Pulse Redefining Medical Technology Innovation

Pulse of the industry
Medical technology report 2013

To our clients and friends:
Welcome to the 2013 issue of EYs 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 medtechs traditional stock-in-trade, innovative technology.
Alongside our analysis are contributions from two of the industrys leading lights,
whose companies are at the forefront of medtechs 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 years 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
Perspectives
Point of view Redelninq innovaLion
Transforming and leading Omar Ishrak, Medtronic, Inc.
Innovating differently Michel Orsinger, DePuy Synthes Companies of Johnson & Johnson
Industry performance
Financial performance Behind the numbers: a growth challenge
Financing Mind the gap
Mergers and acquisitions All signs point to deals
Scope of this report Delninq medical Lechnoloqy
Acknowledgments
Data exhibit index
Global medical technology contacts
2
18
19
32
20
44
52
53
54
56
EY | Pulse of the industry
1 Medical 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.
Medtechs customer base is shifting as payers, health systems
and patients become more inluenLial Lhan Lhey have been in
the past. This shift undermines medtechs fundamental business
model. Companies musL lnd new ways Lo creaLe, deliver and
capture value.
UnlorLunaLely, companies ol all sizes lace siqnilcanL resource
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:
CapitaI efhciency
Ecosystem-wide scanning
Collaborative cultures
Open data enterprises
Disease/Value pathways
Scalable processes with appropriate metrics
Redelninq innovaLion
2 EY | Pulse of the industry
A perfect storm
The 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
siqnilcanL challenqe lor Lhe indusLry, buL
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 industrys 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 lets
sLarL by briely summarizinq Lhe Lrends.
Value-based health care
As payers in many key markets look for ways
Lo brinq healLh care cosL inlaLion under
control, they are increasingly rewarding
those who can demonstrably improve
healLh ouLcomes in cosLellcienL ways.
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 companys
ability to deliver sustainable returns.
For payers, it is a technologys 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 years 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
musL now also be included in delniLions ol
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
on a reporL inLo Lhe lve mosL overused
medical procedures, Lhey idenLiled some
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
Lime, and LhaL Lhe |usLilcaLion lor anoLher
38% of procedures was uncertain. With PCI
costing at least US$15,000 per procedure,
Lhe lqures demonsLraLe LhaL payers will be
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
inluenLial buyers. We are now movinq Lo a
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 Kingdom
The 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
payers exerL more inluence over purchasinq
decisions, they are becoming a key
inluenLial cusLomer lor medLech companies.
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 years Point of view article.)
But the expansion of medtechs customer
base is not just about payers and patients.
There is also a similar shift under way
in Lhe provider universe. 1he inluenLial
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
LxecuLive Ollcer
invendo medical
invendo medical
0

Regulatory pressures
Over 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,
Lhe new direcLive will make Lhe Luropean medLech approval sysLem as dillculL as LhaL ol
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 constraints
Another challenge faced by medical
technology companies of all sizes in the last
lew years is a dwindlinq pool ol lnancial
resources.
Investment in emerging companies has
declined. To some extent, this has been due
to macroeconomic developments in the
wake ol Lhe lnancial crisis, invesLors became
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
lnancial crisis. lnnovaLion capiLal, which
once accounted for nearly two-thirds of all
medtech investment, provided less than 20%
ol Lhe secLor's lnancinq in 201213.
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%
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Jun 2009
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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
lscal year, early rounds capLured |usL 167 ol
Lhe LoLal lundinq, down lrom 337 lve years
earlier. (For more on these trends, refer to
the Financing article in this years 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
U
S
$
b
2004 2000 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
Lhe only ones Lo lnd Lhemselves wiLh
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%
A
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r
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2002 2000 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 rates
250
200
150
100
50
0
U
S
$
b
2002 2000 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
companies make some siqnilcanL deals
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).
CorporaLe VC is also lllinq parL ol Lhe qap.
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 GSKs US$27 million August
2013 investment in SetPoint Medical, a
manufacturer of implantable devices that
LreaL inlammaLory disease.
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 & Johnson
The fund focuses on unique technologies in medical devices, pharmaceuticals and
consumer health care. Recent investments include US$29.6 million in medtech firm
CVRxs 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
conluence ol challenqes. 1his makes iL all
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
siqnilcanLly in expandinq beyond producLs
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 industry 8
Services, solutions and
new business models
The move to value-based health care
undermines the basic pillars of the medtech
industrys traditional business model. Any
companys 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
companys customers most care about (e.g.,
price, convenience, ease of use).
Big changes in a companys 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 medtechs most important
customer might have cared about features
such as ease of use and compatibility
with other platforms, the industrys new
customers are likely to value other attributes
more. Payers and large providers might care
more about a technologys ability to deliver
beLLer healLh ouLcomes in cosLellcienL
ways. Patients are more likely to want
features such as ease of use, personalization
and porLabiliLy. MedLech lrms will need Lo
undersLand Lhese new cusLomers' delniLions
of value. How can they prove to payers that
Lheir producLs can creaLe ellciencies wiLhin
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
companies will need Lo lnd new ways Lo
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
producLiviLy in specilc deparLmenLs).

