Taking the Pulse of the Medical Device IndustryTaking the Pulse of the Medical Device Industry

EY’s John Babitt and Jim Welch join us for this episode to dive deeply into the Pulse of the Industry Report. We’re talking about deals, IPOs, the hottest segments, and more in this incredible episode of Let’s Talk Medtech.

Omar Ford

October 11, 2024

30 Min Listen

The global medical technology industry continued to face broader macroeconomic forces, causing industry players to walk a narrow path between converging topline and bottom-line pressures. Despite this, ongoing breakthroughs in AI and other emerging growth opportunities like the rise of consumer engagement in health technology keep steady growth and profitability within reach, as described by the 18th annual Pulse of the MedTech Industry report produced by Ernst & Young LLP (EY).

Jim Welch, EY Global Medtech Leader, and John Babitt, EY Life Sciences Partner, join us for this episode of Let's Talk Medtech to discuss the report.

Here's a transcript of the podcast.

Good morning and welcome to let's Talk Medtech. You know, it's been a while since we've had you on the show, but I know we've talked fairly recently regarding the pulse of the industry report. And what I want to do is I want to dive into some particulars of the report. But if you had to sum up the industry's health or how it was doing across the board when compared to previous years, what is the state or the pulse of the industry right now?

Welch: Omar, thanks for having John and I. We're excited to be here again with you and to share some insights on this year's report as well as conversations we've had with our clients over the past few months as we develop the content. So to your question, from my perspective, and I'll let John Chime in as well, the industry itself is, is healthy overall. It's growing. It continues to grow. Product approvals have been up to record levels, including for AI enabled devices. Financial performance is improving. Is some of the hyper inflationary pressures of ease. We know the hospital systems are building, investing to build capacity. There's new customer segments that I know we'll probably talk a little bit about. From my perspective, the industry is incredibly healthy and a strong trajectory. And John, you probably have a view of that as well.

Related:Globus Relieves Nevro’s Pain with Strategic Acquisition

Babitt: Yeah, I think you point to a number of the industry considerations. Revenue was up and continues to grow. It's over a half trillion dollar industry for the second year in a row. That trend is continuing into 2024, as Jim alluded to in 2024. We're actually seeing some signs of improving profitability as well. So that bodes well. Long-term innovation or funding into R and D has continued at an elevated rate on a real dollar basis it continues to increase and we're seeing the result of that product of R and D with the FDA approvals. There were some areas that were, I would say challenging over the last year. We're still not seeing an IPO market. I know we're going to talk about that a little bit later on. And then m and A actually ticked up, but it was off a relatively low base last year and still below norms and I know we're going to talk about that as well. And maybe one of the positive signs was the fact that VC deals continue to get done and actually ticked up over the last twelve months. And then there are some new areas on the therapeutic front that I know we're going to talk to in detail that are exciting for med tech. Certainly a lot of opportunities across the space and as we exit 24 and head into 25, it's I think a much-improved environment compared to where we were maybe a year ago, where there was a big GLP, one shadow over the industry and prospects. So overall positive.

Related:Measuring Medtech's M&A Appetite in 2025

 Interesting, interesting. I want to talk about deals, the M&A right now because anecdotally speaking, it seems as if this year has been a little bit better for deals, but that's me covering it as a journalist. However, I think in years past we've had a larger number of deals, but this year it just seems the deal quality might be a little bit better, you know, the deals might be a little bit bigger. Am I kind of off base with that or where are we at with M and A?

Related:What Medtech Is Talking About in January

Babbitt: No, one of the things that we talked about on the m and a front is that the overall volume of, or value of deals actually increased from below 60 billion to north of 60 billion. So it was up, there was, I think, only one megadeal that was overdeveloped, $10 billion, and that being the shockwave deal. But you're right, Omar, the number of deals did indeed tick down. So on average we would typically see about 100 deals a year, 150 deals, I'm sorry. And last year we only cataloged about 99 over the last twelve months. And so the deal volume definitely was negatively impacted. One of the other things that we point out in the report is that this was the second highest level of dividends and buybacks that we've seen over the historical period in medtech. So clearly, as med techs have looked to how they allocate capital, some stock prices have been under pressure. So companies have seen the better opportunity to deploy that capital in the means of returning capital to shareholders. Either by way of dividends or stock buybacks, rather than redeploying that on the m and a front. I think where valuations are, though, it potentially gives us, I think, an opportunistic area to pursue. And so that's one of the things that we're going to talk about at my panel next week at the Medtech conference. And I would think that that bodes well overall for an more active m and a environment.

