Financial News

Innovation, Demand Help Medtech Industry Survive Recession

Forget recession-proof. The medical technology industry seems downright invincible these days.

By its very nature, the industry historically has been quite resilient to economic downturns. While markets such as automobiles and retail typically fall victim to the whims of consumer demand in times of uncertainty, the medical technology sector is fairly insulated by the need for innovation and the growing demand for its products.

That insulation, however, started to fray when the financial crisis exploded last fall and spread like wildfire across the globe. There was hardly an area or an industry that wasn’t negatively impacted in some way by the crisis. Credit markets tightened, and companies hemorrhaged employees as they struggled with doubts about their own solvency. Consumer confidence, meanwhile, plummeted.

By the end of last year, medical technology executives realized that the industry was not going to escape the crisis unscathed. And it didn’t—financing and mergers were down significantly in 2008. But overall, the industry emerged from the worst of the crisis relatively healthy, according to a comprehensive report on the sector from global advisory firm Ernst & Young.

“Revenues in 2008 were actually up. Although, the second half of 2008 was not as robust as the first half. The revenues for the industry in the first half of 2009 have been relatively flat,” said Richard Ramko, U.S. healthcare practice leader at Ernst & Young. “Given every CEO, CFO, [or] board member I speak to, [medical technology] is one of the few industries where revenues were actually flat. In most industries, if your declining revenue is in the single digits, you’re doing pretty well. That was a little bit of a surprise.”

Another surprise was the level of venture capital funding in 2008. The $3.6 billion invested by venture capitalists in the United States last year was just 10 percent short of the record $4 billion reported in 2007, the Ernst & Young report stated. European medical technology firms received $772 million in venture capital financing last year, a 20 percent decrease compared with the amount those companies received in 2007.

In some respects, the decrease in venture capital funding was not surprising because the amount of money that changed hands in 2006 and 2007 was “off the chart,” said Scott Sarazen, Markets Leader at Ernst & Young’s Global Life Sciences Center. Medical device executives agreed, saying the public financing and venture capital market would probably not experience such exuberant levels again.

So far, it hasn’t. In the first six months of 2009, venture capital investment in the American and European medical technology sector totaled $1.6 billion, a decrease of 38 percent compared with the same period in 2008.

“It’s been a difficult period of time. I don’t know if we will ever go back to where we were before a couple of years ago,” said R. Ernest Waaser, Teleflex Medical president, one of the panelists who discussed the Ernst & Young report in mid-October at AdvaMed 2009: The MedTech Conference in Washington, D.C.

“This industry has some good growth factors behind it,” he noted. “No matter what happens with the economy, we have an aging population that is going to drive the need for medical devices, and emerging markets in developing countries that will help fuel growth.”

That growth may take some time to occur though. Initial public offerings (IPO) dried up last year—only two occurred in Europe and the most recent one in the United States took place in the first quarter. That interval represents the longest dry spell for U.S. IPOs in six years, the 58-page report stated.

Overall, medical technology revenues in both the United States and Europe grew 11 percent last year, but that growth stalled in the first half of 2009 as bankruptcy filings skyrocketed and market capital fell significantly, according to Ernst & Young’s data. The amount of financing raised by U.S. and European medical technology firms fell 59 percent in the first half of 2009.

The report, “Pulse of the industry Medical technology Report 2009,” was released by Ernst & Young on the first day of AdvaMed’s annual conference. It provided an overview of the medical technology industry’s general financial health last year as well as detailed explanations of the factors that affected its growth.

Ernst & Young tracked 1,707 medical technology companies in the United States and Europe to obtain the data it compiled in the report. Of that total, 460 companies were classified as publicly traded firms (as of Jan. 1, 2009), down 4 percent compared with the 478 that were publicly traded as of the same date in 2008. The number of public medtech companies in the United States fell 6 percent last year to 292, while the total in Europe remained flat at 168.

Most medtech companies in the United States are located in California, Massachusetts and Minnesota, the report concluded, while Europe’s meccas can be found in the United Kingdom, Israel and Germany.

Revenue for these publicly traded companies—both in the United States and Europe—reached $289 billion last year, according to the data.

Net income fell 11 percent to $11.4 billion, mostly due to special charges from major acquisitions and asset impairments at several large companies. These expenses kept net income from increasing last year, the report stated.

Capital raised by U.S. and European companies fell 38 percent to $9.2 billion. Public financing as well as mergers and acquisitions were down sharply last year. The total value of medtech mergers and acquisitions in 2008 was $41 billion, a 33 percent decline compared with 2007. Through the first half of 2009, only 44 deals with an aggregate value of $6.7 billion have been announced.

“There is no question that the events of 2008 and the first half of 2009 have created a host of challenges for U.S. and European medicaltechnology companies,” the report stated. “The global recession has affected the way medtech companies conduct business—especially emerging R&D-stage companies that lacked access to capital. While corporate balance sheets remained relatively strong for most of the larger medtechs, the lack of access to capital and declining stock prices made it more difficult for emerging companies to finance their operations and for midsize medtechs to complete acquisitions.”

In addition to explaining the impact of the worldwide recession on the medical technology industry, the Ernst & Young report identified emerging challenges that could create new sources of opportunity and uncertainty for companies and investors. Those challenges include healthcare reform in the United States, the possible overhaul of the U.S. Food and Drug Administration’s 510(k) approval process, potentially longer product approval timelines and reduced levels of capital across global financial markets.

More Spent on Healthcare M&A in Third Quarter

The number of mergers and acquisitions in the healthcare industry remained flat in the third quarter, but the amount of money spent on the deals jumped 38 percent, according to a new report.

Preliminary data released by Irving Levin Associates Inc. indicate that 233 deals occurred in the three months ended Sept. 30, an amount nearly identical to the 236 deals announced in the second quarter of 2009, ended June 30. Spending on the latest deals, however, rose to $38.4 billion, a sign of growth in the market, industry analysts said.

Healthcare technology captured the lion’s share of capital during the quarter, garnering nearly 93 cents out of every dollar invested in healthcare M&A, the data showed. It also accounted for more than half the transactions that occurred—initial figures from “The Health Care M&A Report” indicate that technology assumed 61 percent of the quarter’s total deal volume, or 143 transactions.

More than half of the $35.7 billion spent on medical technology M&As were funneled into pharmaceutical firms. According to the data, $17.3 billion, or 45 percent of the total amount of money spent on M&A activity fell into this area. The number of pharmaceutical deals (36) remained steady in the third quarter, but fell 8 percent from the 39 deals announced in the third quarter of 2008, when the financial crisis took root and mushroomed worldwide.

Biotechnology companies were another target of M&A spending, capturing $9.1 billion, or 24 percent of the total amount of capital. The number of deals, however, fell 11 percent compared with the second quarter, but activity nonetheless rose 11 percent compared with the third quarter of 2008. Irving Levin’s data indicates there were 41 deals announced in the third quarter of 2009 and 37 completed in the same period last year.

“The robust deal-making we see in the pharmaceutical and biotechnology sectors owes much to the ability of buyers to circumvent the battered financial system,” said Sanford Steever, Ph.D., editor of the report.

Medical device companies attracted $5.2 billion, or 13 percent of the total M&A funding in the third quarter. But it suffered a fate similar to the biotechnology sector: The number of deals fell 10 percent compared with the second quarter but rose 2 percent compared with the third quarter of 2008.

The hospital sector reached its highest transaction volume in eight years with 21 announced deals. That sector last peaked at 27 deals in the fourth quarter of 2001.