Michael Barbella, Managing Editor11.15.22
The end is within sight.
After 30 long months of lockdowns, lost work, disrupted routines, vaccinations, booster shots, and social isolation, the COVID-19 finish line loomed large on the horizon this year.
“We have never been in a better position to end the pandemic,” WHO Director-General Tedros Adhanom Ghebreyesus, Ph.D., declared at a mid-September press conference. “We are not there yet, but the end is in sight.”
Ghebreyesus’ proclamation was welcome news to the billions of inhabitants who have spent the last two and a half years struggling to tread water amid the ambiguity of a pandemic. For much of that period, it seemed the world had entered a cruel “Groundhog Day” time loop, interminably reliving the same story without hope for resolution.
That time loop finally broke this year as humankind made significant headway in its fight against the deadly coronavirus. Vaccines and booster shots improved mortality rates, relieving the strain on hospitals; face masks become optional in many places as infection rates declined, enabling friends, families, and co-workers to reconnect without fear of contamination.
Seemingly, out of nowhere, the pandemic was no longer big news. The Russia-Ukraine conflict, astronomical gas prices, record high inflation, and recession murmurs all pushed the pandemic to the back burner.
But SARS-CoV-2 was never far from our collective thoughts.
While COVID-19’s end may have begun (or is it the end of the beginning?), Ghebreyesus reminded the world of the importance of keeping our eyes on the prize.
“A marathon runner does not stop when the finish line comes into view, she just runs harder, with all the energy she has left. So must we,” he said. “We can see the finish line, we’re in a winning position. But now is the worst time to stop running. Now is the time to run harder and make sure we cross the line and reap the rewards of all our hard work.”
Time for a sprint to the finish. The reward is worth the effort.
Fishin’ Chips
The nights are not so difficult now.
The dread and apprehension are gone, as are the paralyzing bouts of sleep anxiety. Also missing are the unpleasant thoughts and illusory presumptions that often dawned after sunset.
Replacing all that misery is serenity, certitude, and a bit of contentment—sensibilities that help Lauren sleep without fear these days after a harrowing year-plus interruption in her sleep apnea treatment.
“Life or death,” Lauren told NBC-TV affiliate WESH (Daytona Beach, Fla.) in June. “I could die without it.”
Lauren survived (physically, at least) without her nightly infusion of pressurized air, but the frustrating quandary in which the Orlando, Fla., resident found herself is one of the many hallmarks of pandemic life, spawned by a perfect storm of product recalls, sole-source dependency, and continuing supply chain troubles.
That storm—swirling for nearly 18 months—has left quite a swath of victims and damage in its wake.
Among the victims is Winter Springs, Fla., resident Steve Dross, who’s been waiting eight months (and counting) for a CPAP (continuous positive airway pressure) machine. “I think it’s ridiculous,” Dross griped to WESH. “In this day and age, you shouldn’t have to wait a year for a CPAP machine.”
Indeed, a months-long wait for a CPAP machine is preposterous. But it’s become typical in this day and age of COVID-19-induced material and component shortages, intermittent lockdowns, production slowdowns, escalating shipping costs, grandiose geopolitical aspirations, and faulty polyurethane foam.
CPAP machines have joined an expansive list of medical devices facing critical shortages from the world’s gnarled supply chain. The assistive breathing apparatuses are functional only with computer chips, a component that has become as hard to find as lumber and silicone rubber amid the Great Supply Chain Disruption.
The chip’s descent into the supply chain void was neither swift nor straightforward. Its tumble began with the East Asian trade wars of the late 2010s (U.S.-China, 2018; Japan-Korea, 2019), which increased lead times, inflated pricing, and tightened constraints on raw materials. The U.S.-China dispute triggered semiconductor wafer hoarding in the Middle Kingdom while the Japan-Korea tussle sent manufacturers scrambling for chipmaking chemicals. Compounding the growing shortage were COVID-19 lockdowns and production interruptions from both extreme weather and factory fires.
A colossal miscalculation of anticipated demand, however, sealed the chip supply’s ultimate fate: Major buyers—fearing a severe global recession—scaled back their orders during the pandemic’s early days, leading to a manufacturing slowdown. But the recession never materialized; economic growth actually mushroomed after COVID-19’s initial shocks wore off, leaving the industry woefully unprepared to meet the planet’s surging appetite for telecommunications technology and other commodities.
“Demand for chips is high. It is getting higher,” U.S. Commerce Secretary Gina Raimondo said in January. “Five days of inventory. No room for error. That tells you how fragile this supply chain is. We aren’t even close to being out of the woods. The semiconductor supply chain is very fragile and it’s going to remain that way until we can increase chip manufacturing.”
Increasing manufacturing won’t be easy, though. Adding chip-making capacity is time-consuming and expensive (it can take up to two years and cost billions of dollars). The U.S. government is offering some financial help, providing $52 billion in funding to stateside semiconductor manufacturers, but the money is unlikely to immediately impact supply. Similarly, new factories planned by Intel, Samsung Electronics, and Texas Instruments are not expected to be operational before mid-2024 or 2025 at the earliest.
Increasing manufacturing at existing semiconductor plants is no less complicated. Russia’s war with Ukraine has hobbled sourcing of chip-making ingredients like krypton and neon, and COVID -19 outbreaks in Southeast Asia have stymied the industry’s lead frames stockpile.
The sourcing issues, production disruptions, skyrocketing demand, and international turmoil have caused lead times and chip prices to balloon, with lead times now stretching upwards of 40-50 weeks and costs running at least 10% to 20% above pre-pandemic levels.