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Do we see there being room for a huge deal? I mentioned this during our media roundtable last week, jokingly, a little bit, certainly not on the Medtronic or Covidian level, but what about a shockwave ish like deal, something of that size? Is there the potential for that to happen in this last part of the year?

Babitt: Yeah, I think a couple things. As we look at the last part of the year, we have an election that creates a little bit of uncertainty in the markets. And so I do think that that's going to be a little bit of an overhang on just deal activity. But as we kind of flip the page to 2025, I think it sets up very well. And I do think that the shockwave ishemeral. You know, deals are, you know, something that people will look at, especially with interest rates, you know, declining and potentially declining further, that becomes a much more capital efficient and, you know, more attractive ROI, even for strategics. So I do expect that we'll see some of those deals. But, you know, in the big transformative deals thus far have really not proven the TSR that. Excuse me.

Maybe they’ve promised their shareholders something. As we consider the most probable deals, it seems likely that we’ll see more smaller tuck-in acquisitions. Companies have been able to demonstrate real shareholder value creation from these types of deals. If you look at the companies that have outperformed the market and their sector, many have been active participants in M&A and have successfully executed those strategies. This suggests that we’ll likely see more of these smaller deals.

Welch: I completely agree with John. The environment is indeed setting up well for these acquisitions. We should focus on high-growth areas. Companies have refined their portfolios and are concentrating on specific growth sectors, such as structural heart, robotics, electrophysiology, diabetes, and, of course, renal denervation—one of John’s favorites. These are promising areas for potential deals as we approach 2025.

You make a good point about companies pruning their portfolios. I remember a trend of divestitures and spin-offs, particularly noted in the 2016 report. Companies have shed excess and created a stronger core, which now allows them to pursue strategic acquisitions that truly fit their goals.

Welch: Absolutely. It's important to consider that some of the businesses these companies exited or spun off could create further M&A opportunities in their respective markets. In situations where there’s less competition for capital and a shift from conglomerates to more focused players, there’s a strong incentive to pursue deals and grow.

I want to switch gears a bit. My colleague Amanda Peterson recently discussed significant challenges facing medtech startups. She pointed out that many are struggling to survive, with exits and access to cash becoming increasingly rare compared to previous years. The SPAC mergers and IPOs have practically disappeared. Can you shed some light on this situation?

Babitt: Sure, Jim, would you like me to start?

Welch: Yes, go ahead. I have some thoughts too.

Babitt: On the venture side, over the past twelve months, we’ve actually seen an increase in funding for venture capital. However, as you mentioned, there’s been a lack of IPO activity, leading to a decline in follow-on offerings as well. High interest rates have also reduced debt financing. Overall, while the total capital raised by medtech has decreased, venture capital has seen an uptick. A key factor is that we continue to see VC deals being made, particularly in promising technologies related to diagnostics, robotics, and AI-enabled solutions. As we move into 2025, with the election uncertainty behind us, we’re likely to see several strong companies preparing for an IPO—companies with predictable revenues and scalable operations. I believe medtech will begin to explore the IPO market early next year, which should open up more capital flow into the sector.

Another noteworthy trend is corporate venture capital. This has become an important funding source, with a significant portion of VC rounds including strategic participation from larger medtech companies. While they may not be heavily investing in M&A right now, they are still allocating capital in non-controlling ways within the ecosystem, contributing to the rise in venture capital.

Welch: I’d like to add to that. As exit events occur, they create more capacity for additional VC investment. Although we’ve had a predictable pattern over the past six to seven years, the slowdown in the IPO and M&A markets has created a backlog. I expect we’ll see a more predictable flow in the future. A year from now, I believe we’ll be pleased with the opportunities arising in the innovation ecosystem. It’s crucial for our industry to continue nurturing this ecosystem creatively and diversifying our investor base.

John mentioned corporate VC, which is certainly a component, but we also need to explore more innovative alliances and partnerships. We’re seeing some exciting incubators emerge, particularly in the U.S., that are supporting smaller organizations. For example, there’s one in Chicago called Matter that has successfully secured funding for its participants, and a new initiative in Jersey City, called SciTech City, is being developed with support from the Liberty Science Center. These efforts are creating valuable opportunities. Moving forward, finding creative ways to bring products and solutions to market will be one of the most exciting developments we can expect in the coming years.
Now, speaking of solutions coming to market, that’s an excellent segue to discuss FDA approvals and clearances. We’re seeing a higher number of those in this report, correct?

Welch: Absolutely! The numbers are incredibly strong. FDA reported the highest number of novel devices approved in more than 40 years. 510(k) approvals have been up for the fourth consecutive year, exceeding 3,300, while PMA approvals have increased by 77%. The review and approval times have improved, easing the backlog from the pandemic and making the process much more efficient. This is a positive sign, especially given that there are still many great solutions coming to market to benefit patients and providers.

