Next in medtech: 3 steps to unlocking growth: PwC

The medtech industry is at a critical juncture. The healthcare ecosystem is transforming in the face of increasing cost pressures, empowered consumers, new care settings and disruptive technologies. In response, medtech companies are reinventing their business models — seeking to compete differently in existing markets and unlock opportunities in new markets. In recent months we’ve seen many companies transform their businesses through transactions — divesting assets to reinvest in core capabilities, investing in capabilities to build new businesses around new technologies including AI and connected devices and developing innovative deal structures to expand their reach and improve patient outcomes.

Three growth strategies for medtech companies

However, capturing this opportunity will require a delicate balance. Medtech companies will need to both invest in the capabilities required to compete in the future while aiming to exceed near-term expectations for growth and margin improvement.

Shifting investor expectations

Investors, for their part, have also recognized both the opportunity and challenge facing the industry. From 2012 to 2021, the Dow Jones US Select Medical Equipment Index increased by a compound annual growth rate (CAGR) of nearly 21% while the S&P increased at 14%, reflecting the potential for the industry. More recent performance, however, has been challenged as the industry index has declined by a CAGR more than 6% since 2021 as compared to a 5.5% increase for the S&P 500.¹

While some of this underperformance is due to broader market dynamics, including the fervor around AI and the technology sector, it may also reflect a shift in investor expectations. Top-line growth has historically been the primary driver of value creation, but rising interest rates, increased competition and the need to invest in new capabilities have placed profitability squarely in the spotlight. The industry, however, has struggled to meet the challenge. While top-line growth has remained strong, profit margins have not improved and both investors and management teams have taken note: 19 of the 20 largest medtech companies have discussed goals to improve operating margin in calls with analysts in 2024 and nine cited specific improvement targets.²

Investing in the future of medtech while also meeting near-term commitments will require companies to act across multiple fronts, challenging historical operating models and norms while doubling-down in some key areas. We have identified three key areas of focus for the near-term:

Digital value transformation: Drive returns on historical investments in technology by leveraging data and transforming legacy processes.
Enterprise agility: Embrace a “high-tech” mindset to activate agility and enable change.
M&A strategy: Leverage M&A capabilities to unlock value and invest in the future.

Digital value transformation

Drive returns on historical investments in technology by leveraging data and transforming legacy processes

Digital value transformation (DVT) looks beyond traditional transformation efforts, which have often centered around targeted initiatives such as rote process automation and outsourcing, to fundamentally redesign how work is done. DVT methodology uses “right-to-left thinking” (starting with end outcome in mind), to reimagine end-to-end value chains while delivering value throughout the transformation.

The sector has yet to achieve the promise of improved productivity and revenue growth from IT investments. Digital technologies have been deployed to improve operations, product development, manufacturing, supply chain and marketing efforts.

DVT can fundamentally re-design business processes to deliver step change improvements in business outcomes through agile sprints. Starting with the end in mind means re-drawing processes from start to finish (e.g., order to cash) and identifying the interventions required to break through data and organizational silos. The discipline of following the DVT method includes working in 10-12 week “sprints” and driving value through each one. Technology becomes an enabler but these are not technology projects. Many organizations already have all the technology they need; this is about deploying it in a new way with the business and IT teams teaming together.

Medtech companies can employ DVT to help accelerate and improve R&D cycles, increase efficiency in production, supply chain, sales service capabilities, and more.

Starting a DVT journey is simple:

Identify a priority value chain and a bold outcome (e.g., reduce bad debt by 50%) to set the team on the right path.
Design the end-to-end future state and identify gaps between the current and target state.
Have a bias to action and start small to quickly refine solution details as more information is learned.
Use the transformation to embed a tech-enabled mindset into the organization. We call this building a “Digital Factory,” shorthand for an organizational and operating model construct that can quickly deliver and improve high impact solutions across the enterprise, enabling value drops.

The above process yields results every 12-16 weeks and can quickly create funding for the next sprint.

Companies that employ a DVT approach to transformation typically see outcomes such as 5%+ revenue uplift, 20%+ cost reduction, or 10%+ EBIT.

SourcePwC Analysis

88% of executives struggle to capture value from their technology investments.

Source:2023 PwC Pulse Survey

Enterprise agility

Embrace an agile, “high-tech” mindset and create a culture of empowered decision-makers

Often, companies try to change mindsets by communicating objectives and expectations in town halls and memos and expect behaviors to follow. However, experience proves that won’t cut it. And this time is no different.

At its core, enterprise agility refers to the ability of an organization to adapt and thrive in a rapidly changing business environment. For medtech, this means making quicker, higher-quality decisions and creating internal conditions that can help promote the types of entrepreneurialism that are needed to be successful. This requires a significant shift in ways of working at a time when organizations are already facing complex internal and external pressures — reinventing the business and driving growth while rightsizing the organization, streamlining processes, and trying to improve the employee experience while responding to changing employee expectations — just to name a few.

To move quickly and effectively through this dynamic period of reinvention, medtech companies should focus on creating space for continuous learning and improvement, give teams the control to make decisions, and promote transparent communication.

This starts by establishing a two-way street between leaders and front-line decision makers — each owning their respective role in making quicker, higher-quality decisions.

More than half (53%) of employees worldwide feel that too much change is happening all at once, and 62% said the pace of change at work has increased over the past year. The good news is that three quarters feel ready to adapt to new ways of working.

