pulse redefining medical technology innovation

Pulse of the industryMedical technology report 2013

To our clients and friends:Welcome to the 2013 issue of EY’s annual report on the state of the medical technology industry.

Looking back from here, it is clear that the view we have set out in previous years — that a confluence of factors within health care would create a perfect storm for medtech — has been borne out.

But it is also clear that medtech companies are learning to weather the storm. Our opening article, “Redefining innovation,” sets out ways in which companies are adapting to a new health care ecosystem that values better health outcomes and cost-effectiveness over medtech’s traditional stock-in-trade, innovative technology. Alongside our analysis are contributions from two of the industry’s leading lights, whose companies are at the forefront of medtech’s new value equation. And we are fortunate, in developing this report, to have been able to draw on the insights, opinions and perspectives of key industry insiders.

As always, Pulse of the industry provides an overview of key performance metrics, including US and European financial performance, financing and the M&A landscape, as well as other noteworthy trends from the past 12 months.

We hope this year’s report gives you plenty to think and talk about, and we look forward to continuing the conversation with you.

— EY Global Life Sciences Center

Medical technology report 2013

Table of contents

PerspectivesPoint of view

Transforming and leading Omar Ishrak, Medtronic, Inc.

Innovating differently Michel Orsinger, DePuy Synthes Companies of Johnson & Johnson

Industry performanceFinancial performance Behind the numbers: a growth challenge

Financing Mind the gap

Mergers and acquisitions All signs point to deals

Scope of this report

Acknowledgments

Data exhibit index

Global medical technology contacts

21819

32

20

44525354

56

EY | Pulse of the industry

1Medical technology report 2013 |

Perspectives

Point of view

>> Novel products are no longer reimbursed without also proving that they are contributing to better health care at a reasonable cost. <<

Rudy Dekeyser Managing Partner LSP Health Economics Fund

Key points• The medical technology sector is weathering a perfect storm,

caused by three concurrent trends: the move toward value-based health care, growing regulatory pressures and resource constraints within the industry itself.

• Medtech’s customer base is shifting as payers, health systems and patientsthe past. This shift undermines medtech’s fundamental business modelcapture value.

• constraints precisely when they need to be investing in new kinds of innovation. Financing has become increasingly scarce for small companies, while slowing growth has resulted in “lost” revenues of US$131 billion and “lost” R&D of US$12 billion between 2008 and 2012.

• Companies will need to seek avenues for growth. Successful experiments are already under way in which medtech companies are expanding their offerings in three ways:

• Beyond the product, with services and solutions

• Beyond treatment, by focusing on prevention and real-time management

• Beyond the hospital, with offerings that enable health care everywhere

• To succeed, companies will need to develop or improve several capabilities:

•

• Ecosystem-wide scanning

• Collaborative cultures

• Open data enterprises

• Disease/Value pathways

• Scalable processes with appropriate metrics

2 EY | Pulse of the industry

A perfect stormThe medical technology industry is being disrupted by the convergence of three sweeping trends:

• The move to value-based health care, as payers and providers grapple with budgetary pressures and escalating costs

• Growing regulatory pressures on the medtech industry as regulators bring increased scrutiny to numerous issues, including the process by which products gain marketing approval and the relationship between companies and physicians

• Resource constraints due to investors resetting their expectations in light of the above pressures, together with the ongoing impact of the global economic downturn

Any one of these trends would represent a

their simultaneous occurrence produces what Guy Nohra of Alta Partners calls “a perfect storm” in the medtech market: “There are regulatory challenges with the FDA, there are reimbursement challenges, there is a lack of available venture capital, corporate buyers are mostly missing in action, and the capital markets [for emerging medtech companies] have disappeared.”

This storm is straining the industry’s business model, requiring companies to expand their offerings, reengineer their business models and change how they innovate in order to remain relevant. To understand the challenge this represents for medtech companies — and how executives will need to respond — let’s

Value-based health careAs payers in many key markets look for ways

control, they are increasingly rewarding those who can demonstrably improve

In both Europe and the US, for instance, the trend among payers and providers is toward bundled payments and value-based pricing. Group purchasing decisions are now the new normal, in a trend that began with consolidated purchasing decisions by hospital groups and which now extends to accountable care organizations (ACOs) in the US, health and wellbeing boards in the UK and disease management programs in Germany.

In short, the value equation for medtech has shifted. But it is worth asking, before we go too much further: What does value mean, when applied to medical technology? The answer you get will depend on who you ask:

• Investors will say that it is a company’s ability to deliver sustainable returns.

• For payers, it is a technology’s ability to deliver better health outcomes or save costs — and preferably both.

• For providers of care, it could be ease of use, or whether it is accepted by patients.

• And as we pointed out in last year’s Pulse, patients themselves, who are increasingly the target of medtech marketing, have more of a say in what constitutes value: ease of use, personalization, portability and other patient-empowering factors

the value of medical technology.

This shift is “a huge challenge for health care companies,” says Rudy Dekeyser of Netherlands-based Life Science Partners. “Novel products are no longer reimbursed without also proving that they are contributing to better health care at a reasonable cost.”


Point of view

Indeed, the medtech industry is already feeling the effects of this shift. A sector built on developing innovative products that have saved, prolonged and improved millions of lives is now more often than not regarded as contributing to the spiraling costs of care. Not surprisingly, governments in many major economies are deliberately targeting the medical device industry as part of budgetary belt-tightening.

It is also not surprising, then, that as governments and payers move toward comparative effectiveness research, medtech is often in their crosshairs. A couple of years back, when the US-based Institute of Medicine came out with its list of 100 priority areas for comparative effectiveness research, it was striking that a large share of the priorities targeted procedures involving the use of medical technologies. Earlier this year, when the Joint Commission (a US health care accreditation group) partnered with the American Medical Association

medtech procedures as among the worst offenders. They found that elective, non-acute PCI — angioplasty using a stent — in patients with stable coronary artery disease was used inappropriately 11.6% of the

38% of procedures was uncertain. With PCI costing at least US$15,000 per procedure,

looking carefully at medtech utilization as they seek savings in the system.

For medtech companies, one consequence of the move to value-based health care is that their customer base is shifting. Most medtech products have traditionally been marketed to physicians, who have so far been the most

Country Measures

Italy Health care cuts of €6 billion and €2.5 billion were announced in 2012 and 2013, respectively. In 2012, Italy announced a 5% blanket spending cut on medical devices.

France The 2012 Social Security Bill aims to save €670 million through cuts to drug and device costs, and another €245 million by switching to lower-cost suppliers.

United KingdomThe National Health Service directs Clinical Commissioning Groups (which manage 65% of the NHS budget) to be cautious in budget planning across the board in order to meet a £30 billion budget shortfall by 2020/21.

China In August 2013, the Chinese Ministry of Health announced the start of a 90-month usage review of high-value consumable medical devices.

Budgetary pressures are leading to spending cuts for medtech

Source: Government sources.

world in which doctors no longer have as much freedom to choose any product they want, and in which regulatory changes limit companies’ contact with care providers. As

decisions, they are becoming a key

Meanwhile, patients are becoming more active and involved in purchasing and using medical technologies to manage their own health, thanks to the unfolding revolution in patient-empowering, information-leveraging (PI) technologies, such as smartphone apps, social media and sensor-embedded devices. (For more on these PI technologies, refer to last year’s Point of view article.)

But the expansion of medtech’s customer base is not just about payers and patients. There is also a similar shift under way

customer in the world of providers is no longer the individual physician, but the hospital system. In the US, more and more physicians are leaving independent practices and becoming employees of large hospital systems. Hospitals themselves are merging to acquire scale. And these large systems are centralizing purchasing decisions, giving physicians less autonomy to pick the devices and diagnostics they use.

This shift in the customer base will require medtech companies to adapt how they go to market. As Berthold Hackl, CEO of invendo medical, a developer of endoscopy products based in the US and Germany, puts it, “with the old model, you developed a new product and showed it to physicians. They liked it, and it went from there. Those days are over. With new devices and technologies, you have to look at the environment in which they will be used. [At invendo] we talk with insurers, hospital boards, physicians, nurses, even patients.”

We will explore how the expanding customer base impacts the medtech business model more fully later in this article.

>> With new devices and technologies, you have to look at the environment in which they will be used. [At invendo] we talk with insurers, hospital boards, physicians, nurses, even patients. <<

Berthold Hackl President and Chief

invendo medical

invendo medical 0


Regulatory pressuresOver the last few years, medtech companies in major markets have also faced growing regulatory scrutiny. In the US, the Sunshine Act now requires medtech companies to track and report any transfer of value with a medical practitioner, and some states have enacted laws that restrict interactions between industry and health care providers. Meanwhile, regulators have considered changes to the 510(k) process that would make marketing approval more expensive and uncertain for many classes of products.

More recently, regulatory uncertainty has spread to Europe. Debate is under way in Europe about whether to create a centralized FDA-style system there (see box), at a time when the FDA is itself demanding more data.

Unease in Europe

In late 2011, it was revealed that the French company PIP had been cutting costs by using cheap, non-medical-grade silicone in its breast implants, with catastrophic results. The European Union had already begun redrafting its medical devices directive to improve the product evaluation process, toughen up traceability requirements and place more scrutiny on national regulators.

But the PIP scandal hardened the resolve of some policy makers to strengthen the directive even further. The new draft report on the medical device directive, currently before the European Commission, proposes a pre-market approval procedure for high-risk Class III (implantable) devices, to be administered by a new committee within the European Medicines Agency.

Critics of the idea, including the medtech industry and investors, worry that if it is approved,

the US Food and Drug Administration. “It represents a big threat to SMEs,” says Hubertus Leonhard of SHS VC in Germany. “We feel it will inhibit growth and innovation in Europe.”

The European decision will have repercussions for the US as well, since a popular path to market for emerging US medtech companies in recent years has been to obtain a CE marking (which governs safety, health and environmental protection) in a European market, then gain market experience and utilize patient data from European clinics as part of the basis for an application to the FDA.


Point of view

Resource constraintsAnother challenge faced by medical technology companies of all sizes in the last

resources.

Investment in emerging companies has declined. To some extent, this has been due to macroeconomic developments — in the

more risk-averse and the era of “easy money” ended. But it was also driven by the fact that medtech companies now face increased regulatory and reimbursement uncertainty and lower growth prospects, for the reasons detailed above — and it hardly needs saying that investors do not like uncertainty. So when tolerance for risk recently returned to some segments of the capital markets (initial public offerings are booming in the US, for example) investors remained cool to medtech, even as they warmed to other health care sectors, such as biotech. As Noah Knauf of Warburg Pincus puts it, “A combination of higher risk and lower reward has resulted in a real change in the number of investors and their appetite to invest in medical technology.”

The numbers bear out this observation. In 2012-13, the funding situation for emerging companies continued on its multiyear downward trajectory. Innovation capital — the funds available for the vast majority of pre-commercial companies — declined by 9%, to the lowest level since before the

once accounted for nearly two-thirds of all medtech investment, provided less than 20%

Source: EY, BMO Capital Markets, Dow Jones VentureSource and Capital IQ.Early-stage rounds are first- and second-round VC investments.

Early-stage VC rounds of >US$5 million have plummeted

Number of early-stage rounds Percentage of VC investment going to early-stage medtechs

100

120

140

80

60

40

20

0

25%

30%

20%

15%

10%

5%

0%

Num

ber o

f ear

ly-s

tage

roun

ds

Perc

enta

ge o

f VC

inve

stm

ent g

oing

to e

arly

-sta

ge m

edte

chs

Jul 2008- Jun 2009

Jul 2006- Jun 2007

Jul 2007- Jun 2008

Jul 2009- Jun 2010

Jul 2010- Jun 2011

Jul 2011- Jun 2012

Jul 2012- Jun 2013

The picture is even grimmer when one considers how much of that declining total went to early-stage rounds. Venture investment for early-stage medtech companies has plummeted. In the 2012-13

earlier. (For more on these trends, refer to the Financing article in this year’s report.)

>> A combination of higher risk and lower reward has resulted in a real change in the number of investors and their appetite to invest in medical technology. <<

Noah Knauf Principal, Healthcare Warburg Pincus


... and leading to “lost” R&D spending of US$12 billion

Source: EY and company financial statement data.

R&D spending (actual) R&D spending assuming historic growth rates

15

12

9

6

3

0

US$

b

20042000 2002 2006 2008 2010 2012

If the historic growth rate had been sustained, these companies would have spent an additional US$12 billion on R&D between 2008 and 2012.

But pre-commercial companies are not

limited resources. Larger, commercial entities have also experienced a marked slowdown in growth in recent years, largely as a result of the pressures described above. From 2000 to 2007, the revenues of US and European companies grew at an average of 13% per year.

Since 2008, that growth rate has slowed to just 7%. If post-2008 revenue growth had been sustained at the 13% historic rate, the medtech industry would have brought in an additional US$131 billion in revenue between 2008 and 2012. As a result of these “lost” revenues, companies have less funds to invest in research, development or acquisitions — precisely the activities that would allow them to address the challenges they face.

Medtech revenue growth has slowed, dragging down R&D spending ...


Revenue R&D

20%

25%

15%

10%

5%

0%

20%

25%

15%

10%

5%

0%

Ann

ual r

even

ue g

row

th ra

te

Ann

ual R

&D

grow

th ra

te

20022000 2001 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Average revenue growth: 13%Average R&D growth: 15%

Average revenue growth: 7%Average R&D growth: 7%

... leading to “lost” revenues of US$131 billion ...