“There’s no easy way to get around a short supply of semiconductors and rising costs when every company is in the same boat,” Jabil Global Procurement Vice President Scott Graham wrote in a blog earlier this year. “Having already taken blows from 2021 and 2022’s uncertainties (so far), the markets that rely most heavily on chips...are braced for more unknowns.”
And ugly truths. The chip shortage and other vexing supply chain disruptions have significantly eroded corporate profits this year, particularly in industries that depend on integrated circuits for digitizing components. The automotive industry has sustained the largest losses (an estimated $210 billion in 2021), but the consumer electronics, LED/lighting, power, and medtech sectors have all been affected as well.
While medtech’s financial suffering pales in comparison to automotive’s overall deficit, supply-related challenges have had a far graver impact on its end users, as evidenced by the long waits for life-saving CPAP machines.
Those waits basically resulted from too few chips and too much demand, courtesy of the global shortage and Royal Philips’ Class I recall of more than 5.5 million sleep apnea and ventilator devices in June 2021. Both challenges have made it difficult, if not impossible, to meet CPAP machine demand in a timely manner.
San Diego-based ResMed Inc. spent months scouring its supply chain for available stock, to no avail. The company eventually increased production in Q4 (ended June 30) by redesigning certain AirSense 10 CPAP and APAP machines without cellular communication chips. Rebranded as card-to-cloud devices, the revamped products lack some remote features and substitute automatic data transmission with an SD card-assisted manual upload.
“We’ve been able to mitigate some of the electronic component bottlenecks with the launch of our redesigned card-to-cloud AirSense 10 devices...” ResMed CEO Mick Farrell told investors during a Q4 earnings call in August. “During the last month of the quarter, during June, we were able to allocate more products to our customers than in recent months and in recent quarters. The global supply chain environment remains very much in flux across multiple industries. We are starting to see indications that the macro environment is improving, particularly semiconductor availability. We’re not out of the woods yet, but the compass is pointing to true north and we are on top of it.”
ResMed’s production compass may indicate true north, but the firm’s supply chain struggles have prevented its fiscal magnetometer from achieving a precise directional match. A “very significant double-digit de-commit” from a semiconductor supplier cut ResMed’s anticipated recall windfall by $100 million; during a Q3 earnings call, Farrell adjusted the gain downward from $300 million-$350 million to $200 million-$250 million.
“...our supply chain allowed us to sort of take two steps forward and two steps back versus two steps forward and one step back,” Farrell said in April. “That didn’t allow us to achieve that extra $100 million of incremental revenue we thought we would achieve through fiscal ‘22 for the first half. So that’s going to be tougher and it moves things a little bit further back.”
ResMed was not alone on the two-step dance floor, though. Most major medical device firms boot-scooted their way to financial disappointment from this year’s supply chain troubles.
Medtronic, for example, posted an 8% sales loss in its first fiscal quarter (2023), Philips recorded a $53 million deficit in its second quarter (2022), and GE Healthcare failed to improve its year-over-year Q2 revenue despite a $160 million improvement over the previous three months. Baxter International, meanwhile, lowered its 2022 sales and earnings guidance after a subpar second-quarter performance. The company cut its projected sales growth from 23%-24% on a reported basis and 25%-26% on a constant currency basis to the high teens (reported) and the mid-20s (constant currency). Adjusted EPS fell to $3.60-$3.70 from $4.12-$4.20.
“We have been severely impacted by a lot of factors—the worldwide stress on the supply chain, the inability of our suppliers to supply—and that shows up all over the operations of our company,” Baxter chief financial officer Jay Saccaro told investors during a Q2 earnings call in July. “We’re continuing to navigate a dynamic and ever-changing macro environment. This near-term volatility has created certain challenges for our business, and led us to lowering our full-year outlook. It’s an incredibly volatile dynamic that we’re experiencing as we look at our supplier base.”
That volatility halved Smith+Nephew’s cash flow in the first six months of 2022 (compared to last year), and trimmed its trading profit margin by 0.4%. Although the latter reduction was minor, it nevertheless spawned skepticism among analysts over the company’s ability to achieve its 21% trading profit margin in 2024.
Market instability also decimated NuVasive Inc.’s Q2 2022 net income in spite of a 5.3% sales hike. The company lost $893,000, or 2 cents per share, on $310.5 million in proceeds, compared with $1.79 million in profit, or 3 cents per share, on $294.8 million in Q2 2021 revenue. The loss is not expected to affect sales this year —a 6%-8% growth rate is still within range—but the firm has lowered its diluted EPS to 95 cents-$1.25 from $1.05-$1.35.
For some medtech companies, however, the fallout from prolonged supply chain chaos has been far less tangible. The instability has impacted on-time delivery service at Intuitive Surgical Inc. and delayed product shipments at Stryker Corp.
“I think the persistent thing we are seeing is because the supply chain has been so spotty,” Stryker chief financial officer Glenn Boehnlein said in July, “we are just—feeling inefficiencies in our processes and how we manage our manufacturing across the globe with...inconsistencies of when we will have raw materials available for teams to work on.”
Those raw materials could be available sooner rather than later, actually. Improvements in resin and semiconductor bottlenecks over the summer have given device executives reason to hope for a near-term end to the world’s supply chain drama.
“I am certainly hopeful that we see easing of electromechanical components, along with the normalization of freight lanes and freight times and the impact,” Baxter’s Saccaro said. “I’m optimistic that all of those things will occur...this situation that we’re in, I know it will resolve. I just can’t answer at this point how quickly that will occur.”
Unfortunately, nobody can.
Read more: bit.ly/3ylvOpV
Robotics Competition
The magnitude of the discovery was lost at first.
