Stryker the surprise winner in the medtech spend versus sales stakes
All companies invest in their businesses; the trick is ensuring that these investments pay off. A comparison of the top 10 medtech groups’ sales – historical and forecast – with the cash they have ploughed into R&D and acquiring other groups shows that the sector has some clear winners – and some even clearer losers.
Perhaps surprisingly it is a company in the slow-growing orthopaedics sector that comes out on top. Stryker’s spend over the past 15 years is just 11% of its forecast cumulative 2013-24 sales, making its return on its investment the largest of the cohort. Boston Scientific, though, is still feeling the effects of its disastrous $27bn deal for Guidant in 2006, and languishes at the bottom of the group (see charts below).
The analyses compare each company’s spending between 2003 and the end of 2017 with their historical and forecast sales from 2013 to 2024. The periods are stepped to allow a reasonable period for investments to come to fruition. Unlike yesterday’s equivalent analyses of the largest biopharma companies this does not include revenue from licensing deals since these are much rarer in the medtech sphere (On spend vs sales Pfizer is an outlier – but not always in a good way, May 30, 2018). Instead it includes equity stakes, which often function in much the same way.
As befits the largest company by medtech sales, Medtronic heads the rankings of spenders, having laid out a cumulative $22bn on R&D and $64bn on M&A since 2003. But comparing this with the group’s cumulative 2013-24 sales of $373bn puts the company squarely mid-range; its expenditure amounts to 23% of sales.
Stryker’s position as the most productive of the big medtechs comes despite its fairly aggressive deal-making stance: it has made 21 acquisitions since 2003, including four where it paid over $1bn.
Still, it seems to have no trouble integrating these new businesses. It was one of the early movers into orthopaedic robotics with its 2013 purchase of Mako Surgical, and having bought Boston Scientific’s underperforming neurovascular unit in 2011 turned the business around rapidly – the franchise was generating mid-teens growth by 2015.
That said Stryker is relatively parsimonious when it comes to in-house research, its 2017 R&D spend being just 6% of 2017 sales – the lowest proportion of all the top 10 companies except J&J. The orthopaedics sector’s reputation as one of the less innovative appears to be deserved.
Still, there is not a great range here. The biggest spender on R&D in terms of its sales is Philips, which reinvested 13% of its 2017 revenues into research. There is much more variance in the companies’ acquisition strategies.
M&A is a big deal
The medtech sector runs on mergers and acquisitions. But some companies prioritise this more than others – and only some of the big spenders manage to make it work.
The least acquisitive companies – in terms of cash spent, rather than the number of deals – are General Electric and Roche, with 2003-17 M&A spend being a respective 3% and 4% of cumulative 2013-24 sales. GE Healthcare and Roche sell large pieces of equipment that require customers to continue buying imaging service provision and diagnostic reagents respectively, meaning that their base is locked in, so they do not need to seek inorganic growth. Their high positions in the productivity table reflect this.
Conversely, groups at the poorer end of the productivity analysis are into mergers in a big way.
The reasons for Abbott to be ashamed of buying the diagnostics company Alere for $5bn last year are numerous and well known. Its $25bn acquisition of St Jude is regarded as a better deal, but this does not seem to be reflected in the combined group’s forecast sales. Doubtless Abbott can maximise value by cutting costs – something that this analysis would not take into account.
Becton Dickinson has also closed two massive mergers in recent years, buying Carefusion in 2015 for $12bn and C. R. Bard last year for twice as much. The sellside does not seem convinced by these moves, putting BD’s cumulative forecast sales barely above Stryker’s.
A poor choice
But the loser, by a long way, is Boston Scientific. The company has been circumspect in its business dealings since 2008, reinvesting a respectable 11% of its revenues into R&D and spending less than $10bn on M&A.
By 2008, though, the damage was already done. Boston’s purchase of Guidant in April 2006 held the record for the biggest-ever medtech acquisition for nine solid years, and even now is second only to Medtronic-Covidien.
And it was a horrendous misstep. The deal was the result of a bidding war with J&J in which both parties got somewhat overheated, Boston raising and re-raising its bids even as Guidant issued product recalls and a profit warning.
Boston issued its own profit warning soon after the Guidant deal closed. It had increased its share count by 80% and taken on nearly $7bn in debt to fund the acquisition, and by October had admitted that the Guidant business was not generating a profit. Boston’s stock crashed so profoundly that it took 10 years to recover.
But recover it has, as the scatter plot below shows. Boston has the worst ratio of spending to sales of the top 10 groups, with its 15-year spend equal to 43% of its 2013-24 sales. Its shareholders, however, seem to have put the past behind them.