Revenues (actual) Revenues assuming historic growth rates250

200

150

100

50

0

US$

b

20022000 2004 2006 2008 2010 2012

If the historic growth rate had been sustained, these companies would have seen an additional US$131 billion in revenues between 2008 and 2012.


Point of view

New markets, new investors?Emerging markets offer opportunities for medtech, but they are no panacea — policy makers in those markets are as keen to keep a lid on costs as their counterparts in the US and Europe. Fewer than half a dozen of the leading commercial-stage medtech companies predict a future in which more than 20% of their revenues will be generated in emerging markets. That said, 2012 and 2013 did see US and European medtech

with companies in emerging markets. And companies in China, now the fourth-largest medtech market in the world, have begun to acquire medtech assets in the US and Europe (see the section “Middle Kingdom rising” in the Mergers and acquisitions chapter of this report).

Pharmaceutical and biotech companies have stepped up their investment in non-pharma assets in recent years, to as much as 20%, according to one recent analysis. Of that, a substantial amount goes to medtech, such as GSK’s US$27 million August 2013 investment in SetPoint Medical, a manufacturer of implantable devices that

Country Measures

GlaxoSmithKline The fund, Action Potential Venture Capital, made its first investment, of US$27 million, in SetPoint Medical, a company manufacturing implantable devices to treat inflammatory diseases.

Johnson & JohnsonThe fund focuses on unique technologies in medical devices, pharmaceuticals and consumer health care. Recent investments include US$29.6 million in medtech firm CVRx’s pacemaker-like device for high blood pressure and heart failure.

Merck & Co In April 2013, Global Health Innovation Fund invested US$40 million in electroCore, a company developing non-invasive nerve stimulation devices.

Eli Lilly & Co Lilly Ventures has a focus on emerging technologies in medical devices and pharmaceuticals.

New ventures: corporate funds’ medtech focus

Larger medtech companies will continue to pursue opportunities in emerging markets, and smaller companies have a new avenue for investment in the form of corporate funds. However, neither of these trends will fully address the resource constraints the industry is under.

The larger point is that medtech companies’ resources have shrunk at precisely the time when they need to be investing in new approaches to address an unprecedented

the more imperative that they invest those limited resources wisely. R&D spending needs to be targeted to products that have the best chance of withstanding the increased scrutiny of payers and providers. Even more importantly, companies need to invest

and in developing new business models for a world of value-driven health care. We explore these imperatives next.

Source: Company sources.

EY | Pulse of the industry8

Services, solutions and new business modelsThe move to value-based health care undermines the basic pillars of the medtech industry’s traditional business model. Any company’s business model is essentially the way in which it creates value (e.g., manufacturing products, delivering a service), delivers value (e.g., through retail outlets, franchise operations, online channels) and captures value (e.g., product sales, subscription fees, advertising). Underlying each of these elements is the value proposition — the attribute the company’s customers most care about (e.g., price, convenience, ease of use).

Big changes in a company’s customer base often result in corresponding shifts in its value proposition, since the new customers may value different attributes. This, in turn, can necessitate changes to how companies create, deliver and capture value — resulting in an entirely new business model. For instance, car manufacturers are currently grappling with a shift in their customer base, as more and more young people choose to opt out of car ownership altogether. To court these new customers, companies have had to develop a new value proposition based on the attributes that these segments most care about — convenience, on-demand access and affordability. To deliver on this value proposition, companies have started to expand their offerings into services and solutions, with fundamentally different ways of creating value (car-sharing services rather than just automobile manufacturing), delivering value (mobile apps and websites instead of car dealerships) and capturing value (subscription fees rather than product sales).

Similarly, while the physicians that were historically medtech’s most important customer might have cared about features such as ease of use and compatibility with other platforms, the industry’s new customers are likely to value other attributes more. Payers and large providers might care

more about a technology’s ability to deliver

ways. Patients are more likely to want features such as ease of use, personalization

of value. How can they prove to payers that

health care systems? How can they design products and services that are convenient and easy for patients to use?

To deliver on the new value propositions for each of these customer segments, medtech

create and deliver value (by expanding beyond the product into services and delivery channels) and capture value (by exploring new revenue channels).

We are already seeing companies experiment with new ways to create and deliver value by moving beyond their core product-driven models. This expansion can happen in three basic ways:

• Beyond the product. Companies can, and should, look for ways to focus their product R&D and differentiate their devices in the new marketplace. But many new approaches will involve expanding into services and solutions. These services could be add-ons to enhance the value proposition of existing products for patients (e.g., call centers that assist patients with product-related issues) and for payers/providers (e.g., services that identify the appropriate patients in which a product should be used). But services could also be stand-alone offerings that help payers and providers improve outcomes and/or lower costs in product-agnostic ways (e.g., consulting services to help a hospital lower costs or increase

For medtech companies, which are used to creating value through technological advances, this represents a big shift in thinking. The biggest opportunities to create value may come from remarkably

low-tech solutions. As Philipp Schulte-Noelle of Fresenius puts it, “They may not seem as ‘innovative’ as new products and technologies, but initiatives such as preventive medicine and disease management are very important — they can help providers and payers better understand disease progression and decrease costs by identifying the right intervention and reducing the length of hospital stays.”

• Beyond treatment. Preventive care offers better health outcomes and return on investment than point-of-care treatment. Remote monitoring and earlier

increasingly valued by payers as cost-

value propositions for payers, medtech companies are therefore starting to move into services and solutions that span the cycle of care.

• Beyond the hospital. There is a push to achieve a better balance between care that takes place in patients’ homes and community settings and care that takes place in institutions such as hospitals. Patients value the convenience, and payers can appreciate that it is more

hospital. There are several ways in which medtech companies can help in this regard. They can do more to develop “mobile” products that allow patients to manage their conditions without frequent clinical intervention — as has been the case for some time in diabetes treatment. And they can provide services aimed at keeping patients out of the hospital, such as care delivery, mHealth and training of patients and outreach care providers.


Point of view

We are already seeing many examples of initiatives that are taking the offerings of medtech companies beyond the product, beyond the hospital and beyond treatment. Some of these are listed in the accompanying table to the right.

While medical technology — particularly when

playing an active role in helping providers and patients, it’s important to note that technology alone is not enough.

Initiative Beyond the product

Beyond the hospital

Beyond treatment

GE Healthcare’s Transforming Cities campaignGE works with care providers, payers and patients to monitor and improve health outcomes in selected cities’ populations.Baxter/Chinese National Institute for Hospital AdministrationDeploying sustainable care and delivery models for peritoneal dialysis patientsMedtronic/Cardiocom (acquisition)Cardiocom is a telehealth devices company. The deal is Medtronic’s first foray into services-based business.Covidien’s Sandman programPatient compliance program to improve treatment of sleep disorders — involves training, education and encouraging patientsGE Healthcare’s Get Fit campaignVia behavioral economics, urges patients to adopt healthy lifestyles Medline’s Advancing Health Together programDeveloping tools, services and education to help nursing facilities improve quality of careToshiba’s Protect programEducate and train hospital staff to achieve ALARA (as low as reasonably achievable) imaging with Toshiba’s CT product linePhilips/Georgia Regents Medical Center15-year alliance to achieve patient-centered approaches to care and address GMRC’s current and future clinical, operational and equipment needs

Going beyond: medtech companies expand into services and solutions

Source: Company information.

For instance, an August 2013 meta-analysis published in the Annals of Internal Medicine found that while self-measured blood pressure monitoring by patients is initially effective, its effectiveness is less certain after 12 months — particularly among people not receiving support above their usual care. To increase the effectiveness of medical technology, it is therefore critical that companies accompany products with services that help lower costs by assisting patients and boosting compliance. Payers will likely not reimburse a technology if it cannot demonstrably deliver sustained improvements.

Initially, add-on services offer a line of defense for device manufacturers confronted with higher demands from payers or providers. In Spain, whose regional governments owe €12 billion to pharmaceutical and device companies, Medtronic Iberica responded to price pressure by teaming up with a hospital, helping it to reduce costs associated with long-term coronary care. In England, Medtronic has won a contract to replace the catheterization labs at University Hospital South Manchester NHS Trust and Imperial College London, providing diagnostic imaging to improve clinical processes, training capabilities and patient offering. In the US, Philips has signed a 15-year deal with Georgia Regents Medical Center in which it will provide consulting services, advanced technologies, and operational, planning and maintenance services.

>> [Low-tech solutions] may not seem as ‘innovative’ as new products and technologies, but initiatives such as preventive medicine and disease management are very important. <<

Philipp Schulte-Noelle Senior Vice President,

Corporate Business Development/M&A

Fresenius SE & Co. KGaA Over time, however, we expect more and more companies to expand into services not as a defense tactic but as the basis for new business models built around delivering solutions for payers, providers and patients. These models will frequently be created in collaboration with a diverse set of players from across the spectrum of health care. Many of them will be built around data and analytics — capabilities that medtech companies need to expand to demonstrate

patients. These new models will often seek to share risk and reward in creative new ways, leading to new revenue streams beyond product sales, such as subscriptions and fees based on achieving successful outcomes.

But to fully embrace business model innovation, companies will need to develop new capabilities and use existing strengths differently. We turn to these implications next.


What will innovation look like? To succeed at business model innovation and the move beyond products, companies will need to be able to both tap into their strengths (often using them in creative new ways) and overcome their weaknesses. This will require a different way of looking at innovation and what it comprises, and a reprioritization of spending. It will also require a cultural shift, away from primarily product-centric and toward solution-centric offerings. In view of the diversity of the medtech industry, these attributes will vary from company to company, and individual enterprises will need to assess their own capabilities and shortcomings.

Commercial leadersCertainly, medtech’s largest companies have many valuable strengths when it comes to business model innovation. Thanks to their sheer size, they have capabilities and scale that will be useful for developing and

commercial savvy, regulatory expertise, global footprints and more. Their history of “innovating from the bedside” has given them deep relationships with providers and, to a lesser extent, with payers — connections that will be important as they build solutions that go beyond the product to address issues in health care delivery. And their existing base of products and patients gives them valuable streams of data for developing insights that payers will value. Along these lines, partnerships between medtech companies and providers, for example catheterization labs or orthopedic suites, are already occurring.

But in order to come up with business models that meet future challenges, these large companies will need to break down some barriers. More often than not, they have relatively closed cultures that make them unwilling to share data openly. This mind-set could be an obstacle to constructing new business models around data and analytics.

The biggest challenge for large companies, however, might be that it is notoriously

themselves. Even when they recognize the need to disrupt their own business models, they often have a hard time doing so because they are highly invested in their existing business models, which provide stable sources of revenue that dwarf what new business models can initially offer. The commercial leaders of the future will be those that can adapt to this challenge and be much more entrepreneurial than today’s product-centered success stories.

Emerging companies Disruptive innovation, on the other hand, nearly always comes from smaller companies. But as we’ve discussed, these

the current capital market environment. Smaller enterprises also lack many of

commercialization experience, relationships with payers and providers, an existing base of patients and products whose data can be tapped for insights.

Medtech is an industry in which small companies are often built with the goal of developing an innovative technology and then getting acquired by a larger enterprise.

identifying gaps in the product offerings of

companies are not beholden to old ways of doing business, and they often have more open, collaborative cultures — attributes that make them more likely to be the developers of disruptive business models. “Intelligent start-ups can partner with health insurance companies to convince payers that a

health economics of social insurance,” says Hubertus Leonhardt of SHS VC. “This can give them earlier access to the market.”

will need to be expanded to address issues impacting both the patient experience and

their weaknesses and attract and retain investment, large and small companies will need to build new capabilities. They will also need to redeploy their existing strengths in creative ways.

>> Intelligent start-ups can partner with health insurance companies to convince payers that a

increase in the health economics of social insurance. <<

Hubertus Leonhardt Partner SHS


Point of view

Building new capabilitiesTo succeed at business model innovation, companies will need to build new capabilities

in their current lineup of skills:

Medtech companies are now forced to operate with fewer resources at their disposal. This means that they will have to make more

order to keep investors happy and to free up resources to take advantage of any opportunities for business model innovation. To achieve this, they could,

explore ways to extract more value from intellectual property.

(2) Ecosystem-wide scanning. Medtech companies are now operating in a very

experimenting with different incentives and reimbursement schemes. Policy makers are debating new rules even as regulators implement recently passed legislation and increase their scrutiny of the industry. Providers are responding to lower reimbursements by seeking to root

care. Investors are raising the bar when considering investments, and competitors are entering new lines of business.

To succeed in this environment, medtech companies of all sizes will need to take a broad view of the changing health care landscape for their products and understand where their products can make a difference. “Companies will need to have global and emerging markets experience,” says Susan Morano of Johnson & Johnson. “They have got to focus on stakeholders beyond the physicians. They’ve got to understand health economics, government requirements and market segmentation.” A company’s ability to design a holistic solution to a problem will also enable it to attract more funding.

(3) Collaborative cultures. While medical technology companies have a long history of outside-in innovation, they have typically achieved this through acquisitions rather than alliances. The new world of business model innovation is different. Success will require a wide range of assets and skills that even the largest medtech companies cannot hope to possess in-house. Therefore they will need to truly collaborate — not just with

diverse set of companies from across the ecosystem. Building collaborative cultures will require a strongly articulated vision from senior leaders as well as appropriate incentives that encourage executives to collaborate.