To its excavators, the finding resembled a surgical robotic arm, but it looked markedly different than any they’d ever seen. Simple in structure, the arm lacked the sophistication and sleek, compact design of current models; clearly, the recovered arm was part of an older (outdated) robotic surgical system.
And not just any older system—the very first one, actually.
The excavators—i.e., THINK Surgical Inc. workers—inadvertently stumbled upon the robotic remnants while cleaning out a company-owned storage facility in the San Francisco Bay area. The arm belonged to ROBODOC, a robotic surgical system that made its global debut 30 years ago at Sutter General Hospital (now Medical Center) in Sacramento, Calif.
Standing seven feet tall, ROBODOC’s articulated arm had a drill attached to the end that enabled surgeons to more accurately place artificial joints and implants. ROBODOC was the first innovation to wed robotics and medical imaging, using computed tomography (CT) scans converted into 3D virtual images for pre-operative planning and computer-guided drilling.
Like most revolutionary inventions, ROBODOC was conceived in a moment of frustration. Total hip arthroplasty (THA) was substandard and maddeningly unpredictable in the 1980s due to inferior materials (specifically, acrylic cement) and the lack of technology. Back then, surgeons typically chiseled out an imperfectly-sized cavity in the bone to fit an implant that was manufactured in only a few sizes.
University of California-Davis staff members William Bargar, M.D., and the late veterinarian Howard “Hap” A. Paul teamed up on custom implant research, developing a robotic system that acted like a CAD/CAM machine.
The pair tested their invention on nearly two dozen dogs before beginning a U.S. Food and Drug Administration (FDA)-approved human trial in November 1992.
“Maybe we can help do current operations better,” Bargar said after the first successful ROBODOC hip implant procedure. “There may be new operations never attempted because you didn’t have this kind of tool. People from all over the world are calling me with phenomenal ideas. It’s very exciting to think this technology may have a lot bigger consequences than cementless hips.”
Bigger, indeed: The consequences of robotic surgical technology has far exceeded expectations, extending well beyond the body’s largest ball-and-socket joint to impact treatment for heart disease, digestive disorders, bladder and kidney conditions, and reproductive system ailments. Yet the technology has grown most rapidly in orthopedics over the last three decades due to its capacity for improved surgical and spatial accuracy, more reliable and reproducible outcomes, and better overall bone preparation.
That growth intensified this year as orthopedic implant companies escalated their battle for market supremacy. Industry heavyweights Stryker Corp., Zimmer Biomet Holdings Inc., and Smith+Nephew plc complemented their growing robotics portfolios with new offerings and partnerships, while smaller players continued to build their lineups to remain relevant.
Stryker won FDA 510(k) clearance of and launched spine guidance software for patients aged 13 and older. Featuring new optical tracking options via a redesigned camera and algorithms of the company’s Spine Guidance software, the Q Guidance system is designed to incorporate robotics and intelligent handheld instruments in the future.
Over six months, Smith+Nephew launched RI.HIP NAVIGATION, RI.HIP MODELER, “cementless” CONCELOC advanced porous titanium 3D printing technology with the LEGION CONCELOC cementless total knee, and LEGION revision knee, all of which are supported by the CORI surgical system.
Zimmer Biomet and the Hospital for Special Surgery (HSS), meanwhile, teamed up to create the HSS/Zimmer Biomet Innovation Center for Artificial Intelligence in robotic joint replacement. The companies aim to develop decision support tools, powered by data collection and machine learning, to provide data-driven recommendations to surgeons for robotic-assisted joint surgery.
Accelus, eCential Robotics, Microport Navibot, and Point Robotics Medtech Inc. each earned FDA 510(k) clearances for their respective robotics-related innovations, strengthening their market footprints. Accelus received the agency’s blessing for its Remi Robotic Navigation System software update that allows image capture with the GE OEC 3D, Ziehm Vision RFD 3D, and Stryker Airo TruCT systems. eCential won authorization for its 3D imaging, navigation, and robotics guidance system, and Microport Navibot gained consent for the SkyWalker System, a robot-assisted platform offering a total knee replacement solution that is compatible with the Evolution Medial-Pivot Total Knee System.
Point Robotics’ POINT Kinguide Robotic-Assisted Surgical System is the first surgical robot developed by a Taiwanese medtech firm to earn FDA clearance. The system also is touted as the world’s first hand-held robot framework equipped with a parallel manipulator for orthopedic application.
Finally, ROBODOC’s current owner, THINK Surgical, raised $100 million to accelerate commercialization of its robotic surgery products, and forged a development and distribution agreement with Curexo Inc. The two firms will work to include certain existing THINK technology and certain newly-developed technology in Curexo’s CUVIS-Joint orthopedic surgical robot platform.
THINK Surgical will have exclusive rights to distribute the CUVIS-Joint robotic platform, including the additional technology, in the United States and other countries including the U.K. and certain countries in Europe. The CUVIS-Joint robotic platform currently is used in Korea and India.
“CUVIS-Joint is the next generation of active robot for joint replacement featuring an open implant library,” THINK Surgical president and CEO Stuart Simpson said. “As an open system that works with implants from multiple manufacturers, CUVIS-Joint is an outstanding fit within THINK’s portfolio of products and services. THINK’s open systems, including the CUVIS-Joint, offer a compelling alternative to closed systems, which are limited to one manufacturer’s implants.”
Read more: bit.ly/3DCI9rM
Medtech M&A: Down But Not Out
The maxim “figures don’t lie but liars do figure” has long been attributed to Mark Twain.
Understandable, considering the superior quality of his work. But, truth be told, he was not actually the inventor of that axiom.