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
idenLilcaLion ol aLrisk paLienLs are
increasingly valued by payers as cost-
ellecLive inLervenLions. 1o relne Lheir
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
cosLellcienL Lo keep paLienLs ouL ol Lhe
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
delned Lo encompass Pl Lechnoloqies is
playing an active role in helping providers
and patients, its important to note that
technology alone is not enough.
Initiative
Beyond the
product
Beyond the
hospital
Beyond
treatment
GE Healthcares Transforming Cities campaign
GE works with care providers, payers and patients to monitor and
improve health outcomes in selected cities populations.

Baxter/Chinese National Institute for Hospital Administration
Deploying sustainable care and delivery models for peritoneal
dialysis patients

Medtronic/Cardiocom (acquisition)
Cardiocom is a telehealth devices company. The deal is Medtronics
first foray into services-based business.

Covidiens Sandman program
Patient compliance program to improve treatment of sleep
disorders involves training, education and encouraging patients

GE Healthcares Get Fit campaign
Via behavioral economics, urges patients to adopt healthy lifestyles

Medlines Advancing Health Together program
Developing tools, services and education to help nursing facilities
improve quality of care

Toshibas Protect program
Educate and train hospital staff to achieve ALARA (as low as
reasonably achievable) imaging with Toshibas CT product line

