Medtech Industry Experiences Delayed Reaction to Recession

Medical technology revenues in both the United States and Europe grew 11 percent last year despite a deepening financial crisis that tightened credit markets and limited access to capital, industry leaders said.

That growth, however, stalled in the first half of 2009 as bankruptcy filings skyrocketed and market capital fell significantly, according to a report released Tuesday at AdvaMed 2009. The amount of financing raised by U.S. and European medtech firms fell 59 percent in the first half of this year, and venture capital investment in the sector declined 38 percent to $1.6 billion, according to the report.

“What a year this has been,” said Scott Sarazen, markets leader with Ernst & Young’s Global Life Sciences Center. “The financial crisis really didn’t hit the medtech industry until our report was coming out about this time last year. The medtech industry has not been immune to the effects of the global economic crisis, but it has fared better than most industries and the fundamental drivers for long-term growth in the sector remain intact.”

The report, “Pulse of the Industry: Medical Technology Report 2009,” was released by global financial advisory firm Ernst & Young on the first day of AdvaMed’s annual conference in Washington, D.C. It provided an overview of the medtech 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 report. 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 was down sharply but venture capital was relatively steady, amounting to $3.6 billion last year. That figure is 10 percent short of the record $4 billion in venture capital reported in 2007. European medetch firms received $772 million in venture capital financing last year, a 20 percent decrease compared with the amount those firms 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,” Sarazen said. Medical device executives agreed, saying the public financing and venture capital market would probably not experience such exuberant levels again.

“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. Waaser was one of four panelists who discussed the Ernst & Young report and the challenges facing medtech companies.

“This industry has some good growth factors behind it,” he continued. “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.”

And that growth may take its time to occur. IPOs 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 report stated.

Mergers and acquisitions were just as sparse last year. The total value of medtech mergers and acquisitions last year 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.