For more than a decade, the medical technology (MedTech) sector has outperformed the overall capital market in terms of financial performance. It has generated a total shareholder return (TSR) of 279 percent since 2001, substantially beating the MSCI World Index, which returned 98 percent over the same period. (See Exhibit 1.) Over the past several years, in particular, MedTech companies have performed extremely well. From 2009 through the second quarter of 2013, the sector generated a TSR of 14.8 percent per year. While in terms of value creation its performance trails that of other health-care sectors—such as health care services (at 21.5 percent per year) and biopharmaceuticals (14.9 percent per year)—it has come with less risk (that is, a smaller spread between the TSR values of the best- and the worst-performing companies), thus offering an attractive risk-reward profile for investors.
Despite that strong run, however, it appears that recent investor optimism is outpacing the operational performance of MedTech companies. Growth has slowed, for several reasons. Cost containment measures in Western health-care systems are leading to a reduction in spending on medical technology. The global shift to a value-based health-care market—in which purchases and pricing will face much greater scrutiny and competition than in the past—will likely accelerate this trend. MedTech companies, like all health-care operators, will be assessed on their ability to deliver value to patients and providers, rather than just superior technology or features. In the past, MedTech companies were able to raise prices based on incremental innovations, but that is no longer the case. Finally, while growth has shifted to emerging markets, many Western companies are not yet set up to fully exploit that growth, whether because of problems with distribution, product portfolios that don’t meet patient or customer needs in lower-cost countries, or other issues.
MedTech companies will be assessed on their ability to deliver value to patients and providers, rather than just superior technology or features.
In the years to come, slowing sales growth and margin pressure will pose material challenges for MedTech companies. Much of the sector’s strong recent TSR performance has been driven by the expansion of valuation multiples—that is, investor expectations. If pressure on sales and margins persists, it could potentially affect operations while also dampening investor expectations—a two-pronged effect that would have serious consequences for the value creation outlook at many medtech companies.
These shifts—highlighted in The Boston Consulting Group’s most recent MedTech Value Creators report—create a mandate for change in the sector. The majority of companies in other health-care sectors have already undergone significant cost transformations, yet MedTech companies, by and large, have not. They have implemented cost reduction measures, but these efforts have tended to be incremental instead of transformational. If the MedTech sector is to continue to reward investors and generate value that outperforms the overall market, it will need to fundamentally rethink its operational and sales cost structures. Given growing health-care demands, such as an aging population and an increase in chronic diseases worldwide, there is still considerable potential for growth in the MedTech industry.
-Colm Foley
Partner and Managing Director Bostong Consulting Group
This blogpost was contributed by one of the speakers at MedTech Europe’s “European MedTech Forum 2014”. Follow #mtf2014 to be part of the conversation.