>> Companies will need to have global and emerging markets experience. They have got to focus on stakeholders beyond the physicians. They’ve got to understand health economics, government requirements and market segmentation. <<

Susan Morano Worldwide Vice President for New Business Development,

Medical Devices and Diagnostics Group

Johnson & Johnson


(4) Open data enterprises. One area in which large companies will need to become far more collaborative is data. Value in medtech will increasingly be

analytics to prove the effectiveness and

Investors and payers are already beginning to insist on this, even as they admit that it is not easy to put in place. “Outcome results are very poorly comparable with each other,” says Hans Feenstra, the CEO of Martini Hospital in Groningen in the Netherlands.

Large companies have some advantages in this regard. They have commercialized products and active pools of patients. As more and more medtech products become smart and connected, these devices are producing large volumes of data. However, this data is only useful when combined with information streams from other health care enterprises (e.g., electronic health records from providers, claims data from payers, real-time biometric data from smartphone apps). It is only by combining all this data that the big picture of “big data” can be developed, allowing providers and payers to identify the factors that lead to improved outcomes, adverse events, and so on. Demonstrating that they are good with data is also an ideal opportunity for medtech companies to prove that they understand how to manage patients and deliver care.

Large medtech companies are taking steps to become more open, but they still have a long way to go. Companies should be taking the lead in teaming up with payers, providers and patients to share data and collectively gather insights.

Medtech companies will also need to get better at identifying and working with the people and tools capable of managing both conventional and big data as a continuous process. This could be achieved by scaling up internal resources and by hiring or collaborating with third parties.

(5) Disease/Value pathways. To truly go “beyond the hospital” and build new solutions-based business models that enable better prevention and health management, companies of all sizes will need a comprehensive understanding of the entire cycle of care for the disease areas in which their technology will be placed. “Innovation is going to be driven by entrepreneurs who are true experts in a disease area, and have unique insights into where the holes are,” says Wende Hutton of Canaan Partners. This will involve understanding disease progression and the journey patients take in moving from one disease state to the next. Critically, it will also include identifying the largest “value leakages,” or steps along the patient journey where outcomes are not improved — the “holes” to which Hutton refers — whether or not those stages involve the use of the company’s technology.

Helping to improve ways in which care is delivered is an area where medtech companies have a lot to offer, building on years of experience training clinicians how to use their products. Understanding the causes behind these value leakages gives companies a road map for developing new solutions and models that can help address the biggest cost drivers in a particular disease. At EY, we have been helping numerous pharmaceutical

pathways. As medtech companies embrace business model innovation in a more comprehensive way, they will need to develop similar maps to guide their efforts. Proving that they understand care pathways also allows medtech companies to take on a set of patients, manage their care and demonstrate outcomes — a potentially exciting new market.

(6) Scalable processes with appropriate metrics. Finally, big medtech companies need scalable processes for business model innovation. This will include large numbers of proof-of-concept experiments and the use of appropriate metrics to identify and scale up the most promising trials. The use of metrics is particularly relevant for large companies because, as discussed above, new experiments will be competing against entrenched and proven business models. If they rely excessively on traditional metrics, companies are likely to fall into the trap of dismissing disruptive ideas for not having enough commercial potential and then struggling to catch up when the new models gain traction.

>> Innovation is going to be driven by entrepreneurs who are true experts in a disease area, and have unique insights into where the holes are. <<

Wende Hutton General Partner Canaan Partners


Redeploying existing strengthsThe good news is that some of the strengths of large and small medtech companies

business model innovation. But to achieve

capabilities in new ways.

(1) Customer-centric design. As discussed above, one of the core strengths of medtech companies is that they are very good at working with physicians to design products. This is a useful competency for outcomes-driven health care systems, where it will be imperative to design products and solutions that create and deliver value for an expanded set of customers. Companies could harness this strength not just to create products valued by physicians, but also to design offerings that enhance productivity or reduce costs for health systems, or are easy for patients to use.

Small medtech companies are particularly

niche or gap in the offerings of larger companies. There is a massive need for this approach in value-driven health care systems, where the most successful companies will be those that can identify gaps in health outcomes (value leakages) and design new solutions to address those needs.

(3) Engineering solutions. Lastly, it’s worth keeping in mind that medtech — more

than any other part of life sciences, and perhaps even all of health care — is an engineering culture. While pharma and biotech companies attempt to discover what works, medtech companies are adept at building the answer. And today, more than ever, health care needs builders. Many of the biggest challenges facing health care systems around maximizing

very complex engineering challenges. If medtech companies were to play a more active role in solving them, they could bring much to the table.

The role of investorsWhat does medtech business model innovation mean for investors? VCs and other investors will need to consider new approaches when funding companies in this new environment.

VCs will need to change the lens through which they evaluate and conduct investments. With new business models, they are not backing a technology or product so much as a solution to a particular issue. As such, investors need to be issue-driven rather than excited by the technology alone. In conducting due diligence, they will have to assess not just whether a technology is likely to work but whether a particular solution will be effective in solving an underlying problem, and whether it will gain traction with all the stakeholders in the health care value chain. How will it be reimbursed? How will it be used by physicians, or by patients? The upshot is that medtech VCs will have to develop a much deeper

understanding of health care issues and challenges. They can no longer just be experts on medical devices.

The fact that investors are backing new business models and solutions, rather than technology alone, raises an important corollary question. Solving big health care challenges — in a highly regulated industry

interests — is likely to take much longer than the relatively straightforward task of building a new product. Investors, company management and even strategic buyers will grapple with the question of how far investors should be expected to carry early innovation before a buyout. Without a regulatory approval process, what are the value-creating

These are fascinating questions and we expect that investors will get as creative as the companies they are funding and build new investment paradigms and models. After all, for companies that successfully develop effective solutions to big health care challenges, the upside potential is tremendous. With that much opportunity,

work.

VCs will need to change the lens through which they evaluate and conduct investments

Point of view


ConclusionTwo years ago in Pulse of the industry, we discussed the growing gap between the haves and have-nots in medtech, as large companies’ share of total capital in the sector grew. The gap between large and small companies has not diminished in the ensuing period. There is, however, a growing sense that acceptance of the “new normal,” as we described it in 2011, is leading to some of the most creative thinking the sector has ever seen, driving the creation of new business models.

There is no shortage of money in health care. Health budgets continue to grow, and will do so for the foreseeable future. Very large health challenges remain to be addressed, including chronic diseases associated with lifestyle and aging. But there is a large reallocation of health resources, based on value. Medical technology companies that can truly differentiate their offerings in this new marketplace should be entitled to a larger portion of those resources. But to succeed, they will need to focus as never before on creating and delivering value for payers and patients.


!!!!!

2005-09average

2012

210

!!!!156

Number of warning letters issued by the CDRH

A perfect storm

Number of US hospital M&As (announced)

2005-09average

2012 94

56

Jul 07- Jun 08

Jul 12- Jun 13

Early-stage rounds of > US$5 million

$$$$

$

$$$$

$

$$$$

$

$$$$

$

$$$$

$

$$

$$$$

$

$$$$

$

128

48

Annual R&D growth rate (%) of commercial leaders

2008-12 average

2003-07average

7

16

Innovation capital as a percentage of total capital

Jul 12- Jun 13

Jul 07- Jun 08

18

! ! ! ! ! ! !! !

64Number of aesthetic procedures in the US (millions)

2007 11.7

2012 10.1

Sources: EY, Accenture, American Society for Aesthetic Plastic Surgery, Dow Jones VentureSource, Mercom Capital Group, ThomsonOne and U.S. Food and Drug Administration.

Point of view


2005-09average

2012

33

24

Percentage of US physicians in private practice

Jul 08-Jun 13average 8.4

Jul 05- Jun 08average 16.3

2007 2012

Capital raised by US venture funds (all sectors, US$b)

19.7

35.6

Health care IT VC funding (US$m)

2012

2010

1,174

211

>> It’s a perfect storm. There are regulatory challenges with the FDA, there are reimbursement challenges, there is a lack of available venture capital, corporate buyers are mostly missing in action, and the capital markets [for emerging medtechs] have disappeared. <<

Guy Nohra Managing Partner Alta Partners


Guest articles

The clamor around the sustainability of health care systems worldwide continues to build — and for good reason. As I travel to various countries and meet with health

hear a certain consistency in the challenges and opportunities they are facing. Virtually all of their economies are strained, and health care costs are consuming an ever-increasing portion of their overall budgets. At the same time, huge populations around the world, at all income levels, lack access to basic standards of health care.

All of these countries are working to balance the fundamental challenge of increasing access and managing cost, all while maintaining quality. On one hand, governments, and often the private sector, are working to remove the barriers that limit access. On the other hand, as they seek to expand access, they do so with full knowledge that they cannot allow escalating costs to consume their economies or compromise the quality of care. In the end, the relative emphasis on cost, quality and access in any one country may be different, but they are all confronting the question of how to balance better health care, for more people, while controlling costs.

The situation is particularly acute in the United States, where, in large part, we have access to quality care, but face steeply

cost escalation in the US is the way we

health care delivery. For decades, and even today, the US health care system has largely operated on a fee-for-service

model that rewards volume over value. It can incentivize more treatment over better health, and it often rewards inputs over outcomes. This system isn’t

clinical advancements in patient care.

But the path this system has traveled

assumption: that unlimited funding — from the government, employers or the private sector — will always be available. Wisely, the US health care system is moving to a fee-for-value approach, which incentivizes value over volume and outcomes over inputs. We are seeing increased momentum and energy from a variety of stakeholders — all aimed at improving the sustainability of health care systems.

Within the medical technology industry, it is easy to bemoan the apparent pressure this “new” health care environment places on innovation. However, this very reaction suggests that innovation within our industry is limited to technology alone.

and iterations, we must focus on the

our industry to include bold new business models that deliver clear clinical and economic value to health care systems.

Developing innovative, new therapies to improve clinical outcomes will always be a central value proposition in the marketplace. The basic human desire for better care is limitless, because people will always strive for better health and improved quality of life.

But today’s world requires more from us. Demonstrating economic value can

comprehensive understanding of health systems, developing relationships with a broader set of stakeholders, a new approach to R&D and new commercial models. Success in a system that rewards value over volume requires technology,

services and solutions that encompass the entire patient care continuum. These complete offerings must deliver value to a wider set of decision makers — including governments, payers, hospital systems and consumers — striving not only to improve individual patients’ lives, but also to ensure that the overall health care ecosystem remains viable.

The shift from fee-for-service to fee-for-value is upon us. In general, our industry has been slow to address this dynamic, resulting in increased pricing pressure and, ultimately, slower market growth. We must channel the growing frustration into a rallying cry for our industry to deliver new forms of innovation and value propositions that meet these clinical and economic demands.

These are challenging but exciting times,

medical technology companies and innovators to be part of the solution for

the quality of health care systems around the globe. Every company is faced with a choice: stick to the status quo, or transform and lead.

Omar IshrakChairman and CEO

Medtronic, Inc.

Transforming and leading


Michel OrsingerWorldwide Chairman

DePuy Synthes Companies of Johnson & Johnson

Innovating differently

As health care systems around the globe confront the problem of escalating costs, the medtech industry’s key stakeholders and decision makers are evolving. The stakeholders that matter are no longer just physicians and patients, but also providers, payers and policy makers. And

are more focused than ever on value —identifying and rewarding interventions that improve patient outcomes and satisfaction

Innovating differently

In this environment, medical technology companies cannot conduct business as usual, and one area that must change is innovation. Medtech innovations will need to provide evidence of measurable value creation — demonstrating that they are reducing length of stay, minimizing readmissions, improving operating room

To achieve this, medtech innovation will adapt along three dimensions. First, companies will need to conduct product innovation in new ways. Second, innovation will no longer be limited to products — companies will need to expand into services and solutions as well. Lastly, companies will need to look more broadly at their business models and develop new models that are more relevant for values-driven health care systems, even aiming to transform health care systems.

Differentiated product innovation. Medtech products must demonstrate that they are

ways. As such, product innovation is no longer just about incorporating the latest technology, but also about designing products that use health care resources

integrated systems that reduce inventory needs or simpler ones that require less training. It could consist of devices that are designed to reduce procedure time and increase hospital throughput. And it could be achieved through products designed to lower the chance of costly complications such as infections.

Our ATTUNE Knee System is a great example of new product innovation that can address the need for demonstrating outcomes, patient satisfaction and reduced costs. This system started by focusing on an unmet patient need — providing an increased range of motion and addressing the instability some patients experienced with existing knee replacement systems. The ATTUNE System addresses these needs with a product designed to achieve both stability and range of motion.

Critically, the success of the product is dependent not just on these technological advances, but on demonstrating how it can

publications document the science behind the design, thereby addressing our stakeholders’ need for evidence. And the

allows providers to reduce sterilization and surgical prep costs — thereby helping

delivery.

Innovation beyond the product. Companies also will need to complement their core products with innovative services and programs that provide additional value to stakeholders, helping them achieve desired clinical outcomes, a better patient experience and reduced costs.

The DePuy Synthes Geriatric Fracture Program is such a service-based approach. This comprehensive solution addresses the needs of multiple stakeholders — educating patients and helping providers re-engineer the care process for hip fractures. We looked at the entire episode of care from the time someone fractures their hip through the process of rehabilitation. We then worked with multiple health care professionals to outline a treatment protocol for the entire episode of care and standardize treatment. The result? The program shortens length of stay by more than a day, is designed to reduce complications and improve clinical outcomes, and increases patient satisfaction.

