When the human body is the biggest data platform, how will medtech companies capture value? - Pulse of the industry 2018 ey.com/lifesciences

When the human body is the biggest data platform, how will medtech companies capture value? - Pulse of the industry 2018 ey.com/lifesciences
When the human body
is the biggest data
platform, how will
medtech companies
capture value?
Pulse of the industry 2018
When the human body is the biggest data platform, how will medtech companies capture value? - Pulse of the industry 2018 ey.com/lifesciences
Pulse of the industry 2018

When the human body is the
biggest data platform, how
will medtechs capture value?                                                                          Pamela Spence
That is a key question that medtech companies must address as they strive to                          EY Global Life Sciences
                                                                                                      Industry Leader
deliver better, more engaging health care to consumers. In particular, as data and                    pspence2@uk.ey.com
analytics become central to the value proposition, EY believes medical device
companies must adapt their business models to create systems that move beyond
product-centric definitions of innovation to data-centric definitions.

Historically, the medical device industry has     threaten their leading positions. However, to
created tremendous value via the creation         create future value, medtechs cannot ignore
of therapeutic devices. It is now time for the    deals to acquire new digital capabilities.
industry to invest more effort in analytics-      Unfortunately, there is little evidence that
based solutions that enable seamless, real-       those deals are happening at the scale
time care management. We now have the             or speed required for transformation.
technologies to deliver high-quality care when
and where the consumer wants it, not just         As we discuss in this year’s report, there are
                                                                                                      James Welch
in a traditional office or hospital setting.      clear signs of the digital transformation already
                                                                                                      Life Sciences Leader,
                                                  underway. Artificial intelligence is already
                                                                                                      US Central Region
Such rising consumer expectations build more      sweeping through the imaging sector and
urgency for change in the medical device          shaping a new generation of smart, robotic
industry. The companies that survive and grow     surgical devices, for instance. The 2018
in this dynamic environment will be those that    regulatory approval of a fully automated
create personalized products and services that    algorithm to diagnose diabetic retinopathy
use data to inform and deliver better outcomes,   without physician assistance shows the
with a growing emphasis on coordinated care.      rapid evolution of digital diagnostics.

While some medtechs are investing for this        For the moment, investor confidence
data-driven future, analysis presented in         in medtech is high, driven by a buoyant
the EY 12th annual Pulse of the industry          financing climate, including a growing
report suggests most medtechs remain              base of private investment capital in
overly focused on investors’ near-term            Asia. We believe medtechs have a unique
growth expectations to the detriment of their     opportunity to capitalize on the current            John Babitt
longer-term ambitions. In 2017-18, medtech        digital transformation to get even closer to        Life Sciences Transaction
companies continued to use dealmaking to          their customers, particularly consumers.            Advisory Services Partner, US
create scale in must-win therapy areas, a         Sensors in devices and on — or within — the         Ernst & Young LLP
necessary first step when reimbursement           human body have the power to link data              john.babitt@ey.com
remains challenging and new entrants              collection to powerful algorithms, which will
                                                  transform existing practices and take us
                                                  into a new paradigm of individualized care.
Sensors in devices and                            Harnessing the power of data, the industry
on — or within — the human                        will reshape itself around the empowered
                                                  patient-consumer, rather than forcing the
body have the power to link                       patient to fit into today’s current industry
data collection to powerful                       infrastructure. But if medtech companies
                                                  continue to underinvest in digital capabilities,
algorithms, which will                            they could become less important as the
transform existing                                health ecosystem continues to evolve.               Lucien De Busscher
                                                                                                      Life Sciences
practices and take us                             As medtech companies develop new                    Advisory Partner

into a new paradigm of                            technologies and new business models,
                                                  the global EY organization continues
                                                                                                      Ernst & Young Special
                                                                                                      Business Services CVBA
individualized care.                              to track the pulse of the industry.                 lucien.de.busscher@be.ey.com
When the human body is the biggest data platform, how will medtech companies capture value? - Pulse of the industry 2018 ey.com/lifesciences

06 | Chapter 01
      A new wave of digitization
      will reshape the medtech

12 | Chapter 02
      Is medtech investing
      enough to meet the
      future challenge from
      the tech sector?

20 | Chapter 03
      Advances in imaging and
      non-imaging diagnostics
      show how the medtech
      industry could evolve

24 | Chapter 04
      Future success requires
      greater participation in
      the health ecosystem

28 | Guest perspectives

38 | Databook

57 | Scope of this report

58 | Contacts

60 | Acknowledgments

Connect with us!

When the human body is the biggest data platform, how will medtech companies capture value? - Pulse of the industry 2018 ey.com/lifesciences
4   Pulse of the industry 2018
When the human body is the biggest data platform, how will medtech companies capture value? - Pulse of the industry 2018 ey.com/lifesciences
Key findings
What the Fourth Industrial Revolution means for the medtech industry
The Fourth Industrial Revolution will permanently change how medical device companies do
business. This is the message that clearly emerges from EY analysis of the industry’s 2018
key performance metrics and discussions with leading medtech executives and thought leaders.

• Data and algorithms are tomorrow’s value-                   • Advances
                                                                ►           in imaging, diagnostics and diabetes point
  creating products: Data will be the engine of                   the way forward: Medtech companies in the imaging
  future medtech growth, and thus, value creation.                and diabetes space are investing in new innovations
  The growing importance of data and algorithms                   such as artificial intelligence and consumer-centric
  will accelerate a power shift already underway                  platforms that use data to provide more personalized
  in the industry that gives technology and digital               health care. In the meantime, investments in
  health entrants the advantage.                                  diagnostics, especially the consumer genomics space,
                                                                  show the growing importance of personalization for
• Medtech leaders are overly focused on the short                 medtech companies.
  term: At present, medtech capital allocation is too
  focused on short-term growth. There is too much             • Investor confidence in medtech means high levels
  emphasis on returning cash to shareholders and not            of innovation capital: Investment continues to flow
  enough effort devoted to new kinds of innovations that        into medtech, with venture and IPO funding buoyant
  aren’t product-centric.                                       in 2017-18. Venture investment from China promises
                                                                to be a key factor in the industry’s future, with
• Portfolio optimization remains the core driver                Chinese capital invested in international medtech
  of M&A: Medtech leaders continue to refine their              firms and domestic companies seeking to globalize
  portfolios, using M&A and divestitures to create scale        their innovations.
  in must-win therapeutic areas. Given reimbursement
  challenges and threats from new entrants this is a          • Rethinking the business model is an imperative:
  necessary first step to creating agile businesses that        To deliver on investor expectations and create value in
  can compete over the next 5-10 years. Focusing on             this transformative age, medtechs must rethink their
  fewer therapeutic areas allows companies to achieve           business models, building agile end-to-end services
  synergies and deepen customer engagement in these             that put their customers at the center. It is not enough
  spaces. However, to create future value, medtechs             to develop services that are product add-ons. Provider
  also need to invest in digital capabilities, and there is     and payer customers want new approaches that
  little evidence suggesting those deals are currently          optimize both the efficiency and outcomes of care;
  happening at scale.                                           consumers want individualized solutions personalized
                                                                for their specific health needs.

