Pulse of the industry The MedTech Conference October 2015 Mega - - PowerPoint PPT Presentation

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Medical technology report 2015 Pulse of the industry The MedTech Conference October 2015 Mega trends are disrupting health care and medtech business models Changing demographics Life style diseases Digital and mobile 1.5 billion By 2040,

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The MedTech Conference

October 2015

Pulse of the industry

Medical technology report 2015

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Page 2 Pulse of the industry| Medical technology report 2015

Mega trends are disrupting health care and medtech business models

Value-based health care 1.5 billion

ver-65s

by 2050 By 2040, non- communicable diseases cost US$30 trillion Greater transparency Changing customer expectations Increased efficiency

►

New delivery models and care bench marks

Medtech growth challenges

Changing demographics Life style diseases Digital and mobile 80% of global smartphone users interested in using phones to interact with HC providers

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Page 3 Pulse of the industry| Medical technology report 2015

The pace of change is accelerating…

5 years ago Today 3-5 years from now

Debate and uncertainty about move to value Most people had never heard of “big data” Digital and mobile technologies were novelties Data opacity is the norm Sweeping health care reforms balance cost and access Growing number of analytics initiatives Digital and mobile help engage patient Transparency is the new buzz word New payment, financing models enable access Analytics drive device usage, Dx priorities Shift from engagement to outcomes Trust a source of competitive advantage

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…but medtech revenue growth is not.

Source: EY, Capital IQ and company filings.

$- $50 $100 $150 $200 $250 $300 $350 2007 2008 2009 2010 2011 2012 2013 2014

US$b

Non Conglomerate Conglomerate

US and European revenue growth, 2007-14

2% 4% 2% 1% 2% 5% 11%

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Page 5 Pulse of the industry| Medical technology report 2015

Looking for growth

Pulse of the industry

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Page 6 Pulse of the industry| Medical technology report 2015

Storm clouds are emerging…

►A new normal of single-digit top & bottom line growth ►Dwindling interest from a shrinking venture capital

community

►Eroding early-stage venture capital threatens the

future of medtech’s innovation ecosystem

►Innovation capital drops

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…but there are reasons for optimism.

►Smaller medtechs deliver stronger performance ►Booming M&A market: Result of tepid growth &

historically low cost capital

►A blockbuster year in financing: IPOs & debt

fferings deliver all-time highs

►R&D investment rises for 5th straight year while cash

returned to shareholders decreases

►Medtechs once again outperform the broader public

markets

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Page 8 Pulse of the industry| Medical technology report 2015

250 500 750

2013 2014 Market cap (US$b)

+21%

Looking for growth

US and European pure-play performance – 2014

5 10 15

2013 2014 R&D expense (US$b)

+6%

50 100 150 200

2013 2014 Revenues (US$b)

+5%

5 10 15 20

2013 2014 Net income(US$b)

+4%

Source: Ernst & Young, Capital IQ and company financial statement data.

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Page 9 Pulse of the industry| Medical technology report 2015

A blockbuster year for US & European IPOs

43 medtechs raised US$2.3 billion

10 20 30 40 50 0.0 0.5 1.0 1.5 2.0 2.5

J ul 2014 - J un 2015 J ul 2013 - J un 2014 J ul 2012 - J un 2013 J ul 2011 - J un 2012 J ul 2010 - J un 2011 J ul 2009 - J un 2010 J ul 2008 - J un 2009 J ul 2007 - J un 2008 J ul 2006 - J un 2007 J ul 2005 - J un 2006 J ul 2004 - J un 2005 J ul 2003 - J un 2004 J ul 2002 - J un 2003 J ul 2001 - J un 2002 J ul 2000 - J un 2001

Number of deals Capital raised in IPOs (US$b)

Capital raised Number of deals

Source: EY, Capital IQ, BioCenutry and VentureSource.

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Debt bonanza

US & European innovation capital fell for the 2nd year in a row

10 20 30 40 50 Jul 2008 - Jun 2009 Jul 2009 - Jun 2010 Jul 2010 - Jun 2011 Jul 2011 - Jun 2012 Jul 2012 - Jun 2013 Jul 2013 - Jun 2014 Jul 2014 - Jun 2015 Commercial leaders Innovation capital US$b

Source: EY, BMO Capital Markets, Dow Jones VentureSource and Capital IQ. Innovation capital is the amount of equity capital raised by companies with revenues of less than US $500 million.

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The ugly truth

Early-stage venture capital financing continues to stagnate

0% 5% 10% 15% 20% 25% 20 40 60 80 100 120 140 Jul 2007 - Jun 2008 Jul 2008 - Jun 2009 Jul 2009 - Jun 2010 Jul 2010 - Jun 2011 Jul 2011 - Jun 2012 Jul 2012 - Jun 2013 Jul 2013 - Jun 2014 Jul 2014 - Jun 2015

Percentage of VC investment going to early-stage medtechs Number of early-stage rounds Number of early-stage VC rounds >US$5 million Percentage of VC investment going to early-stage medtechs

Source: EY, Dow Jones VentureSource and Capital IQ. Early-stage rounds are seed-, first- and second-round VC investments.