New business models. Beyond developing products differently and expanding into services and solutions, medtech companies will also need to revolutionize their traditional business models. The shift to value-based health care affects all aspects of the business model — from R&D through manufacturing and sales and marketing — and they will all need to be adapted for increased relevance in a world of value-driven health care. Medtech companies, especially those with scale, portfolio breadth, and the readiness and

have the opportunity to develop new, transformational solutions through strategic partnerships with providers/hospital groups.

Conclusion

There are many positive indicators for the medical technology industry. Global demographics and emerging market growth promise to boost demand in the

face challenges that we cannot ignore. To maintain the vitality of our industry, we need to listen to a broader group of stakeholders (providers, payers and policy makers in addition to physicians and

the value needs of these stakeholders.


Financial performance

boosted by this trend. However, for European companies, the exchange rate also came into

dollars throughout this report for consistency purposes. We therefore converted European

the strengthening dollar — more than their US numbers were boosted by exchange rate shifts. The bottom line is that, somewhat counterintuitively, the results of both US and European companies were hurt by the strengthening US dollar.

While the revenues of US and European companies increased by a relatively modest 2% (after converting all results into US dollars), the true picture was quite different. After adjusting for the J&J/Synthes

the “apples-to-apples” 2012 revenue growth rate would have instead been about 8% — as compared with 4% in 2011. Similarly, the

European publicly traded medtech companies was essentially in line with 2011, other than the decline in aggregate net income of pure-play companies. To understand the true picture, however, one needs to look behind the numbers, because the data was skewed by large swings in the euro/dollar exchange rate and by the year’s megadeal: Johnson & Johnson’s acquisition of Synthes, which

company from the results. (While we include the revenue of conglomerates like J&J in our industry totals, we are unable to do so for other captions. As a result, once Synthes was acquired by J&J, only revenue continued to be captured in the above table.)

impacted by the strengthening of the US dollar against the euro and other European currencies. Since US and European companies sell into each others’ home markets, these exchange rate swings affected companies on both sides of the Atlantic.

strengthening dollar. Conversely, the results

Public company data 2012 2011 % change

Revenues $339.6 $333.9 2%

Conglomerates $148.7 $144.3 3%

Pure-play companies $190.9 $189.5 1%

R&D expense $12.9 $12.8 1%

SG&A expense $60.4 $60.5 0%

Net income $15.5 $19.9 -22%

Cash and cash equivalents and short-term investments $40.7 $39.8 2%

Market capitalization $454.0 $415.1 9%

Number of employees 732,400 725,000 1%

Number of public companies 368 374 -2%

Medical technology at a glance, 2011–12(US$b, data for pure-plays except where indicated)

Source: EY and company financial statement data.Numbers may appear to be inconsistent due to rounding. Data shown for US and European public companies.Market capitalization data is shown for 31 December 2012 and 31 December 2011.

normalized net income growth rate would

the reported 2012 decline of 22% and the 2011 normalized growth rate of 0.5%).

were better than 2011 on a normalized basis, looking at the longer term reveals a more

delivered double-digit increases in revenue and robust net margins. As companies grapple with increasing pressure from market forces, payers and regulators, they will need to take action not to merely sustain their recent performance but rather to return to the top-line growth and bottom-line

crisis. And meeting that challenge will require revisiting how they innovate both their medtech products and their business models for medtech’s new normal.

Behind the numbers: a growth challenge


US public medtech cash index

Source: EY and company financial statement data.Chart excludes companies that are cash flow positive. Numbers may appear to be inconsistent due to rounding.

More than 5 years3–5 years

2–3 years1–2 years

Less than 1 year

100%

80%

40%

60%

20%

0%2010

51%

17%

11%

7%

14%

2011

45%

25%

10%

9%

10%

2012

49%

21%

12%

9%

9%

More than 5 years3–5 years

2–3 years1–2 years

Less than 1 year

European public medtech cash index

Source: EY and company financial statement data.Chart excludes companies that are cash flow positive. Numbers may appear to be inconsistent due to rounding.

100%

80%

40%

60%

20%

0%2010 2011 2012

49%

14%

12%

12%

12%

55%

16%

5%

9%

14%

38%

26%

11%

11%

15%

The industry’s financial growth is significantly below levels before

the financial crisis


Over the last few years, the ranks of medical technology commercial leaders had increased steadily as a number of companies continued to grow and surpass the US$1 billion threshold. This trend was reversed in 2012, when the number of commercial leaders

companies dropped out of the list and no new

billion acquisition of the orthopedic implant maker, and Italian cardiovascular company Sorin fell out because its revenues dropped below US$1 billion. Sorin, which joined the ranks of the commercial leaders in 2011, was affected by two earthquakes that halted manufacturing and interrupted shipments.


US and European commercial leaders

Source: EY and company financial statement data.Commercial leaders are pure-play companies with revenues in excess of US$1 billion.

50

40

20

30

10

02010

42 companies2011

45 companies2012

43 companies2009

42 companies2008

41 companies

26 companies24 companies 25 companies 27 companies 25 companies

8 companies 11 companies 8 companies9 companies 9 companies



> US$10bUS$5b–US$10bUS$2.5b–US$5bUS$1b–US$2.5b


US market capitalization

Source: EY and Capital IQ.Charts includes companies that were active on 30 June 2013.

EY US medtech industry NASDAQ Composite US big pharma EY US biotech industry

150%

0%

50%

100%

-50%

-100%

2008 2009 2010 2011 2012 2013

European market capitalization

Source: EY and Capital IQ.Chart includes companies that were active on 30 June 2013.

50%

60%

40%

-10%

0%

-20%

10%

20%

30%

-30%

-40%

-50%

2008 2009 2010 2011 2012 2013

EY European medtech industry FTSE 100 European big pharma EY European biotech industry

Since 2008, US medtech companies have struggled in the public markets. While a resurgent biotechnology industry has seen its cumulative market valuation double,

indices such as the NASDAQ Composite and fared no better than big pharma, which is struggling in the wake of its patent cliff. Conversely, European medtechs have been a beacon in a tumultuous market impacted by the Eurozone crisis. Not only have they fared better than their American counterparts, but they have outperformed both European biotech and big pharma companies, as well as the DAX, FTSE 100 and CAC 40 indices. As discussed in this year’s Point of view article, the situation in Europe may become

the approval process, but European investors seem to be discounting such concerns.

The tale of two continents


Net income was similarly affected by a series of major, multiyear merger-, impairment- and litigation-related charges by companies

After adjusting for these factors, as well as for the Synthes and ZOLL acquisitions, net income would have increased slightly, by 0.5%, instead of declining by 37%. This is also better than 2011, when net income fell by 1% on a normalized basis. R&D inched up nearly 2% to US$10.2 billion as roughly two-thirds of all companies increased their investments, while headcount was up by 1% (on a normalized basis). More than 70%

the year.

medtech companies was skewed by exchange rate headwinds and a couple of large deals. Revenues increased to US$210 billion, a 2% increase. However, after adjusting for the strong US dollar, the J&J acquisition of Synthes and the Kasei acquisition of ZOLL Medical, revenues would actually have increased by 6%. While this doesn’t approach the double-digit top-line growth the industry used to deliver prior to the great recession, it was a solid performance given the slew of challenges facing today’s medtech industry.

Source: EY and company financial statement data.Numbers may appear to be inconsistent due to rounding. Market capitalization data is shown for 31 December 2012 and 31 December 2011.

United States


Public company data 2012 2011 % change

Revenues $210.1 $206.6 2%

Conglomerates $81.9 $78.4 4%

Pure-play companies $128.2 $128.2 0%

R&D expense $10.2 $10.0 2%

SG&A expense $41.4 $41.6 0%

Net income $8.7 $13.7 -37%

Cash and cash equivalents and short-term investments $33.2 $33.3 0%


Number of employees 431,400 438,000 -2%

Number of public companies 227 232 -2%

US medtech at a glance, 2011–12(US$b, data for pure-plays except where indicated)

A solid performance given the slew of challenges facing today’s medtech industry


Medtech remains an industry of haves and have-nots. After removing the impact of the Synthes acquisition and a series of accounting charges, the 29 commercial leaders outperformed other companies in revenue growth and kept net income

other companies, a higher percentage of commercial leaders increased their revenues (79% vs. 69%), net income (62% vs. 48%) and R&D expenses (79% vs. 62%).

2012 2011 % change

Commercial leaders

Revenues $107.7 $108.1 -0.4%

R&D expense $7.7 $7.6 2%

Net income $9.2 $14.3 -35%



Other companies

Revenues $20.5 $20.1 2%

R&D expense $2.5 $2.5 1%

Net income (loss) $(0.6) $(0.6) 0%



US commercial leaders and other companies, 2011–12(US$b)

Source: EY and company financial statement data.Commercial leaders are pure-play companies with revenues in excess of US$1 billion. Numbers may appear to be inconsistent due to rounding. Market capitalization data is shown for 31 December 2012 and 31 December 2011.

Region RevenueNumber of companies

Market capitalization 31 Dec 2012 R&D Net income

Cash and cash equivalents Total assets

Massachusetts $30,869 28 $51,467 $2,260 -$3,047 $3,545 $71,0294% -13% 16% 5% -274% -9% 2%

Minnesota $22,384 16 $56,414 $2,260 $4,434 $4,266 $43,5370% -6% 2% -3% 11% 11% 7%

Southern California $14,613 33 $46,598 $1,517 $1,103 $6,254 $28,5321% -3% 22% -2% 12% -1% -1%

Northern California $11,953 30 $46,145 $1,255 $1,197 $4,655 $18,08412% -3% 10% 13% 16% 9% 14%

New Jersey $11,992 11 $25,946 $800 $1,739 $3,339 $17,3421% -8% 4% 9% 6% 42% 9%

Michigan $8,950 4 $22,128 $526 $1,265 $4,361 $13,8134% 0% 11% 8% -3% 25% 8%

Indiana $6,519 4 $13,698 $318 $877 $1,650 $11,2482% 0% 15% -3% -2% 12% 8%

Pennsylvania $6,453 9 $11,832 $229 $226 $929 $11,131-33% -10% -60% -42% -85% -73% -42%

New York $3,181 20 $5,758 $217 $61 $306 $4,71510% 0% 23% 1% -20% -56% 3%

Ohio $3,106 5 $3,801 $107 $135 $242 $2,874-4% 0% 11% 50% 82% -18% -2%

Maryland $1,858 4 $7,929 $115 $414 $1,564 $3,2400% 0% 17% 3% 2% 19% 17%

Texas $1,406 8 $4,373 $141 $164 $445 $1,738-4% 14% 13% 18% 122% -13% -10%

Selected US medtech public company financial highlights by region, 2012(US$m, % change over 2011)

Source: EY and company financial statement data.Data shown for pure-play companies only.


Change in US therapeutic device companies’ revenue and net income by disease category, 2011–12


Revenue Net income

1

Oncology Dental Multiple

0

-2

-1

-3

-4

-5

Cardiovascular/vascular

Orthopedic Women’s health

The combined revenue of therapeutic device companies, which accounts for 55% of all pure-play revenue, was essentially unchanged, slipping 0.1% in 2012, compared to a 5% increase in 2011. Unlike 2011, when each of the six largest disease categories saw its top line grow, only four categories increased revenues in 2012. Oncology (+14%, led by Accuray), dental (+13%, led by Dentsply) and women’s health (+12%, led by Hologic) all grew double digits, while cardiovascular and orthopedic revenues were adversely affected by the acquisitions of ZOLL Medical and Synthes, respectively.

Four of the six largest disease categories racked up net losses in 2012, one year after each of them produced positive bottom-line results. CR Bard, Intuitive Surgical and Medtronic drove the “multiple” segment’s 12% increase, while US$5.1 billion in accounting charges from Boston

cardiovascular/vascular.

Research and other equipment led all segments with a 10% year-over-year growth rate, followed by other (+2%) and imaging (+0.2%). In addition to therapeutic devices, non-imaging diagnostics was the only other segment to experience a decline in revenues (-1%).



Companies 2007 2012 CAGR

NuVasive $154 $620 32%

Alere $767 $2,819 30%

Intuitive Surgical $601 $2,179 29%

Illumina $367 $1,149 26%

Life Technologies $1,282 $3,799 24%

Volcano $131 $382 24%

Accuray $140 $409 24%

Danaher: Life Sciences & Diagnostics $2,998 $8,508 23%

Hologic $738 $2,003 22%

Cepheid $129 $331 21%

Selected fast-growing US medtechs by revenue growth, 2007–12(US$m)

Source: EY and company financial statement data.Companies in italics have made significant acquisitions between 2007 and 2012. CAGR = compound annual growth rate

San Diego-based spinal device company NuVasive once again led the US public

revenue growth rate. Six of the 10 fastest-growing companies largely expanded through organic measures, and all of them delivered impressive compound annual growth rates of more than 20%. New to the list in 2012 were California-based companies Volcano, a vascular imaging company, Accuray, maker of the CyberKnife Robotic Radiosurgery System, and Cepheid, a molecular diagnostics company. While these three companies have grown organically, Washington, DC-based conglomerate Danaher has mainly used a series of acquisitions — most notably of Beckman Coulter in 2011 — to join this list.