Philips/Georgia Regents Medical Center
15-year alliance to achieve patient-centered approaches to care
and address GMRCs 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
value Lo payers and inluence Lhe behavior ol
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 leaders
Certainly, medtechs 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
deployinq new soluLions lnancial sLrenqLh,
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
dillculL lor maLure orqanizaLions Lo disrupL
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 todays product-
centered success stories.
Emerging companies
Disruptive innovation, on the other
hand, nearly always comes from smaller
companies. But as weve discussed, these
companies have siqnilcanL resource
consLrainLs. lL has become more dillculL lor
many emerqinq lrms Lo access lundinq in
the current capital market environment.
Smaller enterprises also lack many of
Lhe asseLs LhaL larqe lrms possess:
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.
As such, emerqinq lrms are skilled aL
identifying gaps in the product offerings of
larqer lrms and desiqninq producLs Lo lll
Lhese needs. And unlike larqer lrms, small
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
producL ollers a siqnilcanL increase in Lhe
health economics of social insurance, says
Hubertus Leonhardt of SHS VC. This can
give them earlier access to the market.
As we discuss below, Lhe delniLion ol a "qap"
will need to be expanded to address issues
impacting both the patient experience and
Lhe ellcienL delivery ol care. 1o overcome
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
producL ollers a siqnilcanL
increase in the health
economics of social
insurance. <<
Hubertus Leonhardt
Partner
SHS
Point of view
Building new capabilities
To succeed at business model innovation,
companies will need to build new capabilities
Lo overcome exisLinq mindseLs and lll qaps
in their current lineup of skills:
(1) CapitaI efhciency. Medtech companies
are now forced to operate with fewer
resources at their disposal. This means
that they will have to make more
ellcienL use ol Lheir exisLinq capiLal in
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,
lor example, vary Lheir lxed cosLs,
conducL R&D more ellcienLly and
explore ways to extract more value from
intellectual property.
(2) Ecosystem-wide scanning. Medtech
companies are now operating in a very
luid healLh care environmenL. Payers are
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
ouL inellciency in Lhe delivery ol healLh
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. Theyve got to understand
health economics, government
requirements and market segmentation.
A companys 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
oLher medLech lrms, buL also wiLh a
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. Theyve
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
delned by a company's abiliLy Lo use
analytics to prove the effectiveness and
ellciency ol iLs producLs and acLions.
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
companys 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
companies build diseasespecilc value
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 strengths
The good news is that some of the strengths
of large and small medtech companies
idenLiled earlier could be uselul in drivinq
business model innovation. But to achieve
Lhis, lrms will need Lo use Lhese exisLinq
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.
(2) !dentifyin and hIIin aps. Small
medtech companies are particularly
adepL aL developinq producLs LhaL lll a
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, its 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
ellciency and Lhe like are, aL hearL,
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 investors
What 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
wiLh numerous parLies and conlicLinq
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
inlecLion poinLs aL which invesLors could exiL?
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,
invesLors will lnd ways Lo make Lhe numbers
work.
VCs will need to change
the lens through which
they evaluate and
conduct investments
Point of view
Conclusion
Two 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.
!
!
!
!
!
2005-09
average
2012
210
!
!
!
!
156
Number of warning letters
issued by the CDRH
A perfect storm
Number of US hospital M&As (announced)
2005-09
average
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
2003-07
average
7
16
Innovation capital as a percentage of total capital
Jul 12-
Jun 13
Jul 07-
Jun 08
18
! ! ! ! ! ! !
! !
64
Number 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
2005-09
average
2012
33
24
Percentage of US physicians
in private practice
Number cf medtech !PDs pre- and pcst-hnanciaI crisis
Jul 08-
Jun 13
average
8.4
Jul 05-
Jun 08
average
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
>> Its 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
care leaders and qovernmenL ollcials, l
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
risinq cosLs. A siqnilcanL cause ol Lhe
cost escalation in the US is the way we
have hisLorically lnanced and incenLivized
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 isnt
wiLhouL benelLs iL has losLered years ol
innovaLion, and we have seen siqnilcanL
clinical advancements in patient care.
But the path this system has traveled
lor many years is based on a lawed
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.
lnsLead ol delninq innovaLion as invenLions
and iterations, we must focus on the
opporLuniLy Lo redelne innovaLion across
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 todays world requires more from
us. Demonstrating economic value can
be dillculL, because iL requires a more
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,
llled wiLh Lremendous opporLuniLy lor
medical technology companies and
innovators to be part of the solution for
ellcienLly increasinq access and improvinq
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 Ishrak
Chairman and CEO
Medtronic, Inc.
Transforming
and leading
Michel Orsinger
Worldwide Chairman
DePuy Synthes
Companies of
Johnson & Johnson