Twain was more of an editor than a creator in this case, likely paraphrasing the 1854 adage from its original form: “Figures won’t lie but men that draw up the tables may.”
Regardless of exact wording, the underlying message is clear—in their most basic form, figures (numbers, mathematical data) are factually truthful, but can be presented in misleading ways.
Case in point: medtech M&A in 2022. Activity was down compared to last year, as record high inflation, geopolitical unrest, global recession fears, and lingering supply chain troubles eroded investor confidence.
“Continued uncertainty in the overall financial markets continues to weigh on the M&A appetite,” John Babitt, Americas Medtech Transactions Leader at EY (Ernst & Young), noted in the professional services firm’s Pulse of the Industry medical technology report 2022. “The overall medtech M&A and innovation ecosystem continues to remain intact, but near-term storm clouds are likely to pause transactions volumes into 2023.”
That pause has already impacted merger and acquisition activity this year. Deal value and volume fell considerably from 2021 levels, reflecting a shift in focus to integration and value-capture transactions, financial analysts claim.
Data from various industry sources confirm the decline in 2022 M&A activity, though each uses slightly different measuring tools. A PwC analysis, for example, found that semi-annualized deal value fell 85%, while J.P. Morgan statistics show a first half decline in venture capital investments. Financing for medtech diagnostics, digital therapeutics, and tools diminished 19.1% to $16.1 billion through June 30, the investment bank reported.
Total capital raised between July 2021 and June 2022 fell 30% to $30 billion—well below the previous decade’s $38.8 average, according to EY’s Pulse of the Industry. Financing levels dropped sharply in the first six months of 2022, the report concluded, as public markets tightened.
Capital raised by companies generating less than $500 million in revenue shrunk 35% (nearly $10 billion) to $18.6 billion in the 12 months ending June 30, 2022, and commercial leader capital slipped 20% during that time, Pulse data indicate. Equity financing dwindled 40% to $18.9 billion, with follow-on public offerings plummeting 61% and the IPO market declining 39%.
“The 30% drop-off in total financing levels—which particularly impacts the smaller medtechs that drive innovation within the industry—demonstrates how challenging the operating environment has become...” EY’s Pulse of the Industry stated. “...the first six months of 2022 saw a rapid decline in the medtech IPO market. With special-purpose acquisition company (SPAC) deals significantly slowing and the largest venture capital investments going to late-stage financing rounds, smaller medtechs’ access to the public markets looks far more constrained in 2022.”
Deal volume was down as well this year. Stout’s healthcare and life science transaction totals posted double-digit decreases in the first half of 2022, falling 15.7% in Q1 to 438 deals and 36.8% in Q2 to 338 proceedings. While a weaker first half was expected given the bolus of transactions consummated late last year, the second-quarter decline was far greater than Stout analysts had anticipated.
The springtime slump makes sense in retrospect, as it coincided with worsening inflation, strict COVID-19 lockdowns in China, and escalating warfare between Russia and Ukraine (leading to higher gas prices and supply shortages). Yet the poor M&A showing tells only part of the story.
The other part (a very important one, incidentally) is the record level of M&A activity last year. “2021 was an incredible outlier year. It is by far the biggest year that M&A has ever seen,” MedWorld Advisors CEO and president Florence Joffroy-Black told participants of an Oct. 6 webinar. “If you remember, things were kind of stopped in 2020, people waited, and in 2021, people started all over again. What’s interesting is we went up not only in the number of deals [in 2021] but also in the value of deals. 2021 will go down as a record year not only because of the value in deals but also because of the size of the mergers that took place.”
Transaction size was definitely a contributing factor to 2022’s downfall. The mega deals that helped bolster medtech M&A value last year (Thermo Fisher-PPD, $17.4 billion; Baxter-Hillrom, $12.4 billion; Steris-Cantel Medical, $4.6 billion) were missing in 2022. Orthopedics’ megadeal drought continued for a second consecutive year, with only two 10-figure transactions occurring through Nov. 1: Stryker Corporation’s $3 billion purchase of Vocera Communications Inc. and Patient Square Capital’s $1.25 billion acquisition of Austin, Texas-based prosthetic manufacturer Hangar.
In place of those larger acquisitions were smaller, capabilities-driven deals that helped enhance Paragon 28’s pre-operative planning services (via Disior); strengthen Össur’s limb product offerings (courtesy of Naked Prosthetics); expand Enovis Corporation’s augmented reality visualization system prowess (through Insight Medical Systems); augment OrthoPediatric Corp.’s clubfoot treatment options (via MD Orthopaedics); and fortify Acumed’s upper extremity solutions portfolio (per ExsoMed).
Most of the portfolio-enhancing deals were several hundred million dollars or less; Bioventus’s $450 million payout for CartiHeal was the year’s third-largest transaction (trailing the Stryker and Patient Square Capital purchases). Even large OEMs like DePuy Synthes, Smith+Nephew, Exactech, and Orthofix curbed their spending in 2022.
Not quite on par with last year’s activity.
Such a substandard performance, however, must be taken in context. Medtech M&A may indeed have been anemic this year compared with 2021 (an aberration, no doubt), but it nevertheless fared significantly better than in pre-pandemic years.
As Joffroy-Black agreed in the webinar, “Overall M&A activity in 2022 is still positive, even if the numbers tell a different story. There’s a lot of cash out there being used in deals. The level of cash used in M&A transactions has definitely gotten higher. If you look at healthcare...the deal count is down but it’s still a good number compared to 2020 or 2019. We are ahead of where we were then.”
Not a bad position to be in these days.
