Medtech value creation has been a story of haves and have-nots in recent years. Since 2019, the top value creators have outpaced the S&P 500, while the rest of the industry has struggled (Exhibit 1). Industry and capital market volatility during the COVID-19 pandemic masked the differences in performance between the top medtech companies and their peers. In the years since, investor behavior has revealed just how wide of a gap they see between these cohorts.
High performers share a success profile that distinguishes them from other companies: above-average industry growth, relentless focus on quality, rich innovation pipelines, rising profit margins, and steady levels of free cash flow. Underneath the financials, these industry leaders have taken largely similar paths to success. In this article, we spotlight the six strategic and operational moves that leading companies are making to create value.
Prioritizing innovation productivity to drive growth
For decades, innovation has driven growth for the medtech industry, enabling companies to reach new patients and achieve revenues to outpace underlying patient population growth. Over the past 15 years, however, R&D has become more expensive, cutting into value returned on investment—R&D spend as a percentage of sales has grown by 300 basis points since 2008. The bar for new-product adoption has also risen: customers increasingly expect meaningful innovation, often backed by clinical evidence, rather than incremental improvements.
In response to these trends, top-performing medtech companies have acted with conviction to invest and commit to the following value-creating practices:
Adoption of digital tools and solutions
Top performers have built digital backbones for their product development processes. Some of them have also adopted an agile quality management system, which emphasizes simplicity and continuous improvement, streamlines processes, promotes innovation, and allows organizations to adapt to changing regulations and markets. Others are taking bolder measures—for example, deploying digital twins to identify the optimal specifications for a new product. Based on our experience, successful deployment of such digital solutions and tools can lead to a 20 percent reduction in development time, with a proportionate decrease in costs.
Building great tools is not enough. We’ve witnessed companies develop terrific tools only to see them fade into obscurity. At-scale adoption and value creation hinge on change management—a transformation of organizational behaviors.
Data-driven management
R&D is often a “black box” for management teams—hindering their ability to monitor and optimize productivity, cycle time, and other key metrics. Top performers illuminate the black box by defining and tracking a small number of KPIs throughout the development process. Leaders in these companies are intimate with the details of their projects, pushing back on inconsistent assumptions and demanding that teams commit to more near-term milestones, rather than chasing the promise of future returns.
Clinical excellence
The need for clinical data to drive product adoption is no longer reserved for a few select devices. To improve clinical-evidence-generation productivity, top medtech performers are looking to the pharmaceutical industry. Pharma companies have developed analytical tools that help them select sites and investigators, as well as execute and monitor trials.
Continuously shaping and reshaping the portfolio
So far, 2024 has been the industry’s most active year for portfolio shaping since 2017. Companies have made more acquisitions in the first six months of this year than they did in all of 2023, and they are on track to make the industry’s second-highest number of acquisitions of more than $1 billion in the past decade (Exhibit 2). Top performers have been particularly active acquirers: since 2019, companies in the 10 percent of total shareholder returns have made roughly 3.5 times more acquisitions than their peers.
Medtech companies have also been active sellers in this period. Divestitures in 2023 and 2024 have doubled the numbers for the prior two years.
However, making transactions alone does not guarantee success. Deal success has been mixed, which has caused some companies to temper their dealmaking activity—since 2022, roughly 20 percent of medtech companies have made one or zero transactions per year.
Having an effective strategy is therefore critical. The most effective acquisition and divestiture strategies are tailored to the acquirer’s goals, as seen in the following examples:
- Programmatically acquiring smaller, high-growth-adjacent businesses remains an evergreen strategy to accelerate near-term growth, add innovation to the acquirer’s portfolio, and access its adjacencies. The best companies take a portfolio-style approach to early- and midstage acquisitions, executing multiple transactions and betting that the upside of the “winners” can help cover the downside of the companies or products that flop.
- Step-out acquisitions that target new-patient pools or technology areas work well for companies seeking to transform their long-term growth plans. We are seeing increasing numbers of medtech companies move into high-unmet-need disease states and explore nascent, high-potential digital solutions.
- M&A transactions with other at-scale companies could work for a company that is resetting its cost base. In these cases, successful integration is critical for success. The greater the synergy between the two companies, the higher the likelihood of achieving substantial long-term operating-margin expansion.
- Unlocking dormant value involves a divestiture, enabling a high-potential but underfunded business unit to increase focus and investment under new ownership (either stand-alone or within another company’s business). For the businesses and shareholders involved to see value, companies must have a clear set of initiatives that the divested business unit can pursue rapidly after the transaction.
Ambitiously managing costs
The financial dust is beginning to settle in medtech after years of disruptions—for example, a sharp decline in the volume of medical procedures during the pandemic and rising inflation more recently. Since 2019, industry margins are down roughly 100 basis points, and, as noted, the gap between the top and bottom performers has widened (Exhibit 3).
McKinsey analysis suggests that most of the leading companies have already undertaken cost transformations, and in the past 12 to 24 months, at least nine medtech companies have announced significant transformation programs. These programs build on the existing objectives of unconditionally delivering on patient safety and regulatory requirements. Medtech companies that have unlocked the most run-rate savings have pulled cost and revenue improvement levers across these five categories:
- Portfolio simplification involves the divestiture of lower-growth or dilutive assets to improve growth and margin profile.