Innovating
differently
As health care systems around the globe
confront the problem of escalating costs,
the medtech industrys 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
Lhese increasinqly inluenLial sLakeholders
are more focused than ever on value
identifying and rewarding interventions that
improve patient outcomes and satisfaction
in Lhe mosL cosLellcienL manner.
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
ellciency, addressinq supply chain
inellciencies, eLc.
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
improvinq healLh ouLcomes in cosLellcienL
ways. As such, product innovation is no
longer just about incorporating the latest
technology, but also about designing
products that use health care resources
ellcienLly. 1his could include more
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
improve ouLcomes and Lhe ellciency ol
healLh care delivery. 1o daLe, 27 scienLilc
publications document the science behind
the design, thereby addressing our
stakeholders need for evidence. And the
sysLem's inLuiLive, ellcienL insLrumenLaLion
allows providers to reduce sterilization
and surgical prep costs thereby helping
Lo improve Lhe ellciency ol healLh care
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
commiLmenL Lo innovaLe in Lhis leld, will
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
years ahead, and Lhere are siqnilcanL
unmeL needs Lo be llled. BuL we also
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
paLienLs) and redelne innovaLion Lo meeL
the value needs of these stakeholders.
Financial performance
ol Luropean lrms sellinq in Lhe US were
boosted by this trend. However, for European
companies, the exchange rate also came into
play in a second siqnilcanL way. We use US
dollars throughout this report for consistency
purposes. We therefore converted European
lrms' reporLed resulLs inLo US dollars lor our
analysis. ln Lhis conversion, Luropean lrms'
overall numbers were arLilcially lowered by
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
meqadeal and lor exchanqe raLe lucLuaLions,
the apples-to-apples 2012 revenue growth
rate would have instead been about 8% as
compared with 4% in 2011. Similarly, the
1he 2012 lnancial perlormance ol US and
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 years megadeal: Johnson
& Johnsons acquisition of Synthes, which
removed a siqnilcanL sLandalone medLech
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.)
1he 2012 numbers were also siqnilcanLly
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.
US lrms sellinq in Lurope were hurL by Lhe
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 $415.1 9%
Number of employees 732,400 725,000 1%
Number of public companies 368 374 -2%
Medical technology at a glance, 201112
(US$b, data for pure-plays except where indicated)
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
have been 3.57 (siqnilcanLly beLLer Lhan boLh
the reported 2012 decline of 22% and the
2011 normalized growth rate of 0.5%).
While Lhe indusLry's 2012 lnancial resulLs
were better than 2011 on a normalized basis,
looking at the longer term reveals a more
Lroublinq picLure. 1he indusLry's lnancial
qrowLh is siqnilcanLly below levels belore
Lhe lnancial crisis, when medLech rouLinely
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
prolLabiliLy Lhey en|oyed belore Lhe lnancial
crisis. And meeting that challenge will require
revisiting how they innovate both their
medtech products and their business models
for medtechs new normal.
Behind the numbers: a growth challenge
US public medtech cash index
Chart excludes companies that are cash flow positive.
Numbers may appear to be inconsistent due to rounding.
More than 5 years
35 years
23 years
12 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 years
35 years
23 years
12 years
Less than 1 year
European public medtech cash index
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 industrys 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
dropped lor Lhe lrsL Lime in lve years, as Lwo
companies dropped out of the list and no new
lrms were added. SynLhes was dropped in
June 2012, when J&J lnalized iLs USS19.7
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
Commercial leaders are pure-play companies with revenues in excess of US$1 billion.
50
40
20
30
10
0
2010
42 companies
2011
45 companies
2012
43 companies
2009
42 companies
2008
41 companies
26 companies
24 companies
25 companies
27 companies
25 companies
8 companies
11 companies
8 companies
9 companies
9 companies
4 companies
3 companies
5 companies
5 companies
5 companies
3 companies
4 companies
4 companies
4 companies
4 companies
> US$10b US$5bUS$10b US$2.5bUS$5b US$1bUS$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
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,
medLech lrms have Lraded below broader
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 years Point of view
article, the situation in Europe may become
more dillculL due Lo proposed chanqes Lo
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
such as Alere, BosLon ScienLilc and Holoqic.
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%
ol medLech lrms added employees durinq
the year.
1he lnancial perlormance ol US public
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 doesnt 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 todays medtech industry.
Numbers may appear to be inconsistent due to rounding. Market capitalization data is shown for 31 December 2012 and 31 December 2011.
United States
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, 201112
A solid performance given
the slew of challenges
facing todays 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
relaLively laL. Allinall, compared Lo
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) $(0.6) 0%
US commercial leaders and other companies, 201112
(US$b)
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 Revenue
Number 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 $71,029
4% -13% 16% 5% -274% -9% 2%
Minnesota
$22,384 16 $56,414 $2,260 $4,434 $4,266 $43,537
0% -6% 2% -3% 11% 11% 7%
Southern California
$14,613 33 $46,598 $1,517 $1,103 $6,254 $28,532
1% -3% 22% -2% 12% -1% -1%
Northern California