                                                                                                Pulse of the industry 2018   5
When the human body is the biggest data platform, how will medtech companies capture value? - Pulse of the industry 2018 ey.com/lifesciences
A new wave of digitization will
reshape the medtech industry
Increasingly, medtech’s future growth will be driven by the ability to connect, combine and share data
quickly and at scale to create secure solutions that deliver clinical and economic benefits. Indeed, to create a
sustainable path for future growth, medtechs must look to capture value not only through the manufacture
and sale of products, but also via the data those devices generate. As Donald Jones, Chief Digital Officer of the
Scripps Translational Science Institute, says, “In this environment, the value is in the clinical insights and trend
analysis that the devices spit out, rather than in the med device itself.“

Increasingly, customers of the medical          As peer-to-peer sharing and mobile have       Indeed, consumers are already using
device industry — especially payers,            transformed the banking, mobility and         data to demand greater voice in how
providers and consumers — are defining          retail industries, the growing importance     their care is delivered, putting pressure
that value in new ways. As presented            of data and algorithms will force medtech     on providers and payers to adapt with
in Figure 1, future value (FV) for all          companies to adapt their traditional          data-centric solutions of their own that
stakeholders will come from innovations (I)     offerings to create personalized products     provide more personalized coaching. In
that unlock the power of data (D) to deliver    and services that are person-centric. (See    addition, these providers and payers are
personalized health outcomes.                   Figure 2 and box, “Important definitions.”)   also using data to increase the efficiency
                                                                                              and standardization of care delivery,
Ultimately, this emphasis on health             As health care budgets tighten across         important actions to improve outcomes
outcomes data will lead the industry from       all markets, the increased availability       and lower health care costs. As these two
a product-centric to a patient-centric          and importance of health data skews           groups become more sophisticated in
orientation, where digital platforms allow      the traditional balance of power within       their management and use of data, they
seamless delivery of care. It will also align   health care away from traditional medtech     will broaden their focus from the sickest
with the rising expectations of medtech’s       companies and toward medtech’s core           and most costly patients to the general
customers, particularly consumers               customers and new entrants.                   population, enabling improved outcomes
who have experienced the wholesale                                                            at scale. (For more see the Progressions
restructuring of other areas of their lives     Traditional utilization-based payment         2018 report, “Life Sciences 4.0: Securing
as a result of the democratization of data.     models will not survive this power shift.     value through data-driven platforms.”)

6   Pulse of the industry 2018
When the human body is the biggest data platform, how will medtech companies capture value? - Pulse of the industry 2018 ey.com/lifesciences
                                                                                                                                      of the industry


New thinking for a new age
                                                                                                             Important definitions
Figure 1. A new equation for delivering value
                                                                                                             • The Fourth Industrial Revolution:
                                                                                                               A fusion of the physical, digital and
                                                                                                               biological worlds that redefines
                                                                                                               innovation and blurs the traditional
                                                                                                               lines between industries. This

                                                                               Data                            advancement is driven by the ability to
                                                                                                               combine a range of new technologies
Future                           Innovation                     (Connect + Combine + Share)                    and the safe and rapid generation and
value                     Outcomes x Personalization                                                           dissemination of data.

                                                                                                             • Health ecosystem: A number of
                                                                                                               different stakeholders provide goods
                                                                                                               or services to consumers in today’s
                             For people         Participatory   Data streams   Traditional and   Platforms     networked health environment.
                             For physicians     Precise                        non-traditional   of care
                                                                                                               These stakeholders include primary
                             For payers         Predictive                     partners
                             For policymakers   Proactive                                                      and specialty care physicians, public
                                                                                                               and private payers, and a range of
                                                                                                               technology, retail, telecom, mobility
                                                                                                               and life sciences companies.
Figure 2. Changing customer expectations combine with
technological advances to create the the future medtech market                                               • Platform: A mechanism to connect
                                                                                                               different stakeholders in order to
                                                                                                               combine and share data easily and
What’s now                                                          What’s next
                                                                                                               securely to deliver a shared goal:
                                                                                                               improved health outcomes.

                                                                                                             • Power shift: Tightening health care
Payers, consumers and new                                           Super consumers demand
entrants have the power                                             convenient, seamless care                  budgets, technological disruption
                                                                                                               and democratized data change the
                                                                                                               traditional power balance in health
                                                                                                               care. Life sciences companies may
Connected devices allow                                             New technologies allow “pre-disease”       cede power to more informed and
continuous disease management                                       identification and treatment               connected payers, providers and
                                                                                                               consumers — and potentially to new
                                                                                                               entrants who can better meet the
                                                                                                               needs of these stakeholders.
Medical devices are the                                             Data and algorithms are the
highest value products                                              highest value product                    • Super consumer: The empowered
                                                                                                               consumer is at the center of the way
                                                                                                               companies increasingly do business in
                                                                                                               networked, platform-driven markets.
Value is captured by                                                Value is captured by sharing the           Able to access goods and services with
owning all the data                                                 data with ecosystem stakeholders
                                                                                                               minimal frictions, the super consumer
                                                                                                               represents a potential disruptive force
                                                                                                               in health care markets.

Health ecosystem is static                                          Health ecosystem is a
and well-defined                                                    dynamic network

                                                                                                                    Pulse of the industry 2018   7
When the human body is the biggest data platform, how will medtech companies capture value? - Pulse of the industry 2018 ey.com/lifesciences
   of the industry

As patients increasingly embrace the                                                 increasing evidence to prioritize funding                                                              Entrants from the tech sector are already
opportunity to take a proactive role in                                              for tools and technologies that enable                                                                 eyeing the health space as a fertile area
their own health care, wearables, sensors                                            earlier intervention and prevention.                                                                   for new growth. In the consumer and
and new digital interfaces will become                                                                                                                                                      search spaces, technology companies
critical tools for personal health care                                              As payers, providers and consumers                                                                     have honed their customer engagement
management. Providers will use these                                                 embrace the data and tools to make                                                                     and advanced data and analytics
data, with workflow-friendly analytics                                               personalized health management a reality,                                                              skills, including the ability to acquire
layered on top, to maximize clinical                                                 new entrants will gain the opportunity to                                                              and securely maintain information, to
insights and deliver optimal and efficient                                           deliver the solutions all parties are seeking.                                                         create more satisfying and personalized
care. Payers, meantime, will have greater                                            In particular, technology companies with                                                               customer experiences. They can do the
transparency on the benefits achieved                                                expertise in digital platforms and customer                                                            same in health care.
for the health care dollars spent. This                                              outreach will be well-placed to capitalize on
information will provide payers with                                                 the industry’s shifting balance of power.

