Pulse of the industry - medical technology report 2013 - Ernst & Young

Pulse of the industry Medical technology report 2013

To our clients and friends: Welcome to the 2013 issue of EY’s annual report on the state of the medical technology industry. Looking back from here, it is clear that the view we have set out in previous years — that a confluence of factors within health care would create a perfect storm for medtech — has been borne out. But it is also clear that medtech companies are learning to weather the storm. Our opening article, “Redefining innovation,” sets out ways in which companies are adapting to a new health care ecosystem that values better health outcomes and cost-effectiveness over medtech’s traditional stock-in-trade, innovative technology. Alongside our analysis are contributions from two of the industry’s leading lights, whose companies are at the forefront of medtech’s new value equation. And we are fortunate, in developing this report, to have been able to draw on the insights, opinions and perspectives of key industry insiders. As always, Pulse of the industry provides an overview of key performance metrics, including US and European financial performance, financing and the M&A landscape, as well as other noteworthy trends from the past 12 months. We hope this year’s report gives you plenty to think and talk about, and we look forward to continuing the conversation with you. — EY Global Life Sciences Center

Medical technology report 2013

Table of contents

Perspectives 2

Point of view J]\]Õfaf_affgnYlagf

18

Transforming and leading Omar Ishrak, Medtronic, Inc.

19

Innovating differently Michel Orsinger, DePuy Synthes Companies of Johnson & Johnson

Industry performance 20

Financial performance Behind the numbers: a growth challenge

32

Financing Mind the gap

44

Mergers and acquisitions All signs point to deals

52

Scope of this report> Novel products are no longer reimbursed without also proving that they are contributing to better health care at a reasonable cost. > With new devices and

technologies, you have to look at the environment in which they will be used. [At invendo] we talk with insurers, hospital boards, physicians, nurses, even patients. US$5 million have plummeted Number of early-stage rounds

Percentage of VC investment going to early-stage medtechs

140

30%

120

25%

100 20% 80 15% 60 10% 40

5%

20

0

Jul 2006Jun 2007

Jul 2007Jun 2008

Jul 2008Jun 2009

Jul 2009Jun 2010

Jul 2010Jun 2011

Jul 2011Jun 2012

Jul 2012Jun 2013

Percentage of VC investment going to early-stage medtechs

Another challenge faced by medical technology companies of all sizes in the last ^]oq]YjkakY\oaf\daf_hggdg^ÕfYf[aYd resources.

Number of early-stage rounds

Resource constraints

0%

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

The picture is even grimmer when one considers how much of that declining total went to early-stage rounds. Venture investment for early-stage medtech companies has plummeted. In the 2012-13 Õk[Ydq]Yj$]Yjdqjgmf\k[Yhlmj]\bmkl).g^ l`]lglYd^mf\af_$\gof^jge++Õn]q]Yjk earlier. (For more on these trends, refer to the Financing article in this year’s report.)

>> A combination of higher

risk and lower reward has resulted in a real change in the number of investors and their appetite to invest in medical technology. > [Low-tech solutions] may

not seem as ‘innovative’ as new products and technologies, but initiatives such as preventive medicine and disease management are very important. > Intelligent start-ups

can partner with health insurance companies to convince payers that a hjg\m[lg^^]jkYka_faÕ[Yfl increase in the health economics of social insurance. Companies will need to

have global and emerging markets experience. They have got to focus on stakeholders beyond the physicians. They’ve got to understand health economics, government requirements and market segmentation. > Innovation is going to

be driven by entrepreneurs who are true experts in a disease area, and have unique insights into where the holes are. US$5 million

! ! ! ! !

210 128 $

$

$

$

$

$$ $

! ! ! !

Jul 12Jun 13

2005-09 average

156

$$

$

$

$

$

$

$$ $

$

$

$

$

$

$

$

$$ $ $$ $ $$ $ Jul 07Jun 08

48

$$ $

Number of US hospital M&As (announced)

Annual R&D growth rate (%) of commercial leaders

2012

Sources: EY, Accenture, American Society for Aesthetic Plastic Surgery, Dow Jones VentureSource, Mercom Capital Group, ThomsonOne and U.S. Food and Drug Administration.

16

EY | Pulse of the industry

7

2008-12 average

Innovation capital as a percentage of total capital Jul 07Jun 08

10.1

16

2003-07 average

2012

11.7

94

2012

Number of aesthetic procedures in the US (millions)

2007

56

2005-09 average

Jul 12Jun 13

! ! ! ! ! ! ! 64 ! !

18

Percentage of US physicians in private practice

Health care IT VC funding (US$m)

211

2010

1,174

2012

2012

Capital raised by US venture funds (all sectors, US$b)

19.7

2007

2012

24

FmeZ]jgê]\l][ÀHGkhj]%Yf\hgkl%ÔfYf[aYd[jakak Jul 05Jun 08 average

35.6

33

2005-09 average

Jul 08Jun 13 average

16.3 8.4

>> It’s a perfect storm. There are regulatory challenges with the FDA, there are reimbursement challenges, there is a lack of available venture capital, corporate buyers are mostly missing in action, and the capital markets [for emerging medtechs] have disappeared. US$10b

50

2012 43 companies

The tale of two continents

US market capitalization EY US medtech industry 150%

2008

NASDAQ Composite

2009

US big pharma

2010

2011

EY US biotech industry

2012

2013

100%

50%

0%

-50%

-100% Source: EY and Capital IQ. Charts includes companies that were active on 30 June 2013.

European market capitalization EY European medtech industry

FTSE 100

European big pharma

EY European biotech industry

Since 2008, US medtech companies have struggled in the public markets. While a resurgent biotechnology industry has seen its cumulative market valuation double, e]\l][`Õjek`Yn]ljY\]\Z]dgoZjgY\]j indices such as the NASDAQ Composite and fared no better than big pharma, which is struggling in the wake of its patent cliff. Conversely, European medtechs have been a beacon in a tumultuous market impacted by the Eurozone crisis. Not only have they fared better than their American counterparts, but they have outperformed both European biotech and big pharma companies, as well as the DAX, FTSE 100 and CAC 40 indices. As discussed in this year’s Point of view article, the situation in Europe may become egj]\a^Õ[mdl\m]lghjghgk]\[`Yf_]klg the approval process, but European investors seem to be discounting such concerns.

60% 50%

2008

2009

2010

2011

2012

2013

40% 30% 20% 10% 0% -10% -20% -30% -40% -50% Source: EY and Capital IQ. Chart includes companies that were active on 30 June 2013.

Medical technology report 2013 |

23

Financial performance

United States

US medtech at a glance, 2011–12

(US$b, data for pure-plays except where indicated) Public company data Revenues Conglomerates Pure-play companies

2012

2011

$210.1

$206.6

% change 2%

$81.9

$78.4

4% 0%

$128.2

$128.2

R&D expense

$10.2

$10.0

2%

SG&A expense

$41.4

$41.6

0%

$8.7

$13.7

-37%

Net income Cash and cash equivalents and short-term investments

$33.2

$33.3

0%

Market capitalization

$309.4

$296.5

4%

Number of employees

431,400

438,000

-2%

227

232

-2%

Number of public companies

Source: EY and company financial statement data. Numbers may appear to be inconsistent due to rounding. Market capitalization data is shown for 31 December 2012 and 31 December 2011.

L`]ÕfYf[aYdh]j^gjeYf[]g^MKhmZda[ medtech companies was skewed by exchange rate headwinds and a couple of large deals. Revenues increased to US$210 billion, a 2% increase. However, after adjusting for the strong US dollar, the J&J acquisition of Synthes and the Kasei acquisition of ZOLL Medical, revenues would actually have increased by 6%. While this doesn’t approach the double-digit top-line growth the industry used to deliver prior to the great recession, it was a solid performance given the slew of challenges facing today’s medtech industry.