$11,953 30 $46,145 $1,255 $1,197 $4,655 $18,084
12% -3% 10% 13% 16% 9% 14%
New Jersey
$11,992 11 $25,946 $800 $1,739 $3,339 $17,342
1% -8% 4% 9% 6% 42% 9%
Michigan
$8,950 4 $22,128 $526 $1,265 $4,361 $13,813
4% 0% 11% 8% -3% 25% 8%
Indiana
$6,519 4 $13,698 $318 $877 $1,650 $11,248
2% 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 $4,715
10% 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 $3,240
0% 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)
Data shown for pure-play companies only.
Change in US therapeutic device companies revenue and net income by
disease category, 201112
Revenue Net income
1
Oncology Dental Multiple
0
-2
-1
-3
-4
-5
Cardiovascular/
vascular
Orthopedic Womens 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 womens 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
segments 12% increase, while US$5.1
billion in accounting charges from Boston
ScienLilc conLribuLed Lo a 31^7 decline by
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 $331 21%
Selected fast-growing US medtechs by revenue growth, 200712
(US$m)
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
medLech indusLry wiLh Lhe hiqhesL lveyear
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
lnancial resulLs were converLed inLo US
dollars for presentation in this report
(we use dollars throughout the report
for consistency). In this conversion, the
lnancial resulLs were arLilcially delaLed by
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
exchanqe raLe lucLuaLions and sLaLinq Lhe
results in euros, the industrys revenues were
up by a much healthier 10% in 2012 (vs.
3% in 2011), primarily driven by Europes
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.
As in Lhe US, Lhe lnancial perlormance
of the medtech sector in Europe was
siqnilcanLly skewed by exchanqe raLe
lucLuaLions. ln Lhe case ol Lurope, Lhese
effects worked in two distinct ways. The
lrsL impacL is LhaL Lhe resulLs ol Luropean
companies were bolstered by the rise of
Lhe dollar. 1he US revenues and prolLs
of European companies were boosted by
about 3 percentage points due to favorable
exchange rate movements.
Numbers may appear to be inconsistent due to rounding. Market capitalization data is shown for 31 December 2012 and 31 December 2011.
Europe
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, 201112
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,
publicly Lraded medLech lrms surpassed Lhe
300,000 employee level.
European commercial leaders once again
outperformed their smaller counterparts
across all ma|or lnancial indicaLors, wiLh
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 continents 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.
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 $(0.0) 746%
European commercial leaders and other companies, 201112
(US$b)
Country Revenue
Number 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 $25,760
5% -17% 6% -4% 9% 34% 11%
Ireland
$11,935 2 $27,635 $626 $1,922 $1,941 $22,454
2% 0% 26% 12% 2% 23% 9%
France
$9,515 22 $27,088 $534 $847 $1,240 $12,665
7% 38% 44% 7% -5% 53% 2%
Sweden
$5,376 32 $15,183 $230 $614 $659 $9,244
6% 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)
Data shown for pure-play companies only.
Europes therapeutic device companies raised
their collective top line by 2.5% to US$65.7
billion in 2012, which accounted for 51% of
the industrys 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 segments 8%
growth, while Essilor and Novartis Alcon
Surgical drove ophthalmics 9% increase. On
the other hand, all three companies in ENT
and lour ouL ol lve wound care companies
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.
1his comes one year alLer all lve seqmenLs
delivered revenue growth of at least 8%.
Change in European therapeutic device companies revenue and net
income by disease category, 201112
1.0
Hematology/
renal
Multiple
0.8
0.4
0.6
0.2
0.0
-0.2
Ophthalmic Ear, 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 industry 30
Unlike the US, where the majority of the
lasLesLqrowinq medLech lrms expanded
their top lines organically, all but three
companies in Europe did so via the aid of
siqnilcanL acquisiLions. 1he lasLesLqrowinq
European medtech company over the past
lve years, OpLos, a ScoLLish producer ol
retinal imaging devices, is a newcomer to the
list that achieved this feat through organic
growth (albeit from a low base). In addition
Lo OpLos, Lhree oLher lrms France's Lssilor
International and Novartis Alcon Surgical
division (both in the ophthalmic segment)
and diversiled healLh care company CeLinqe
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 $3,582 8%
Selected fast-growing European medtechs by revenue growth, 200712
(US$m)
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 industrys 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)
Numbers may appear to be inconsistent because of rounding. PIPEs included in follow-on and other.
the industrys 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 industrys total funding.
At the other end of the spectrum, the
lnancinq opLions lor smaller, emerqinq
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
venLure capiLal LhaL is lowinq inLo medLech is
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
lnancinqs have qone Loward relnancinq
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 years
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
227 yearoveryear qrowLh, debL lnancinq
was actually down 6% in 2012-13. Instead, it
was lollowon and oLher lnancinq LhaL drove
Lhe increase in lnancinq. ln lacL, Lhis was
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 industrys 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
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
U
S
$
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
medLech's commercial leaders (delned
as lrms wiLh revenues in excess ol USS1
billion). This pattern continued during the
12-month period ending June 2013, when
commercial leaders raised 82% of total
indusLry lnancinq USS2^.3 billion, larqely
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
nearly LwoLhirds ol all medLech lnancinq,
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
%

