Life Sciences Practice

Value creation priorities

shaping medtech
With pandemic-related volatility subsiding, the strategies separating
industry leaders from their peers are coming into focus.
by Delphine Nain Zurkiya, Gerti Pellumbi, Peter Pfeiffer, and Tommy Reid

October 2024
 Medtech value creation has been a story of haves the six strategic and operational moves that leading
and have-nots in recent years. Since 2019, the top companies are making to create value.
value creators have outpaced the S&P 500, while
the rest of the industry has struggled (Exhibit 1).1
Industry and capital market volatility during the Prioritizing innovation
COVID-19 pandemic masked the differences in productivity to drive growth
performance between the top medtech companies For decades, innovation has driven growth for
and their peers. In the years since, investor behavior the medtech industry, enabling companies to
has revealed just how wide of a gap they see reach new patients and achieve revenues to
between these cohorts. outpace underlying patient population growth.
Over the past 15 years, however, R&D has become
High performers share a success profile that more expensive, cutting into value returned on
distinguishes them from other companies: above- investment—R&D spend as a percentage of sales
average industry growth, relentless focus on quality, has grown by 300 basis points since 2008.2 The
rich innovation pipelines, rising profit margins, and bar for new-product adoption has also risen:
steady levels of free cash flow. Underneath the customers increasingly expect meaningful
financials, these industry leaders have taken largely innovation, often backed by clinical evidence,
similar paths to success. In this article, we spotlight rather than incremental improvements.

Web <2024>
<MedTechValue>
Exhibit
Exhibit <1>1 of <4>

Most of the growth in medtech over the past two years has been driven by
the top-decile performers.

Medtech total shareholder returns relative to the S&P 500, index (Jan 2019 = 100)

Top-decile medtech¹ Rest of medtech S&P 500

300 300 300
+44% +2% +21%
CAGR CAGR CAGR
250 250 250

200 200 200

150 150 150

100 100 100

2019 2024 2019 2024 2019 2024

1
Out of top 60 medtech companies, by market cap, as of Aug 31, 2024.
Source: S&P Capital IQ, accessed Aug 31, 2024

McKinsey & Company

1
Based on McKinsey analysis of the top 60 medtech companies, by market capitalization. Weighted average is based on market capitalization.
Average of the rest of medtech is 2 percent, with median –3 percent. Based on data from S&P Capital IQ, accessed September 4, 2024.
2
Based on McKinsey analysis of company filings by the top 30 medtech companies, by market capitalization. Based on data from S&P Capital
IQ, accessed August 31, 2024.

2 Value creation priorities shaping medtech

In response to these trends, top-performing Clinical excellence
medtech companies have acted with conviction The need for clinical data to drive product adoption
to invest and commit to the following value- is no longer reserved for a few select devices. To
creating practices: improve clinical-evidence-generation productivity,
top medtech performers are looking to the
Adoption of digital tools and solutions pharmaceutical industry. Pharma companies have
Top performers have built digital backbones for their developed analytical tools that help them select
product development processes. Some of them sites and investigators, as well as execute and
have also adopted an agile quality management monitor trials.
system, which emphasizes simplicity and
continuous improvement, streamlines processes,
promotes innovation, and allows organizations to Continuously shaping and
adapt to changing regulations and markets. Others reshaping the portfolio
are taking bolder measures—for example, deploying So far, 2024 has been the industry’s most active
digital twins to identify the optimal specifications for year for portfolio shaping since 2017. Companies
a new product. Based on our experience, successful have made more acquisitions in the first six months
deployment of such digital solutions and tools can of this year than they did in all of 2023, and they
lead to a 20 percent reduction in development time, are on track to make the industry’s second-highest
with a proportionate decrease in costs. number of acquisitions of more than $1 billion in the
past decade (Exhibit 2). Top performers have been
Building great tools is not enough. We’ve witnessed particularly active acquirers: since 2019, companies
companies develop terrific tools only to see in the 10 percent of total shareholder returns have
them fade into obscurity. At-scale adoption and made roughly 3.5 times more acquisitions than
value creation hinge on change management—a their peers.3
transformation of organizational behaviors.
Medtech companies have also been active sellers
Data-driven management in this period. Divestitures in 2023 and 2024 have
R&D is often a “black box” for management teams— doubled the numbers for the prior two years.4
hindering their ability to monitor and optimize
productivity, cycle time, and other key metrics. Top However, making transactions alone does not
performers illuminate the black box by defining and guarantee success. Deal success has been mixed,
tracking a small number of KPIs throughout the which has caused some companies to temper
development process. Leaders in these companies their dealmaking activity—since 2022, roughly
are intimate with the details of their projects, 20 percent of medtech companies have made
pushing back on inconsistent assumptions and one or zero transactions per year.5
demanding that teams commit to more near-term
milestones, rather than chasing the promise of
future returns.

3
Based on data from S&P Capital IQ, accessed August 31, 2024.
4
S&P Global Market Intelligence: Capital IQ, accessed August 31, 2024.
5
Based on McKinsey analysis of company filings by the top 30 medtech companies, by market capitalization. Data from S&P Capital IQ,
accessed August 31, 2024.

Value creation priorities shaping medtech 3

 Web <2024>
<MedTechValue>
Exhibit 2 of <4>
Exhibit <2>

Medtech dealmaking has rebounded in 2024 after a slowdown in 2023.

Medtech M&A value as a share of market, %

18

14
13
12

8
7
6 6 6
4

2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 YTD1

Deal value,
46 72 57 30 29 26 632 42 20 37
$ billion
Deal count 147 132 125 93 122 108 154 98 58 97

Note: Represents deals classified as “acquisition of majority stake” and nonzero total disclosed transaction value.
Jan 1–Aug 19, 2024.
1

Excludes deals with undisclosed terms.