Net income was similarly affected by a series of major, multiyear merger-, impairmentand litigation-related charges by companies km[`Yk9d]j]$:gklgfK[a]flaÕ[Yf\@gdg_a[& After adjusting for these factors, as well as for the Synthes and ZOLL acquisitions, net income would have increased slightly, by 0.5%, instead of declining by 37%. This is also better than 2011, when net income fell by 1% on a normalized basis. R&D inched up nearly 2% to US$10.2 billion as roughly two-thirds of all companies increased their investments, while headcount was up by 1% (on a normalized basis). More than 70% gê]\l][`ÕjekY\\]\]ehdgq]]k\mjaf_ the year.

A solid performance given the slew of challenges facing today’s medtech industry 24


US commercial leaders and other companies, 2011–12 (US$b)

2012

2011

% change

$107.7

$108.1

-0.4%

Commercial leaders Revenues R&D expense

$7.7

$7.6

2%

Net income

$9.2

$14.3

-35%


$252.2

$242.9

4%

Number of employees

351,200

358,600

-2%

$20.5

$20.1

2%

$2.5

$2.5

1%

$(0.6)

$(0.6)

0%

Medtech remains an industry of haves and have-nots. After removing the impact of the Synthes acquisition and a series of accounting charges, the 29 commercial leaders outperformed other companies in revenue growth and kept net income j]dYlan]dqÖYl&9dd%af%Ydd$[gehYj]\lg other companies, a higher percentage of commercial leaders increased their revenues (79% vs. 69%), net income (62% vs. 48%) and R&D expenses (79% vs. 62%).

Other companies Revenues R&D expense Net income (loss) Market capitalization

$57.2

$53.7

7%

Number of employees

80,200

79,400

1%

Source: EY and company financial statement data. Commercial leaders are pure-play companies with revenues in excess of US$1 billion. Numbers may appear to be inconsistent due to rounding. Market capitalization data is shown for 31 December 2012 and 31 December 2011.

Selected US medtech public company financial highlights by region, 2012 (US$m, % change over 2011)

Market capitalization 31 Dec 2012

R&D

Net income

Cash and cash equivalents

Total assets

Region

Revenue

Number of companies

Massachusetts

$30,869 4%

28 -13%

$51,467 16%

$2,260 5%

-$3,047 -274%

$3,545 -9%

$71,029 2%

Minnesota

$22,384 0%

16 -6%

$56,414 2%

$2,260 -3%

$4,434 11%

$4,266 11%

$43,537 7%

Southern California

$14,613 1%

33 -3%

$46,598 22%

$1,517 -2%

$1,103 12%

$6,254 -1%

$28,532 -1%

Northern California

$11,953 12%

30 -3%

$46,145 10%

$1,255 13%

$1,197 16%

$4,655 9%

$18,084 14%

New Jersey

$11,992 1%

11 -8%

$25,946 4%

$800 9%

$1,739 6%

$3,339 42%

$17,342 9%

Michigan

$8,950 4%

4 0%

$22,128 11%

$526 8%

$1,265 -3%

$4,361 25%

$13,813 8%

Indiana

$6,519 2%

4 0%

$13,698 15%

$318 -3%

$877 -2%

$1,650 12%

$11,248 8%

Pennsylvania

$6,453 -33%

9 -10%

$11,832 -60%

$229 -42%

$226 -85%

$929 -73%

$11,131 -42%

New York

$3,181 10%

20 0%

$5,758 23%

$217 1%

$61 -20%

$306 -56%

$4,715 3%

Ohio

$3,106 -4%

5 0%

$3,801 11%

$107 50%

$135 82%

$242 -18%

$2,874 -2%

Maryland

$1,858 0%

4 0%

$7,929 17%

$115 3%

$414 2%

$1,564 19%

$3,240 17%

Texas

$1,406 -4%

8 14%

$4,373 13%

$141 18%

$164 122%

$445 -13%

$1,738 -10%

Source: EY and company financial statement data. Data shown for pure-play companies only.


25


The combined revenue of therapeutic device companies, which accounts for 55% of all pure-play revenue, was essentially unchanged, slipping 0.1% in 2012, compared to a 5% increase in 2011. Unlike 2011, when each of the six largest disease categories saw its top line grow, only four categories increased revenues in 2012. Oncology (+14%, led by Accuray), dental (+13%, led by Dentsply) and women’s health (+12%, led by Hologic) all grew double digits, while cardiovascular and orthopedic revenues were adversely affected by the acquisitions of ZOLL Medical and Synthes, respectively. Four of the six largest disease categories racked up net losses in 2012, one year after each of them produced positive bottom-line results. CR Bard, Intuitive Surgical and Medtronic drove the “multiple” segment’s 12% increase, while US$5.1 billion in accounting charges from Boston K[a]flaÕ[[gfljaZml]\lgY+),\][daf]Zq cardiovascular/vascular. Research and other equipment led all segments with a 10% year-over-year growth rate, followed by other (+2%) and imaging (+0.2%). In addition to therapeutic devices, non-imaging diagnostics was the only other segment to experience a decline in revenues (-1%).

26


Change in US therapeutic device companies’ revenue and net income by disease category, 2011–12 Revenue Oncology

Net income Cardiovascular/ vascular

1

0

-1

-2

-3

-4

-5 Source: EY and company financial statement data.

Dental

Multiple

Orthopedic

Women’s health

Selected fast-growing US medtechs by revenue growth, 2007–12 (US$m)

Companies

2007

2012

CAGR

NuVasive

$154

$620

32%

Alere

$767

$2,819

30%

Intuitive Surgical

$601

$2,179

29% 26%

Illumina

$367

$1,149

$1,282

$3,799

24%

Volcano

$131

$382

24%

Accuray

$140

$409

24%

Life Technologies

Danaher: Life Sciences & Diagnostics

$2,998

$8,508

23%

Hologic

$738

$2,003

22%

Cepheid

$129

$331

21%

Source: EY and company financial statement data. Companies in italics have made significant acquisitions between 2007 and 2012. CAGR = compound annual growth rate

San Diego-based spinal device company NuVasive once again led the US public e]\l][àf\mkljqoal`l`]à_`]klÕn]%q]Yj revenue growth rate. Six of the 10 fastestgrowing companies largely expanded through organic measures, and all of them delivered impressive compound annual growth rates of more than 20%. New to the list in 2012 were California-based companies Volcano, a vascular imaging company, Accuray, maker of the CyberKnife Robotic Radiosurgery System, and Cepheid, a molecular diagnostics company. While these three companies have grown organically, Washington, DC-based conglomerate Danaher has mainly used a series of acquisitions — most notably of Beckman Coulter in 2011 — to join this list.

6 of the 10 fastest-growing companies largely expanded through organic measures


27


Europe

European medtech at a glance, 2011–12

(US$b, data for pure-plays except where indicated) Public company data Revenues

2012

2011

% change

Normalized % change

$129.6

$127.3

2%

10%

Conglomerates

$66.9

$65.9

1%

10%

Pure-play companies

11%

$62.7

$61.3

2%

R&D expense

$2.74

$2.72

1%

9%

SG&A expense

$18.9

$18.8

0%

9%

Net income

$6.8

$6.2

11%

20%

Cash and cash equivalents and short-term investments

$7.5

$6.5

17%

26%


$144.6

$118.6

22%

32%

Number of employees

301,000

287,000

5%

5%

141

142

-1%

-1%

Number of public companies

Source: EY and company financial statement data. Numbers may appear to be inconsistent due to rounding. Market capitalization data is shown for 31 December 2012 and 31 December 2011.

9kafl`]MK$l`]ÕfYf[aYdh]j^gjeYf[] of the medtech sector in Europe was ka_faÕ[Yfldqkc]o]\Zq]p[`Yf_]jYl] Öm[lmYlagfk&Afl`][Yk]g^=mjgh]$l`]k] effects worked in two distinct ways. The ÕjklaehY[lakl`Yll`]j]kmdlkg^=mjgh]Yf companies were bolstered by the rise of l`]\gddYj&L`]MKj]n]fm]kYf\hjgÕlk of European companies were boosted by about 3 percentage points due to favorable exchange rate movements.