v
e
n
t
u
r
e

f
u
n
d
i
n
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
invesLmenL wenL Lo lrsL or second rounds
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
benelLs ol Lheir producLs.
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 2012June 2013
25%
50%
0
-25%
-50%
-75% 3
0

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LPDX GMED ATOS EGI NSTG ALNOV NANO SPAG ALTER VIVO ALSGD NSTG
The post-IPO returns of 2012-13s 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,
Pennsylvanias 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 years 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 years largest IPO. The Seattle-based
provider of life science tools and molecular
diagnostics planned to use the proceeds
to commercialize its platform. Frances
NanoBiotix, a maker of cancer radiotherapy
treatment, had Europes largest IPO. With
proceeds of US$52 million and US$18
million, these were the smallest IPO leaders
since 2008-09.
Company Ticker Location Product type (disease) Gross raised (US$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 2012June 2013
Financing
United States
Driven by debt, US medtech financing reached another record
25
30
20
15
10
5
0
U
S
$
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
industrys 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
by privaLe equiLy lrms: BiomeL (USS2.6
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
1hermo Fisher ScienLilc, which used Lhe
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
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(
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
U
S
$
b
Financing
Although the total amount of medtech-
specilc venLure capiLal has slumped, Lhe
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
companies lace an increasinqly dillculL
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.