6 of the 10 fastest-growing companies largely expanded

through organic measures


The second impact occurred when these

dollars for presentation in this report (we use dollars throughout the report for consistency). In this conversion, the

about 11 percentage points because of the strengthening of the dollar.

In US dollars, European companies’ revenues increased by a relatively modest 2%. However, after normalizing for these

results in euros, the industry’s revenues were up by a much healthier 10% in 2012 (vs. 3% in 2011), primarily driven by Europe’s commercial leaders. Similarly, R&D (+9%), net income (+20%), cash holdings (+26%), market cap (+32%) and the number of employees (+5%) also increased, at rates that outpaced the American industry.

of the medtech sector in Europe was

effects worked in two distinct ways. The

companies were bolstered by the rise of

of European companies were boosted by about 3 percentage points due to favorable exchange rate movements.

Source: EY and company financial statement data.Numbers may appear to be inconsistent due to rounding. Market capitalization data is shown for 31 December 2012 and 31 December 2011.

Europe


Public company data 2012 2011 % change Normalized % change

Revenues $129.6 $127.3 2% 10%

Conglomerates $66.9 $65.9 1% 10%

Pure-play companies $62.7 $61.3 2% 11%

R&D expense $2.74 $2.72 1% 9%

SG&A expense $18.9 $18.8 0% 9%

Net income $6.8 $6.2 11% 20%

Cash and cash equivalents and short-term investments $7.5 $6.5 17% 26%

Market capitalization $144.6 $118.6 22% 32%

Number of employees 301,000 287,000 5% 5%

Number of public companies 141 142 -1% -1%

European medtech at a glance, 2011–12(US$b, data for pure-plays except where indicated)

Spearheaded by strong performances from companies such as Philips Healthcare, Alcon Surgical, Advanced Medical Solutions Group and Optos, 58% (82% in euros) of European public medtechs increased their revenues in 2012, 54% (69% in euros) of pure-play companies increased their R&D spend, while 58% (60% in euros) grew their bottom lines — all of which were consistent with the prior year. And despite high levels of unemployment across much of Europe,

300,000 employee level.


European commercial leaders once again outperformed their smaller counterparts

the exception of net income. As in the US, the gulf between commercial leaders and other companies continued to expand, as smaller companies were more susceptible to the continent’s widespread austerity measures, increased pricing pressures and delayed payment cycles. Still, 80% of other companies increased revenues and two-thirds boosted their R&D budgets.

Source: EY and company financial statement data.Commercial leaders are pure-play companies with revenues in excess of US$1 billion. Numbers may appear to be inconsistent due to rounding. Market capitalization data is shown for 31 December 2012 and 31 December 2011.

2012 2011 % change

Commercial leaders

Revenues $54.9 $53.1 4%

R&D expense $2.2 $2.1 2%

Net income $6.5 $6.2 4%



Other companies

Revenues $7.7 $8.3 -6%

R&D expense $0.6 $0.6 -5%

Net income (loss) $0.3 $(0.0) 746%



European commercial leaders and other companies, 2011–12(US$b)

Country RevenueNumber of companies

Market capitalization 31 Dec 2012 R&D Net income

Cash and cash equivalents Total assets

Germany $17,786 15 $24,625 $269 $1,349 $930 $25,7605% -17% 6% -4% 9% 34% 11%

Ireland $11,935 2 $27,635 $626 $1,922 $1,941 $22,4542% 0% 26% 12% 2% 23% 9%

France $9,515 22 $27,088 $534 $847 $1,240 $12,6657% 38% 44% 7% -5% 53% 2%

Sweden $5,376 32 $15,183 $230 $614 $659 $9,2446% 3% 37% -13% 44% 19% 9%

United Kingdom $4,935 19 $11,712 $212 $759 $301 $6,793-1% -5% 14% -4% 27% -5% 16%

Switzerland $3,855 9 $11,629 $275 $394 $582 $4,700-5% 0% -5% 15% 1% -29% -11%

Denmark $3,569 4 $14,836 $176 $596 $513 $3,449-2% -20% 32% -14% 4% 24% 0%

Italy $2,925 5 $4,465 $145 $245 $375 $3,785-10% 0% 43% -3% 15% -9% -8%

Netherlands $1,532 2 $4,991 $145 $108 $516 $4,780-1% -33% 22% -6% 28% 45% 9%

Israel $524 21 $1,308 $68 -$47 $281 $822-6% -19% -10% -25% -54% -24% -7%

Selected European medtech public company financial highlights by region, 2012(US$m, % change over 2011)

Source: EY and company financial statement data.Data shown for pure-play companies only.


Europe’s therapeutic device companies raised their collective top line by 2.5% to US$65.7 billion in 2012, which accounted for 51% of the industry’s total public revenue. Unlike the US, where 12 of the disease segments increased year-over-year revenue in 2012, only seven did so in Europe. In fact, of the six largest disease segments, only half experienced revenue growth in 2012, versus 100% in 2011. Fresenius, largely due to its 2011 acquisition of Liberty Dialysis, helped pace the hematology/renal segment’s 8% growth, while Essilor and Novartis’ Alcon Surgical drove ophthalmic’s 9% increase. On the other hand, all three companies in ENT

experienced declines in year-over-year revenues. Therapeutic device companies increased their bottom lines by 9% in 2012, as 10 of the 16 disease segments enjoyed year-over-year growth, including four of the six largest.

Similar to the US, research and other equipment companies had the largest revenue growth rate (6%). Therapeutic devices, imaging (+2%), other (+1%) and non-imaging diagnostics (-1%) followed.

delivered revenue growth of at least 8%.


Change in European therapeutic device companies’ revenue and net income by disease category, 2011–12


1.0

Hematology/renal

Multiple

0.8

0.4

0.6

0.2

0.0

-0.2 OphthalmicEar, nose and throat

Wound care Orthopedic

Revenue Net income

Of the six largest disease segments,

only half experienced revenue growth in 2012,

versus 100% in 2011

EY | Pulse of the industry30

Unlike the US, where the majority of the

their top lines organically, all but three companies in Europe did so via the aid of

European medtech company over the past

retinal imaging devices, is a newcomer to the list that achieved this feat through organic growth (albeit from a low base). In addition

International and Novartis’ Alcon Surgical division (both in the ophthalmic segment)

of Sweden — joined this list in 2012, with the assistance of recent acquisitions.

Companies Location 2007 2012 CAGR

Optos UK $87 $193 17%

Elekta Sweden $674 $1,337 15%

Qiagen Netherlands $650 $1,254 14%

Syneron Medical Israel $141 $264 13%

Sonova Holding Switzerland $926 $1,728 13%

Sempermed Austria $300 $493 10%

Essilor International France $3,986 $6,415 10%

Novartis: Alcon Surgical Switzerland $2,500 $3,752 8%

Getinge Sweden $2,436 $3,582 8%

Selected fast-growing European medtechs by revenue growth, 2007–12(US$m)

Source: EY and company financial statement data.Companies in italics have made significant acquisitions between 2007 and 2012. CAGR = compound annual growth rate


Financing

Mind the gap

Debt has continued to constitute the vast majority of the industry’s total funding

Type Jul 2006– Jun 2007

Jul 2007– Jun 2008

Jul 2008– Jun 2009

Jul 2009- Jun 2010

Jul 2010– Jun 2011

Jul 2011– Jun 2012

Jul 2012– Jun 2013

Venture $5,471 $5,243 $4,737 $4,961 $4,108 $4,463 $3,542

IPO $1,112 $711 $17 $378 $790 $425 $202

Follow-on and other $2,404 $2,110 $1,805 $2,564 $2,332 $973 $3,997

Debt $4,227 $4,551 $6,674 $13,327 $15,429 $23,273 $21,765

Total $13,213 $12,615 $13,233 $21,230 $22,659 $29,134 $29,506

Capital raised in the US and Europe by year (US$m)

Source: EY, BMO Capital Markets, Dow Jones VentureSource and Capital IQ.Numbers may appear to be inconsistent because of rounding. PIPEs included in “follow-on and other.”

the industry’s total funding, driven largely by a handful of commercial leaders who have taken advantage of historically low interest rates. As in the prior year, there were eight individual debt offerings of at least US$1 billion in 2012-13. These commercial leaders were responsible for an astonishing 82% of the industry’s total funding.

At the other end of the spectrum, the

companies have slowly eroded. Venture capital investment was down 21% in 2012-13 to its lowest level in more than a decade, while the total value of IPOs was cut in half from the prior year and was down more than 80% from pre-recession norms. The

increasingly skewed toward later rounds.

The picture that emerges from these trends is that there is a growing funding gap between the huge sums being raised by large medtech commercial leaders (largely in the form of debt) and the dwindling options for early-stage companies. In addition, more than 70% of the proceeds from debt

existing debt or restructuring balance sheets, rather than for growth purposes, such as company acquisitions or investing in early-stage companies. This, in turn, raises the question of another gap — a decline in innovation as the amount of capital going to fund medtech R&D declines. (For more on these implications, refer to this year’s Point of view article.)

US and European medical technology companies raised a combined US$29.5 billion during the 12-month period ending 30 June 2013, a 1.3% increase over the prior year — which was itself a record high. Unlike the prior 12-month period when debt drove a

was actually down 6% in 2012-13. Instead, it

the only investment category that increased during the year, growing by an impressive 311% to reach US$4 billion.

While total debt investment was slightly down in 2012-13, the overall story around the industry’s funding has remained largely unchanged in recent years. Debt has continued to constitute the vast majority of


Innovation capital continues to decline in the US and Europe

Source: EY, BMO Capital Markets, Dow Jones VentureSource and Capital IQ.Innovation capital is the amount of equity capital raised by companies with revenues of less than US$1 billion.

Commercial leaders Innovation capital

25

30

20

15

10

5

0

US$

b

Jul 2008-Jun 2009

Jul 2006- Jun 2007

Jul 2007- Jun 2008

Jul 2009- Jun 2010

Jul 2010- Jun 2011

Jul 2011- Jun 2012

Jul 2012-Jun 2013

While fund-raising totals have increased at an impressive rate in recent years, the vast majority of this funding has gone to

billion). This pattern continued during the 12-month period ending June 2013, when commercial leaders raised 82% of total

in the form of debt. Conversely, the funds raised by the rest of the industry (what we refer to as “innovation capital”) were down 11% to US$5.2 billion — the lowest amount raised in at least the past seven years. In 2007-08, innovation capital made up

compared to less than 20% in 2012-13.


Financing

Less than a quarter of all venture funding in the US and Europe went to early-stage medtechs

Source: EY, Dow Jones VentureSource and Capital IQ.

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0

% ve

ntur

e fu

ndin

g

Jul 2008- Jun 2009

Jul 2006- Jun 2007

Jul 2007- Jun 2008

Jul 2009- Jun 2010

Jul 2010-Jun 2011

Jul 2011- Jun 2012

Jul 2012- Jun 2013

Later-stage Early-stage

The decline in venture funding was compounded by a shift away from early-stage funding. Only 25% of medtech venture

in 2012-13, which was down from pre-recession levels of 40%-45%. Faced with regulatory and pricing pressures, an anemic IPO market and selective corporate buyers, VCs will likely remain cautious and favor funding later-stage companies with clearer paths to exits. In this environment, early-stage companies will be better positioned to raise venture capital if they have a truly novel technology and can clearly demonstrate the clinical and economic

VCs will likely remain cautious and favor funding later-stage companies with clearer paths to exits


There were 12 medtech IPOs in the US and Europe during the year ending June 2013. While this total was up from 11 the year before, total proceeds were down 52% to US$202 million, the lowest total seen since the midst of the great recession (2008-09) when only US$17 million was raised. In all, the number of IPOs doubled from three to six in the US, while the total value

IPO performance, July 2012–June 2013

Source: EY and Capital IQ.

25%

50%

0

-25%

-50%

-75%30 J

une

2013

clo

sing

pric

e re

lativ

e to

off

erin

g pr

ice

LPDXGMED ATOS EGI NSTG ALNOV NANO SPAG ALTER VIVO ALSGD NSTG

The post-IPO returns of 2012-13’s class were slightly better than those of the previous year when only one of 11 companies ended in positive territory. In all, three US and two European companies traded above their IPO prices at the end of June 2013.

Despite being active in a competitive, price-constrained spinal implant market, Pennsylvania’s Globus Medical had the largest post-IPO return of 41%.

of US$155 million was up 20% year-over-year. European IPOs were down from eight to six, and totals were off nearly 80% to US$48 million. Only three of the year’s 12 IPOs were by therapeutic device companies, which once again speaks to the regulatory and reimbursement challenges faced by this segment.

NanoString Technologies took honors for the year’s largest IPO. The Seattle-based provider of life science tools and molecular diagnostics planned to use the proceeds to commercialize its platform. France’s NanoBiotix, a maker of cancer radiotherapy treatment, had Europe’s largest IPO. With proceeds of US$52 million and US$18 million, these were the smallest IPO leaders since 2008-09.

Source: EY, BMO Capital Markets, Dow Jones VentureSource and Capital IQ.