Data will drive a health care power shift
Figure 3. Stakeholders empowered by data

As stakeholders acquire, share and utilize data, new ways of delivering personalized health
care emerge, shifting the power away from traditional medtechs.
Patients/consumers                                                                                                                                                                                                Power shift in action
                                                                                                                                                                                                                  •   Nearly 60% of adults consult
 Data flow: Acquire                                                               Share                                                           Share                                                               internet first to research health
                                             ne                                                            fin                                                          ne
                                                                 ta                                                           at                                                                                      conditions


                                                                                                                                                                                                lized coachin
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                                                    Informed                                                                                                                 Personalized                         •   56% of US adults have used some
                                                                                             rich and

                                                     patient                                                                                                                  health care                             form of digital technology to
 Business model                                                                                                 by informed
                                                   researches                                                                                                                tailors care in                          interact with care team1
                                                                                                                patient and
                                                                 nd w

                                                  care options                                                                                                                  real time

                                                                                                                 care team                                                                                        •   92% of US individuals want the



                                                                                                                                                                                                                      ability to use wearable/sensor

                                                              ea                                                            ic                                                             r

                                                           Dis                                                          Clin                                                             Pe
                                                                                  Learn                                                           Learn                                                               data to personalize interventions2

Health providers                                                                                                                                                                                                  Power shift in action
                                                                                                                                                                                                                  •   Improved AI reduces duplicative
 Data flow: Acquire                                                               Share                                                           Share                                                               documentation, creating time for
                                             ne              lo
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                                                                                                                                                                                                                  •   Combining big data with clinical
                                                                                                                                                                                                   here care
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                                                      Data                                                       Data                                                        Personalized
                                                 optimization                                               consolidation                                                     health care                             evidence to manage patient health
 Business model                                   to enhance                                                to standardize                                                   tailors care in                          is top 2018 physician priority3
                                                   efficiency                                                care delivery                                                      real time

                                                                                                                                                                                                                  •   Global virtual care industry will




                                                                                                                                                                                                                      grow from US$18.1b in 2015 to

                                                           Imp                    Learn                                  Po                       Learn                                                               US$41.2b in 20214

  EY Future of Health Survey, Spring 2018. 2 Tung, J. Y et al. 2018. Accelerating precision health by applying the lessons learned from direct-to-
consumer genomics to digital health technologies. NAM Perspectives. Discussion Paper, National Academy of Medicine, Washington, DC.
  2018 HealthCare Executive Group (HCEG) Top 10 List of critical opportunities 4 Statista. Global telemedicine market size (2015-2021)

8   Pulse of the industry 2018
When the human body is the biggest data platform, how will medtech companies capture value? - Pulse of the industry 2018 ey.com/lifesciences
                                                                                                                                                                                                                                    PULSE 2018
                                                                                                                                                                                                                                     of the industry

There are clear signs that leading tech                                                 Other technology companies are also                                                                even medtech’s leaders can’t match.
companies are moving beyond fitness and                                                 developing data-rich platforms that                                                                (See Figure 4.) This will be a major
wellness tracking to care management                                                    make it easy to share data proactively                                                             advantage as companies seek to assemble
using easy-to-use, consumer-facing                                                      with consumers and providers to avoid                                                              the breadth of talent, technology and
devices. In September 2018, for instance,                                               adverse health events and optimize care                                                            expertise needed to take the next steps
Apple announced its newest watch                                                        management at the individual level. (See                                                           towards personalized health care.
incorporates an electrical heart rate                                                   Figure 3.)
sensor that can take an electrocardiogram
(ECG) using an app that has been granted                                                The challenge from tech companies is
                                                                                                                                                                                           1       Press release. “Apple Watch Series 4:
a De Novo classification by the U.S. Food                                               likely to be all the greater given their
                                                                                                                                                                                                   Beautifully redesigned with breakthrough
& Drug Administration.1                                                                 serious financial firepower. Tech’s biggest                                                                communication, fitness and health capabili-
                                                                                        players wield M&A firepower on a level                                                                     ties,” Apple, September 12, 2018.

Health payers                                                                                                                                                                                                 Power shift in action
                                                                                                                                                                                                              •     Recent deals: CVS/Aetna, Optum/
    Data flow: Acquire                                                                Share                                                       Share                                                             DaVita, Humana/Kindred Healthcare
                                               ne                                                              fin                                                      ne
                                                                                                                                                                                                              •     90% of payers surveyed by the

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                                                                                                                     Data                                                    Personalized                           Society of Actuaries say they will
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                                                                                                                consolidation                                                 health care                           adopt predictive big data analytics
    Business model                                     of care
                                                                                                                to standardize                                               tailors care in                        tools in next five years5
                                                    delivery and
                                                                                                                 care delivery                                                  real time


                                                                                                                                                                                                              •     Insurers invest in mobile tools to




                                                                                                                                                                                               C                    help consumers manage disease


                                                                                      Learn                                                       Learn                                                             and wellness

New entrants                                                                                                                                                                                                  Power shift in action
                                                                                                                                                                                                              •     Smart phones track sleep, fitness
    Data flow: Acquire                                                                Share                                                       Share
                                                                                                                    ne                                                                                        •     Apple/Stanford launch heart
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                                                                                                                                                                              health care                     •     Amazon/JPM/Berkshire Hathaway
    Business model                                  tracking via                                                management
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                                                       mobile                                                   via IoT devices                                                                                     partnership
                                                                                                                                                                                real time






                                                             Imp                      Learn                                 Po                    Learn

    Survey by Society of Actuaries. 2017 Predictive analytics in HC Trend Forecast.

                                                                                                                                                                                                                  Pulse of the industry 2018   9
When the human body is the biggest data platform, how will medtech companies capture value? - Pulse of the industry 2018 ey.com/lifesciences
  of the industry


Data will replace devices as                      Figure 4. New tech and consumer entrants have dealmaking
medtech’s key value driver                        firepower that medtech can’t match

In today’s rapidly changing environment,                            Medtech: pure-play          Medtech: conglomerates                Disruptors
medtech companies have no choice but
to use data to deliver improved outcomes                          2,000
and a better customer experience to
consumers, providers and payers.
Multiple medical device manufacturers are
already incorporating digital capabilities
                                               Firepower (US$b)

into their products. For instance, many                           1,200
medical devices are connected to the
Internet of Things (IoT), potentially
allowing continuous disease monitoring                             800

and management. Unfortunately, these
efforts tend to be wrap-around services
that don’t necessarily position new
connected technologies and the data they
generate at the heart of the medtech
company’s strategic business goals. And,                                  2008   2009    2010    2011     2012    2013     2014     2015     2016     2017 H1 2018
because investments are made in isolation
from each other rather than across a                                                 The disruptors include Alphabet, Amazon, Apple, CVS Health, Intel, IBM, Microsoft,
                                                                                           Samsung, Verizon and Walgreens Boots Alliance. Sources: EY and Capital IQ.
business portfolio, medtechs are at risk
of underinvesting in the technologies that
                                                   Instead, medtechs understand how                               entrants will have to adapt to the stricter
could drive future top-line growth.
                                                   to operate in complicated, regulated                           regulatory environment in health care to
Near-term digital opportunities worthy of          markets and develop sophisticated clinical                     succeed. As Anand Iyer, Chief Strategy
greater medtech investment include:                evidence to support regulatory approval.                       Officer of the digital health company
                                                                                                                  Welldoc observes, “Digital health solutions
• Collecting
  ►            and managing growing                If medtech companies can not — or                              need to meet the same standards as
    volumes of patient data in the cloud:          choose not to — accelerate their digital                       traditional drugs and medical devices.”
    patient data remains a largely untapped        agendas, it is likely that new market                          But if technology companies can meet
    source of value and one of the biggest         entrants will benefit from, and capitalize                     this benchmark, they have every chance
    near-term opportunities for the industry       on, the data-driven transformations of the                     of challenging the market position of
    if they can create secure systems to           Fourth Industrial Revolution. These new                        medtech incumbents.
    manage and use it.

