Throughout the 2010s, the medtech industry maintained its solid financial performance year after year. While the financial crisis of 2007 and 2008 was a heavy blow to medtech and many other industries, the following decade witnessed a medtech resurgence due to strong fundamentals and investors’ high confidence in the sector. Though annual growth in revenues had yet to recapture the heights of the early years of the 21st century, 2019 was another solid year, particularly in R&D growth.
Though we don’t have full-year 2020 financial data to assess the impact of the pandemic (and the socioeconomic chaos it has brought in its wake) on medtech, we can already recognize that the industry’s financials in 2020 will look nothing like 2019 or any other year over the previous decade.
An analysis of Q1 and Q2 2020 financial reporting indicates that roughly two-thirds of US commercial leaders (pure-play medtech companies with more than US$500 million in annual revenue) and conglomerates have experienced an aggregate revenue decline of 5%. However, this figure conceals wide variations.
Among companies focused on elective procedures, the impact has been higher, as patients have stayed away from hospitals where the COVID-19 pandemic dominated clinical priorities in the second quarter of 2020. By contrast, companies focused on diagnostics saw toplines rise significantly with the heightened demand the pandemic brought.
Is medtech in a position to ride out the disruptions of 2020 and regain or even surpass its performance across the 2010s? Examining the industry’s most recent financial performance, financing and M&A data gives us a mostly affirmative answer — though not without some underlying causes for concern, too.
Medtech valuations rise again in 2020
Among medtech’s key metrics in 2020 to date, investor confidence stands out. Though medtech’s valuations fell along with the broader market (bottoming out in late March 2020), they recovered strongly in the subsequent months. By the end of August 2020, medtech’s valuations were up 50% compared to January 2019, much stronger than the rebound for broader composite indices such as the New York Stock Exchange and the S&P 500 (up 15% and 40%, respectively, over the same period).
Digital health companies rebounded even more strongly — up 65%, likely due to investor excitement over enhanced use of virtual health and other remote technologies during the COVID-19 pandemic But medtech’s commercial and noncommercial leaders both comfortably outperformed big pharmaceutical companies (which saw valuations rise 18% compared to January 2018) and biotech companies (up 40%).
A key driver of medtech’s high valuations was the non-imaging diagnostics segment, whose valuations rose 116% between January 2019 and August 2020, more than twice as much as for any other segment. In part, this reflects the urgent need for new diagnostic tools to combat the COVID-19 pandemic: the valuation of one diagnostics firm, Quidel, jumped 331% when the U.S. Food and Drug Administration (FDA) gave the company an emergency use authorization (EUA) for its rapid point-of-care test for detecting COVID-19 infection.
The COVID-19 pandemic could act as a growth driver for non-imaging diagnostics in the longer term as well. For example, Exact Sciences’ revenue surged 93% to US$876 million as use of its Cologuard at-home colon cancer tests doubled to 1.7 million.
Financing: major players load up on debt as startups face uncertainty
Medtech’s financing levels more than doubled to a record US$57.1 billion in the 12-month period from July 2019 to June 2020, compared with the previous 12 months. Over 40% of this dramatic growth was a result of US$35.6 billion of public debt financing, fueled by historically low interest rates. In fact, a record 18 companies raised US$500 million or more, with Thermo Fisher Scientific alone accounting for US$9.2 billion of the total.
However, both debt and follow-on fundraising (about 23% of the period funding total) was driven by medtech’s bigger players, rather than the smaller companies that form a key component of the industry’s R&D engine. Overall “innovation capital” (money raised by the industry’s noncommercial leaders) slid to US$18.4 billion, accounting for only 32% of total funding (down from the previous 10-year average of 47%).
The IPO and venture capital (VC) fundraising channels saw less activity than debt and follow-on financing over the same 12-month period, which presents a challenging landscape for early-stage companies reliant on these financing options. And while the US$3.2 billion total for IPOs was the third highest on record, just 3 deals constituted roughly 85% of that volume, and the number of deals (14) was the lowest in a decade. Most of the IPO volume in the 12-month period considered here was concentrated in Q3 2019, before the COVID-19 pandemic had an impact. IPO activity fell precipitously in the first two quarters of 2020.
M&A: will the pendulum swing back in 2021?
The disruptive impact of the COVID-19 outbreak is particularly evident in the industry’s M&A performance, with M&A expenditures from July 2019 to June 2020 plunging 60% to US$27.1 billion compared to the previous 12-month period. An already-low total deal value was further reduced when Thermo Fisher Scientific was rebuffed on its proposed US$12.5 billion acquisition of Qiagen in August 2020. Focused on molecular diagnostics, including in infectious disease, Qiagen saw its operating income jump 84% in the first six months of 2020 due to the impact of the COVID-19 pandemic, leaving its shareholders reluctant to accept Thermo Fisher Scientific’s enhanced offer.
The next-biggest deal – Stryker’s US$5.4 billion proposed acquisition of orthopedic company Wright Medical – is under regulatory review in the US and the UK as of September 2020. However, the impact on M&A is not confined to the fall in such “megadeals” (those worth over US$10 billion): the total value of non-megadeals has also dropped 41%, while the average deal value across the industry shrank to US$167 million (from US$463 million in the previous year).
The slowdown in M&A, IPOs and VC funding raises concerns that a major source of innovation will disproportionately impact startups and small companies that are reliant on this capital. To sustain the cycle of innovation, larger medtech companies may need to consider other approaches, such as partnerships, incubators and more milestone payments (a strategy these companies frequently employed during the aftermath of the 2007 and 2008 financial crisis).
There are signs, however, that the big medtech players may instead be contemplating a surge of acquisitions in the near future. A buyer’s market may be developing as smaller, and perhaps even midsize, companies question whether they can survive the economic uncertainty triggered by the COVID-19 pandemic. Meanwhile, as noted, large medtech companies have recapitalized through debt and follow-on offerings, and now have substantial M&A firepower.