28


The second impact occurred when these ÕfYf[aYdj]kmdlko]j][gfn]jl]\aflgMK dollars for presentation in this report (we use dollars throughout the report for consistency). In this conversion, the ÕfYf[aYdj]kmdlko]j]YjlaÕ[aYddq\]ÖYl]\Zq about 11 percentage points because of the strengthening of the dollar. In US dollars, European companies’ revenues increased by a relatively modest 2%. However, after normalizing for these ]p[`Yf_]jYl]Öm[lmYlagfkYf\klYlaf_l`] results in euros, the industry’s revenues were up by a much healthier 10% in 2012 (vs. 3% in 2011), primarily driven by Europe’s commercial leaders. Similarly, R&D (+9%), net income (+20%), cash holdings (+26%), market cap (+32%) and the number of employees (+5%) also increased, at rates that outpaced the American industry.

Spearheaded by strong performances from companies such as Philips Healthcare, Alcon Surgical, Advanced Medical Solutions Group and Optos, 58% (82% in euros) of European public medtechs increased their revenues in 2012, 54% (69% in euros) of pure-play companies increased their R&D spend, while 58% (60% in euros) grew their bottom lines — all of which were consistent with the prior year. And despite high levels of unemployment across much of Europe, hmZda[dqljY\]\e]\l][`ÕjekkmjhYkk]\l`] 300,000 employee level.

European commercial leaders once again outperformed their smaller counterparts Y[jgkkYddeYbgjÕfYf[aYdaf\a[Ylgjk$oal` the exception of net income. As in the US, the gulf between commercial leaders and other companies continued to expand, as smaller companies were more susceptible to the continent’s widespread austerity measures, increased pricing pressures and delayed payment cycles. Still, 80% of other companies increased revenues and twothirds boosted their R&D budgets.

European commercial leaders and other companies, 2011–12 (US$b)

2012

2011

% change

$54.9

$53.1

4%

$2.2

$2.1

2%

Commercial leaders Revenues R&D expense Net income

$6.5

$6.2

4%


$127.8

$103.0

24%

Number of employees

268,900

253,300

6%

Other companies Revenues

$7.7

$8.3

-6%

R&D expense

$0.6

$0.6

-5%

Net income (loss)

$0.3

$(0.0)

746%


$16.7

$15.6

7%

Number of employees

32,100

33,700

-5%

Source: EY and company financial statement data. Commercial leaders are pure-play companies with revenues in excess of US$1 billion. Numbers may appear to be inconsistent due to rounding. Market capitalization data is shown for 31 December 2012 and 31 December 2011.

Selected European medtech public company financial highlights by region, 2012 (US$m, % change over 2011)

Market capitalization 31 Dec 2012

R&D

Net income

Cash and cash equivalents

Total assets

Country

Revenue

Number of companies

Germany

$17,786 5%

15 -17%

$24,625 6%

$269 -4%

$1,349 9%

$930 34%

$25,760 11%

Ireland

$11,935 2%

2 0%

$27,635 26%

$626 12%

$1,922 2%

$1,941 23%

$22,454 9%

France

$9,515 7%

22 38%

$27,088 44%

$534 7%

$847 -5%

$1,240 53%

$12,665 2%

Sweden

$5,376 6%

32 3%

$15,183 37%

$230 -13%

$614 44%

$659 19%

$9,244 9%

United Kingdom

$4,935 -1%

19 -5%

$11,712 14%

$212 -4%

$759 27%

$301 -5%

$6,793 16%

Switzerland

$3,855 -5%

9 0%

$11,629 -5%

$275 15%

$394 1%

$582 -29%

$4,700 -11%

Denmark

$3,569 -2%

4 -20%

$14,836 32%

$176 -14%

$596 4%

$513 24%

$3,449 0%

Italy

$2,925 -10%

5 0%

$4,465 43%

$145 -3%

$245 15%

$375 -9%

$3,785 -8%

Netherlands

$1,532 -1%

2 -33%

$4,991 22%

$145 -6%

$108 28%

$516 45%

$4,780 9%

$524 -6%

21 -19%

$1,308 -10%

$68 -25%

-$47 -54%

$281 -24%

$822 -7%

Israel

Source: EY and company financial statement data. Data shown for pure-play companies only.


29


Europe’s therapeutic device companies raised their collective top line by 2.5% to US$65.7 billion in 2012, which accounted for 51% of the industry’s total public revenue. Unlike the US, where 12 of the disease segments increased year-over-year revenue in 2012, only seven did so in Europe. In fact, of the six largest disease segments, only half experienced revenue growth in 2012, versus 100% in 2011. Fresenius, largely due to its 2011 acquisition of Liberty Dialysis, helped pace the hematology/renal segment’s 8% growth, while Essilor and Novartis’ Alcon Surgical drove ophthalmic’s 9% increase. On the other hand, all three companies in ENT Yf\^gmjgmlg^Õn]ogmf\[Yj][gehYfa]k experienced declines in year-over-year revenues. Therapeutic device companies increased their bottom lines by 9% in 2012, as 10 of the 16 disease segments enjoyed year-over-year growth, including four of the six largest. Similar to the US, research and other equipment companies had the largest revenue growth rate (6%). Therapeutic devices, imaging (+2%), other (+1%) and non-imaging diagnostics (-1%) followed. Làk[ge]kgf]q]YjY^l]jYddÕn]k]_e]flk delivered revenue growth of at least 8%.

30


Change in European therapeutic device companies’ revenue and net income by disease category, 2011–12 Revenue

Net income

1.0

0.8

0.6

0.4

0.2

0.0

-0.2

Ear, nose and throat

Wound care

Hematology/ renal

Multiple

Ophthalmic

Orthopedic

Source: EY and company financial statement data.

Of the six largest disease segments, only half experienced revenue growth in 2012, versus 100% in 2011

Selected fast-growing European medtechs by revenue growth, 2007–12 (US$m)

Companies

Location

Optos

UK

2007

2012

$87

$193

Elekta

17%

Sweden

$674

$1,337

15%

Qiagen

Netherlands

$650

$1,254

14%

Syneron Medical

Israel

$141

$264

13%

Sonova Holding

Switzerland

$926

$1,728

13%

Sempermed

Austria

$300

$493

10%

Essilor International

France

$3,986

$6,415

10%

Novartis: Alcon Surgical

Switzerland

$2,500

$3,752

8%

Getinge

Sweden

$2,436

$3,582

8%

Source: EY and company financial statement data. Companies in italics have made significant acquisitions between 2007 and 2012. CAGR = compound annual growth rate

CAGR

Unlike the US, where the majority of the ^Ykl]kl%_jgoaf_e]\l][`Õjek]phYf\]\ their top lines organically, all but three companies in Europe did so via the aid of ka_faÕ[YflY[imakalagfk&L`]^Ykl]kl%_jgoaf_ European medtech company over the past Õn]q]Yjk$Ghlgk$YK[gllak`hjg\m[]jg^ retinal imaging devices, is a newcomer to the list that achieved this feat through organic growth (albeit from a low base). In addition lgGhlgk$l`j]]gl`]jÕjekÈ>jYf[]Ìk=kkadgj International and Novartis’ Alcon Surgical division (both in the ophthalmic segment) Yf\\an]jkaÕ]\`]Ydl`[Yj][gehYfq?]laf_] of Sweden — joined this list in 2012, with the assistance of recent acquisitions.


31

Financing

Mind the gap Capital raised in the US and Europe by year (US$m)

Jul 2006– Jun 2007

Jul 2007– Jun 2008

Jul 2008– Jun 2009

Jul 2009Jun 2010

Jul 2010– Jun 2011

Jul 2011– Jun 2012

Jul 2012– Jun 2013

Venture

$5,471

$5,243

$4,737

$4,961

$4,108

$4,463

$3,542

IPO

$1,112

$711

$17

$378

$790

$425

$202

Follow-on and other

$2,404

$2,110

$1,805

$2,564

$2,332

$973

$3,997

Debt

$4,227

$4,551

$6,674

$13,327

$15,429

$23,273

$21,765

Total

$13,213

$12,615

$13,233

$21,230

$22,659

$29,134

$29,506

Type

Source: EY, BMO Capital Markets, Dow Jones VentureSource and Capital IQ. Numbers may appear to be inconsistent because of rounding. PIPEs included in “follow-on and other.”