Read more: bit.ly/3TJvvOk
After 30 long months of lockdowns, lost work, disrupted routines, vaccinations, booster shots, and social isolation, the COVID-19 finish line loomed large on the horizon this year.
“We have never been in a better position to end the pandemic,” WHO Director-General Tedros Adhanom Ghebreyesus, Ph.D., declared at a mid-September press conference. “We are not there yet, but the end is in sight.”
Ghebreyesus’ proclamation was welcome news to the billions of inhabitants who have spent the last two and a half years struggling to tread water amid the ambiguity of a pandemic. For much of that period, it seemed the world had entered a cruel “Groundhog Day” time loop, interminably reliving the same story without hope for resolution.
That time loop finally broke this year as humankind made significant headway in its fight against the deadly coronavirus. Vaccines and booster shots improved mortality rates, relieving the strain on hospitals; face masks become optional in many places as infection rates declined, enabling friends, families, and co-workers to reconnect without fear of contamination.
Seemingly, out of nowhere, the pandemic was no longer big news. The Russia-Ukraine conflict, astronomical gas prices, record high inflation, and recession murmurs all pushed the pandemic to the back burner.
But SARS-CoV-2 was never far from our collective thoughts.
While COVID-19’s end may have begun (or is it the end of the beginning?), Ghebreyesus reminded the world of the importance of keeping our eyes on the prize.
“A marathon runner does not stop when the finish line comes into view, she just runs harder, with all the energy she has left. So must we,” he said. “We can see the finish line, we’re in a winning position. But now is the worst time to stop running. Now is the time to run harder and make sure we cross the line and reap the rewards of all our hard work.”
Time for a sprint to the finish. The reward is worth the effort.
Fishin’ Chips
The nights are not so difficult now.
The dread and apprehension are gone, as are the paralyzing bouts of sleep anxiety. Also missing are the unpleasant thoughts and illusory presumptions that often dawned after sunset.
Replacing all that misery is serenity, certitude, and a bit of contentment—sensibilities that help Lauren sleep without fear these days after a harrowing year-plus interruption in her sleep apnea treatment.
“Life or death,” Lauren told NBC-TV affiliate WESH (Daytona Beach, Fla.) in June. “I could die without it.”
Lauren survived (physically, at least) without her nightly infusion of pressurized air, but the frustrating quandary in which the Orlando, Fla., resident found herself is one of the many hallmarks of pandemic life, spawned by a perfect storm of product recalls, sole-source dependency, and continuing supply chain troubles.
That storm—swirling for nearly 18 months—has left quite a swath of victims and damage in its wake.
Among the victims is Winter Springs, Fla., resident Steve Dross, who’s been waiting eight months (and counting) for a CPAP (continuous positive airway pressure) machine. “I think it’s ridiculous,” Dross griped to WESH. “In this day and age, you shouldn’t have to wait a year for a CPAP machine.”
Indeed, a months-long wait for a CPAP machine is preposterous. But it’s become typical in this day and age of COVID-19-induced material and component shortages, intermittent lockdowns, production slowdowns, escalating shipping costs, grandiose geopolitical aspirations, and faulty polyurethane foam.
CPAP machines have joined an expansive list of medical devices facing critical shortages from the world’s gnarled supply chain. The assistive breathing apparatuses are functional only with computer chips, a component that has become as hard to find as lumber and silicone rubber amid the Great Supply Chain Disruption.
The chip’s descent into the supply chain void was neither swift nor straightforward. Its tumble began with the East Asian trade wars of the late 2010s (U.S.-China, 2018; Japan-Korea, 2019), which increased lead times, inflated pricing, and tightened constraints on raw materials. The U.S.-China dispute triggered semiconductor wafer hoarding in the Middle Kingdom while the Japan-Korea tussle sent manufacturers scrambling for chipmaking chemicals. Compounding the growing shortage were COVID-19 lockdowns and production interruptions from both extreme weather and factory fires.
A colossal miscalculation of anticipated demand, however, sealed the chip supply’s ultimate fate: Major buyers—fearing a severe global recession—scaled back their orders during the pandemic’s early days, leading to a manufacturing slowdown. But the recession never materialized; economic growth actually mushroomed after COVID-19’s initial shocks wore off, leaving the industry woefully unprepared to meet the planet’s surging appetite for telecommunications technology and other commodities.
“Demand for chips is high. It is getting higher,” U.S. Commerce Secretary Gina Raimondo said in January. “Five days of inventory. No room for error. That tells you how fragile this supply chain is. We aren’t even close to being out of the woods. The semiconductor supply chain is very fragile and it’s going to remain that way until we can increase chip manufacturing.”
Increasing manufacturing won’t be easy, though. Adding chip-making capacity is time-consuming and expensive (it can take up to two years and cost billions of dollars). The U.S. government is offering some financial help, providing $52 billion in funding to stateside semiconductor manufacturers, but the money is unlikely to immediately impact supply. Similarly, new factories planned by Intel, Samsung Electronics, and Texas Instruments are not expected to be operational before mid-2024 or 2025 at the earliest.
Increasing manufacturing at existing semiconductor plants is no less complicated. Russia’s war with Ukraine has hobbled sourcing of chip-making ingredients like krypton and neon, and COVID -19 outbreaks in Southeast Asia have stymied the industry’s lead frames stockpile.
The sourcing issues, production disruptions, skyrocketing demand, and international turmoil have caused lead times and chip prices to balloon, with lead times now stretching upwards of 40-50 weeks and costs running at least 10% to 20% above pre-pandemic levels.