Babitt: Definitely.

I want to talk about continuous glucose monitors (CGMs). My colleague Katie Hobbins covered how some athletes at the Olympics were using them. These technologies are considered medical devices, yet active individuals without diabetes are using them to monitor their stats and assess how their bodies react under stress during workouts. Can you discuss this trend and its implications for the industry? It seems to align with patients becoming more consumer-oriented and involved in their health. Many technologies that were once limited to doctor’s offices are now wearable, and users can easily understand the readings.

Welch: It’s an incredibly exciting market, Omar. We’re seeing fascinating developments driven by the demand for personalization in healthcare and self-care. These trends are not new, but their convergence is creating a new consumer market for us in medtech. This offers opportunities to better understand consumer behaviors and tailor products and services accordingly, whether through retail or online partnerships.

For instance, in our team’s 14th annual Future Consumer Index, 37% of consumers reported they’re willing to pay more for products that promote health and wellness. Notably, 24% are open to sharing private data in exchange for personalized recommendations. This indicates that some barriers to adoption are starting to fall. High-performance athletes can fine-tune their overall health and fitness, effectively scheduling workouts and recovery. John, you’ve worked with clients in this market—what’s your perspective?

Babitt: For several years, we’ve emphasized the rise of direct-to-consumer channels and the consumerization of healthcare. We’re now seeing that manifest in the market. This year’s Pulse report includes discussions on how to approach direct-to-consumer marketing effectively. This evolution is here to stay, and companies that are first to market will likely reap the greatest benefits, overcoming challenges along the way.

This trend also highlights the migration of care from hospitals to less acute settings. For example, glucose monitors that used to be sold through durable medical equipment channels are now available over the counter. Many technologies and wearables will likely follow this trajectory, making it an important trend to watch.

I would argue that healthcare is not just moving into the home; it’s becoming mobile and accessible wherever you are. You could be in a hotel room or an airport, checking your stats and vitals. This shift implies that healthcare is no longer confined to facilities. The data from the consumer group is intriguing, as more people are becoming conscious of their health and seeking ownership over it. We’ve discussed the patient-consumer shift for years, with individuals increasingly aware of their vitals and making lifestyle changes. This market potential is vast, and med tech has an advantage over other sectors because it understands FDA requirements. Startups often struggle with these regulations, which can be a significant roadblock.

Companies like Abbott and Dexcom are at the forefront of this shift. It’s safe to say that Dexcom, in particular, may not just be viewed as a med tech company but as a consumer company, given their technological advancements. Kevin Sayer (Dexcom CEO) might have some thoughts on that.

Welch: I completely agree, Omar. That’s a great way to characterize it. The opportunity for the industry to engage with patients in diverse ways is fantastic.

Let’s look ahead to 2025. I won’t ask for election predictions, but will we see a rise in deals, and what sectors should we watch? PFA, surgical robotics, artificial intelligence—what are your thoughts, gentlemen?

Welch: John?

Babitt: You hit the nail on the head. We’re likely to see activity in all those areas. Additionally, I see potential in robotics and minimally invasive procedures that target very specific indications. This trend also continues the shift of care to less acute settings.

Renal denervation presents a significant opportunity. We’re at a point where it could become med tech's equivalent of GLP-1. While there’s still work to be done regarding adoption, access, and reimbursement, the high prevalence of related conditions underscores the potential for minimally invasive interventions. This could significantly impact the market.

Welch: I fully agree. If we look at the focus on fundamentals that leading companies have emphasized over the past 18 months, it’s starting to reflect in their performance, which will likely spur market activity. Adapting to various changes in exciting areas, particularly AI, will benefit many companies, both big and small. It’s going to be exciting to watch.

Thank you both for joining us on "Let’s Talk Medtech." We always appreciate your insights.

Welch: Thanks for the opportunity, Omar. We really enjoyed it.

Babitt: Yes, thank you again!

About the Author

Omar Ford

Omar Ford is a veteran reporter in the field of medical technology and healthcare journalism. As Editor-in-Chief of MD+DI (Medical Device and Diagnostics Industry), a leading publication in the industry, Ford has established himself as an authoritative voice and a trusted source of information.

Ford, who has a bachelor's degree in print journalism from the University of South Carolina, has dedicated his career to reporting on the latest advancements and trends in the medical device and diagnostic sector.

During his tenure at MD+DI, Ford has covered a wide range of topics, including emerging medical technologies, regulatory developments, market trends, and the rise of artificial intelligence. He has interviewed influential leaders and key opinion leaders in the field, providing readers with valuable perspectives and expert analysis.

 

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