US and European medical technology companies raised a combined US$29.5 billion during the 12-month period ending 30 June 2013, a 1.3% increase over the prior year — which was itself a record high. Unlike the prior 12-month period when debt drove a **q]Yj%gn]j%q]Yj_jgol`$\]ZlÕfYf[af_ was actually down 6% in 2012-13. Instead, it oYk^gddgo%gfYf\gl`]jÕfYf[af_l`Yl\jgn] l`]af[j]Yk]afÕfYf[af_&Af^Y[l$làkoYk the only investment category that increased during the year, growing by an impressive 311% to reach US$4 billion. While total debt investment was slightly down in 2012-13, the overall story around the industry’s funding has remained largely unchanged in recent years. Debt has continued to constitute the vast majority of

the industry’s total funding, driven largely by a handful of commercial leaders who have taken advantage of historically low interest rates. As in the prior year, there were eight individual debt offerings of at least US$1 billion in 2012-13. These commercial leaders were responsible for an astonishing 82% of the industry’s total funding. At the other end of the spectrum, the ÕfYf[af_ghlagfk^gjkeYdd]j$]e]j_af_ companies have slowly eroded. Venture capital investment was down 21% in 201213 to its lowest level in more than a decade, while the total value of IPOs was cut in half from the prior year and was down more than 80% from pre-recession norms. The n]flmj][YhalYdl`YlakÖgoaf_aflge]\l][àk increasingly skewed toward later rounds.

The picture that emerges from these trends is that there is a growing funding gap between the huge sums being raised by large medtech commercial leaders (largely in the form of debt) and the dwindling options for early-stage companies. In addition, more than 70% of the proceeds from debt ÕfYf[af_k`Yn]_gf]lgoYj\j]ÕfYf[af_ existing debt or restructuring balance sheets, rather than for growth purposes, such as company acquisitions or investing in early-stage companies. This, in turn, raises the question of another gap — a decline in innovation as the amount of capital going to fund medtech R&D declines. (For more on these implications, refer to this year’s Point of view article.)

Debt has continued to constitute the vast majority of the industry’s total funding

32


While fund-raising totals have increased at an impressive rate in recent years, the vast majority of this funding has gone to e]\l][`Ìk[gee]j[aYdd]Y\]jk \]Õf]\ YkÕjekoal`j]n]fm]kaf]p[]kkg^MK) billion). This pattern continued during the 12-month period ending June 2013, when commercial leaders raised 82% of total af\mkljqÕfYf[af_ÈMK*,&+Zaddagf$dYj_]dq in the form of debt. Conversely, the funds raised by the rest of the industry (what we refer to as “innovation capital”) were down 11% to US$5.2 billion — the lowest amount raised in at least the past seven years. In 2007-08, innovation capital made up f]Yjdqlog%làj\kg^Ydde]\l][`ÕfYf[af_$ compared to less than 20% in 2012-13.

Innovation capital continues to decline in the US and Europe Commercial leaders

Innovation capital

30

25

US$b

20

15

10

5

0 Jul 2006Jun 2007

Jul 2007Jun 2008

Jul 2008Jun 2009

Jul 2009Jun 2010

Jul 2010Jun 2011

Jul 2011Jun 2012

Jul 2012Jun 2013

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$1 billion.


33

Financing

Less than a quarter of all venture funding in the US and Europe went to early-stage medtechs Later-stage

Early-stage

100% 90% 80% % venture funding

The decline in venture funding was compounded by a shift away from earlystage funding. Only 25% of medtech venture afn]kle]flo]fllgÕjklgjk][gf\jgmf\k in 2012-13, which was down from prerecession levels of 40%-45%. Faced with regulatory and pricing pressures, an anemic IPO market and selective corporate buyers, VCs will likely remain cautious and favor funding later-stage companies with clearer paths to exits. In this environment, earlystage companies will be better positioned to raise venture capital if they have a truly novel technology and can clearly demonstrate the clinical and economic Z]f]Õlkg^l`]ajhjg\m[lk&

70% 60% 50% 40% 30% 20% 10% 0 Jul 2006Jun 2007

Jul 2007Jun 2008

Jul 2008Jun 2009

Source: EY, Dow Jones VentureSource and Capital IQ.

VCs will likely remain cautious and favor funding later-stage companies with clearer paths to exits

34


Jul 2009Jun 2010

Jul 2010Jun 2011

Jul 2011Jun 2012

Jul 2012Jun 2013

US and European IPOs, July 2012–June 2013 Company

Ticker

Location

Product type (disease)

Gross raised (US$m)

Quarter

NanoString Technologies

NSTG

US – Washington

Research and other equipment

54

Q2 2013

LipoScience

LPDX

US – North Carolina

Non-imaging diagnostics

52

Q1 2013

Globus Medical

GMED

US – Pennsylvania

Therapeutic devices (orthopedic)

25

Q3 2012

Electrical Geodesics

EGI

US – Oregon


12

Q2 2013

NanoBiotix

NANO

France

Therapeutic devices (oncology)

18

Q4 2012

TheraDiag

ALTER

France


11

Q4 2012

SpineGuard

ALSGD

France


11

Q2 2013

Cancer Genetics

CGIX

US – New Jersey


7

Q2 2013

Atossa Genetics

ATOS

US – Washington


5

Q4 2012

Novacyt

ALNOV

France


3

Q4 2012

Spago Imaging

SPAG

Sweden

Imaging

3

Q4 2012

Vivoline Medical

VIVO

Sweden


2

Q2 2013

Source: EY, BMO Capital Markets, Dow Jones VentureSource and Capital IQ.

There were 12 medtech IPOs in the US and Europe during the year ending June 2013. While this total was up from 11 the year before, total proceeds were down 52% to US$202 million, the lowest total seen since the midst of the great recession (200809) when only US$17 million was raised. In all, the number of IPOs doubled from three to six in the US, while the total value

of US$155 million was up 20% year-overyear. European IPOs were down from eight to six, and totals were off nearly 80% to US$48 million. Only three of the year’s 12 IPOs were by therapeutic device companies, which once again speaks to the regulatory and reimbursement challenges faced by this segment.

The post-IPO returns of 2012-13’s class were slightly better than those of the previous year when only one of 11 companies ended in positive territory. In all, three US and two European companies traded above their IPO prices at the end of June 2013.

30 June 2013 closing price relative to offering price

IPO performance, July 2012–June 2013 50%

25%

0

GMED

ATOS

-25%

LPDX

EGI

NSTG

ALNOV

NanoString Technologies took honors for the year’s largest IPO. The Seattle-based provider of life science tools and molecular diagnostics planned to use the proceeds to commercialize its platform. France’s NanoBiotix, a maker of cancer radiotherapy treatment, had Europe’s largest IPO. With proceeds of US$52 million and US$18 million, these were the smallest IPO leaders since 2008-09.

NANO

SPAG

ALTER

VIVO

ALSGD

NSTG

Despite being active in a competitive, price-constrained spinal implant market, Pennsylvania’s Globus Medical had the largest post-IPO return of 41%.

-50%

-75%

Source: EY and Capital IQ.


35

Financing

United States

Driven by debt, US medtech financing reached another record Debt

Follow-on and other

IPO

Venture

30

25

US$b

20

15

10

5

0 Jul 2006Jun 2007

Jul 2007Jun 2008

Jul 2008Jun 2009

Jul 2009Jun 2010

Jul 2010Jun 2011

Jul 2011Jun 2012


US medical technology companies raised an impressive US$27 billion in the 12-month period ending June 2013, an 18% increase over the previous year. For the fourth straight year, large debt offerings by the industry’s commercial leaders made up the vast majority of total funding. In fact, debt contributed 74%, or US$20 billion, of the US industry total in 2012-13. Led by Medtronic (which raised US$3 billion in debt), seven companies issued debt in excess of US$1 billion, including three that were owned ZqhjanYl]]imalqÕjek2:age]l MK*&. billion), Kinetic Concepts (US$2.4 billion) and Carestream Health (US$2.4 billion).