“There’s no easy way to get around a short supply of semiconductors and rising costs when every company is in the same boat,” Jabil Global Procurement Vice President Scott Graham wrote in a blog earlier this year. “Having already taken blows from 2021 and 2022’s uncertainties (so far), the markets that rely most heavily on chips...are braced for more unknowns.”
And ugly truths. The chip shortage and other vexing supply chain disruptions have significantly eroded corporate profits this year, particularly in industries that depend on integrated circuits for digitizing components. The automotive industry has sustained the largest losses (an estimated $210 billion in 2021), but the consumer electronics, LED/lighting, power, and medtech sectors have all been affected as well.
While medtech’s financial suffering pales in comparison to automotive’s overall deficit, supply-related challenges have had a far graver impact on its end users, as evidenced by the long waits for life-saving CPAP machines.
Those waits basically resulted from too few chips and too much demand, courtesy of the global shortage and Royal Philips’ Class I recall of more than 5.5 million sleep apnea and ventilator devices in June 2021. Both challenges have made it difficult, if not impossible, to meet CPAP machine demand in a timely manner.
San Diego-based ResMed Inc. spent months scouring its supply chain for available stock, to no avail. The company eventually increased production in Q4 (ended June 30) by redesigning certain AirSense 10 CPAP and APAP machines without cellular communication chips. Rebranded as card-to-cloud devices, the revamped products lack some remote features and substitute automatic data transmission with an SD card-assisted manual upload.
“We’ve been able to mitigate some of the electronic component bottlenecks with the launch of our redesigned card-to-cloud AirSense 10 devices...” ResMed CEO Mick Farrell told investors during a Q4 earnings call in August. “During the last month of the quarter, during June, we were able to allocate more products to our customers than in recent months and in recent quarters. The global supply chain environment remains very much in flux across multiple industries. We are starting to see indications that the macro environment is improving, particularly semiconductor availability. We’re not out of the woods yet, but the compass is pointing to true north and we are on top of it.”
ResMed’s production compass may indicate true north, but the firm’s supply chain struggles have prevented its fiscal magnetometer from achieving a precise directional match. A “very significant double-digit de-commit” from a semiconductor supplier cut ResMed’s anticipated recall windfall by $100 million; during a Q3 earnings call, Farrell adjusted the gain downward from $300 million-$350 million to $200 million-$250 million.
“...our supply chain allowed us to sort of take two steps forward and two steps back versus two steps forward and one step back,” Farrell said in April. “That didn’t allow us to achieve that extra $100 million of incremental revenue we thought we would achieve through fiscal ‘22 for the first half. So that’s going to be tougher and it moves things a little bit further back.”
ResMed was not alone on the two-step dance floor, though. Most major medical device firms boot-scooted their way to financial disappointment from this year’s supply chain troubles.
Medtronic, for example, posted an 8% sales loss in its first fiscal quarter (2023), Philips recorded a $53 million deficit in its second quarter (2022), and GE Healthcare failed to improve its year-over-year Q2 revenue despite a $160 million improvement over the previous three months. Baxter International, meanwhile, lowered its 2022 sales and earnings guidance after a subpar second-quarter performance. The company cut its projected sales growth from 23%-24% on a reported basis and 25%-26% on a constant currency basis to the high teens (reported) and the mid-20s (constant currency). Adjusted EPS fell to $3.60-$3.70 from $4.12-$4.20.
“We have been severely impacted by a lot of factors—the worldwide stress on the supply chain, the inability of our suppliers to supply—and that shows up all over the operations of our company,” Baxter chief financial officer Jay Saccaro told investors during a Q2 earnings call in July. “We’re continuing to navigate a dynamic and ever-changing macro environment. This near-term volatility has created certain challenges for our business, and led us to lowering our full-year outlook. It’s an incredibly volatile dynamic that we’re experiencing as we look at our supplier base.”
That volatility halved Smith+Nephew’s cash flow in the first six months of 2022 (compared to last year), and trimmed its trading profit margin by 0.4%. Although the latter reduction was minor, it nevertheless spawned skepticism among analysts over the company’s ability to achieve its 21% trading profit margin in 2024.
Market instability also decimated NuVasive Inc.’s Q2 2022 net income in spite of a 5.3% sales hike. The company lost $893,000, or 2 cents per share, on $310.5 million in proceeds, compared with $1.79 million in profit, or 3 cents per share, on $294.8 million in Q2 2021 revenue. The loss is not expected to affect sales this year —a 6%-8% growth rate is still within range—but the firm has lowered its diluted EPS to 95 cents-$1.25 from $1.05-$1.35.
For some medtech companies, however, the fallout from prolonged supply chain chaos has been far less tangible. The instability has impacted on-time delivery service at Intuitive Surgical Inc. and delayed product shipments at Stryker Corp.
“I think the persistent thing we are seeing is because the supply chain has been so spotty,” Stryker chief financial officer Glenn Boehnlein said in July, “we are just—feeling inefficiencies in our processes and how we manage our manufacturing across the globe with...inconsistencies of when we will have raw materials available for teams to work on.”
Those raw materials could be available sooner rather than later, actually. Improvements in resin and semiconductor bottlenecks over the summer have given device executives reason to hope for a near-term end to the world’s supply chain drama.
“I am certainly hopeful that we see easing of electromechanical components, along with the normalization of freight lanes and freight times and the impact,” Baxter’s Saccaro said. “I’m optimistic that all of those things will occur...this situation that we’re in, I know it will resolve. I just can’t answer at this point how quickly that will occur.”
Unfortunately, nobody can.
Read more: bit.ly/3ylvOpV
Robotics Competition
The magnitude of the discovery was lost at first.