• Building
  ►        analytics into care                                    Questions for medtech companies to consider
    management algorithms using AI.
                                                                  • How will medtechs leverage data to improve outcomes for all stakeholders
• Recognizing
  ►              that the clinical insights                         in the health ecosystem?
    captured in connected devices will                            • How are medtechs moving from selling devices and tests to monetizing
    increasingly be the real source of                              data and algorithms?
    value — rather than the device itself.
                                                                  • Are medtech C-suites and boards strategically thinking about and
Historically, these skills have not been                            planning for digital change, or simply reacting?
medtech companies’ core capabilities.

10   Pulse of the industry 2018
                            of the industry


“In this environment,
 the value is in the
 clinical insights and
 trend analysis that
 the devices spit out,
 rather than in the
 med device itself.“
 Donald Jones
 Chief Digital Officer
 Scripps Translational Science Institute

            Pulse of the industry 2018   11
Is medtech investing enough to meet the
future challenge from the tech sector?
Based on a number of annual metrics that EY tracks, there are signs that the industry, in aggregate, is
overinvesting in short-term business activities to the potential detriment of its long-term growth. Over-
emphasis on returning cash to shareholders at the expense of R&D spending leaves the industry with a looming
“innovation gap.” While medtech companies continue to develop new generations of products, these are,
increasingly, niche additions that do not offer sufficient or lasting new market opportunities for companies to
sustain their historic growth rates.

This is particularly true for companies   top-line growth and capital allocation       At first glance, the medtech industry
developing therapeutic devices, which     practices raises important questions         appeared to deliver a healthy performance
generate the majority of the industry’s   about the long-term sustainability of the    in 2017 and the first half of 2018. A closer
total revenue. Although the industry’s    industry given the technological changes     analysis of indicators such as revenue
2017 aggregate revenues hit a new high    of the Fourth Industrial Revolution. (See    growth and R&D spending, however,
of US$379.1b and medtech valuations       “The Pulse of the industry data book,”       raises questions about opportunities for
outperformed the industry’s broader       page 38.)                                    future growth.
indices, a deeper analysis of medtech’s
                                                                                       For instance, the industry’s 2017 4.0%
                                          New products aren’t enough                   growth rate suggests that it has reached a
   Medtech companies that                 for medtech companies to                     new equilibrium of solid, if unspectacular
   fail to adopt data-driven              return to growth                             single-digit growth. However, this rate
                                                                                       compares poorly with the 14.9% average
   strategies may find it                 Medtech companies that fail to adopt         annual revenue growth rate achieved in
   increasingly difficult to              data-driven strategies will find it          the 2000–07 era. (See Figure 5.)
   mount the kind of returns              increasingly difficult to post the returns
                                          necessary to remain top performers.          In part, this decline reflects rising payer
   necessary to remain top                An analysis of a number of key metrics       skepticism. As a senior medtech executive
   performers.                            suggests this hypothesis.                    told EY, “Investors talk about the four

12   Pulse of the industry 2018
                                                                                                                                                                            of the industry

      Figure 5. Industry growth pre- and post-2007

                                     Revenue        R&D

                                     30%                                                                                                                                              24%
                                                                              Pre-financial crisis        Post-financial crisis

                                     25%                                                                                                                                              20%
Annual revenue growth (percentage)

                                                                                                                                                                                              R&D growth rate (percentage)
                                     20%                                                                                                                                              16%

                                     15%                                                                                                                                              12%

                                     10%                                                                                                                                              8%

                                     5%                                                                                                                                               4%

                                     0%                                                                                                                                               0%

                                     –5%                                                                                                                                              –4%
                                           2000   2001   2002   2003   2004     2005    2006    2007   2008   2009   2010    2011   2012    2013    2014   2015    2016    2017

                                                                                                                       Source: EY, Capital IQ and company financial statement data.

      Ps: patient, physician, provider [i.e.,                                      Van Sickle and other health care leaders              of capital allocation trends suggest
      hospital system] and payer. When we                                          believe digital therapeutics that capture             medtechs are caught squarely in the
      started out, we didn’t worry about the last                                  data about the way patients use their                 conundrum of balancing short-term
      one. That was the least of our problems.                                     products, as well as real-world outcomes,             investor expectations with longer-term
      Now it’s number one.”                                                        are critical as value-based reimbursement             growth needs.
                                                                                   becomes more important in health
      Payers’ demands to demonstrate the value                                     markets around the globe. “The more
      of new, expensive devices or tests are not                                   that this information gets wired into
                                                                                                                                         Growth in R&D spending
      receding. Hit hard by budgetary pressures                                    billing and health care delivery systems,             continues to decline, raising
      linked to aging populations and the rising                                   the more the model will evolve from unit              questions about future
      incidence of chronic diseases, payers                                        sales to companies providing therapeutics
      must make hard decisions about what
                                                                                                                                         medtech innovation
                                                                                   as a service to the organizations,” says
      to cover — and what to deny. As a result,                                    Van Sickle.                                           In an industry built on constant
      they have developed more sophisticated                                                                                             innovation, R&D spending is a key
      mechanisms to determine whether new                                          However, most leading medtechs struggle               parameter defining future growth.
      innovations merit reimbursement. As                                          to transition from selling products to                Alongside M&A, organic investment
      David Van Sickle, Co-founder and CEO                                         selling outcomes. Part of the issue                   is critical to creating the next wave of
      of the digital health company Propeller                                      is the needed capital investments                     innovations that will return revenue
      Health, observes in an accompanying                                          to properly capture and proactively                   growth to double-digit levels. Importantly,
      guest perspective, “Payers don’t want                                        use such outcomes data come at the                    as digital technologies are embedded in a
      to buy medicines; they want to buy the                                       cost of satisfying short-term investor                wider array of products, medtechs must
      outcomes the medicines bring about.”                                         expectations. Indeed, an analysis                     develop capabilities that enable them to