36


Follow-on public offerings skyrocketed more than 400% to US$3.7 billion. While US$2.5 billion of the total was issued by L`]jeg>ak`]jK[a]flaÕ[$oà[`mk]\l`] proceeds to help pay for its acquisition of Life Technologies, the remaining portion (US$1.2 billion) was still 70% higher than the year before and 10 companies raised at least US$50 million each. The news on venture capital and IPOs was not nearly as good, as totals dropped 19% and 20%, respectively.

Follow-on public offerings skyrocketed more than 400%

Jul 2012Jun 2013

In this chart, net debt represents the capital raised through debt issuances, net of debt repayments in the period. Despite the considerable amount of capital being raised by commercial leaders via the debt markets, typically more than 70% of the proceeds are not deployed outside the company, limiting the amount available either to fund growth through acquisitions or to return to shareholders in the form of dividends or stock buybacks.

The large majority of debt funding does not get deployed Debt issued

Net debt

$30

$25

US$b

$20

$15

$10

$5

$0 2008

2009

2010

2011

2012

-$5 Source: EY, BMO Capital Markets, Dow Jones VentureSource and Capital IQ.

US venture capital investment slid to its lowest level in years Average deal size

5

15

4

12

3

9

2

6

1

3

0

Jul 2006Jun 2007

Jul 2007Jun 2008

Jul 2008Jun 2009

Jul 2009Jun 2010

Jul 2010Jun 2011

Jul 2011Jun 2012

Jul 2012Jun 2013

Average deal size (US$m)

Total amount raised (US$b)

Total amount raised

After a slight rebound in 2011-12, the total amount of US medtech venture funding slid 19% to US$3.0 billion in the 12-month period ending June 2013. The US$3.0 billion raised was the lowest venture capital total in at least the past seven years and was down more than 30% from the levels seen prior to the recession. The total number of rounds (369) and average round size (US$8.1 million) were also below the averages of the past seven years. While medtech remains a challenging sector for many investors, the decline largely mirrors the reduction in total venture capital investing across all industries.

0



37

Financing

Although the total amount of medtechkh][aÕ[n]flmj][YhalYd`Ykkdmeh]\$l`] industry continued to attract the same share of overall venture capital being invested across all industries — roughly between 9% and 10% since 2010. While there is no denying that venture-backed medtech [gehYfa]k^Y[]Yfaf[j]Ykaf_dq\a^Õ[mdl funding and operational environment, it was reassuring to see that investors continue to maintain the same proportionate focus on the industry as they have over the past several years.

Medtech’s share of US venture capital Medtech’s share of total venture funding

Health care’s share of total venture funding

35%

30%

25%

20%

15%

10%

5%

0%

2007

Source: Dow Jones VentureSource.

38


2008

2009

2010

2011

2012

2013

Further emphasizing the trend by venture [YhalYdaklklghdY[]l`]ajZ]lkgfÕjekl`Yl provide the potential for quicker, more predictable exits, the 12 largest venture rounds in the US were later-stage rounds in 2012-13. In fact, only 10% of all venture rounds were early-stage rounds, accounting for 16% of total venture funding. These Õ_mj]ko]j]\gof*/Yf\+*$j]kh][lan]dq$

from 2007-08. San Diego-based Vital Therapies, the developer of the ELAD extracorporeal liver support system, secured the year’s largest venture round of US$86 million. It was Vital Therapies’ sixth round of funding and the company planned to use the proceeds to fund pivotal Phase III trials. The second-largest round went to TearScience, which planned to use the proceeds to fully

commercialize its TearScience system as the standard of care for the dry eye market. In all, 50% of the largest rounds went to either research and other equipment or non-imaging diagnostics companies, perhaps another signal that investors wish to avoid some of the regulatory and reimbursement pitfalls of therapeutic devices.

Top US venture rounds, July 2012–June 2013 Gross raised (US$m)

Quarter

Round type

Therapeutic devices (hematology/renal)

86

Q3 2012

Late stage

North Carolina

Therapeutic devices (ophthalmic)

70

Q1 2013

Late stage

Northern California


58

Q3 2012

Late stage

Northern California


58

Q4 2012

Late stage

Company

Region


Vital Therapies

Southern California

TearScience CardioDx 23andMe Histogenics

Massachusetts


49

Q3 2012

Late stage

Nevro

Northern California

Therapeutic devices (neurology)

48

Q1 2013

Late stage

OptiScan Biomedical

Northern California


45

Q1 2013

Late stage

Proteus Digital Health

Northern California


45

Q2 2013

Late stage

Cleveland HeartLab

Ohio


45

Q3 2012

Late stage

Avedro

Massachusetts

Therapeutic devices (ophthalmic)

43

Q1 2013

Late stage

EndoChoice

Georgia

Therapeutic devices (cardiovascular/vascular)

43

Q1 2013

Late stage


When removing the impact of debt, Massachusetts still led all regions with US$3.4 billion. Excluding Thermo Fisher’s US$2.5 billion follow-on offering, Massachusetts would have come in just behind Northern California, oà[`Õfak`]\oal`MK1--eaddagfaffgf% \]ZlÕfYf[af_Yll`]]f\g^Bmf]*()+&9k is typically the case, Northern California, Massachusetts and Southern California attracted the lion’s share of the US industry’s total venture capital investment (58%) and number of VC rounds (47%).

Capital raised by leading US regions without debt, July 2012–June 2013 4 Total equity capital raised (US$b)

For the second consecutive year, EYkkY[`mk]llkd]\YddMKj]_agfkafÕfYf[af_ with US$6.1 billion, and was followed by Minnesota, Texas and New York. Like Massachusetts, whose total was buoyed by L`]jeg>ak`]jK[a]flaÕ[Ìk[geZaf]\\]ZlYf\ follow-on offerings of US$3.8 billion, each of these three states was home to companies that raised billion-dollar debt offerings.

Massachusetts 3 Northern California 2

1

Pennsylvania Texas New York New Jersey

Southern California

Minnesota 0 100

200

300

400

500

600

700

800

900

1,000

Venture capital raised (US$m) Source: EY, BMO Capital Markets, Dow Jones VentureSource and Capital IQ. Size of bubbles shows relative number of financings per region.


39

Financing

Europe

European medtech financing tumbles Debt

Follow-on and other

IPO

Venture

7

6

5

US$b

4

3

2

1

0 Jul 2006Jun 2007

Jul 2007Jun 2008

Jul 2008Jun 2009

Jul 2009Jun 2010

Jul 2010Jun 2011

Jul 2011Jun 2012

Jul 2012Jun 2013


Total funding of European medtech companies tumbled to US$2.7 billion in the 12-month period ending June 2013. This was the lowest amount raised by the industry since 2008-09 and was down 58% from the US$6.3 billion raised the prior year. However, the vast majority of the drop was the result of a 65% reduction (to US$1.8 billion) in debt from the record-breaking levels of the prior year, when Fresenius and Covidien alone Y[[gmfl]\^gjMK,Zaddagfaf\]ZlÕfYf[af_&

40


As in the US, European venture funding reached at least a seven-year low in 201213, and the IPO market was tepid at best. L`]gfdqZja_`lkhglaf=mjgh]YfÕfYf[af_ was follow-on public offerings, which were up 14% to $305 million. However, this amount was still 40% below the average over the prior six years.

European venture funding reached at least a seven-year low in 2012-13

European venture capital falls Total amount raised

Average deal size

1.5

Average deal size (US$m)

Total amount raised (US$b)

1.25

1.0

0.75

0.5

The European venture market continued its decline in 2012-13 as total venture investment dropped 29% to US$553 million, the lowest mark since 2004-05. While larger Eurozone uncertainties have created a headwind for the industry, Europe’s venture investment, like that in the US, largely mirrors the reduction in total venture capital investing across all industries.

