines and treatments. The decentralized nature of the U.S. healthcare system will need to allow for decentralized clinical trials, in multiple languages, in different media, and serving diverse populations.
Diversity. The age of personalized medicine continues, and technology solutions from medtech businesses that have outsized returns will be targeted to patient populations. Policy initiatives to extend access to services will be made to diverse populations, both inside and outside the country. Medtech businesses will need to plan for diversity in the product roadmap.
Privacy. The coordinated response to the coronavirus pandemic has brought an unprecedented incursion into personal privacy. Many commercial establishments require entrants to fill a form that asks for personal data—and this data is collected, stored, and transmitted to enable contact tracing. Will proof of diagnostic testing and vaccination become a matter of public record? Will it be a condition to accessing essential services we consider fundamental to human rights? Where is the line?
The global pandemic has drastically changed the healthcare world in so many life varying ways. Overall, we think medtech businesses that design the right legal and policy solutions into their roadmap will benefit from more significant investment and outsized economic returns. With new and innovative technology disrupting and improving how healthcare is delivered to patients, healthcare will never be the same. It is truly making the world a better place for patients and providers alike. Therefore, the medtech industry has never been so attractive to investors.