For many large medtech companies, scale and diversification were intended to drive innovation and efficiency. Large, diversified companies in other industries have delivered superior shareholder returns by rationalizing fixed costs, mobilizing their balance sheets, and building broad-based relationships with customers. But while many large medtechs are among the industry’s most profitable, their diversification has not brought the same improvements in shareholder value as in other industries (Exhibit 1).
Diversification has not been as effective in medtech for structural reasons, including the slow and cautious adoption of new products and the different business models required to manage various product types. However, companies that understand these challenges can surmount them and enhance shareholder value with several targeted strategies.
Why large, diversified medtechs struggle
Large medtech portfolios have enormous value. They can make a company more relevant to its customers, who count on companies with large portfolios to provide critical supplies reliably and often in large volumes to patients and healthcare providers around the globe. Also, a diversified company’s steadier businesses may sometimes help it weather the downturns in other, more cyclical businesses. Despite these benefits, scale and diversification present several obstacles to value creation in medtech.
Hurdles to resource reallocation
In many industries, diversified companies sustain high performance by efficiently reallocating resources. Once a business unit reaches maturity, management can reduce R&D and other investments to expand margins and generate cash, freeing up resources that can then be redeployed to grow other businesses. This way, the company can sustain profits while positioning for future growth.
This strategy works in industries where competitive barriers, such as brand equity or high switching costs, persist for decades and where the maintenance costs of low-growth businesses are low. In enterprise software, for example, the time and resources required for a customer to switch from one provider to another ensure high customer retention without significant investment from the provider. In medtech, however, rapid innovations and competitor initiatives can quickly erode competitive barriers. Also, substantial regulatory, product development, and commercial investments are needed to sustain a company’s market leadership. Because of the high costs to maintain existing products, slower-growing large medtechs incur selling, general, and administrative (SG&A) expenses at almost the same rate as their high-growth peers (Exhibit 2).
Lack of business model synergies
The medtech industry is fragmented; no single technology segment accounts for more than 10 percent of the total. Geographically, the United States accounts for 40 percent of global medtech sales, and China accounts for close to 15 percent; no other country exceeds 10 percent. Consequently, when growth in a company’s core market decelerates, the company must expand beyond that core market and its traditional geography to grow through breadth rather than depth. Leaders must then manage portfolios that span multiple markets and regions and require different business models.
Consider a hypothetical company with two business units: The first designs highly innovative implantable devices that are tested in large clinical trials, used by cardiac surgeons, manufactured in high volumes, and sold through clinician-driven purchasing committees. The second business unit makes moderately innovative capital equipment used by radiology departments, manufactured in low volumes, and sold to capital expenditure committees. These sales generate significant revenues for service and repair.
It is unrealistic to expect corporate leaders to make value-adding decisions for business units with such distinctive characteristics. Further, imposing identical corporate standards—such as for compensation, employee roles, and strategic planning cycles—on both business units can paralyze the units’ ability to retain specialized talent or respond nimbly to competitors.
A portfolio with less upside than downside
A common misconception is that diversification benefits shareholders by reducing volatility. In fact, investment managers can easily diversify their portfolios through their own investment choices; even small investors can diversify through low-cost mutual funds. Diversification does, however, slow growth, which hurts shareholder value.
A diverse medtech portfolio has a limited upside because it is unlikely that all of a company’s businesses will outperform simultaneously. Furthermore, most markets in which larger medtech companies compete are relatively mature and not large, making their growth more susceptible to deceleration and disruption. From 2022 to 2024, only three of the 30 highest-growth medtech segments were larger than $3 billion, so hit products rarely move the needle for a corporation. And across 50 medtechs and three time periods, the potential downside barely differed between larger players and small, focused ones (Exhibit 3).