0.25

0.0 Jul 2006Jun 2007

Jul 2007Jun 2008

Jul 2008Jun 2009

Jul 2009Jun 2010

Jul 2010Jun 2011

Jul 2011Jun 2012

Jul 2012Jun 2013


As in the US, the European medtech sector’s share of total venture funding has held up even as the amount of venture funding has declined. With the exception of a drop to 5% in 2012, the overall proportion of medtech investment has annually been about 7% of total industry funding — similar to what e]\l][`[gehYfa]kYlljY[l]\afl`]Õjkl half of 2013.

Medtech’s share of European venture funding Medtech’s share of total venture funding

Health care’s share of total venture funding

35%

30%

25%

20%

15%

10%

5%

0%

2007

2008

2009

2010

2011

2012

2013

Source: Dow Jones VentureSource.


41

Financing

Top European venture rounds, July 2012–June 2013 Gross raised (US$m)

Quarter

Round type

Therapeutic devices (cardiovascular/vascular)

40

Q4 2012

Late stage

France

Imaging

37

Q1 2013

Late stage

Spain


22

Q2 2013

Early stage

Company

Country


Endosense

Switzerland

SuperSonic Imagine STAT–Diagnostica & Innovation Glide Pharma

UK

Therapeutic devices (non-disease-specific)

22

Q1 2013

Late stage

Ornim Medical

Israel


20

Q3 2012

Early stage

Sensimed

Switzerland


18

Q4 2012

Late stage

Novaliq

Germany

Therapeutic devices (respiratory)

18

Q1 2013

Late stage

Curetis

Germany


16

Q2 2013

Late stage

EarlySense

Israel


15

Q4 2012

Late stage

Cheetah Medical

Israel


14

Q1 2013

Early stage


European VCs seemed somewhat more willing to make large early-stage investments than their counterparts in the US. Europe’s largest venture rounds included early rounds for companies such as STAT-Diagnostica, Ornim Medical and Cheetah Medical — all of which are non-imaging diagnostic companies. Overall, however, early rounds accounted for only 7% of all venture rounds and 20% of venture dollars — sharply below 2007-08 levels.

Switzerland’s Endosense, a maker of forcesensing technology for cardiac arrhythmias, had the largest single round in Europe. As has been the case over the past several years, investors gravitated toward nonimaging diagnostics, which attracted six of the top 10 venture rounds, including the three aforementioned early-stage rounds.

Early rounds accounted for only 7% of European venture rounds

42


Capital raised by leading European countries without debt, July 2012–June 2013 250

Total equity capital raised (US$m)

France 200 UK Israel 150 Germany

Netherlands 100

Switzerland 50

Sweden

Finland 0 20

40

60

80

Venture capital raised (US$m) Source: EY, BMO Capital Markets, Dow Jones VentureSource and Capital IQ. Size of bubbles shows relative number of financings per region.

100

120

Sweden led all European countries in total funding with US$376 million — 82% of which oYkl`]j]kmdlg^Y\]ZlÕfYf[af_Zq?]laf_]& Switzerland (US$292 million) and Germany (US$259 million) rounded out the top three. Israel once again regained the top spot for the total amount of venture capital raised with US$112 million, the only country to surpass US$100 million in VC funding. By removing debt, the funding landscape in Europe radically changed. Sweden dropped ^jgeÕjkllgk]n]fl`$oàd]>jYf[] MK*)( million) took the top spot via a well-rounded mix of funding that included four IPOs and the second-largest venture funding, by ultrasound company SuperSonic Imagine. A largely venture-driven UK (US$147 million) followed France, with Israel (US$139 million) closing out the top three.

Medical technology report 2013 | 43

Mergers and acquisitions

All signs point to deals M&As in the US and Europe Total value of M&As

Number of M&As

75

200

60

160

45

120

30

80

15

40

0

Jul 2008Jun 2009

Jul 2009Jun 2010

Jul 2010Jun 2011

Jul 2011Jun 2012

Jul 2012Jun 2013

Number of deals

Total deal value (US$b)

Total deal value of megadeals (> US$10b)

0

Source: EY, Capital IQ and Thomson ONE. Average deal size calculated using M&As with announced values.

The total value of mergers and acquisitions involving a US or European medical technology company increased 23% to US$47 billion during the 12-month period ending June 2013. This total was in line with the Yn]jY_]g^MK,0&-Zaddagfgn]jl`]hYklÕn] years. The total was aided by Thermo Fisher K[a]flaÕ[ÌkYffgmf[]\Y[imakalagfg^^]ddgo k[a]flaÕ[Yf\dYZgjYlgjq]imahe]fleYc]j Life Technologies for US$15.8 billion. When this deal closes, it will be the fourth-largest medtech acquisition in the past decade. By normalizing the data for the impact of that megadeal, the total value of M&As in 201213 actually fell 19% to US$31.2 billion — the second consecutive year in which megadealadjusted totals declined, but also in line with l`]Õn]%q]YjYn]jY_]g^MK++&*Zaddagf& Also, for the second year in a row, the number of transactions with values in excess of US$1 billion dropped. As has always been the case, M&As have ranged from riskier, long-term bets on breakthrough technologies to strategic “tuck-in” acquisitions. Whatever the strategy, companies continue to seek deals that hold the promise of spurring the growth they are hard-pressed to generate on their own.

44


This past year, a variety of buyers, both old and new, used M&As to either diversify their portfolios (e.g., Valeant/Bausch & Lomb), move them into market leadership (Thermo Fisher/Life Technologies) or open new geographies (Medtronic/China Kanghui Holdings). Several large acquirers also took advantage of l`]gf_gaf_dgoafl]j]kljYl]klg`]dhÕfYf[] their purchases. Valeant Pharmaceuticals and Baxter International issued US$7.5 billion and US$3.5 billion worth of debt, respectively, for their acquisitions of Bausch & Lomb and Gambro, while Thermo Fisher tapped the equity markets to secure a US$2.5 billion follow-on public offering to help pay for Life Technologies. Despite being a long-time user of favorable \]ZlYf\[j]\aleYjc]lklgÕfYf[] Y[imakalagfk$hjanYl]]imalqÕjeko]j] relatively quiet on the M&A front in 2012)+&@go]n]j$kge]Õjeko]j]g[[mha]\ with divesting medtech assets from their portfolios. Warburg Pincus sold Bausch & Lomb to Valeant, Nordic Capital

sold Swedish power wheelchair maker Permobil to Investor AB, and Onex attempted to sell Carestream Health. In the case of Carestream Health, Onex was unable to secure a buyer for the price it was looking for, and eventually called off the auction for the medical imaging company. A year after PEs made 16 acquisitions with announced terms of US$11.9 billion, only 11 deals for US$1.4 billion were publicly announced. While a consortium of PEs was reported to have been in the running to acquire Life Technologies, more broadly the stock market rally has boosted the price expectations of sellers and has made many PEs wary of overpaying. While the megadeals-adjusted value of M&As declined year-over-year, it’s important to keep in mind that M&A data is often “lumpy,” since the number of transactions is relatively small and the activity of acquirers often waxes and wanes (for a variety of reasons, including the need to integrate recently purchased assets).

Underlying the overall numbers, there were signs of growing interest in deals. The composition of buyers is now more diverse than in any comparable period that we have analyzed, and deal activity in China accelerated dramatically over the last 12 months. Longer term, the outlook for deals remains bullish. At a time when access to venture [YhalYd`YkZ][ge]egj]\a^Õ[mdlYf\ AHGk`Yn]\aeafak`]\YkYnaYZd]ÕfYf[af_ option, the case for an M&A exit has become more compelling for smaller companies. Meanwhile, acquirers will need to use acquisitions to jump-start growth. While medtech companies are grappling with unprecedented pressures from regulators, payers and the overall market, all signs point to robust M&A activity in the months and years ahead.

US and European M&As by type of buyer Other

Private equity

Pharma

Conglomerate

Medtech

100 90 80 Share of total deal value

The second consecutive year in which megadealadjusted totals declined

70 60 50 40 30 20 10 0 Jan 2007-Dec 2008

Jan 2009-Dec 2010

Jan 2011-Jun 2013

Source: EY, Capital IQ and Thomson ONE.