To its excavators, the finding resembled a surgical robotic arm, but it looked markedly different than any they’d ever seen. Simple in structure, the arm lacked the sophistication and sleek, compact design of current models; clearly, the recovered arm was part of an older (outdated) robotic surgical system.
And not just any older system—the very first one, actually.
The excavators—i.e., THINK Surgical Inc. workers—inadvertently stumbled upon the robotic remnants while cleaning out a company-owned storage facility in the San Francisco Bay area. The arm belonged to ROBODOC, a robotic surgical system that made its global debut 30 years ago at Sutter General Hospital (now Medical Center) in Sacramento, Calif.
Standing seven feet tall, ROBODOC’s articulated arm had a drill attached to the end that enabled surgeons to more accurately place artificial joints and implants. ROBODOC was the first innovation to wed robotics and medical imaging, using computed tomography (CT) scans converted into 3D virtual images for pre-operative planning and computer-guided drilling.
Like most revolutionary inventions, ROBODOC was conceived in a moment of frustration. Total hip arthroplasty (THA) was substandard and maddeningly unpredictable in the 1980s due to inferior materials (specifically, acrylic cement) and the lack of technology. Back then, surgeons typically chiseled out an imperfectly-sized cavity in the bone to fit an implant that was manufactured in only a few sizes.
University of California-Davis staff members William Bargar, M.D., and the late veterinarian Howard “Hap” A. Paul teamed up on custom implant research, developing a robotic system that acted like a CAD/CAM machine.
The pair tested their invention on nearly two dozen dogs before beginning a U.S. Food and Drug Administration (FDA)-approved human trial in November 1992.
“Maybe we can help do current operations better,” Bargar said after the first successful ROBODOC hip implant procedure. “There may be new operations never attempted because you didn’t have this kind of tool. People from all over the world are calling me with phenomenal ideas. It’s very exciting to think this technology may have a lot bigger consequences than cementless hips.”
Bigger, indeed: The consequences of robotic surgical technology has far exceeded expectations, extending well beyond the body’s largest ball-and-socket joint to impact treatment for heart disease, digestive disorders, bladder and kidney conditions, and reproductive system ailments. Yet the technology has grown most rapidly in orthopedics over the last three decades due to its capacity for improved surgical and spatial accuracy, more reliable and reproducible outcomes, and better overall bone preparation.
That growth intensified this year as orthopedic implant companies escalated their battle for market supremacy. Industry heavyweights Stryker Corp., Zimmer Biomet Holdings Inc., and Smith+Nephew plc complemented their growing robotics portfolios with new offerings and partnerships, while smaller players continued to build their lineups to remain relevant.
Stryker won FDA 510(k) clearance of and launched spine guidance software for patients aged 13 and older. Featuring new optical tracking options via a redesigned camera and algorithms of the company’s Spine Guidance software, the Q Guidance system is designed to incorporate robotics and intelligent handheld instruments in the future.
Over six months, Smith+Nephew launched RI.HIP NAVIGATION, RI.HIP MODELER, “cementless” CONCELOC advanced porous titanium 3D printing technology with the LEGION CONCELOC cementless total knee, and LEGION revision knee, all of which are supported by the CORI surgical system.
Zimmer Biomet and the Hospital for Special Surgery (HSS), meanwhile, teamed up to create the HSS/Zimmer Biomet Innovation Center for Artificial Intelligence in robotic joint replacement. The companies aim to develop decision support tools, powered by data collection and machine learning, to provide data-driven recommendations to surgeons for robotic-assisted joint surgery.
Accelus, eCential Robotics, Microport Navibot, and Point Robotics Medtech Inc. each earned FDA 510(k) clearances for their respective robotics-related innovations, strengthening their market footprints. Accelus received the agency’s blessing for its Remi Robotic Navigation System software update that allows image capture with the GE OEC 3D, Ziehm Vision RFD 3D, and Stryker Airo TruCT systems. eCential won authorization for its 3D imaging, navigation, and robotics guidance system, and Microport Navibot gained consent for the SkyWalker System, a robot-assisted platform offering a total knee replacement solution that is compatible with the Evolution Medial-Pivot Total Knee System.
Point Robotics’ POINT Kinguide Robotic-Assisted Surgical System is the first surgical robot developed by a Taiwanese medtech firm to earn FDA clearance. The system also is touted as the world’s first hand-held robot framework equipped with a parallel manipulator for orthopedic application.
Finally, ROBODOC’s current owner, THINK Surgical, raised $100 million to accelerate commercialization of its robotic surgery products, and forged a development and distribution agreement with Curexo Inc. The two firms will work to include certain existing THINK technology and certain newly-developed technology in Curexo’s CUVIS-Joint orthopedic surgical robot platform.
THINK Surgical will have exclusive rights to distribute the CUVIS-Joint robotic platform, including the additional technology, in the United States and other countries including the U.K. and certain countries in Europe. The CUVIS-Joint robotic platform currently is used in Korea and India.
“CUVIS-Joint is the next generation of active robot for joint replacement featuring an open implant library,” THINK Surgical president and CEO Stuart Simpson said. “As an open system that works with implants from multiple manufacturers, CUVIS-Joint is an outstanding fit within THINK’s portfolio of products and services. THINK’s open systems, including the CUVIS-Joint, offer a compelling alternative to closed systems, which are limited to one manufacturer’s implants.”
Read more: bit.ly/3DCI9rM
Medtech M&A: Down But Not Out
The maxim “figures don’t lie but liars do figure” has long been attributed to Mark Twain.
Understandable, considering the superior quality of his work. But, truth be told, he was not actually the inventor of that axiom.
