Covid-19 scrambles big MedTech’s spending

2020 was a quiet year for deal making among big MedTech – the top-10 companies closed only four deals, and only one of these was worth more than USD 1 billion. But this cohort has been far more active this year, with Roche, Philips, and Siemens Healthineers all doing billion-dollar deals.

The largest medical device makers have reacted to the seismic changes wrought by the Covid-19 pandemic by spending more on research than ever before. The top-10 groups spent, between them, USD 15.6 billion on R&D last year, a 4-percent increase from 2019 – despite this cohort’s total 2020 device sales showing a year-on-year increase of just 1 percent.

Of course, these headline figures disguise huge variation in the fates, and the strategies, of these 10 companies. For instance, Baxter International kept a tight hold on its purse strings last year, whereas Boston Scientific was relatively extravagant.

The interactive graphs below were compiled using companies’ stated expenditure on R&D specifically in MedTech and their acquisitions of other, smaller MedTech companies, as well as their medical technology sales.

In terms of sheer R&D expenditure, Medtronic leads the way. It devoted USD 2.5 billion last year to advancing new devices, a 7-percent increase from 2019. But the greatest increase in R&D spending came from Roche, whose 2020 R&D bill was at USD 1.7 billion, 12 percent higher than the year before. It had cash to burn – as a major player in Covid-19 testing, its 2020 sales saw a 13-percent year-on-year increase.

The only other top-10 companies to beat this revenue increase was Abbott, which also sold billions of dollars-worth of coronavirus diagnostics. Abbott did not reinvest in research as Roche did, however, boosting its R&D spending by a relatively paltry 3 percent.

In terms of proportional spending – how much of a company’s MedTech sales are reinvested in developing new devices – Philips is ahead of the pack. The Dutch group spent 13 percent of its 2020 sales on research, just pipping Boston Scientific, which invested 12 percent of its 2020 revenues into device development.

That said, 2020 was unlike any other year that has gone before it. The top-10 MedTechs’ proportional spending was likely affected as much by fluctuations in their sales as by their strategic R&D priorities.

For instance, Johnson & Johnson’s expenditure on R&D last year was equivalent to 9 percent of its 2020 sales, a sizeable increase from the year before. And it did indeed up its research budget. But the company’s sales fell 12 percent owing to Covid-19, and it is probably this that accounts for most of the proportional increase.

Some MedTechs prioritize a different route to broadening their product offerings – M&A. Medtronic is, again, the biggest overall spender, with USD 50 billion of its USD 58 billion total over the past decade having gone on a single deal – the purchase of Covidien in 2015.

Medtronic is still one of the largest spenders on M&A as a proportion of its cumulative sales over the past decade, dedicating 23 percent of its revenues to this purpose. Abbott is close behind.

But it is Becton Dickinson that has, over the past ten years, allocated the largest proportion of its sales to M&A, at 35 percent. The group has done two of the five largest deals since 2011, buying Carefusion for USD 12.2 billion in 2015 and CR Bard for USD 24 billion two years later.

2020 was a quiet year for deal making among big MedTech – the top-10 companies closed only four deals, and only one of these, Stryker’s acquisition of Wright Medical, was worth more than USD 1 billion. But this cohort has been far more active this year, with Roche, Philips and Siemens Healthineers, who do not generally prioritize acquisitions as a way to use their cash, all doing billion-dollar deals. The picture could be about to shift.

Covid-19 takes its toll on MedTechs’ efficiency. Staffing levels changed little across 2020 as M&A slowed – but sales are another story.

In some cases, the pandemic has accelerated trends among the biggest device makers, and in others it has reversed them. A look at the MedTech revenues the top-15 companies generated for the size of their workforce, a measure of the efficiency of their operations, reveals some notable fluctuations.

Even the roster of companies that make up that top-15 has changed. Zimmer Biomet and Coloplast suffered such a drastic loss of value across 2020 that they fell out of this cohort entirely, to be replaced by the ventilator maker Resmed and the diabetes tech company Dexcom.

As relatively small groups that have enjoyed fast-growing sales in tandem with leaps in valuation, Resmed and Dexcom have scorched into the second and third places on this per-worker efficiency measure. The former’s sales soared as its respiratory technologies, largely aimed at treating sleep apnea, were repurposed to aid patients hospitalized with coronavirus.

Last year, the second and third spots were taken by orthopedics companies (MedTechs that book the most sales per employee face the greatest losses, September 3, 2020). Zimmer Biomet is no longer part of this analysis since its market cap fell by USD 5 billion during 2020. Stryker’s reduced sales per employee has prompted a slide from third place to sixth.

The leader, however, has continued to reign supreme. Of the top-15 MedTechs, Intuitive Surgical has long been able to wring the most value from its workforce. But the actual figure has been steadily declining over the past five years – and then Covid-19 caused a sharp downturn, as hospitals called off or postponed the surgeries for which Intuitive’s machines are used.

A similar pattern can be seen among other groups whose products are used for non-urgent procedures, including Boston Scientific and Stryker.

One group showed quite the opposite drift. Abbott had already been improving on the sales per employee metric, but the figure rocketed in 2020, thanks to its Covid-19 test revenues.

The biggest groups’ headcounts have not varied greatly, but the picture is very different among smaller companies. And in terms of percentage growth in workforce over 2020, the three biggest movers are all cancer-testing groups. Fulgent Genetics is a player in Covid-19 diagnostics as well as hereditary cancer testing, and it more than tripled its headcount last year.

Natera and Invitae, meanwhile, are working in the white-hot area of liquid biopsy technology.

As for the group that shed the greatest proportion of their staff, Obalon, a developer of an anti-obesity device, wound down over 2020. Obalon’s brainwave was a balloon that was swallowed and then inflated in the patient’s stomach to give a sensation of fullness; sales dwindled steadily from a peak of USD 148 million in 2016, and the group had only two employees left at the end of last year. The rump of the company was acquired by Reshape Medical in August.

This article is based on a report by Evaluate Vantage.