In recent years, the composition of buyers of medtech companies has shifted considerably. In 2009 and 2010, for instance, conglomerate buyers grew to dominate the scene, while the relative representation of medtech and private equity buyers diminished. Since 2011, the distribution of buyers is more diverse and well-represented than in any other period in recent years, j]Ö][laf_l`Yle]\l][`[gehYfa]k[gflafm]\ to attract interest from a diverse group of acquirers. Led by the likes of Thermo >ak`]jK[a]flaÕ[$>j]k]famkE]\a[Yd;Yj] and Hologic, pure-play medtechs were responsible for more than half of all industry

M&A value since January 2011. Meanwhile, as price caps, vendor consolidation and reduced utilization rates continue to be a major drag on organic growth, a diverse group of health care-related companies — from Johnson & Johnson and Danaher to Valeant International and Apax Partners — `YkZ]]fY[imajaf_e]\l][`ÕjeklgY[[]kk high-growth technologies, enter desirable markets, broaden portfolios and take advantage of economies of scale.


45


D]\Zql`]L`]jeg>ak`]jK[a]flaÕ['Da^] L][`fgdg_a]ke]_Y\]Yd$gfdqÕn]E9 transactions surpassed the US$1 billion eYjc&LàkÕ_mj]oYk\gof^jge0l`] previous year and 12 the year before that. Notable acquisitions during the 12-month period ending 30 June 2013 included Valeant’s purchase of ophthalmic company Bausch & Lomb, as well as Medtronic and Stryker’s plunge into the fast-growing Chinese medtech market. Before buying Bausch & Lomb, Valeant had publicly pursued generic drugmaker Actavis with a US$13 billion offer. When that deal fell through, Valeant quickly turned its attention to Bausch & Lomb, whose private equity owner Warburg Pincus — which had acquired it for US$4.5 billion in 2007 — was attempting to take the ÕjehmZda[& The latest 12-month period also saw a number of industry stalwarts return to the list of biggest dealmakers after a notable YZk]f[]&Kge]g^l`]k]Õjek$km[`Yk Medtronic and Stryker, had not done a ka_faÕ[YflY[imakalagf MK-((eaddagfgj higher) in two years.

46


Selected M&As, July 2012–June 2013 Acquiring company

Location

Thermo Fisher Scientific

US – Massachusetts Life Technologies

Acquired company

US – California

$15,800

Valeant Pharmaceuticals International

Canada

US – New York

$8,700

Bausch & Lomb

Location

Value (US$m)

Baxter International

US – Illinois

Gambro

Sweden

$3,915

Fresenius Kabi

Germany

Fenwal

US – Illinois

$1,100

Bayer

Germany

Conceptus

US – California

$1,100

Thermo Fisher Scientific

US – Massachusetts One Lambda

US – California

$925

Investor AB

Sweden

Permobil

Sweden

$846

Medtronic

US – Minnesota

China Kanghui Holdings

China

$816

Smith & Nephew

UK

Healthpoint Biotherapeutics

US – Texas

$782

Stryker

US – Michigan

Trauson Holdings

China

$764

Mitsui Chemicals

Japan

Heraeus Kulzer

Germany

$591

Illumina

US – California

Verinata Health

US – California

$450

Boston Scientific

US – Massachusetts Vessix Vascular

US – California

$425

Hill-Rom

US – Indiana

US – Michigan

$400


Aspen Surgical Products

United States

US M&As Total deal value

Number of M&As

60

120

50

100

40

80

30

60

20

40

10

20

0

Jul 2008Jun 2009

Jul 2009Jun 2010

Jul 2010Jun 2011

Jul 2011Jun 2012

Jul 2012Jun 2013

Number of deals


Total deal value of megadeals (> US$10b)

0


Europe

European M&As Total deal value of megadeals (> US$10b)

Total deal value

Number of M&As

60

75

50

40 45 30 30 20 15

10

0 Jul 2008Jun 2009

Jul 2009Jun 2010


Jul 2010Jun 2011

Jul 2011Jun 2012

Jul 2012Jun 2013

Number of deals


60

0

US-based medtechs dominated the M&A scene during the 12-month period ending 30 June 2013. The total value of M&As afngdnaf_MK%ZYk]\e]\l][`ÕjekoYkmh 39% to US$43 billion in the period. However, after normalizing the data for the US$15.8 billion Thermo Fisher/Life Technologies megadeal, total deal value was down 12% to US$27.2 billion, which was in line with the Õn]%q]Yj$fgf%e]_Y\]YdYn]jY_]&Oàd]l`] total number of M&As with announced terms declined to 102, the median deal size was US$68 million, 26% above the cumulative Õn]%q]YjYn]jY_]&HjagjlgZ]af_Y[imaj]\ itself, Life Technologies was the US’ most active buyer, with eight acquisitions between July 2012 and June 2013.

The total value of M&As involving European companies was down for the third consecutive year in 2012-13, declining 5% to US$11.6 billion. After normalizing for the Novartis/Alcon megadeal in 2009-10, this Õ_mj]oYkY[lmYddqbmklYZgn]l`]Õn]%q]Yj average of US$11.5 billion. The number of M&As with announced deal terms slid 4% year-over-year while median deal size edged up 13% to US$176 million. The largest Y[imakalagfg^Y=mjgh]Yfe]\l][`Õje was by US conglomerate Baxter, which acquired Sweden’s Gambro, a developer of dialysis products and renal therapies, for US$3.5 billion.


47


The use of milestone payments remains robust ... Percentage of M&As with milestone payments

40

40%

30

30%

20

20%

10

10%

0

Jul 2008Jun 2009

Jul 2009Jun 2010

Jul 2010Jun 2011

Jul 2011Jun 2012

Jul 2012Jun 2013

Percentage of M&As with milestone payments

Number of M&As with milestones

Number of M&As

Afl`]Y^l]jeYl`g^l`]_dgZYdÕfYf[aYd[jakak$ the use of milestone-based payments has increased. At a time of mounting market pressures and increased scrutiny from buyers, milestones give acquirers a way to pursue more avenues for growth by increasing the number of “shots on goal” while simultaneously containing the risk associated with their M&A strategies.

0%


... as they continue to make up more than one–third of total deal value. Total value of milestones/total value of all M&As with milestones

2.5

50%

2.0

40%

1.5

30%

1.0

20%

0.5

10%

0

Jul 2008Jun 2009

Jul 2009Jun 2010


The use of milestonebased payments has increased 48


Jul 2010Jun 2011

Jul 2011Jun 2012

Jul 2012Jun 2013

0%

Share of total value


Total value of milestones

Selected M&As by segment Acquiring company Segment Therapeutics devices

Jul 2007–Jun 2012

Jul 2012–Jun 2013

Number of deals

Value (US$m)

% of total deal value

Number of deals

Value (US$m)

% of total deal value

414

$115,045

68%

119

$13,799

42%

Ophthalmic*

28

$45,657

27%

6

$102

0%

Orthopedic*

70

$22,007

13%

22

$1,115

3%

Cardiovascular/vascular

70

$17,598

10%

18

$2,266

7%

Respiratory

17

$660

0%

3

$487

1%

Non-disease specific

77

$3,617

2%

15

$1,648

5%

Multiple

20

$2,932

2%

9

$558

2%

Hematology/renal

18

$3,120

2%

6

$4,005

12%

Wound care

25

$9,861

6%

7

$665

2%

Oncology

12

$1,217

1%

2

$34

0%

All others

77

$8,376

5%

31

$2,919

9%

90

$24,107

14%

18

$15,996

48%

Research and other equipment Non-imaging diagnostics

146

$20,214

12%

42

$2,220

7%

Other

65

$6,076

4%

34

$417

1%

Imaging

65

$4,203

2%

23

$656

2%

9k`YkZ]]fl`][Yk]^gjl`]hYklÕn]q]Yjk$ non-imaging diagnostic companies attracted the largest number of acquirers. Without the Thermo Fisher/Life Technologies megadeal, diagnostics would have come behind only the hematology/renal and cardiovascular/ vascular segments for top dollar value in 2012-13. At a time when regulators and payers are subjecting drugs to greater scrutiny, non-imaging diagnostics have growth opportunities from the increased adoption of personalized medicine.