- Go-to-market optimization includes channel shifts, geographic exits, and sales force optimization.
- Supplier renegotiation involves managing and optimizing relationships with vendors to reduce costs and improve efficiency.
- Operations discipline aims to reduce product costs and enhance product value through process improvements, increased asset utilization, design-to-value strategies, and “smart quality” initiatives.
- Overhead optimization reduces nonessential costs and improves efficiency in administrative and support functions.
Successful transformations are multilevered but selective—usually tackling two to four levers at a time. They also build on existing efforts, leverage current strengths, empower frontline ownership, and focus on the levers that capture the most value the fastest to drive near- and midterm results. When executed well, transformations can unlock capital that could be used to fund additional value-creating activities and boost growth.
Driving manufacturing and supply chain excellence
The past five years have been challenging for medtech supply chains. Since 2019, their gross margins are down 100 to 200 basis points, and COVID-19-era disruptions are still limiting growth for some companies, according to our research. Even as the external environment stabilizes, most companies continue to struggle with lower margins, product availability, quality lapses, excessive inventory, or insufficient working capital.
To improve these conditions, leaders have followed a set of guiding principles:
- Maintain a relentless focus on interventions that directly affect critical business metrics with a proactive approach to quality.
- Minimize the time spent in the design phase by adopting an iterative approach to rapidly test and scale products and features. Compliance is integrated into design, including feedback loops with product development teams.
- Utilize digital tools only if they significantly accelerate and lead to sizable improvements. When doing so, allocate equal effort to solution development and organizational training and adoption.
- Emphasize change management and internal capability building from the outset of any initiative. This includes aligning to a shared vision across the enterprise, particularly with a focus on quality.
- Prioritize interface processes to improve collaboration with cross-functional teams (such as quality assurance, quality control, and commercial).
Improving commercial productivity through selective AI and generative AI implementation
Our research has shown that medtech companies with strong commercial capabilities have a CAGR that is 1.4 times higher than their market growth rate. Medtech companies generally excel in basic commercial functions, but they have significant room to improve their omnichannel and ecosystem selling strategies. Across the board, there have been improvements, but significant variance persists within the peer set. Successful companies have started to utilize the power of generative AI (gen AI) to drive commercial excellence, particularly in identifying potential customers and providing account-level insights. Some high-impact use cases are starting to emerge (Exhibit 4).
Gen AI can generate value along four drivers of commercial excellence: right customers, right content, right frequency and channel, and right investment. Here are some of the most promising use cases:
- Rep copilot. Intelligence can assist sales reps in identifying the right customers to engage by enabling efficient retrieval of customer information and autogeneration of draft account plans.
- Next-best action. Fully automated next-best-action recommendations at the individual buyer level (such as proposed message and content, timing, preferred channel) can replace existing call plans.
- Tender excellence. Analytics can identify high-potential prospects (beyond size) and thereby focus sales reps on highest-potential opportunities with new and existing customers.
- Content generator. Improved automation can be achieved through the integration of gen AI into each step of the marketing content creation process.
Leading medtech companies are beginning to capture significant value from gen AI and are setting a benchmark for the industry. A substantial opportunity remains for other medtech companies to catch up and realize the full potential of AI-powered commercial capabilities.
Adapting to geopolitical uncertainty
In addition to the supply chain, medtech is also facing challenges in managing infrastructure and demand driven by geopolitical uncertainty. Some of the hurdles for medtech companies include new competition (particularly from emerging companies in China and India), regulatory changes, and increasing regionalization of growth (for example, tenders in Europe and volume-based procurement in China).
As medtech companies navigate these geographical dynamics, top performers are doing four things well:
Demonstrate discipline around ‘must win’ geographies
They focus on the largest markets and ensure that their portfolio, commercial model, and operations are fit for purpose in those geographies. More important, companies are going beyond historically larger markets (China, the European Union, Japan, and the United States) to invest in the next wave of growth.
Lean into localization
Every company operating in China has, in one way or another, needed to make choices around this trend. Other markets, such as Indonesia and Saudi Arabia, are following the China model. Localization presents challenges for some companies, but for others, it’s an opportunity to challenge the entire enterprise footprint and double down on investments into their largest markets, such as localization of innovation and R&D to fuel local growth.
Partner with local organizations
Given the complexity associated with global footprints, leading global medtechs are becoming much more creative around what third-party partners can do, beyond simply moving boxes; some are investing in local partners that can unlock significant growth and cover more of the value chain for them.
Reduce complexity (and sometimes, their geographic footprint)
Managing tail-end countries has long been a strategy in the medtech industry; however, this approach has always resulted in lower volumes and stranded costs. Being bold here matters, not just in the choices a company makes around smaller markets but also in understanding how complex global footprints contribute to functional and supply chain complexity and cost.
As these value creation themes unfold, medtech companies that embrace and respond effectively to change will be well positioned to achieve sustainable growth to meet the needs of patients and other stakeholders in the years ahead.