Medtechs share of US venture capital
Source: Dow Jones VentureSource.
Medtechs share of total venture funding Health cares share of total venture funding
25%
30%
35%
20%
15%
10%
5%
0%
2009 2007 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 2012June 2013
Further emphasizing the trend by venture
capiLalisLs Lo place Lheir beLs on lrms LhaL
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
lqures were down 277 and 327, respecLively,
from 2007-08. San Diego-based Vital
Therapies, the developer of the ELAD
extracorporeal liver support system, secured
the years 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 2012June 2013
Size of bubbles shows relative number of financings per region.
4
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(
U
S
$
b
)
Venture capital raised (US$m)
300 100 200 400 500 600 700 800 900 1,000
Massachusetts
Northern California
New Jersey
Southern California
Texas
Minnesota
New York
Pennsylvania
For the second consecutive year,
MassachuseLLs led all US reqions in lnancinq
with US$6.1 billion, and was followed
by Minnesota, Texas and New York. Like
Massachusetts, whose total was buoyed by
1hermo Fisher ScienLilc's combined debL and
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 Fishers US$2.5
billion follow-on offering, Massachusetts would
have come in just behind Northern California,
which lnished wiLh USS955 million in non
debL lnancinq aL Lhe end ol June 2013. As
is typically the case, Northern California,
Massachusetts and Southern California
attracted the lions share of the US industrys
total venture capital investment (58%) and
number of VC rounds (47%).
Financing Financing
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
accounLed lor USS^ billion in debL lnancinq.
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.
1he only briqhL spoL in Luropean lnancinq
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
U
S
$
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.
Medtechs share of European venture funding
Medtechs share of total venture funding Health cares share of total venture funding
25%
30%
35%
20%
15%
10%
5%
0%
2009 2007 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
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U
S
$
m
)
Total amount raised Average deal size
As in the US, the European medtech sectors
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
medLech companies aLLracLed in Lhe lrsL
half of 2013.
The European venture market continued
its decline in 2012-13 as total venture
investment dropped 29% to US$553 million,
the lowest mark since 2004-05. While larger
Eurozone uncertainties have created a
headwind for the industry, Europes venture
investment, like that in the US, largely
mirrors the reduction in total venture capital
investing across all industries.
Financing Financing
Company Country Product type (disease)
Gross raised
(US$m) Quarter Round type
Endosense Switzerland Therapeutic devices (cardiovascular/vascular) 40 Q4 2012 Late stage
SuperSonic Imagine France Imaging 37 Q1 2013 Late stage
STATDiagnostica & 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 2012June 2013
European VCs seemed somewhat more willing
to make large early-stage investments than
their counterparts in the US. Europes 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.
Switzerlands 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 2012June 2013
Size of bubbles shows relative number of financings per region.
250
200
150
100
50
0
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(
U
S
$
m
)
Venture capital raised (US$m)
60 20 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
was Lhe resulL ol a debL lnancinq by CeLinqe.
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
lrom lrsL Lo sevenLh, while France (USS210
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
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(
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
averaqe ol USS^8.5 billion over Lhe pasL lve
years. The total was aided by Thermo Fisher
ScienLilc's announced acquisiLion ol lellow
scienLilc and laboraLory equipmenL maker
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
Lhe lveyear averaqe ol USS33.2 billion.
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
Lhe onqoinq low inLeresL raLes Lo help lnance
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
debL and crediL markeLs Lo lnance
acquisiLions, privaLe equiLy lrms were
relatively quiet on the M&A front in 2012-
13. However, some lrms were occupied
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, its 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
capiLal has become more dillculL and
lPOs have diminished as a viable lnancinq
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
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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,
relecLinq LhaL medLech companies conLinued
to attract interest from a diverse group
of acquirers. Led by the likes of Thermo
Fisher ScienLilc, Fresenius Medical Care
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
has been acquirinq medLech lrms Lo access
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 2012June 2013
Led by Lhe 1hermo Fisher ScienLilc/Lile
1echnoloqies meqadeal, only lve M&A
transactions surpassed the US$1 billion
mark. 1his lqure was down lrom 8 Lhe
previous year and 12 the year before that.
Notable acquisitions during the 12-month
period ending 30 June 2013 included
Valeants purchase of ophthalmic company
Bausch & Lomb, as well as Medtronic and
Strykers 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
lrm public.
The latest 12-month period also saw a
number of industry stalwarts return to the
list of biggest dealmakers after a notable
absence. Some ol Lhese lrms, such as
Medtronic and Stryker, had not done a
siqnilcanL acquisiLion (USS500 million or
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
involvinq USbased medLech lrms was up
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
lveyear, nonmeqadeal averaqe. While Lhe
total number of M&As with announced terms
declined to 102, the median deal size was
US$68 million, 26% above the cumulative
lveyear averaqe. Prior Lo beinq acquired
itself, Life Technologies was the US most
active buyer, with eight acquisitions between
July 2012 and June 2013.
United States
Europe
US M&As
Total 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
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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
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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
lqure was acLually |usL above Lhe lveyear
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
acquisiLion ol a Luropean medLech lrm
was by US conglomerate Baxter, which
acquired Swedens 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%
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o
t
a
l

d
e
a
l

v
a
l
u
e

(
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%
P
e
r
c
e
n
t
a
g
e

o
f

M
&
A
s

w
i
t
h

m
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e

p
a
y
m
e
n
t
s
N
u
m
b
e
r

o
f

M
&
A
s
Jul 2008-
Jun 2009
Jul 2009-
Jun 2010
Jul 2010-
Jun 2011
Jul 2011-
Jun 2012
Jul 2012-
Jun 2013
ln Lhe alLermaLh ol Lhe qlobal lnancial crisis,
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 2007Jun 2012 Jul 2012Jun 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%
As has been Lhe case lor Lhe pasL lve years,
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
* 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
N
u
m
b
e
r

