Medtech To Hit $530bn In 2022, Fueled By Diagnostics And Neurology

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The medical technology industry was a calmer place during the past year than it has been for some time. The trend for billion-dollar mergers as groups at the very top of the market sought to deal with macroeconomic pressures has largely dissipated, and now the dust has settled a clearer picture has emerged. EvaluateMedTech’s World Preview 2016 released today shows that the medtech sector is set to grow at 5.2% per year, with total sales of $530bn in 2022.

Medtronic (NYSE:MDT) was the largest company by sales of medical devices in 2015, and its 4.7% annual growth rate puts it even further ahead in 2022, when its medtech revenues are forecast to reach $40bn. But the largest segment will be one in which Medtronic has no involvement. In vitro diagnostics will have 2022 sales of $71bn – more than 13% of the industry’s total revenues.

Top 5 device segments by 2022 sales

Global sales ($bn)

Segment

2015

2022

CAGR

Total change

In Vitro Diagnostics

48.4

70.8

5.6%

22.4

Cardiology

42.1

62.3

5.7%

20.2

Diagnostic imaging

38.9

50.3

3.7%

11.4

Orthopaedics

34.0

44.1

3.8%

10.1

Ophthalmics

24.9

37.1

5.8%

12.2

Source: EvaluateMedTech

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Diagnostic testing might be the medical technology with the greatest sales, both now and in 2022, but it is not the fastest growing. Of the top 15 segments, the swiftest expansion will be seen among neurological devices, forecast to grow at 7.6% each year to 2022. This is mostly driven by uptake of neurostimulation technologies, which are going from strength to strength as treatments for everything from pain and depression to obesity.

Fastest growing of the top 15 device segments

Global sales ($bn)

Segment

2015

2022

CAGR

Total change

Neurology

6.7

11.1

+7.6%

4.4

Endoscopy

16.4

26.0

+6.8%

9.6

Ophthalmics

24.9

37.1

+5.8%

12.2

Cardiology

42.1

62.3

+5.7%

20.2

Diabetic Care

11.0

16.2

+5.7%

5.2

Source: EvaluateMedTech

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An analysis of the sector by device maker shows Medtronic way out in front in terms of sales, but several other groups are growing faster. Perhaps surprisingly, of the top 15 companies by sales, the fastest growing are active in fairly commoditized markets that do not see a great deal of innovation.

Top of the pile is Japan’s Olympus, whose sales, predominantly of imaging equipment, are forecast to grow at 7.1% annually, reaching $8.2bn in 2022. Much of this growth will be seen in its endoscopy and endotherapy businesses, despite Olympus being one of the manufacturers whose duodenoscopes were linked to fatal infections with superbugs including carbapenem-resistant enterobacteriaceae over the last couple of years.

Fastest growing of the top 20 medtech companies

Sales ($bn)

Company

Country

2015

2022

CAGR

Olympus

Japan

5.1

8.2

7.1%

Stryker

USA

9.9

16.0

7.0%

Becton Dickinson

USA

9.2

14.7

7.0%

Zimmer Biomet

USA

6.0

9.6

7.0%

Essilor International

France

6.5

10.2

6.7%

Source: EvaluateMedTech

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Also growing strongly are the orthopaedics groups Stryker (NYSE:SYK) and Zimmer Biomet (NYSE:ZBH), with annual expansion rates of 7.0% each. However, within the ortho segment the fastest growing of the top 10 companies is Wright Medical Group (NASDAQ:WMGI), forecast to grow by a whopping 16.9% per year between 2015 and 2022, thanks to its streamlining into a pure extremities and biologics company with its merger with Tornier (NASDAQ:TRNX) last year.

Cessation of consolidation

EvaluateMedTech’s World Preview 2016 finds that, at just $17bn, M&A activity in the first half of this year has slumped 79% from the same period in 2015. But there are still a few major deals up ahead. When Abbott’s (NYSE:ABT) $25bn purchase of St. Jude Medical (NYSE:STJ) closes later in 2016 Abbott could climb the company rankings from seventh position overall to third.

To keep growing, a medtech group must build its pipeline one way or the other. If the sector is moving away from buying technologies in, companies must instead develop in-house. It is unsurprising to see a loose correlation between R&D dollar spend and overall company size. But a look at the biggest investors in internal R&D as a percentage of their device revenues throws up a different list of companies.

Biggest spenders on R&D in dollar terms

Medtech R&D spend ($bn)

R&D as % of medtech sales

Company

2015

2022

CAGR

2015

2022

Medtronic

2.2

2.8

3.6%

7.7%

7.1%

Johnson & Johnson

1.6

1.9

2.2%

6.4%

6.1%

Siemens

1.3

1.6

3.1%

8.7%

9.1%

Biggest spenders on R&D as % of medtech sales

Medtech R&D spend ($m)

R&D as % of medtech sales

Company

2015

2022

CAGR

2015

2022

Edwards Lifesciences

383.1

692.1

8.8%

15.4%

15.0%

bioMérieux

265.0

381.9

5.4%

15.3%

14.1%

St. Jude Medical

676.0

956.2

5.1%

12.2%

12.4%

Source: EvaluateMedTech

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The heart valve specialist Edwards Lifesciences (NYSE:EW) has long been famous for its high rate of investment in R&D and reluctance to buy – the group has made only four acquisitions in the last decade (Edwards looks to tricuspid valves and beyond, October 8, 2015).

The French diagnostics group bioMérieux and the soon-to-be-bought St. Jude Medical have also been willing to put their money behind research efforts. But there is a worrying trend here: reinvestment in R&D is falling. 15 of the top 20 companies are forecast to spend less on R&D as a proportion of sales in 2022 than they did in 2015.

If this results in fewer innovative products coming through company pipelines they might well need to turn to M&A again.