Twain was more of an editor than a creator in this case, likely paraphrasing the 1854 adage from its original form: “Figures won’t lie but men that draw up the tables may.”
Regardless of exact wording, the underlying message is clear—in their most basic form, figures (numbers, mathematical data) are factually truthful, but can be presented in misleading ways.
Case in point: medtech M&A in 2022. Activity was down compared to last year, as record high inflation, geopolitical unrest, global recession fears, and lingering supply chain troubles eroded investor confidence.
“Continued uncertainty in the overall financial markets continues to weigh on the M&A appetite,” John Babitt, Americas Medtech Transactions Leader at EY (Ernst & Young), noted in the professional services firm’s Pulse of the Industry medical technology report 2022. “The overall medtech M&A and innovation ecosystem continues to remain intact, but near-term storm clouds are likely to pause transactions volumes into 2023.”
That pause has already impacted merger and acquisition activity this year. Deal value and volume fell considerably from 2021 levels, reflecting a shift in focus to integration and value-capture transactions, financial analysts claim.
Data from various industry sources confirm the decline in 2022 M&A activity, though each uses slightly different measuring tools. A PwC analysis, for example, found that semi-annualized deal value fell 85%, while J.P. Morgan statistics show a first half decline in venture capital investments. Financing for medtech diagnostics, digital therapeutics, and tools diminished 19.1% to $16.1 billion through June 30, the investment bank reported.
Total capital raised between July 2021 and June 2022 fell 30% to $30 billion—well below the previous decade’s $38.8 average, according to EY’s Pulse of the Industry. Financing levels dropped sharply in the first six months of 2022, the report concluded, as public markets tightened.
Capital raised by companies generating less than $500 million in revenue shrunk 35% (nearly $10 billion) to $18.6 billion in the 12 months ending June 30, 2022, and commercial leader capital slipped 20% during that time, Pulse data indicate. Equity financing dwindled 40% to $18.9 billion, with follow-on public offerings plummeting 61% and the IPO market declining 39%.
“The 30% drop-off in total financing levels—which particularly impacts the smaller medtechs that drive innovation within the industry—demonstrates how challenging the operating environment has become...” EY’s Pulse of the Industry stated. “...the first six months of 2022 saw a rapid decline in the medtech IPO market. With special-purpose acquisition company (SPAC) deals significantly slowing and the largest venture capital investments going to late-stage financing rounds, smaller medtechs’ access to the public markets looks far more constrained in 2022.”
Deal volume was down as well this year. Stout’s healthcare and life science transaction totals posted double-digit decreases in the first half of 2022, falling 15.7% in Q1 to 438 deals and 36.8% in Q2 to 338 proceedings. While a weaker first half was expected given the bolus of transactions consummated late last year, the second-quarter decline was far greater than Stout analysts had anticipated.
The springtime slump makes sense in retrospect, as it coincided with worsening inflation, strict COVID-19 lockdowns in China, and escalating warfare between Russia and Ukraine (leading to higher gas prices and supply shortages). Yet the poor M&A showing tells only part of the story.
The other part (a very important one, incidentally) is the record level of M&A activity last year. “2021 was an incredible outlier year. It is by far the biggest year that M&A has ever seen,” MedWorld Advisors CEO and president Florence Joffroy-Black told participants of an Oct. 6 webinar. “If you remember, things were kind of stopped in 2020, people waited, and in 2021, people started all over again. What’s interesting is we went up not only in the number of deals [in 2021] but also in the value of deals. 2021 will go down as a record year not only because of the value in deals but also because of the size of the mergers that took place.”
Transaction size was definitely a contributing factor to 2022’s downfall. The mega deals that helped bolster medtech M&A value last year (Thermo Fisher-PPD, $17.4 billion; Baxter-Hillrom, $12.4 billion; Steris-Cantel Medical, $4.6 billion) were missing in 2022. Orthopedics’ megadeal drought continued for a second consecutive year, with only two 10-figure transactions occurring through Nov. 1: Stryker Corporation’s $3 billion purchase of Vocera Communications Inc. and Patient Square Capital’s $1.25 billion acquisition of Austin, Texas-based prosthetic manufacturer Hangar.
In place of those larger acquisitions were smaller, capabilities-driven deals that helped enhance Paragon 28’s pre-operative planning services (via Disior); strengthen Össur’s limb product offerings (courtesy of Naked Prosthetics); expand Enovis Corporation’s augmented reality visualization system prowess (through Insight Medical Systems); augment OrthoPediatric Corp.’s clubfoot treatment options (via MD Orthopaedics); and fortify Acumed’s upper extremity solutions portfolio (per ExsoMed).
Most of the portfolio-enhancing deals were several hundred million dollars or less; Bioventus’s $450 million payout for CartiHeal was the year’s third-largest transaction (trailing the Stryker and Patient Square Capital purchases). Even large OEMs like DePuy Synthes, Smith+Nephew, Exactech, and Orthofix curbed their spending in 2022.
Not quite on par with last year’s activity.
Such a substandard performance, however, must be taken in context. Medtech M&A may indeed have been anemic this year compared with 2021 (an aberration, no doubt), but it nevertheless fared significantly better than in pre-pandemic years.
As Joffroy-Black agreed in the webinar, “Overall M&A activity in 2022 is still positive, even if the numbers tell a different story. There’s a lot of cash out there being used in deals. The level of cash used in M&A transactions has definitely gotten higher. If you look at healthcare...the deal count is down but it’s still a good number compared to 2020 or 2019. We are ahead of where we were then.”
Not a bad position to be in these days.
Read more: bit.ly/3TJvvOk