o
f

C
h
i
n
e
s
e

m
e
d
t
e
c
h
s

a
c
q
u
i
r
e
d

b
y

W
e
s
t
e
r
n

r
m
s
U
S
$
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
June 2013, which wiLnessed a siqnilcanL
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, Chinas 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, Chinas 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
N
u
m
b
e
r

o
f

W
e
s
t
e
r
n

m
e
d
t
e
c
h
s

a
c
q
u
i
r
e
d

b
y

C
h
i
n
e
s
e

c
o
m
p
a
n
i
e
s
U
S
$
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 Datascopes
patient monitoring business in 2007-08).
The largest acquisition was conducted
by MicroPorL ScienLilc, which purchased
US-based Wright Medicals 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.
OLher siqnilcanL deals included BCl
Shenzens US$118 million acquisition of US-
based, DNA sequencing company Complete
Genomics and Mindray Medicals purchase
of Zonare Medical Systems, a US-based
manufacturer of ultrasound technologies.
Scope of this report
Delninq medical Lechnoloqy
Except as otherwise noted, medical
technology (medtech) companies are
delned lor Lhis reporL as companies LhaL
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 Israels 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
LhaL do noL lL in any ol Lhe above
caLeqories were classiled in Lhis seqmenL
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 divisions 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
Drger: Medical
Eckert & Ziegler: Medizintechnik
Fresenius: Medical Devices
Halma: Medical
Jenoptik: Medical
Novartis: Alcon Surgical
Philips Healthcare
Quantel Medical
Roche Diagnostics
Sanol: Cenzyme Biosurqery
SCA Svenska Cellulosa Aktiebolaget:
Personal Care
Sempermed
Siemens Healthcare
Smiths Medical
Acknowledgments
Project leadership
Gautam Jaggi and Glen Giovannetti
once again acted as co-editors-in-chief for
Pulse of the industry. Gautam was also
responsible lor cowriLinq Lhe "Redelninq
innovation article, as well as the Industry
performance section.
Iain Scott cowroLe Lhe "Redelninq
innovation 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 years
reporL Lhe lrsL in which he has been
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
reports data, and coauthored the Industry
performance section. In addition, Jason
conducted a number of external interviews
used to help shape the reports viewpoint.
Strategic direction
Special 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
LxecuLive Ollcer, invendo medical), 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
invaluable insiqhLs and lrsLhand experiences
that were used as the foundation for the
reports key themes
and focus.
John Babitt, Dave DeMarco and Patrick
Flochel provided strategic vision for this
report, in particular their valuable feedback
lor Lhe "Redelninq innovaLion" arLicle.
Data analysis
The research, collection and analysis of
all lnancinq, lnancial perlormance and
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 assistance
Russell Colton brought his incomparable
skills as a copy editor and proofreader to
this publication. His patience, hard work and
attention to detail were unparalleled.
Design
This 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 support
Public relations efforts related to the book
and its launch were led by Susan Jones.
Greg Kelley lrom Lhe PR lrm FeinsLein
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, 201112 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, 201112 24
US commercial leaders and other companies, 201112 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, 201112 26
Selected fast-growing US medtechs by revenue growth, 200712 27
European medtech at a glance, 201112 28
European commercial leaders and other companies, 201112 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, 201112 30
Selected fast-growing US medtechs by revenue growth, 200712 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 2012June 2013 35
IPO performance, July 2012June 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
Medtechs share of US venture capital 38
Top US venture rounds, July 2012June 2013 39
Capital raised by leading US regions without debt, July 2012June 2013 39
European medtech financing tumbles 40
European venture capital falls 41
Medtechs share of European venture funding 42
Top European venture rounds, July 2012June 2013 42
Capital raised by leading European countries without debt, July 2012June 2013 43
M&As in the US and Europe 44
US and European M&As by type of buyer 45
Selected M&As, July 2012June 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 glen.giovannetti@ey.com +1 617 585 1998
Deputy Global Life Sciences Leader Patrick Flochel patrick.flochel@ch.ey.com +41 58 286 4148
Australia Brisbane Winna Brown winna.brown@au.ey.com +61 7 3011 3343
Melbourne Denise Brotherton denise.brotherton@au.ey.com +61 3 9288 8758
Sydney Gamini Martinus gamini.martinus@au.ey.com +61 2 9248 4702
Austria Vienna Erich Lehner erich.lehner@at.ey.com +43 1 21170 1152
Belgium Brussels Thomas Sileghem thomas.sileghem@be.ey.com +32 2 774 9536
Brazil So Paulo Frank de Meijer frank-de.meijer@br.ey.com +55 11 2573 3383
Canada Montral Lara Iob lara.iob@ca.ey.com +1 514 879 6514
China Shanghai Kenneth Lee kenneth-kf.lee@cn.ey.com +86 10 58153465
Czech Republic Prague Petr Knap petr.knap@cz.ey.com +420 225 335 582
Denmark Copenhagen Benny Lynge Srensen benny-lynge.soerensen@dk.ey.com +45 35 87 25 25
Finland Helsinki Pekka Risnen pekka.raisanen@fi.ey.com +358 405 433 565
France Paris Virginie Lefebvre-Dutilleul virginie.lefebvre-dutilleul@ey-avocats.com +33 1 55 61 10 62
Germany Dsseldorf Gerd Strz gerd.w.stuerz@de.ey.com +49 211 9352 18622
Mannheim Siegfried Bialojan siegfried.bialojan@de.ey.com +49 621 4208 11405
India Mumbai Ajit Mahadevan ajit.mahadevan@in.ey.com +91 22 61920000
Hitesh Sharma hitesh.sharma@in.ey.com +91 22 61920620
Ireland Dublin Aidan Meagher aidan.meagher@ie.ey.com +353 1 221 1139
Neil Byrne neil.byrne@ie.ey.com +353 1 221 2370
Israel Tel Aviv Yoram Wilamowski yoram.wilamowski@il.ey.com +972 3 623 2519
Italy Milan Lapo Ercoli lapo.ercoli@it.ey.com +39 02 7221 2546
Japan Tokyo Hironao Yazaki yazaki-hrn@shinnihon.or.jp +81 3 3503 2165
Netherlands Amsterdam Jules Verhagen jules.verhagen@nl.ey.com +31 88 407 1888
New Zealand Auckland Jon Hooper jon.hooper@nz.ey.com +64 9 300 8124
Norway Trondheim/Oslo Willy Eidissen willy.eidissen@no.ey.com +47 918 63 845
Poland Warsaw Mariusz Witalis mariusz.witalis@pl.ey.com +48 225 577950
Russia Moscow Dmitry Khalilov dmitry.khalilov@ey.com +7 495 755 9757
Singapore Singapore Swee Ho Tan swee.ho.tan@sg.ey.com +65 6309 8238
South Africa Johannesburg Sarel Strydom sarel.strydom@za.ey.com +27 11 772 3420
Spain Barcelona Silvia Ondategui-Parra silvia.ondateguiparra@es.ey.com +48 2 2557 7351
Sweden Uppsala Bjrn Ohlsson bjorn.ohlsson.uppsala@se.ey.com +46 18 19 42 22
Switzerland Basel Jrg Zrcher juerg.zuercher@ch.ey.com +41 58 286 84 03
Zrich Heinrich Christen heinrich.christen@ch.ey.com +41 58 286 3485
United Kingdom London David MacMurchy dmacmurchy@uk.ey.com +44 20 7951 8947
Reading Ian Oliver ioliver@uk.ey.com +44 11 8928 1197
United States Boston Kevin Casey kevin.casey1@ey.com +1 617 585 1817
Michael Donovan michael.donovan1@ey.com +1 617 585 1957
Chicago Jerry DeVault jerry.devault@ey.com +1 312.879.6518
Houston Carole Faig carole.faig@ey.com +1 713 750 1535
Indianapolis Scott Bruns scott.bruns@ey.com +1 317 681 7229
Minneapolis Scott McGurl scott.mcgurl@ey.com +1 612 371 8331
William Miller william.miller@ey.com +1 612 371 6984
Nashville Kim Ramko kim.ramko@ey.com +1 615 252 8249
New York/New Jersey John Babitt john.babitt@ey.com +1 212 773 0912
Dave DeMarco dave.demarco@ey.com +1 732 516 4602
Mitchell Cohen mitchell.cohen@ey.com +1 203 674 3244
Jeff Greene jeffrey.greene@ey.com +1 212 773 6500
Michael McDaid michael.mcdaid@ey.com +1 732 516 4570
Orange County Dave Copley david.copley@ey.com +1 949 437 0250
Kim Letch kim.letch@ey.com +1 949 437 0244
Philadelphia Howard Brooks howard.brooks@ey.com +1 215 448 5115
Steve Simpson stephen.simpson@ey.com +1 215 448 5309
Raleigh Mark Baxter mark.baxter@ey.com +1 919 981 2966
San Diego Dan Kleeburg daniel.kleeburg@ey.com +1 858 535 7209
San Francisco Bay Area Scott Morrison scott.morrison@ey.com +1 650 802 4688
Chris Nolet chris.nolet@ey.com +1 650 802 4504
Richard Ramko richard.ramko@ey.com +1 650 802 4518
Notes
EY | Assurance | Tax | Transactions | Advisory
About EY
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insights and quality services we deliver help build trust and confidence in the
capital markets and in economies the world over. We develop outstanding
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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
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does not provide services to clients. For more information about our
organization, please visit ey.com.
How EYs 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 patients 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.
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Pulse of the industry

Medical technology report 2013

Going beyond: medtech companies expand into services and solutions

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