                                                                                                                                                       Pulse of the industry 2018   13
  of the industry

keep pace as product cycles compress              Figure 6. US and Europe medtech commercial leaders spending trend, 2009–17
and connected devices and analytics
grow in importance.                                                        M&A expenses           R&D expenses         Cash returned to shareholders

                                                                           Cash returned to shareholders as a percentage of total R&D and M&A spending
Yet, despite the urgency to invest in
new capabilities, medtech companies                                       100                                                                                                    75%
in aggregate are under-investing in
R&D. Year-over-year investment in

                                                                                                                                                                                                     Percentage of total R&D and M&A spend
R&D held steady in 2017, but — as with                                    80                                                                                                     60%
revenue growth — the longer view shown
in Figure 5 reveals that the rate of
R&D investment growth has dwindled                                        60                                                                                                     45%
in recent years, declining to 4.7% in

2013–17 from an average of 15.5% in
2000–07.                                                                  40                                                                                                     30%

Meantime, capital allocation strategies
align closely to historical trends,
                                                                          20                                                                                                     15%
with an emphasis on returning cash
to shareholders. In 2017, medtech
companies rewarded their shareholders
                                                                           0                                                                                                     0%
with share buybacks and dividends                                                   2009   2010    2011    2012      2013      2014       2015      2016       2017
worth US$16.4b, more than the total
                                                                                                           Sources: EY, Capital IQ and company financial statement data.
amount invested in R&D activities
during the same 12-month period. The
question is, where will future growth             Figure 7. FDA premarket approvals (PMAs) and 510(k) clearances, 2013–18
come from if companies don’t invest
                                                                           Number of 510(k) clearances           Number of PMA approvals
more aggressively in new innovations?
(See Figure 6.)                                                            3,500                                                                                  50

Recent numbers for FDA premarket
approvals (PMAs) and 510(K) clearances
are another sign that it is time to                                        2,800                                                                                  40

rebalance R&D investment and cash
                                             Number of 510(k) approvals

                                                                                                                                                                           Number of PMA approvals

returned to shareholders. Premarket
approvals hit a high in 2017, but to date,                                 2,100                                                                                  30
2018 results have been less impressive.
(See Figure 7.) There were just 21
PMAs through 31 August 2018, and the
                                                                           1,400                                                                                  20
number of 510(k) clearances issued in
the first half of 2018 declined as well,
despite steps taken by the U.S. Food &
                                                                            700                                                                                   10
Drug Administration (FDA) to improve
the efficiency of the medical device
approvals process.
                                                                                0                                                                                 0
                                                                                       2013       2014      2015          2016          2017          2018*

                                                                   Number of 510(k) clearances are shown through 30 June 2018. PMAs are shown through 31 August 2018.
                                                                                                                                                        Source: US FDA.

14   Pulse of the industry 2018
                                                                                                                                                         of the industry

    Figure 8. M&A in the US and Europe by year, July 2013-June 2018

                          Megadeals (>US$10b)   Other M&A             Number of deals

                          125                                                                                                                                     200

                          100                                                                                                                                     160
Total deal value (US$b)

                                                                                                                                                                           Number of deals
                           75                                                                                                                                     120

                          50                                                                                                                                      80

                          25                                                                                                                                      40

                           0                                                                                                                                      0
                                   7/2013–           7/2014–                       7/2015–                        7/2016–                        7/2017–
                                   6/2014            6/2015                        6/2016                         6/2017                         6/2018

                                                     Chart includes deals ≥US$5m (medtech deal where either acquirer or target is located in the US or Europe).

    This lackluster performance sharpens                    investment), up 64% against the five-year                status quo and will have to resort to
    the question over whether companies                     average. (See “The Pulse of the industry                 inorganic means to maintain growth.
    are investing sufficiently in R&D to                    data book,” page 38.)                                    Historically, the industry has used M&A to
    secure their future revenue growth.                                                                              bolster near-term revenue growth, and as
    Note also that most of the new wave of                  However, medtech companies still face                    Figure 6 shows, medtech M&A investment
    approvals make little or no use of digital              fundamental challenges as they try to                    was solid in 2017.
    technologies or data analytics: only 16                 maintain growth. As markets become
    of the 43 therapeutic devices approved                  more crowded with competing products                     Most of this 2017 total went to two
    between January 2017 and June 2018                      and payers become increasingly cautious                  major deals: BD’s purchase of Bard and
    include any digital health component.                   about reimbursement, there is simply                     the pending Essilor-Luxottica business
    This shows that these pivotal new                       less scope for the kind of product-centric               combination. Between July 2017 and
    capabilities are yet to be embedded in                  growth that fueled the industry in past                  June 2018 there were no additional
    medtech innovation.                                     years. The devices that medtechs have                    megadeals, defined as transactions
                                                            depended on for revenue growth, from                     valued greater than US$10b. As a result,
    Perhaps the relatively low PMA numbers                  stents to knee and hip implants, are now                 the deal value for 2017–18 looks modest
    are not yet a cause for concern. They                   mature, and there are diminishing returns                compared with the previous 12 months,
    may partly be explained by the FDA’s                    for next-generation successor products.                  falling 56% to US$44.1b. This total was
    October 2017 simplification of its De                   For the leading players, traditional                     spread across 101 deals, itself a 42%
    Novo review process, which provides                     product-focused R&D may no longer be                     decline versus the previous 12 months.
    novel products with an alternative path to              enough to achieve revenue growth in line                 (See Figure 8.)
    market without PMA or 510(k) approval.                  with these companies’ current sizes.
    Moreover, the amount of venture capital                                                                          More important than these fluctuations
    raised by earlier-stage medtechs means                                                                           is the overriding question of where the
                                                            Is medtech M&A overly                                    M&A spend is being directed. The data
    the industry has high levels of funding that
    can potentially support future innovation.
                                                            focused on business as usual?                            suggest that in 2017–18 medtech’s
    Financing reached record levels in                      The ongoing under-investment in R&D                      commercial leaders focused on tuck-in
    2017–18, with US$21.7b of innovation                    suggests some medtechs could struggle                    acquisitions that added scale in areas of
    capital raised (US$8.2b of venture                      to innovate their way out of the current                 therapeutic interest.

                                                                                                                                    Pulse of the industry 2018   15
       of the industry

Figure 9. Tuck-in acquisitions and divestitutes by select medtechs, 2011–H1 2018

          Imaging             Non-imaging diagnostics                ROE              Services & other

          TD — cardiovascular             TD — multiple              TD — ophthalmic               TD — orthopedic               TD — all other









                  Abbott           Becton            Danaher             Essilor         Johnson &         Medtronic           Stryker            Thermo           Zimmer
                                  Dickinson                                               Johnson                                                  Fisher          Biomet

                      The values of acquisitions are shown on the positive y-axis; values of divestitures are shown on the negative y-axis. The figure includes previous M&As of
                      companies that were later acquired. The therapeutic device (TD) category was subdivided by relevant therapeutic area. TD - multiple refers to deals that
                 include assets from multiple therapeutic areas. TD - all other refers to a deal in a single therapeutic area that is not cardiovascular, ophthalmic or orthopedic.
                                                                                                                  Sources: EY, Capital IQ and company financial statement data.