Source:PwC’s 2024 Hopes and Fears Report

Leaders

Leaders have a responsibility to ensure colleagues know the decisions they are expected to make, the boundaries of those decisions and the relevant context (e.g., values, strategy, goals).

Leaders must take accountability for the decisions they own while providing the support and space for their people to own the decisions they’ve delegated.

Supportive leaders understand the decision-making strengths of their people, engage sufficiently upfront, allow multiple paths to the outcome, and create a psychologically safe, learning-oriented approach to failure.

Front-line decision-makers

Decision-makers need to seek clarity on which decisions are delegated and take ownership for making the choice.

People must possess the expertise and access to necessary information to make the decision — as well as the capability to manage conflict, navigate internal politics, and engage in difficult conversations.

Front-line decision makers put trust in-action by making choices and following through on decisions, while being open to constructive feedback if the results do not materialize as planned.

Medtech leaders have an opportunity to act now — focusing on their sphere of influence to create a culture of enterprise agility and entrepreneurialism powered by empowered decision-makers.

M&A strategy

Leverage M&A capabilities to unlock value and invest in the future

The M&A market requires companies to exceed investor and market expectations and act with urgency. An increasingly narrow pool of buyers competing for scarce differentiated assets has led to increased valuations and a heightened focus on delivering the value of a deal. As a result, medtech companies have built considerable M&A capability leading to more than 750 deals with a value of more than $700 billion dollars over the last decade.³ While activity has softened in recent quarters, dealmaking will remain a priority use of capital for medtech companies as they seek innovative technologies and capabilities to accelerate their growth strategies. In light of the increased focus on delivering profitable growth, medtech companies may consider the following:

Proactive portfolio renewal
Broaden your aperture
Revisit your M&A process
Reevaluate integration archetypes

Proactive portfolio renewal

The medtech industry has seen a wave of divestitures and spin-offs in recent years, a trend we expect will continue as companies look to sharpen their strategic focus and unlock the capacity to invest in differentiated capabilities. Companies should proactively review their portfolios and incorporate divestitures as part of their strategic plans to realize the opportunity to unlock value. Divestitures in medtech are particularly complex due to global supply chains, quality and regulatory considerations and commercial models and require a proactive posture to truly realize the strategic and economic objectives of the deal.

For companies that announced a divestiture over the past decade, the median increase in stock price around the date of announcement was 3.8% compared to their industry index.

Source:2023 PwC Divestiture Study

Broaden your aperture

As the industry continues to embrace new business models and to solve increasingly complex healthcare problems, companies will need to adapt their M&A strategies as well and engage with a broad set of industry and non-traditional healthcare participants. In this context, M&A will often not be the optimal (or feasible) means to access a technology or capability and companies will instead need to evaluate collaborations, partnerships and joint ventures. These structures also have the potential to mitigate the capital investment required in a traditional M&A deal allowing for further investment capacity. While common in pharmaceutical, biotechnology and other industries, these structures have not been widely adopted in medtech and bring a host of nuance and complexity ranging from setting the strategy to finding a partner to governance.

Revisit your M&A process

Medtech companies should also evaluate their diligence processes to confirm they are fit for purpose. This may include retooling diligence activities and deal analytics to establish a thorough understanding of the value drivers and risks of a particular asset as they may differ from traditional acquisitions. Acquirers should also anticipate and understand the value proposition of an acquisition to non-traditional interlopers. Efforts in this area may mitigate the risk of a “blind spot” which could lead to either “paying for” the unique value brought to a transaction or losing out on an asset by not fully considering potential sources of value to others in the new and evolving industry dynamics.

Reevaluate integration archetypes

These new and different transaction dynamics will also require different integration strategies for M&A deals to maximize the value of the acquisition. While commercial integration and execution have historically been the primary value levers for medtech M&A, this new era may require heightened attention on topics such as employee retention and culture. Additionally, the deal strategy and objectives may significantly impact the optimal type of integration. For example, a transaction to establish an enterprise-wide AI capability may call for a different integration approach than a traditional tuck-in acquisition where a larger company buys a smaller company to gain market share or new resources. Pursuing and executing the right integration strategy will be critical to success and ultimately delivering profitable growth from the deal.

Call to action for profitable growth

CEOs worldwide worry their organizations won’t last another decade if they don’t change. Medtech is no exception. The medtech mission is more important than ever as the need for life-changing and lifesaving devices grows every year. To meet patient needs as well as shareholder expectations for profitable growth, medtech leaders should ask themselves some key questions:

Have we challenged ourselves to think critically about a “pain point” in our organization and to reimagine it through leveraging technology?
Are we doing enough to foster an agile and empowered culture that can help our organization thrive through the evolution of the industry?
Have we looked closely enough at our portfolio to identify opportunities to unlock value through divestitures? Is our playbook fit for purpose in the new M&A environment?

It’s time to act. Executive teams should put a plan in place now to propel the organization forward toward profitable growth and create the value that patients and shareholders expect.

45% of global CEOs think their organization will no longer be economically viable in 10 years' time, if they continue on their current course, up from 39% in 2023.

Source:PwC’s 27th Annual Global CEO Survey

_{1. Donahoe, G. Estimates of medical device spending in the United States. June 2, 2021. AdvaMed website. Accessed August 1, 2022.

2. US Centers for Medicare and Medicaid Services website. National health expenditure projections. Accessed August 1, 2022.

3. PwC analysis of Capital IQ data. Includes announced transactions for controlling interests with a disclosed deal value greater than $50 million between June 1, 2014 and June 30, 2024 where either party is a medtech sector participant.}