US and European early-stage VC rounds >US$5 million

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A solid M&A market

Driven by tepid growth and historically low cost of capital

20 40 60 80 100 120 140 160 180 10 20 30 40 50 60 70 80 90 Jul 2007 - Jun 2008 Jul 2008 - Jun 2009 Jul 2009 - Jun 2010 Jul 2010 - Jun 2011 Jul 2011 - Jun 2012 Jul 2012 - Jun 2013 Jul 2013 - Jun 2014 Jul 2014 - Jun 2015

Number of deals Total deal value (US$b) Total deal value of mega deals (>US$10b) Total value of M&As Number of M&As

Source: EY, Capital IQ and Thomson ONE Chart includes deals with value disclosed

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The capital allocation balancing act

How US & European medtechs have deployed their cash

5 10 15 20 25 30 35 40

2009 2010 2011 2012 2013 2014

Cash acquisitions Cash returned to shareholders R&D expenses

Annual spend (US$b)

Data shown for US and European public pure-play companies for which data were publicly disclosed. Cash returned to shareholders includes total dividends paid and stock repurchased. Source: EY, Capital IQ and Thomson ONE.

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Differentiating differently

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Commoditization How does it play out in medtech?

Shifting customer perception Lower barriers to market entry Full-on price competition

► Move downstream or upstream ► Create stickiness by rebranding

Strategies against commoditization

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What do medtech purchasers value?

Procurement

► Hospital managers and administrators —not physicians —are key influencers ► Centralized procurement models

Research and development

► Real-world data, beyond-the-product services important to purchasers ► Iterative innovations matter less

Contracting models

► Value-based purchasing, pay-for-performance are more important ► Simple cost-cutting is less important

Pharmacoeconomic outcomes

► Total cost of care the most important outcome ► Reduced hospital stays, improved surgical efficiency less important

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What’s on medtech purchasers’ minds? Pressure points are shifting

44% 41% 37% 33% 22% 37% 40% 38% 27% 12%

Cost-cutting Cost of upgrading/maintaining IT systems High-end medical technology costs (non- imaging) Rising drug costs Imaging costs

Today In three years

21% 34%

Healthcare reform initiatives (e.g. value-based purchasing, pay-for- performance)

Declining: simple cost-cutting Increasing: value/outcomes

Source: EY Hospital survey 2014.

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What’s on medtech purchasers’ minds? Medtech’s customer base is changing

Physicians are becoming less important as influencers of purchasing decisions

2.4 1.7 1.6 0.2 1.9 1.9 1.7 0.5

Physicians CFO Finance department Procurement Purchasing department Payers Insurers

Today In three years

Ranking

Source: EY Hospital survey 2014. Higher scores indicate influencers who are more influential in hospital purchasing decisions.

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What’s on medtech purchasers’ minds? The old rules count for less

Price remains the top factor Old ways of differentiation are losing relevance

55% 32% 22% 27% 22% 18%

Physician preference for specific device User-friendly design Training in use

Today In three years

51% 27% 31% 6% 62% 35% 35% 25%

Data demonstrating clinical outcomes Data demonstrating value “Beyond the product” services (e.g. patient support) Risk-sharing agreement

Differentiation will have to be based on data and value

Price of device

77% 77% Source: EY Hospital survey 2014.

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Implications for medtech New bases for competition

Achieve superior outcomes via technological advances

► Buyers care less about iterative innovations ► New product R&D can catalyze new standards of care

Increase scope through services and solutions

► Medtechs can “own” more of the bundle ► Solutions must focus on health care buyers’ needs

Increase scope by adding product offerings

► End-to-end solutions have an edge in value-driven care ► Opportunity for contracts around total cost of care

Take costs out of the health care system

► Demonstrate that products result in cost offsets that

reduce total cost of care

2 1 3 4

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Achieve superior outcomes via technological advances

1

Look for areas where R&D can catalyze new care standards

STRATEGY 1: Traditional medtech innovation

► Highly specialized, sophisticated devices (e.g.,

EndoChoice)

► Superior outcomes ► Novel approaches to unmet medical needs can appeal to

payers

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Achieve superior outcomes via technological advances

1

Look for areas where R&D can catalyze new care standards

STRATEGY 2: Leveraging the internet of things

► Patient-empowering, information-leveraging (PI)

technology

► Regulator-approved products that can be bought by

consumers (e.g., AliveCor)

► Change care delivery paradigm

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Increase scope through services and solutions

2

As bundled payments become increasingly common in health care, companies can try to own more of the bundle

► Successful components:

► Customer-centric ► Focused on partnerships – not transactions ► Emphasis on improving patient outcomes

► May require new capabilities or technologies

► e.g., data analytics, remote monitoring, etc.

► Examples:

► Philips/ Georgia Regents Medical Center ► Medtronic/ Diabeter/Cardiocom ► Fresenius/Several acquisitions in the provider space

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Increase scope by adding product offerings

3

Companies that offer end-to-end solutions may have an edge in value-driven health care settings

STRATEGY 1: Create scope in a disease area

► Example: Zimmer/ Biomet

STRATEGY 2: Create scope in multiple disease areas

► Example: Medtronic/Covidien

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Take costs out of the health care system

4

If commoditization is a fait accompli… recognize that medtechs can provide value with products that take costs out of the system

STRATEGY:

Reduce cost of production & pass savings on to customers

► Engineer simpler, lower-tech devices ► Manufacture more cheaply ► Example: Smith & Nephew’s Syncera pilot

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Moving forward Key questions for medtech companies

How do you think about your contracting and commercial capabilities? How do you allocate your R&D spending to create products that will have value in the marketplace? How can you boost your data/analytics capabilities to better prove value to health care buyers? How do you develop truly customer-centric solutions? How do you create a brand that extends beyond the product?

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Thank you and stay tuned!

ey.com/vitalsigns ey.com/medtech http://ow.ly/NTufL