Slow adoption curve for new products
Medtech has produced some of healthcare’s greatest innovations over the past decade, improving millions of patients’ lives. However, new-product sales often take years to scale up and become profitable. During a device’s early years, companies must run clinical trials, educate physicians, train care teams, prepare their sales forces, and develop the next iteration of the product. Meanwhile, adoption proceeds slowly as the company expands its user base and physicians determine how best to deploy the product and which patients could benefit from it. The upfront investment is enough to dilute margins, while the growth is insufficient to raise corporate revenues materially for several years.
Investors are more forgiving of smaller companies, often valuing them on the promise of future growth. Larger companies, however, rarely get the same leeway. Consider several of the industry’s most significant growth drivers over the past two decades: surgical robots, neurovascular thrombectomy devices, and intravascular lithotripsy. The early iterations of these technologies were developed and scaled by stand-alone companies, each of which garnered valuations of a billion dollars or more shortly after going public, despite low profitability. But in a conglomerate, hit products, even in large markets, generate too little revenue in their early years to meaningfully affect performance.
How to reignite value creation in large, diversified medtechs
The challenges facing medtechs will not go away. However, several companies have shown that, with the right strategy and culture, large and diversified portfolios can be effective. Diversified medtechs can consider several strategic options to improve their value to shareholders:
- Allow business units to adopt their own management styles. As discussed, different business units (BUs) have unique needs for investments, capabilities, and management styles. Diversified companies can enable each business unit to adopt its own organizational structure, compensation schemes, and strategic and financial planning. The corporation can then create value with a lean center that oversees capital allocation, talent sharing, and performance management. Stryker, for example, has a decentralized management model that allows its business unit leaders to manage their businesses end to end. This allows each unit to make decisions quickly, tailor its policies and investments to its needs, and cultivate a high-accountability ownership mentality among its leaders.
- Increase focus through divestitures or company splits. A diversified company’s management team should assess whether each business unit is more competitive as part of the company than as a stand-alone or part of someone else’s portfolio. If the unit would be more competitive outside the company, the divestment question should be if, not when, the company should divest. Several medtech companies are doing this; divestitures are up 30 percent over the last 24 months compared with the prior 24. However, the success of a divestiture relies as much on timing and preparedness as it does on fit. Companies create the most value with a divestiture when the business unit has momentum, internal operations have been organized for a clean separation, and investors have had enough time and transparency to follow the business unit’s performance.
- Use the balance sheet to create growth opportunities, not as a cushion. Too often, large, diversified companies tout their balance sheet flexibility without ever deploying it to create new growth opportunities. A company’s balance sheet can, of course, enable acquisitions of high-performing companies that fit with the buyer’s portfolio and companies that appear undervalued by the market and whose performance can be improved. These acquisitions are most valuable if they are conducted within a programmatic M&A strategy. However, companies with large balance sheets can also drive innovation in other ways, including venture investing and partnering. Boston Scientific, for instance, has used its balance sheet to become one of medtech’s most successful venture investors. Its early-stage investments have enabled it to develop relationships with innovators, learn about breakthrough technologies early in their development cycles, and steer start-ups to successful launches. Several of these investments have become acquisitions. Hologic, in contrast, has used its balance sheet to partner with other companies to build potentially disruptive innovations.
Large diversified medtech companies face challenges to value creation, but they can unlock significant shareholder value by embracing decentralized management, strategically evaluating portfolio fit, and mobilizing their balance sheets for bold moves. Now is the time for medtech leaders to assess their strategies and pursue the necessary changes to drive sustainable growth and shareholder value.
FAQ
Q: Why have large, diversified medtech companies struggled to create shareholder value?
A: Large medtech companies face hurdles such as resource reallocation challenges, lack of business model synergies, limited upside in their portfolios, and slow adoption curves for new products, which impact their ability to generate significant shareholder value.
Conclusion
In conclusion, large, diversified medtech companies can overcome the challenges they face by implementing targeted strategies that focus on decentralized management, strategic divestitures, and utilizing their balance sheets for growth opportunities. By addressing these obstacles head-on, medtech leaders can drive sustainable growth and enhance shareholder value in a rapidly evolving industry.