This relatively defensive approach to                          Having commercial scale not only                            A necessary first step for some
M&A is not surprising, largely because it                      improves a company’s capital efficiency by                  companies, therefore, is to shed non-
is the early days for the digital revolution                   building expertise in specific therapeutic                  core assets or business units, either
and many C-suites may question the                             areas, but also gives companies the ability                 through spin-offs or divestitures.
wisdom of spending significant cash on                         to deepen their offerings by, for instance,                 Johnson & Johnson was among the
unproven technologies that can’t help                          building value-added services and forming                   most active in this regard in 2017–18,
bolster the top-line any time soon. It                         closer relationships with end-users to                      selling its LifeScan and Advanced
is also true that before companies can                         improve product development. These                          Sterilization Products business units to
adequately invest in digital technologies                      efforts allow organizations to build end-to-                private equity groups. (See Figure 9.)
that will drive future growth, they must                       end capabilities that will derive maximum
first build scale in the therapeutic areas                     benefit when digital and data-centric skills
that are top priorities.                                       are fully embedded.

16   Pulse of the industry 2018
                                                                                                                                         of the industry


Can digital deals close the                    of alliances and acquisitions from life                  records, are more novel and will require
                                               sciences company financial statements                    medtechs to think about how to use data,
innovation gap for medtech?
                                               and press releases.                                      not devices or tests, as their primary
Even if consolidation is entirely rational,                                                             currency for reimbursement.
it doesn’t eliminate the need to invest        For the purposes of this analysis, EY
in data-centric capabilities. Since many       has defined digital to include a range                   Despite the growing strategic importance
medtechs lack the in-house capabilities        of technologies, including: digitally                    of digital technologies, medtech
to develop personalized health care            enabled devices (e.g., wearables and                     companies have not been particularly
offerings, there is even more need to          implants); software applications that                    active dealmakers in this space. From
acquire these skills via dealmaking.           provide physician or consumer support;                   the beginning of 2014 to the end of June
Unfortunately, EY analysis suggests that in    telemedicine infrastructure; and analytics               2018, life sciences-focused companies
terms of dollar values and deal numbers,       capabilities that use AI to support                      signed 292 alliances or acquisitions to
most medtechs have yet to make such            diagnosis and care management.                           access digital technologies, with building
digital collaborations a significant part of                                                            capabilities in monitoring, refining R&D
their dealmaking agendas.                      Some of these capabilities (for instance,                and accessing data the most common
                                               the use of wearables) are natural                        goals. (See Figure 10.) Of this total,
To better understand how medtech               extensions of the kinds of products                      medtech companies were responsible
companies use business development             medtech companies have historically                      for just over a quarter (76) of the
to create digital capabilities, EY has         developed. Others, such as the integration               transactions, including 13 acquisitions.
constructed a proprietary data base            of non-medical data into electronic health

Figure 10. Understanding the drivers of life sciences digital dealmaking

Broad purpose of all life sciences digital deals                         Most active medtech companies
Monitoring                                                               Philips
                                                77                                                 21

Improving R&D                                                            Medtronic
                                  55                                                     14

Data access                                                              Smith & Nephew
                             49                                                   5

Physician support                                                        Siemens Healthineers
                            47                                                4

Platform                                                                 Becton Dickinson
                    29                                                        4

Virtual care                                                             Abbott
               22                                                         3

Breakthrough innovation                                                  GE Healthcare
   10                                                                     3

Patient support                                                          Boston Scientific
    11                                                                    2

                                                                         Zimmer Biomet

                                                     Because some digital deals were motivated by more than one driver, numbers in the analysis exceed the
                                                        total number of deals in the data set. Sources: EY, Capital IQ and company financial statement data.

                                                                                                                    Pulse of the industry 2018   17
  of the industry

Because companies disclosed deal values         Players such as Philips and Medtronic, for
for very few of these arrangements,             instance, may have a greater opportunity      Questions for medtech
the overall level of investment is hard         to secure their position in the ecosystem
to gauge. However, the lack of digitally        given their investments in digital, data-
                                                                                              companies to consider
targeted M&A — and the undisclosed              driven business models. (See Figure 10.)      • Are medtechs investing for the
nature of the financial transactions            Companies pursuing these strategies may         future or just consolidating for
involved in the digital deals that have         also find greater collaborative synergies       the short-term?
been announced — suggest that overall,          with each other in the future. Philips and
                                                                                              • As health care evolves, what
medtech companies’ interest in this             Medtronic, have for example, entered
                                                                                                innovations give medtechs a
space has been limited compared to              into a business relationship to develop
                                                                                                lasting edge?
their investment in traditional sources         and commercialize the LungGPS Patient
of innovation.                                  Management Platform, a comprehensive          • Is your company right-sized
                                                patient and data management platform            and focused on its core areas
Some companies appear to be paying              designed to streamline the management           for value creation?
more attention to digital deals, particularly   of lung nodule patients from identification
in certain therapeutic areas such as            through diagnosis, treatment, and long-
diabetes and cardiovascular disease.            term survivorship.
(See sidebar, “Using technology to create
high touch chronic disease management.”)

   “The more that value-
    based reimbursement
    gets wired into billing
    and health care
    delivery systems,
    the more the model
    will evolve from unit
    sales to companies
    providing therapeutics
    as a service to the
      David Van Sickle
      Co-founder and CEO
      Propeller Health

18   Pulse of the industry 2018
Using technology to create high
touch chronic disease management
EY analysis suggests that most medtechs have focused their digital efforts in chronic
diseases such as diabetes and cardiovascular disease, areas where the need to improve the
consumer experience through data-driven approaches is more pressing. Indeed, since 2014,
23 of the 48 therapeutically-focused medtech digital deals with a defined therapeutic area
focus address these conditions. (See Figure 11.)