Company Ticker Location Product type (disease) Gross raised (US$m) Quarter

NanoString Technologies NSTG US – Washington Research and other equipment 54 Q2 2013

LipoScience LPDX US – North Carolina Non-imaging diagnostics 52 Q1 2013

Globus Medical GMED US – Pennsylvania Therapeutic devices (orthopedic) 25 Q3 2012

Electrical Geodesics EGI US – Oregon Non-imaging diagnostics 12 Q2 2013

NanoBiotix NANO France Therapeutic devices (oncology) 18 Q4 2012

TheraDiag ALTER France Non-imaging diagnostics 11 Q4 2012

SpineGuard ALSGD France Therapeutic devices (orthopedic) 11 Q2 2013

Cancer Genetics CGIX US – New Jersey Non-imaging diagnostics 7 Q2 2013

Atossa Genetics ATOS US – Washington Non-imaging diagnostics 5 Q4 2012

Novacyt ALNOV France Non-imaging diagnostics 3 Q4 2012

Spago Imaging SPAG Sweden Imaging 3 Q4 2012

Vivoline Medical VIVO Sweden Non-imaging diagnostics 2 Q2 2013

US and European IPOs, July 2012–June 2013


Financing


United States Driven by debt, US medtech financing reached another record

25

30

20

15

10

5

0

US$

b

Jul 2008-Jun 2009

Jul 2006- Jun 2007

Jul 2007- Jun 2008

Jul 2009- Jun 2010

Jul 2010- Jun 2011

Jul 2011- Jun 2012

Jul 2012- Jun 2013

Debt Follow-on and other IPO Venture

US medical technology companies raised an impressive US$27 billion in the 12-month period ending June 2013, an 18% increase over the previous year. For the fourth straight year, large debt offerings by the industry’s commercial leaders made up the vast majority of total funding. In fact, debt contributed 74%, or US$20 billion, of the US industry total in 2012-13. Led by Medtronic (which raised US$3 billion in debt), seven companies issued debt in excess of US$1 billion, including three that were owned

billion), Kinetic Concepts (US$2.4 billion) and Carestream Health (US$2.4 billion).

Follow-on public offerings skyrocketed more than 400% to US$3.7 billion. While US$2.5 billion of the total was issued by

proceeds to help pay for its acquisition of Life Technologies, the remaining portion (US$1.2 billion) was still 70% higher than the year before and 10 companies raised at least US$50 million each. The news on venture capital and IPOs was not nearly as good, as totals dropped 19% and 20%, respectively.

Follow-on public offerings skyrocketed more than 400%


In this chart, net debt represents the capital raised through debt issuances, net of debt repayments in the period. Despite the considerable amount of capital being raised by commercial leaders via the debt markets, typically more than 70% of the proceeds are not deployed outside the company, limiting the amount available either to fund growth through acquisitions or to return to shareholders in the form of dividends or stock buybacks.

After a slight rebound in 2011-12, the total amount of US medtech venture funding slid 19% to US$3.0 billion in the 12-month period ending June 2013. The US$3.0 billion raised was the lowest venture capital total in at least the past seven years and was down more than 30% from the levels seen prior to the recession. The total number of rounds (369) and average round size (US$8.1 million) were also below the averages of the past seven years. While medtech remains a challenging sector for many investors, the decline largely mirrors the reduction in total venture capital investing across all industries.

US venture capital investment slid to its lowest level in years


5

4

3

2

1

0

15

12

9

6

3

0

Tota

l am

ount

rai

sed

(US$

b)

Ave

rage

dea

l siz

e (U

S$m

)

Jul 2008- Jun 2009

Jul 2006- Jun 2007

Jul 2007- Jun 2008

Jul 2009- Jun 2010

Jul 2010- Jun 2011

Jul 2011- Jun 2012

Jul 2012- Jun 2013

Total amount raised Average deal size

The large majority of debt funding does not get deployed


Debt issued Net debt

-$5

$0

$5

$10

$15

$20

$25

$30

2008 2009 2010 2011 2012

US$

b


Financing

Although the total amount of medtech-

industry continued to attract the same share of overall venture capital being invested across all industries — roughly between 9% and 10% since 2010. While there is no denying that venture-backed medtech

funding and operational environment, it was reassuring to see that investors continue to maintain the same proportionate focus on the industry as they have over the past several years.

Medtech’s share of US venture capital

Source: Dow Jones VentureSource.

Medtech’s share of total venture funding Health care’s share of total venture funding

25%

30%

35%

20%

15%

10%

5%

0%20092007 2008 2010 2011 2012 2013


Company Region Product type (disease)Gross raised

(US$m) Quarter Round type

Vital Therapies Southern California Therapeutic devices (hematology/renal) 86 Q3 2012 Late stage

TearScience North Carolina Therapeutic devices (ophthalmic) 70 Q1 2013 Late stage

CardioDx Northern California Non-imaging diagnostics 58 Q3 2012 Late stage

23andMe Northern California Non-imaging diagnostics 58 Q4 2012 Late stage

Histogenics Massachusetts Therapeutic devices (orthopedic) 49 Q3 2012 Late stage

Nevro Northern California Therapeutic devices (neurology) 48 Q1 2013 Late stage

OptiScan Biomedical Northern California Non-imaging diagnostics 45 Q1 2013 Late stage

Proteus Digital Health Northern California Non-imaging diagnostics 45 Q2 2013 Late stage

Cleveland HeartLab Ohio Non-imaging diagnostics 45 Q3 2012 Late stage

Avedro Massachusetts Therapeutic devices (ophthalmic) 43 Q1 2013 Late stage

EndoChoice Georgia Therapeutic devices (cardiovascular/vascular) 43 Q1 2013 Late stage

Top US venture rounds, July 2012–June 2013


Further emphasizing the trend by venture

provide the potential for quicker, more predictable exits, the 12 largest venture rounds in the US were later-stage rounds in 2012-13. In fact, only 10% of all venture rounds were early-stage rounds, accounting for 16% of total venture funding. These

from 2007-08. San Diego-based Vital Therapies, the developer of the ELAD extracorporeal liver support system, secured the year’s largest venture round of US$86 million. It was Vital Therapies’ sixth round of funding and the company planned to use the proceeds to fund pivotal Phase III trials. The second-largest round went to TearScience, which planned to use the proceeds to fully

commercialize its TearScience system as the standard of care for the dry eye market. In all, 50% of the largest rounds went to either research and other equipment or non-imaging diagnostics companies, perhaps another signal that investors wish to avoid some of the regulatory and reimbursement pitfalls of therapeutic devices.

Capital raised by leading US regions without debt, July 2012–June 2013

Source: EY, BMO Capital Markets, Dow Jones VentureSource and Capital IQ. Size of bubbles shows relative number of financings per region.

4

3

2

1

0

Tota

l equ

ity c

apita

l rai

sed

(US$

b)

Venture capital raised (US$m)300100 200 400 500 600 700 800 900 1,000

Massachusetts

Northern California

New JerseySouthern California

Texas

Minnesota

New York

Pennsylvania

For the second consecutive year,

with US$6.1 billion, and was followed by Minnesota, Texas and New York. Like Massachusetts, whose total was buoyed by

follow-on offerings of US$3.8 billion, each of these three states was home to companies that raised billion-dollar debt offerings.

When removing the impact of debt, Massachusetts still led all regions with US$3.4 billion. Excluding Thermo Fisher’s US$2.5 billion follow-on offering, Massachusetts would have come in just behind Northern California,

is typically the case, Northern California, Massachusetts and Southern California attracted the lion’s share of the US industry’s total venture capital investment (58%) and number of VC rounds (47%).


FinancingFinancing


Europe

Total funding of European medtech companies tumbled to US$2.7 billion in the 12-month period ending June 2013. This was the lowest amount raised by the industry since 2008-09 and was down 58% from the US$6.3 billion raised the prior year. However, the vast majority of the drop was the result of a 65% reduction (to US$1.8 billion) in debt from the record-breaking levels of the prior year, when Fresenius and Covidien alone

As in the US, European venture funding reached at least a seven-year low in 2012-13, and the IPO market was tepid at best.

was follow-on public offerings, which were up 14% to $305 million. However, this amount was still 40% below the average over the prior six years.

European venture funding reached at least a seven-year low in 2012-13

European medtech financing tumbles

6

7

5

4

3

2

1

0

US$

b

Jul 2008- Jun 2009

Jul 2006- Jun 2007

Jul 2007- Jun 2008

Jul 2009- Jun 2010

Jul 2010- Jun 2011

Jul 2011- Jun 2012

Jul 2012- Jun 2013

Debt Follow-on and other IPO Venture


Source: Dow Jones VentureSource.

Medtech’s share of European venture funding

Medtech’s share of total venture funding Health care’s share of total venture funding

25%

30%

35%

20%

15%

10%

5%

0%20092007 2008 2010 2011 2012 2013

European venture capital falls


Jul 2008- Jun 2009

Jul 2006- Jun 2007

Jul 2007- Jun 2008

Jul 2009- Jun 2010

Jul 2010-Jun 2011

Jul 2011- Jun 2012

Jul 2012- Jun 2013

1.5

1.0

0.5

0.25

0.75

1.25

0.0

Tota

l am

ount

rai

sed

(US$

b)

Ave

rage

dea

l siz

e (U

S$m

)

Total amount raised Average deal size

As in the US, the European medtech sector’s share of total venture funding has held up even as the amount of venture funding has declined. With the exception of a drop to 5% in 2012, the overall proportion of medtech investment has annually been about 7% of total industry funding — similar to what

half of 2013.

The European venture market continued its decline in 2012-13 as total venture investment dropped 29% to US$553 million, the lowest mark since 2004-05. While larger Eurozone uncertainties have created a headwind for the industry, Europe’s venture investment, like that in the US, largely mirrors the reduction in total venture capital investing across all industries.


FinancingFinancing

Company Country Product type (disease)Gross raised

(US$m) Quarter Round type

Endosense Switzerland Therapeutic devices (cardiovascular/vascular) 40 Q4 2012 Late stage

SuperSonic Imagine France Imaging 37 Q1 2013 Late stage

STAT–Diagnostica & Innovation Spain Non-imaging diagnostics 22 Q2 2013 Early stage

Glide Pharma UK Therapeutic devices (non-disease-specific) 22 Q1 2013 Late stage

Ornim Medical Israel Non-imaging diagnostics 20 Q3 2012 Early stage

Sensimed Switzerland Non-imaging diagnostics 18 Q4 2012 Late stage

Novaliq Germany Therapeutic devices (respiratory) 18 Q1 2013 Late stage

Curetis Germany Non-imaging diagnostics 16 Q2 2013 Late stage

EarlySense Israel Non-imaging diagnostics 15 Q4 2012 Late stage

Cheetah Medical Israel Non-imaging diagnostics 14 Q1 2013 Early stage

Top European venture rounds, July 2012–June 2013


European VCs seemed somewhat more willing to make large early-stage investments than their counterparts in the US. Europe’s largest venture rounds included early rounds for companies such as STAT-Diagnostica, Ornim Medical and Cheetah Medical — all of which are non-imaging diagnostic companies. Overall, however, early rounds accounted for only 7% of all venture rounds and 20% of venture dollars — sharply below 2007-08 levels.

Switzerland’s Endosense, a maker of force-sensing technology for cardiac arrhythmias, had the largest single round in Europe. As has been the case over the past several years, investors gravitated toward non-imaging diagnostics, which attracted six of the top 10 venture rounds, including the three aforementioned early-stage rounds.

Early rounds accounted for only 7% of European venture rounds


Capital raised by leading European countries without debt, July 2012–June 2013

Source: EY, BMO Capital Markets, Dow Jones VentureSource and Capital IQ.Size of bubbles shows relative number of financings per region.

250

200

150

100

50

0

Tota

l equ

ity c

apita

l rai

sed

(US$

m)

Venture capital raised (US$m)

6020 40 80 100 120

Germany

UK

Sweden

France

Switzerland

Netherlands

Israel

Finland

Sweden led all European countries in total funding with US$376 million — 82% of which

Switzerland (US$292 million) and Germany (US$259 million) rounded out the top three. Israel once again regained the top spot for the total amount of venture capital raised with US$112 million, the only country to surpass US$100 million in VC funding.

By removing debt, the funding landscape in Europe radically changed. Sweden dropped

million) took the top spot via a well-rounded mix of funding that included four IPOs and the second-largest venture funding, by ultrasound company SuperSonic Imagine. A largely venture-driven UK (US$147 million) followed France, with Israel (US$139 million) closing out the top three.


Mergers and acquisitions

Source: EY, Capital IQ and Thomson ONE. Average deal size calculated using M&As with announced values.

All signs point to deals

M&As in the US and Europe

Total deal value of megadeals (> US$10b) Total value of M&As Number of M&As

75

60

45

30

15

0

200

160

120

80

40

0

Num

ber

of d

eals

Tota

l dea

l val

ue (U

S$b)

Jul 2008-Jun 2009

Jul 2009-Jun 2010

Jul 2010-Jun 2011

Jul 2011-Jun 2012

Jul 2012-Jun 2013

The total value of mergers and acquisitions involving a US or European medical technology company increased 23% to US$47 billion during the 12-month period ending June 2013. This total was in line with the

years. The total was aided by Thermo Fisher

Life Technologies for US$15.8 billion. When this deal closes, it will be the fourth-largest medtech acquisition in the past decade.

By normalizing the data for the impact of that megadeal, the total value of M&As in 2012-13 actually fell 19% to US$31.2 billion — the second consecutive year in which megadeal-adjusted totals declined, but also in line with

Also, for the second year in a row, the number of transactions with values in excess of US$1 billion dropped.

As has always been the case, M&As have ranged from riskier, long-term bets on breakthrough technologies to strategic “tuck-in” acquisitions. Whatever the strategy, companies continue to seek deals that hold the promise of spurring the growth they are hard-pressed to generate on their own.