Source: EY, Capital IQ and Thomson ONE. * Includes megadeals


49


Middle Kingdom rising?

50


company, for US$764 million. Stryker had maintained a manufacturing agreement for instrumentation sets with spine and trauma specialist Trauson since 2007. Through their respective acquisitions, Medtronic and Stryker increased their penetration of the fast-growing Chinese orthopedic market. The deals have the potential to deliver growth through established distribution networks with access to thousands of hospitals, and serve as platforms to further expand in China and other developing markets.

While Western companies increasingly targeted Chinese medtechs ... Total deal value

Number of deals

$2.0

10

$1.6

8

$1.2

6

$0.8

4

$0.4

2

$0

Jul 2005Jun 2006

Jul 2006Jun 2007


Jul 2007Jun 2008

Jul 2008Jun 2009

Jul 2009Jun 2010

Jul 2010Jun 2011

Jul 2011Jun 2012

Jul 2012Jun 2013

0

Number of Chinese medtechs acquired by Western firms

US and European medtech companies have been looking at China as a source of growth

The two largest deals — which accounted for 91% of the total — were conducted by Medtronic and Stryker. In September 2012, Medtronic agreed to acquire China Kanghui Holdings, China’s second-largest manufacturer and distributor of orthopedic products, for US$816 million. The purchase of Kanghui, which had gone public on the New York Stock Exchange in 2010, was the largest purchase of a Chinese health care company ever, according to Bloomberg, and commanded a 22% premium. Two months later, Stryker paid an even higher premium (45%) to purchase Hong Kong-based Trauson Holdings, China’s largest orthopedic

US$b

With increasing regulatory and market pressures in the West, US and European medtech companies have been looking at China as a source of growth. This was very evident over the 12-month period ending Bmf]*()+$oà[òalf]kk]\Yka_faÕ[Yfl uptick in medtech transaction activity in China. Western companies closed nine acquisitions of Chinese medtechs for a total value of US$1.7 billion. In the seven years prior to 2012-13, there were only 25 announced deals for US$346 million.

While Medtronic and Stryker were making waves in China, Chinese companies were also busy acquiring medtech assets in the US and Europe. In 2012-13, Chinese companies conducted six acquisitions of Western medtechs for a total of US$730 million — four of which were in excess of US$100 million. These numbers far exceeded the averages of the past seven years when a grand total of seven M&As were completed for US$268 million (US$240 million came from a single deal — Mindray Medical buying Datascope’s patient monitoring business in 2007-08).

The largest acquisition was conducted ZqEa[jgHgjlK[a]flaÕ[$oà[`hmj[`Yk]\ US-based Wright Medical’s OrthoRecon business segment for US$290 million. The OrthoRecon business included hip and knee implant products and provides MicroPort not only a presence in the US ortho market but also an opportunity for greater growth in China. While OrthoRecon had products approved in China, MicroPort had historically focused on the cardiovascular market and had not been as large a player in orthopedics. In the second-largest M&A, Shanghai Fosun Pharmaceutical and Pramerica-Fosun China Opportunity Fund jointly purchased Alma Lasers, an Israeli manufacturer of laser

and ultrasound devices for aesthetic and medical applications, for US$222 million. The purchase of Alma, which had a 15% global market share and was the market leader in China, allows Fosun Pharma to make progress on its goal to further internationalize and broaden its traditional pharmaceutical and health services business. Gl`]jka_faÕ[Yfl\]Ydkaf[dm\]\:?A% Shenzen’s US$118 million acquisition of USbased, DNA sequencing company Complete Genomics and Mindray Medical’s purchase of Zonare Medical Systems, a US-based manufacturer of ultrasound technologies.

... Chinese companies were also actively acquiring Western medtechs. Number of deals 8

$600

6

$400

4

$200

2

$0

Number of Western medtechs acquired by Chinese companies

US$m

Total deal value $800

0 Jul 2005Jun 2006

Jul 2006Jun 2007

Jul 2007Jun 2008

Jul 2008Jun 2009

Jul 2009Jun 2010

Jul 2010Jun 2011

Jul 2011Jun 2012

Jul 2012Jun 2013



51

Scope of this report

]afkl]af Kean Healthcare served as an integral partner as well.


53

Pulse of the industry

Data exhibit index Budgetary pressures are leading to spending cuts for medtech

4

Early-stage VC rounds of >US$5 million have plummeted

6

Medtech revenue growth has slowed, dragging down R&D spending ...

7

... leading to “lost” revenues of US$131 billion ...

7

... and leading to “lost” R&D spending of US$12 billion

7

New ventures: corporate funds’ medtech focus

8

Going beyond: medtech companies expand into services and solutions A perfect storm

10 16-17

Medical technology at a glance, 2011–12

20

US public medtech cash index

21

European public medtech cash index

21

US and European commercial leaders

22

US market capitalization

23

European market capitalization

23

US medtech at a glance, 2011–12

24

US commercial leaders and other companies, 2011–12

25

Selected US medtech public company financial highlights by region, 2012

25

Change in US therapeutic device companies’ revenue and net income by disease category, 2011–12

26

Selected fast-growing US medtechs by revenue growth, 2007–12

27

European medtech at a glance, 2011–12

28

European commercial leaders and other companies, 2011–12

29

Selected European medtech public company financial highlights by region, 2012

29

Change in European therapeutic device companies’ revenue and net income by disease category, 2011–12

30

Selected fast-growing US medtechs by revenue growth, 2007–12

31

Capital raised in the US and Europe by year

32

54


Innovation capital continues to decline in the US and Europe

33

Less than a quarter of all venture funding in the US and Europe went to early-stage medtechs

34

US and European IPOs, July 2012–June 2013

35

IPO performance, July 2012–June 2013

35

Driven by debt, US medtech financing reached another record

36

The large majority of debt funding does not get deployed

37

US venture capital investment slid to its lowest level in years

37

Medtech’s share of US venture capital

38

Top US venture rounds, July 2012–June 2013

39

Capital raised by leading US regions without debt, July 2012–June 2013

39

European medtech financing tumbles

40

European venture capital falls

41

Medtech’s share of European venture funding

42

Top European venture rounds, July 2012–June 2013

42

Capital raised by leading European countries without debt, July 2012–June 2013

43

M&As in the US and Europe

44

US and European M&As by type of buyer

45

Selected M&As, July 2012–June 2013

46

US M&As

47

European M&As

47

The use of milestone payments remains robust ...

48

... as they continue to make up more than one–third of total deal value

48

Selected M&As by segment

49

While Western companies increasingly targeted Chinese medtechs ...

50

... Chinese companies were also actively acquiring Western medtechs

51


55

Pulse of the industry

Global medical technology contacts Global Life Sciences Leader

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56 EY | Pulse of the industry

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57

Notes

58


EY | Assurance | Tax | Transactions | Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. How EY’s Global Life Sciences Center can help your business Life sciences companies — from emerging to multinational — are facing challenging times as access to health care takes on new importance. Stakeholder expectations are shifting, the costs and risks of product development are increasing, alternative business models are manifesting, and collaborations are becoming more complex. At the same time, players from other sectors are entering the field, contributing to a new ecosystem for delivering health care. New measures of success are also emerging as the sector begins to focus on improving a patient’s “health outcome,” and not just on units of a product sold. Our Global Life Sciences Center brings together a worldwide network of more than 7,000 sector-focused assurance, tax, transaction and advisory professionals to anticipate trends, identify implications and develop points of view on how to respond to the critical sector issues. We can help you navigate your way forward and achieve success in the new health ecosystem. © 2013 EYGM Limited. All Rights Reserved. SCORE No. CW0076 1307-1104613_W ED 0713 This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice.

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