Diabetes, the principal target for medtech’s digital           by demonstrating outcomes that are better than more
deals, has been the testing ground for the pure digital        standard therapies. (See “Scientific rigor will drive
solutions that may be central to medtech’s future              digital health success,” a guest perspective by Anand
growth. Predictive analytics and customer-facing               Iyer, Chief Strategy Officer of Welldoc.)
software are beginning to supply diabetics with the
personalized treatments and high-touch engagement              As tools for mobile monitoring, smart delivery and
tools that over-stretched physicians cannot. Indeed,           real-time analytics converge, fully automated diabetes
some studies estimate that diabetics spend just six            management will become a reality. Medtronics’
hours a year in face-to-face interactions with their           MiniMed 670G system, launched in 2017, still requires
care teams. For the remaining 8,730 hours in a year,           the consumer to manually enter dietary data, but its
these individuals must cope on their own.                      ability to automatically adjust insulin dosages based
                                                               on predictive analytics suggests that the ”artificial
This is where digital technology can make a major              pancreas” is nearer to reality than before.
difference. By focusing on user experience, digital
devices can get much closer to the patient, and provide
continuous effective care management. As Welldoc’s             Figure 11. Diabetes and cardiovascular disease
Anand Iyer says, “When solutions are intuitive and             dominate medtech digital dealmaking
fit into clinical workflows and daily life, higheruser         Diabetes
engagement can result” — even without the human                                                                                15
touch of a clinician closely overseeing the patient.
The rapid rise of smart insulin delivery pens and                                               8
automated continuous glucose monitoring (CGM)
systems have allowed patients to better monitor
themselves on a daily basis and take control of their care.
Software applications from Livongo, Onduo and Welldoc          Orthopedic
have also been an important step forward. These                                 4
solutions allow individuals to better integrate diet, weight
                                                               All others
and blood sugar metrics with medication schedules,
allowing consumers to better manage their condition.
                                                               Sources: EY, Capital IQ and company financial statement data.
They are also beginning to rival traditional therapeutic
interventions. Welldoc’s BlueStar, for instance, has
won FDA approval and reimbursement from payers,

                                                                                                         Pulse of the industry 2018   19
Advances in imaging and non-imaging
diagnostics show how the medtech
industry could evolve
The most obvious signs of the growing importance of digital capabilities, especially AI-enabled analytics, are
apparent in the imaging and non-diagnostic imaging segments. While AI enables medtechs to extract more
value from imaging and other data, innovations in non-imaging diagnostics allow medtechs to build data-rich
profiles of individuals, not just in a formal clinical setting, but in the real world. Indeed, diagnostics represent an
opportunity to get close to the patient and provide the customized high-touch care individuals want to better
manage disease symptoms and overall health.

AI is already                                 reference the growing importance of           processing speed in tens of thousands of
                                              big data, AI and deep machine learning.       imaging devices globally. However, while
transforming imaging
                                              Products such as Siemens’ Biograph            imaging has been a valuable test case for
Among the most striking developments          Vision PET/CT scanner are marketed as         AI in medtech, its potential is far wider,
in 2018 was Siemens Healthineers’ initial     precision medicine-enabling technologies      opening up every area of medical data to
public offering (IPO). Raising US$5.2b,       built on AI algorithm-driven software.        systematic analysis. (See the perspective,
the Siemens Healthineers flotation was                                                      “How AI-powered imaging can help build
the largest IPO in the medtech industry’s     A number of other companies are also          precision health.”)
history, and boosted the total value of IPO   exploring AI’s potential in imaging. GE
transactions since July 2016 to US$9.1b —     Healthcare, which announced in June           As McGuinness says, the “mountain of
more than the previous decade’s               2018 that it would spin off from its parent   data” already generated by the health
combined total IPO value. (See Figure 12.)    General Electric, and Philips are both        care system has traditionally been an
                                              making major investments in this arena.       underused resource. “Less than 3% of
Investors’ appetite for the Siemens                                                         health data is actionable, tagged or
Healthineers’ IPO underscores the             As Tom McGuinness, President and CEO of       analyzed. That equation changes with
potential of digitally enabled monitoring     GE Healthcare’s US$9b Imaging business        AI, which can augment human decision-
and diagnosis tools to personalize            notes, GE Healthcare is already using         making to scale the delivery of improved
health care. Siemens’ own statements          AI to accelerate image acquisition and        outcomes,” he says.

20   Pulse of the industry 2018
                                                                                                                                                                            of the industry

   Figure 12. IPO deal numbers and cumulative value July 2003-June 2018

                        Capital raised             Number of deals

                        7.5                                                                                                                                                          50

                        6.0                                                                                                                                                          40
Capital raised (US$b)

                                                                                                                                                                                              Number of IPOs
                        4.5                                                                                                                                                          30

                        3.0                                                                                                                                                          20

                        1.5                                                                                                                                                          10

                         0                                                                                                                                                           0
                              7/2003–    7/2004–   7/2005–   7/2006–   7/2007–   7/2008–   7/2009–   7/2010–   7/2011–   7/2012–   7/2013–   7/2014–   7/2015–   7/2016–   7/2017–
                              6/2004     6/2005    6/2006    6/2007    6/2008    6/2009    6/2010    6/2011    6/2012    6/2013    6/2014    6/2015    6/2016    6/2017    6/2018

                                                                                                               Sources: EY, Capital IQ, BioCentury and Dow Jones VentureSource.

    Algorithms revolutionize                                                The implications of the IDx product are                    may be determined not by their robotic
                                                                            profound. In the past, physicians would                    hardware but by the level of learned
    diabetic retinopathy diagnosis
                                                                            have studied patients’ retinal images                      surgical expertise in their algorithms.
    An important bellwether signalling the                                  to detect disease symptoms, requiring
    growing importance of AI is the FDA’s                                   screening by ophthalmologists. With                        In order for AI and deep learning
    April 2018 approval of IDx’s proprietary                                IDx-DR, scanning for diabetic retinopathy                  capabilities to become mainstream in the
    algorithm IDx-DR, a new tool to diagnose                                can now be automated and managed by                        medical device industry, however, more
    diabetic retinopathy. IDx’s product is                                  non-specialists in primary care and retail                 flexible regulatory processes that promote
    the 13th AI-based algorithm to win FDA                                  clinics. Those at greatest risk would be                   the continuous improvements required for
    approval since Arterys’ MRI cardiac                                     identified for a follow-up consultation with               software will be critical. (See sidebar, “To
    imaging interpretation became the first in                              a specialist.                                              augment AI, the industry must focus on
    January 2017.                                                                                                                      regulatory flexibility and security.”)
                                                                            The machine learning capabilities seen
    But IDx-DR differs from the previous                                    in the IDx-DR product are early signals of
    approved algorithms in that it is the                                   the impact AI will have in medtech. This
    first ever to make screening decisions                                  technology has potential to improve areas
    without the need for any additional human                               of care delivery ranging from remote
    interpretation. Supporting the higher                                   monitoring to complex surgery. Next-
    level of evidence required, this is also the                            generation robotic surgical platforms
    first algorithm to be approved based on                                                                                            1   Michael D. Abràmoff, et al. Pivotal trial of an
                                                                            from Verb Surgical and Versius are                             autonomous AI-based diagnostic system for
    a prospective clinical trial. In IDx’s pivotal                          incorporating AI so that systems can learn                     detection of diabetic retinopathy in primary
    trial, the algorithm showed more than 87%                               to optimize their performance. The relative                    care offices. npj Digital Medicine, volume
    sensitivity and 90% specificity, beating                                value of surgical systems in the future                        1, Article number: 39 (2018). https://www.
    pre-specified primary endpoints.1                                                                                                      nature.com/articles/s41746-018-0040-6