This past year, a variety of buyers, both old and new, used M&As to either diversify their portfolios (e.g., Valeant/Bausch & Lomb), move them into market leadership (Thermo Fisher/Life Technologies) or open new geographies (Medtronic/China Kanghui Holdings).

Several large acquirers also took advantage of

their purchases. Valeant Pharmaceuticals and Baxter International issued US$7.5 billion and US$3.5 billion worth of debt, respectively, for their acquisitions of Bausch & Lomb and Gambro, while Thermo Fisher tapped the equity markets to secure a US$2.5 billion follow-on public offering to help pay for Life Technologies.

Despite being a long-time user of favorable

relatively quiet on the M&A front in 2012-

with divesting medtech assets from their portfolios. Warburg Pincus sold Bausch & Lomb to Valeant, Nordic Capital

sold Swedish power wheelchair maker Permobil to Investor AB, and Onex attempted to sell Carestream Health. In the case of Carestream Health, Onex was unable to secure a buyer for the price it was looking for, and eventually called off the auction for the medical imaging company. A year after PEs made 16 acquisitions with announced terms of US$11.9 billion, only 11 deals for US$1.4 billion were publicly announced. While a consortium of PEs was reported to have been in the running to acquire Life Technologies, more broadly the stock market rally has boosted the price expectations of sellers and has made many PEs wary of overpaying.

While the megadeals-adjusted value of M&As declined year-over-year, it’s important to keep in mind that M&A data is often “lumpy,” since the number of transactions is relatively small and the activity of acquirers often waxes and wanes (for a variety of reasons, including the need to integrate recently purchased assets).


Underlying the overall numbers, there were signs of growing interest in deals. The composition of buyers is now more diverse than in any comparable period that we have analyzed, and deal activity in China accelerated dramatically over the last 12 months.

Longer term, the outlook for deals remains bullish. At a time when access to venture

option, the case for an M&A exit has become more compelling for smaller companies. Meanwhile, acquirers will need to use acquisitions to jump-start growth. While medtech companies are grappling with unprecedented pressures from regulators, payers and the overall market, all signs point to robust M&A activity in the months and years ahead.

US and European M&As by type of buyer

Source: EY, Capital IQ and Thomson ONE.

Other Private equity Pharma Conglomerate Medtech

100

80

90

30

40

50

60

70

20

10

0

Shar

e of

tota

l dea

l val

ue

Jan 2007-Dec 2008 Jan 2009-Dec 2010 Jan 2011-Jun 2013

In recent years, the composition of buyers of medtech companies has shifted considerably. In 2009 and 2010, for instance, conglomerate buyers grew to dominate the scene, while the relative representation of medtech and private equity buyers diminished. Since 2011, the distribution of buyers is more diverse and well-represented than in any other period in recent years,

to attract interest from a diverse group of acquirers. Led by the likes of Thermo

and Hologic, pure-play medtechs were responsible for more than half of all industry

M&A value since January 2011. Meanwhile, as price caps, vendor consolidation and reduced utilization rates continue to be a major drag on organic growth, a diverse group of health care-related companies — from Johnson & Johnson and Danaher to Valeant International and Apax Partners —

high-growth technologies, enter desirable markets, broaden portfolios and take advantage of economies of scale.

The second consecutive year in which megadeal-adjusted totals declined



Acquiring company Location Acquired company Location Value (US$m)

Thermo Fisher Scientific US – Massachusetts Life Technologies US – California $15,800

Valeant Pharmaceuticals International Canada Bausch & Lomb US – New York $8,700

Baxter International US – Illinois Gambro Sweden $3,915

Fresenius Kabi Germany Fenwal US – Illinois $1,100

Bayer Germany Conceptus US – California $1,100

Thermo Fisher Scientific US – Massachusetts One Lambda US – California $925

Investor AB Sweden Permobil Sweden $846

Medtronic US – Minnesota China Kanghui Holdings China $816

Smith & Nephew UK Healthpoint Biotherapeutics US – Texas $782

Stryker US – Michigan Trauson Holdings China $764

Mitsui Chemicals Japan Heraeus Kulzer Germany $591

Illumina US – California Verinata Health US – California $450

Boston Scientific US – Massachusetts Vessix Vascular US – California $425

Hill-Rom US – Indiana Aspen Surgical Products US – Michigan $400

Selected M&As, July 2012–June 2013


transactions surpassed the US$1 billion

previous year and 12 the year before that. Notable acquisitions during the 12-month period ending 30 June 2013 included Valeant’s purchase of ophthalmic company Bausch & Lomb, as well as Medtronic and Stryker’s plunge into the fast-growing Chinese medtech market. Before buying Bausch & Lomb, Valeant had publicly pursued generic drugmaker Actavis with a US$13 billion offer. When that deal fell through, Valeant quickly turned its attention to Bausch & Lomb, whose private equity owner Warburg Pincus — which had acquired it for US$4.5 billion in 2007 — was attempting to take the

The latest 12-month period also saw a number of industry stalwarts return to the list of biggest dealmakers after a notable

Medtronic and Stryker, had not done a

higher) in two years.


US-based medtechs dominated the M&A scene during the 12-month period ending 30 June 2013. The total value of M&As

39% to US$43 billion in the period. However, after normalizing the data for the US$15.8 billion Thermo Fisher/Life Technologies megadeal, total deal value was down 12% to US$27.2 billion, which was in line with the

total number of M&As with announced terms declined to 102, the median deal size was US$68 million, 26% above the cumulative

itself, Life Technologies was the US’ most active buyer, with eight acquisitions between July 2012 and June 2013.


United States

Europe

US M&AsTotal deal value of megadeals (> US$10b) Total deal value Number of M&As

50

60

40

30

20

10

0

100

120

80

60

40

20

0

Num

ber

of d

eals

Tota

l dea

l val

ue (U

S$b)

Jul 2008-Jun 2009

Jul 2009-Jun 2010

Jul 2010-Jun 2011

Jul 2011-Jun 2012

Jul 2012-Jun 2013

European M&As

Total deal value of megadeals (> US$10b) Total deal value Number of M&As

50

60

40

30

20

10

0

75

60

45

30

15

0

Num

ber o

f dea

ls

Tota

l dea

l val

ue (U

S$b)

Jul 2008-Jun 2009

Jul 2009-Jun 2010

Jul 2010-Jun 2011

Jul 2011-Jun 2012

Jul 2012-Jun 2013

The total value of M&As involving European companies was down for the third consecutive year in 2012-13, declining 5% to US$11.6 billion. After normalizing for the Novartis/Alcon megadeal in 2009-10, this

average of US$11.5 billion. The number of M&As with announced deal terms slid 4% year-over-year while median deal size edged up 13% to US$176 million. The largest

was by US conglomerate Baxter, which acquired Sweden’s Gambro, a developer of dialysis products and renal therapies, for US$3.5 billion. Source: EY, Capital IQ and Thomson ONE.




... as they continue to make up more than one– third of total deal value.Total value of milestones Total value of milestones/total value of all M&As with milestones

2.5

2.0

1.5

1.0

0.5

0

50%

40%

30%

20%

10%

0%

Shar

e of

tota

l val

ue

Tota

l dea

l val

ue (U

S$b)

Jul 2008-Jun 2009

Jul 2009-Jun 2010

Jul 2010-Jun 2011

Jul 2011-Jun 2012

Jul 2012-Jun 2013


The use of milestone payments remains robust ...Number of M&As with milestones Percentage of M&As with milestone payments

40

30

20

10

0

40%

30%

20%

10%

0%

Perc

enta

ge o

f M&A

s w

ith

mile

ston

e pa

ymen

ts

Num

ber

of M

&As

Jul 2008-Jun 2009

Jul 2009-Jun 2010

Jul 2010-Jun 2011

Jul 2011-Jun 2012

Jul 2012-Jun 2013

the use of milestone-based payments has increased. At a time of mounting market pressures and increased scrutiny from buyers, milestones give acquirers a way to pursue more avenues for growth by increasing the number of “shots on goal” while simultaneously containing the risk associated with their M&A strategies.

The use of milestone-based payments has increased


Acquiring company Jul 2007–Jun 2012 Jul 2012–Jun 2013

Segment Number of deals

Value (US$m)

% of total deal value

Number of deals

Value (US$m)

% of total deal value

Therapeutics devices 414 $115,045 68% 119 $13,799 42%

Ophthalmic* 28 $45,657 27% 6 $102 0%

Orthopedic* 70 $22,007 13% 22 $1,115 3%

Cardiovascular/vascular 70 $17,598 10% 18 $2,266 7%

Respiratory 17 $660 0% 3 $487 1%

Non-disease specific 77 $3,617 2% 15 $1,648 5%

Multiple 20 $2,932 2% 9 $558 2%

Hematology/renal 18 $3,120 2% 6 $4,005 12%

Wound care 25 $9,861 6% 7 $665 2%

Oncology 12 $1,217 1% 2 $34 0%

All others 77 $8,376 5% 31 $2,919 9%

Research and other equipment 90 $24,107 14% 18 $15,996 48%

Non-imaging diagnostics 146 $20,214 12% 42 $2,220 7%

Other 65 $6,076 4% 34 $417 1%

Imaging 65 $4,203 2% 23 $656 2%

non-imaging diagnostic companies attracted the largest number of acquirers. Without the Thermo Fisher/Life Technologies megadeal, diagnostics would have come behind only the hematology/renal and cardiovascular/vascular segments for top dollar value in 2012-13. At a time when regulators and payers are subjecting drugs to greater scrutiny, non-imaging diagnostics have growth opportunities from the increased adoption of personalized medicine.

Selected M&As by segment

Source: EY, Capital IQ and Thomson ONE.* Includes megadeals



While Western companies increasingly targeted Chinese medtechs ...


Total deal value Number of deals

$2.0

$1.6

$1.2

$0.8

$0.4

$0

10

8

6

4

2

0

Num

ber o

f Chi

nese

med

tech

s ac

quir

ed b

y W

este

rn fi

rms

US$

b

Jul 2005- Jun 2006

Jul 2006-Jun 2007

Jul 2007- Jun 2008

Jul 2008-Jun 2009

Jul 2009- Jun 2010

Jul 2010- Jun 2011

Jul 2011-Jun 2012

Jul 2012- Jun 2013

With increasing regulatory and market pressures in the West, US and European medtech companies have been looking at China as a source of growth. This was very evident over the 12-month period ending

uptick in medtech transaction activity in China. Western companies closed nine acquisitions of Chinese medtechs for a total value of US$1.7 billion. In the seven years prior to 2012-13, there were only 25 announced deals for US$346 million.

The two largest deals — which accounted for 91% of the total — were conducted by Medtronic and Stryker. In September 2012, Medtronic agreed to acquire China Kanghui Holdings, China’s second-largest manufacturer and distributor of orthopedic products, for US$816 million. The purchase of Kanghui, which had gone public on the New York Stock Exchange in 2010, was the largest purchase of a Chinese health care company ever, according to Bloomberg, and commanded a 22% premium. Two months later, Stryker paid an even higher premium (45%) to purchase Hong Kong-based Trauson Holdings, China’s largest orthopedic

company, for US$764 million. Stryker had maintained a manufacturing agreement for instrumentation sets with spine and trauma specialist Trauson since 2007.

Through their respective acquisitions, Medtronic and Stryker increased their penetration of the fast-growing Chinese orthopedic market. The deals have the potential to deliver growth through established distribution networks with access to thousands of hospitals, and serve as platforms to further expand in China and other developing markets.

US and European medtech companies have been looking at China as a source of growth

Middle Kingdom rising?


... Chinese companies were also actively acquiring Western medtechs.


Total deal value Number of deals

$800

$600

$400

$200

$0

8

6

4

2

0

Num

ber o

f Wes

tern

med

tech

s ac

quir

ed b

y Ch

ines

e co

mpa

nies

US $

m

Jul 2005-Jun 2006

Jul 2006-Jun 2007

Jul 2007- Jun 2008

Jul 2008-Jun 2009

Jul 2009-Jun 2010

Jul 2010-Jun 2011

Jul 2011-Jun 2012

Jul 2012-Jun 2013

While Medtronic and Stryker were making waves in China, Chinese companies were also busy acquiring medtech assets in the US and Europe. In 2012-13, Chinese companies conducted six acquisitions of Western medtechs for a total of US$730 million — four of which were in excess of US$100 million. These numbers far exceeded the averages of the past seven years when a grand total of seven M&As were completed for US$268 million (US$240 million came from a single deal — Mindray Medical buying Datascope’s patient monitoring business in 2007-08).

The largest acquisition was conducted

US-based Wright Medical’s OrthoRecon business segment for US$290 million. The OrthoRecon business included hip and knee implant products and provides MicroPort not only a presence in the US ortho market but also an opportunity for greater growth in China. While OrthoRecon had products approved in China, MicroPort had historically focused on the cardiovascular market and had not been as large a player in orthopedics.

In the second-largest M&A, Shanghai Fosun Pharmaceutical and Pramerica-Fosun China Opportunity Fund jointly purchased Alma Lasers, an Israeli manufacturer of laser

and ultrasound devices for aesthetic and medical applications, for US$222 million. The purchase of Alma, which had a 15% global market share and was the market leader in China, allows Fosun Pharma to make progress on its goal to further internationalize and broaden its traditional pharmaceutical and health services business.