                                                                                                                                                       Pulse of the industry 2018   21
  of the industry


Diagnostics drive industry                      Color raised some of the largest US           recognize that these products in isolation
                                                venture rounds observed in 2017–18.           no longer have the same value-creating
growth as personalized health
                                                (See “The Pulse of the industry data          potential they once did. To create more
becomes more important                          book,” page 38.) These companies have         value in the future, therapeutic devices will
In the past, diagnostics may have seemed        the ability to generate unprecedented         have to continue to focus on building the
like a peripheral value stream for the          amounts of personal data while                data capture and analysis capabilities that
medical device industry. Today, however,        simultaneously empowering consumers           are already altering medtech’s diagnostics
they hold the potential to transform health     in their health care. Though companies        and imaging segments.
care delivery. In the digital era of medtech,   must remain vigilant about the security
wearables that funnel data directly to the      and privacy of personal data, creating the
cloud decouple the acquisition of medical       tools to build that data is nevertheless an
data from traditional office visits to care     important advance in the diagnostics field.      Questions for medtech
providers. Built-in AI analytics, meanwhile,                                                     companies to consider
                                                Over the course of 2017-18, data-rich,
mean these data become highly
                                                non-imaging diagnostic companies were            • How will medtechs use
meaningful and actionable in real-time.
                                                increasingly important acquisition targets.        diagnostics and AI-driven
Key metrics from 2017–18 underscore             Twenty-three percent of the 2017-18                analytics to achieve better
the growing importance of non-imaging           total M&A spend was dedicated to the               therapeutic outcomes for
diagnostics to the medtech industry’s           acquisition of diagnostic assets. That is          their customers?
future performance and overall growth.          a considerable jump from the 9% 5-year           • How will medtechs use data to
For instance, non-imaging diagnostic            average observed from 2013–17.                     deepen their relationships with
companies accumulated 38% of the                                                                   consumers and providers?
US$14.4b venture dollars invested in            At the same time, therapeutic devices’
                                                share of medtech’s total M&A spend fell          • As connectivity becomes
medtech between 2016 and 2018.
                                                from a five-year average of 77% to only            standard, what steps are
In particular, venture investors see major      53% in 2017–18. This suggests that even            medtechs taking to secure their
opportunities in the consumer genomics          though traditional therapeutic devices are         devices — and patient data?
space. Helix, Counsyl, 23andMe and              still the mainstay of the market, acquirers

   “Less than 3% of health
    data is actionable,
    tagged or analyzed.
    That equation
    changes with AI,
    which can augment
    human decision-
    making to scale the
    delivery of improved
      Tom McGuinness
      President and CEO, Imaging
      GE Healthcare

22   Pulse of the industry 2018
To augment AI, the industry
must focus on regulatory
flexibility and security
As Dr. Simon Kos, Chief Health Officer of Microsoft notes in an accompanying perspective,
“We are at a point in medical history where we have more data than human beings can
process, and at a critical time when technology can help make sense of that data.” (See guest
perspective, “Creating the health infrastructure to massively improve health outcomes.”)
To make sense of the data, AI-driven algorithms will be essential. That need creates
regulatory hurdles, too. To work with these new products, regulators need to build flexible
and intelligent frameworks that optimize the use of data in health care while minimizing risk.

Traditional regulatory bodies treat devices as           at Action Potential Venture Capital. A steady trickle
unchanging products requiring a single assessment        of negative headlines in 2016 and 2017 linked to
before entering the market. This approach,               the hacking of insulin pumps and vulnerabilities
however, does not capture the reality of how self-       in implantable cardiac devices continues to
learning algorithms work, constantly improving           create anxiety.
and updating themselves. Given the rate of AI’s
evolution, new technologies that rely on the             As yet, no hacker has attempted to corrupt a medical
capability have the potential to be reviewed and         device to inflict individual harm,but that doesn’t mean
updated on a continual basis. As Scripps Translational   medical devices and the data they generate aren’t
Science Institute’s Jones notes, “The challenge          valuable targets. Microsoft’s Kos notes that health
medtechs have now is managing these overlapping          care organizations are “more at risk than many other
business cycles so that hardware advances remain         industries due the age, number and complexity of
aligned with software developments.”                     hospital systems.” Based on Microsoft’s analysis of
                                                         which data are most valuable to cybercriminals, Kos
                                                         believes “cybercriminals are aware that health data is
The cybersecurity opportunity                            considerably more valuable than financial data alone.”
Continuous upgrading is not only necessary to
maintain software efficacy, but to maintain safety.      Moreover, as digital technology enables the rise of
Indeed, one of the central challenges as AI is           personalized health care, it also blurs the boundary
embedded in more and more medtech products is            between medical data and individual personal data,
creating systems that are robust enough to resist        leaving a broad front for medtech to defend against
emerging cyber terrorist threats.                        cybersecurity vulnerabilities. What companies
                                                         have traditionally seen as a distinct IT problem will
“Cybersecurity is one or two headlines away” from        increasingly become a necessary strategic focus for
becoming the primary focus of the media and              medtech development.
consumers, contends Juan-Pablo Mas, a partner

                                                                                            Pulse of the industry 2018   23
Future success requires greater
participation in the health ecosystem
The promising developments in the imaging and non-diagnostics segments offer a glimpse of how new thinking and
new technology could transform the medtech industry’s fortunes. Current high valuations for medtech companies
suggest that investors are optimistic for the industry’s future. To justify this positive sentiment and position
themselves to create future value, medtech companies must embrace digital technologies and increase their data
and analytics focus. Above all, medtechs will have to work with their partners in the broader health ecosystem to
rebuild health care around the patient-consumer, if they are to achieve better outcomes for all stakeholders.

Can medtech continue to                  in revenue, and non-imaging diagnostic     models, much of the industry is still
                                         companies led the valuation surge.         focused on “business as usual.” That
outperform the broader indices
                                         Indeed, valuations for these two           emphasis on the status quo may make it
using the usual formula?                 subgroups increased 92% and 82%,           difficult for some companies to continue to
In 2017–18, the medtech industry         respectively. Investor confidence was      justify their high valuations in the future.
outperformed the broader indices, with   partly driven by growing investment in
valuations across the industry soaring   the non-imaging diagnostics space and
                                         continued refinement of chronic disease
                                                                                    To create future value,
50%. Medtech’s smaller companies,
businesses with less than US$500m        management. A more transparent US          medtechs need to embed
                                         regulatory process, including continued    themselves in the health
                                         evaluation of a digital health software    ecosystem
   Medtechs that embed                   precertification program, removed
                                                                                    Success for medtech in the future
                                         uncertainties that weighed down investor
   their devices, services               expectations in previous years.            means abandoning the business as
   and solutions in the health                                                      usual approach that has yielded solid if
                                         Yet, as we have noted, there are also      uninspiring growth via bolt-on M&A and
   ecosystem’s workflows                                                            consolidation. Medtechs may hold unique
                                         warning signs on the horizon. While
   can exploit the power of              certain companies have started to          expertise in manufacturing devices,
   the network.                          embrace digital, data-rich business        but if data and algorithms become the

24   Pulse of the industry 2018
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