Shenzen’s US$118 million acquisition of US-based, DNA sequencing company Complete Genomics and Mindray Medical’s purchase of Zonare Medical Systems, a US-based manufacturer of ultrasound technologies.


Scope of this report

Except as otherwise noted, medical technology (medtech) companies are

primarily design and manufacture medical technology equipment and supplies and are headquartered within the United States or Europe. For the purposes of this report, we have placed Israel’s data and analysis within the European market, and any grouping of the US and Europe has been referred to as “global.” This wide-ranging definition includes medical device, diagnostic, drug delivery and analytical/life science tool companies, but excludes distributors and service providers such as contract research organizations or contract manufacturing organizations.

By any measure, medical technology is an extraordinarily diverse industry. While developing a consistent and meaningful classification system is important, it is anything but straightforward. Existing taxonomies sometimes segregate companies into scores of thinly populated categories, making it difficult to identify and analyze industry trends. Furthermore, they tend to combine categories based on products (such as imaging or tools) with those based on diseases targeted by those products (such as cardiovascular or oncology), which makes it harder to analyze trends consistently across either dimension. To address some of these challenges, we have categorized medtech companies across both dimensions — products and diseases targeted.

All publicly traded medtech companies were classified as belonging to one of five broad product groups:

• Imaging: companies developing products used to diagnose or monitor conditions via imaging technologies, including products such as MRI machines, computed tomography (CT) and X-ray imaging equipment and optical biopsy systems

• Non-imaging diagnostics: companies developing products used to diagnose or monitor conditions via non-imaging technologies, which can include patient monitoring and in vitro testing equipment

• Research and other equipment: companies developing equipment used for research or other purposes, including analytical and life science tools, specialized laboratory equipment and furniture

• Therapeutic devices: companies developing products used to treat patients, including therapeutic medical devices, tools or drug delivery/infusion technologies

• Other: companies developing products

In addition to product groups, this report tracks conglomerate companies that derive a significant part of their revenues from medical technologies. While a conglomerate medtech division’s technology could technically fall into one of the product groups listed above (e.g., General Electric into “imaging” and Allergan into “therapeutic devices”), all conglomerate data is kept separate from that of the non-conglomerates. This is due to the fact that, while conglomerates report revenues for their medtech divisions, they typically do not report other financial results for their medtech divisions, such as research and development or net income.

Conglomerate companies:United States

• 3M: Health Care

• Abbott: Devices and Diagnostics

• Agilent Technologies: Life Sciences and Chemical Analysis

• Allergan: Medical Devices

• Baxter International: Medical Products

• Corning: Life Sciences

• Danaher: Life Sciences & Diagnostics and Dental

• Endo Health Solutions: AMS and HealthTronics

• GE Healthcare

• Hospira: Devices

• IDEX: Health & Science

• Johnson & Johnson: Medical Devices & Diagnostics

• Kimberly-Clark: Health Care

• Pall: Life Sciences

Europe

• Agfa: HealthCare

• Bayer HealthCare: Medical Care

• Beiersdorf: Hansaplast

• Carl Zeiss: Meditec

• DSM: Medical

• Dräger: Medical

• Eckert & Ziegler: Medizintechnik

• Fresenius: Medical Devices

• Halma: Medical

• Jenoptik: Medical

• Novartis: Alcon Surgical

• Philips Healthcare

• Quantel Medical

• Roche Diagnostics

• • SCA Svenska Cellulosa Aktiebolaget:

Personal Care

• Sempermed

• Siemens Healthcare

• Smiths Medical


Pulse of the industry

Acknowledgments

Project leadershipGautam Jaggi and Glen Giovannetti once again acted as co-editors-in-chief for Pulse of the industry. Gautam was also

innovation” article, as well as the “Industry performance” section.

Iain Scottinnovation” article and helped manage the data analysis. Through a series of external interviews, as well as primary and secondary research, Iain developed many of the themes and elements for this year’s

involved.

As the project manager for Pulse of the industry, Jason Hillenbach had responsibility for the entire content and quality of this publication. He was also directly accountable for the analysis of the report’s data, and coauthored the “Industry performance” section. In addition, Jason conducted a number of external interviews used to help shape the report’s viewpoint.

Strategic directionSpecial thanks to Mark Campbell (Associate Director, Medical Technologies Evaluation Programme, National Institute for Health and Care Excellence (NICE)), Rudy Dekeyser (Managing Partner, LSP Health Economics Fund), Berthold Hackl (President & Chief

Wende Hutton (General Partner, Canaan Partners), Noah Knauf (Principal, Healthcare, Warburg Pincus), Hubertus Leonhardt (Partner, SHS), Susan Morano (Worldwide Vice President for New Business Development, Medical Devices and Diagnostics Group, Johnson & Johnson), Guy Nohra (Managing Partner, Alta Partners), Nils Reimers (Manager, Global Medical Science, Stryker), Philipp Schulte-Noelle (Senior Vice President, Head of Corporate Business Development/M&A Fresenius SE & Co. KGaA.) and Jon Shear (Vice President, Business Development, Thoratec) for their participation on strategy development interviews for Pulse. They provided

that were used as the foundation for the report’s key themes and focus.

John Babitt, Dave DeMarco and Patrick Flochel provided strategic vision for this report, in particular their valuable feedback

Data analysisThe research, collection and analysis of

M&A data was conducted by Nina Hahn, UIrike Kappe and Lisa-Marie Schulte.

Jason Hillenbach, Ulrike Kappe and Kim Medland conducted fact-checking and quality review of the numbers throughout the publication.

Editing assistanceRussell Colton brought his incomparable skills as a copy editor and proofreader to this publication. His patience, hard work and attention to detail were unparalleled.

DesignThis publication would not look the way it does without the creativity of Oliver Voigt, who was the lead designer for this project. Additional design assistance was provided by Robert Fernandez and Kiran MK (chart design).

Marketing and supportPublic relations efforts related to the book and its launch were led by Susan Jones. Greg Kelley Kean Healthcare served as an integral partner as well.



Data exhibit index

Budgetary pressures are leading to spending cuts for medtech 4

Early-stage VC rounds of >US$5 million have plummeted 6

Medtech revenue growth has slowed, dragging down R&D spending ... 7

... leading to “lost” revenues of US$131 billion ... 7

... and leading to “lost” R&D spending of US$12 billion 7

New ventures: corporate funds’ medtech focus 8

Going beyond: medtech companies expand into services and solutions 10

A perfect storm 16-17

Medical technology at a glance, 2011–12 20

US public medtech cash index 21

European public medtech cash index 21

US and European commercial leaders 22

US market capitalization 23

European market capitalization 23

US medtech at a glance, 2011–12 24

US commercial leaders and other companies, 2011–12 25

Selected US medtech public company financial highlights by region, 2012 25

Change in US therapeutic device companies’ revenue and net income by disease category, 2011–12 26

Selected fast-growing US medtechs by revenue growth, 2007–12 27

European medtech at a glance, 2011–12 28

European commercial leaders and other companies, 2011–12 29

Selected European medtech public company financial highlights by region, 2012 29

Change in European therapeutic device companies’ revenue and net income by disease category, 2011–12 30

Selected fast-growing US medtechs by revenue growth, 2007–12 31

Capital raised in the US and Europe by year 32


Innovation capital continues to decline in the US and Europe 33

Less than a quarter of all venture funding in the US and Europe went to early-stage medtechs 34

US and European IPOs, July 2012–June 2013 35

IPO performance, July 2012–June 2013 35

Driven by debt, US medtech financing reached another record 36

The large majority of debt funding does not get deployed 37

US venture capital investment slid to its lowest level in years 37

Medtech’s share of US venture capital 38

Top US venture rounds, July 2012–June 2013 39

Capital raised by leading US regions without debt, July 2012–June 2013 39

European medtech financing tumbles 40

European venture capital falls 41

Medtech’s share of European venture funding 42

Top European venture rounds, July 2012–June 2013 42

Capital raised by leading European countries without debt, July 2012–June 2013 43

M&As in the US and Europe 44

US and European M&As by type of buyer 45

Selected M&As, July 2012–June 2013 46

US M&As 47

European M&As 47

The use of milestone payments remains robust ... 48

... as they continue to make up more than one– third of total deal value 48

Selected M&As by segment 49

While Western companies increasingly targeted Chinese medtechs ... 50

... Chinese companies were also actively acquiring Western medtechs 51



Global medical technology contacts

Global Life Sciences Leader Glen Giovannetti [email protected] +1 617 585 1998

Deputy Global Life Sciences Leader Patrick Flochel [email protected] +41 58 286 4148

Australia Brisbane Winna Brown [email protected] +61 7 3011 3343

Melbourne Denise Brotherton [email protected] +61 3 9288 8758

Sydney Gamini Martinus [email protected] +61 2 9248 4702

Austria Vienna Erich Lehner [email protected] +43 1 21170 1152

Belgium Brussels Thomas Sileghem [email protected] +32 2 774 9536

Brazil São Paulo Frank de Meijer [email protected] +55 11 2573 3383

Canada Montréal Lara Iob [email protected] +1 514 879 6514

China Shanghai Kenneth Lee [email protected] +86 10 58153465

Czech Republic Prague Petr Knap [email protected] +420 225 335 582

Denmark Copenhagen Benny Lynge Sørensen [email protected] +45 35 87 25 25

Finland Helsinki Pekka Räisänen [email protected] +358 405 433 565

France Paris Virginie Lefebvre-Dutilleul [email protected] +33 1 55 61 10 62

Germany Düsseldorf Gerd Stürz [email protected] +49 211 9352 18622

Mannheim Siegfried Bialojan [email protected] +49 621 4208 11405

India Mumbai Ajit Mahadevan [email protected] +91 22 61920000

Hitesh Sharma [email protected] +91 22 61920620

Ireland Dublin Aidan Meagher [email protected] +353 1 221 1139

Neil Byrne [email protected] +353 1 221 2370

Israel Tel Aviv Yoram Wilamowski [email protected] +972 3 623 2519

Italy Milan Lapo Ercoli [email protected] +39 02 7221 2546

Japan Tokyo Hironao Yazaki [email protected] +81 3 3503 2165

Netherlands Amsterdam Jules Verhagen [email protected] +31 88 407 1888

New Zealand Auckland Jon Hooper [email protected] +64 9 300 8124

Norway Trondheim/Oslo Willy Eidissen [email protected] +47 918 63 845

Poland Warsaw Mariusz Witalis [email protected] +48 225 577950

Russia Moscow Dmitry Khalilov [email protected] +7 495 755 9757

Singapore Singapore Swee Ho Tan [email protected] +65 6309 8238


South Africa Johannesburg Sarel Strydom [email protected] +27 11 772 3420

Spain Barcelona Silvia Ondategui-Parra [email protected] +48 2 2557 7351

Sweden Uppsala Björn Ohlsson [email protected] +46 18 19 42 22

Switzerland Basel Jürg Zürcher [email protected] +41 58 286 84 03

Zürich Heinrich Christen [email protected] +41 58 286 3485

United Kingdom London David MacMurchy [email protected] +44 20 7951 8947

Reading Ian Oliver [email protected] +44 11 8928 1197

United States Boston Kevin Casey [email protected] +1 617 585 1817

Michael Donovan [email protected] +1 617 585 1957

Chicago Jerry DeVault [email protected] +1 312.879.6518

Houston Carole Faig [email protected] +1 713 750 1535

Indianapolis Scott Bruns [email protected] +1 317 681 7229

Minneapolis Scott McGurl [email protected] +1 612 371 8331

William Miller [email protected] +1 612 371 6984

Nashville Kim Ramko [email protected] +1 615 252 8249

New York/New Jersey John Babitt [email protected] +1 212 773 0912

Dave DeMarco [email protected] +1 732 516 4602

Mitchell Cohen [email protected] +1 203 674 3244

Jeff Greene [email protected] +1 212 773 6500

Michael McDaid [email protected] +1 732 516 4570

Orange County Dave Copley [email protected] +1 949 437 0250

Kim Letch [email protected] +1 949 437 0244

Philadelphia Howard Brooks [email protected] +1 215 448 5115

Steve Simpson [email protected] +1 215 448 5309

Raleigh Mark Baxter [email protected] +1 919 981 2966

San Diego Dan Kleeburg [email protected] +1 858 535 7209

San Francisco Bay Area Scott Morrison [email protected] +1 650 802 4688

Chris Nolet [email protected] +1 650 802 4504

Richard Ramko [email protected] +1 650 802 4518


Notes


EY | Assurance | Tax | Transactions | Advisory

About EY

EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities.

EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com.

How EY’s Global Life Sciences Center can help your business

Life sciences companies — from emerging to multinational — are facing challenging times as access to health care takes on new importance. Stakeholder expectations are shifting, the costs and risks of product development are increasing, alternative business models are manifesting, and collaborations are becoming more complex. At the same time, players from other sectors are entering the field, contributing to a new ecosystem for delivering health care. New measures of success are also emerging as the sector begins to focus on improving a patient’s “health outcome,” and not just on units of a product sold. Our Global Life Sciences Center brings together a worldwide network of more than 7,000 sector-focused assurance, tax, transaction and advisory professionals to anticipate trends, identify implications and develop points of view on how to respond to the critical sector issues. We can help you navigate your way forward and achieve success in the new health ecosystem.

© 2013 EYGM Limited. All Rights Reserved.

SCORE No. CW0076

1307-1104613_W

ED 0713

This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice.

ey.com/medtech

pulse redefining medical technology innovation

Documents