2

Source: S&P Capital IQ, accessed Aug 31, 2024

McKinsey & Company

Having an effective strategy is therefore critical. The need disease states and explore nascent, high-
most effective acquisition and divestiture strategies potential digital solutions.
are tailored to the acquirer’s goals, as seen in the
following examples: — M&A transactions with other at-scale companies
could work for a company that is resetting its
— Programmatically acquiring smaller, high- cost base. In these cases, successful integration
growth-adjacent businesses remains an is critical for success. The greater the synergy
evergreen strategy to accelerate near-term between the two companies, the higher the
growth, add innovation to the acquirer’s likelihood of achieving substantial long-term
portfolio, and access its adjacencies. The best operating-margin expansion.
companies take a portfolio-style approach to
early- and midstage acquisitions, executing — Unlocking dormant value involves a divestiture,
multiple transactions and betting that the upside enabling a high-potential but underfunded
of the “winners” can help cover the downside of business unit to increase focus and investment
the companies or products that flop. under new ownership (either stand-alone or
within another company’s business). For the
— Step-out acquisitions that target new-patient businesses and shareholders involved to see
pools or technology areas work well for value, companies must have a clear set of
companies seeking to transform their long-term initiatives that the divested business unit can
growth plans. We are seeing increasing numbers pursue rapidly after the transaction.
of medtech companies move into high-unmet-

4 Value creation priorities shaping medtech

Ambitiously managing costs These programs build on the existing objectives
The financial dust is beginning to settle in medtech of unconditionally delivering on patient safety and
after years of disruptions—for example, a sharp regulatory requirements. Medtech companies that
decline in the volume of medical procedures during have unlocked the most run-rate savings have
the pandemic and rising inflation more recently. pulled cost and revenue improvement levers across
Since 2019, industry margins are down roughly 100 these five categories:
basis points, and, as noted, the gap between the top
and bottom performers has widened (Exhibit 3). — Portfolio simplification involves the divestiture
of lower-growth or dilutive assets to improve
McKinsey analysis suggests that most of the growth and margin profile.
leading companies have already undertaken
cost transformations, and in the past 12 to 24 — Go-to-market optimization includes
months, at least nine medtech companies have channel shifts, geographic exits, and sales
announced significant transformation programs. force optimization.

Web <2024>
<MedTechValue>
Exhibit 3 of <4>
Exhibit <3>

Industry margins have been dipping since 2019, and the gap between the
leaders and the laggards is widening.
EBITA margin 35
across top
~30 global
medtech 30
companies,¹
% (quarterly) ~75th percentile
25

Median
20

15 ~25th percentile

10

2019 2020 2021 2022 2023 20242

0

EBITA margin, 27.1 25.6 28.4 27.2 26.4 27.3 ~75th percentile
by percentile, 23.6 22.5 25.2 23.7 22.5 22.4 Median
% (CAGR)
17.4 16.5 19.2 17.4 15.7 15.2 ~25th percentile

1
Top ~30 medtechs, by 2022 sales, based on available data from 2018 to 2023, as of Aug 31, 2024.
²Jan 1–Aug 31, 2024.
Source: S&P Capital IQ, accessed Aug 31, 2024

McKinsey & Company

Value creation priorities shaping medtech 5

 — Supplier renegotiation involves managing and — Minimize the time spent in the design phase by
optimizing relationships with vendors to reduce adopting an iterative approach to rapidly test
costs and improve efficiency. and scale products and features. Compliance is
integrated into design, including feedback loops
— Operations discipline aims to reduce product with product development teams.
costs and enhance product value through
process improvements, increased asset — Utilize digital tools only if they significantly
utilization, design-to-value strategies, and accelerate and lead to sizable improvements.
“smart quality” initiatives. When doing so, allocate equal effort to
solution development and organizational
— Overhead optimization reduces nonessential training and adoption.
costs and improves efficiency in administrative
and support functions. — Emphasize change management and internal
capability building from the outset of any
Successful transformations are multilevered but initiative. This includes aligning to a shared
selective—usually tackling two to four levers at a vision across the enterprise, particularly with a
time. They also build on existing efforts, leverage focus on quality.
current strengths, empower frontline ownership,
and focus on the levers that capture the most value — Prioritize interface processes to improve
the fastest to drive near- and midterm results. When collaboration with cross-functional teams
executed well, transformations can unlock capital (such as quality assurance, quality control,
that could be used to fund additional value-creating and commercial).
activities and boost growth.

Improving commercial productivity

Driving manufacturing and through selective AI and
supply chain excellence generative AI implementation
The past five years have been challenging for Our research has shown that medtech companies
medtech supply chains. Since 2019, their gross with strong commercial capabilities have a CAGR
margins are down 100 to 200 basis points, and that is 1.4 times higher than their market growth
COVID-19-era disruptions are still limiting growth rate.6 Medtech companies generally excel in basic
for some companies, according to our research. commercial functions, but they have significant
Even as the external environment stabilizes, most room to improve their omnichannel and ecosystem
companies continue to struggle with lower margins, selling strategies. Across the board, there have
product availability, quality lapses, excessive been improvements, but significant variance
inventory, or insufficient working capital. persists within the peer set. Successful companies
have started to utilize the power of generative AI
To improve these conditions, leaders have followed (gen AI) to drive commercial excellence, particularly
a set of guiding principles: in identifying potential customers and providing
account-level insights. Some high-impact use cases
— Maintain a relentless focus on interventions that are starting to emerge (Exhibit 4).
directly affect critical business metrics with a
proactive approach to quality.

6
Abhi Patangay, Marcel Meuer, Kelsey Kennedy, and Maria Strom, “Commercial capabilities: A predictor of growth for medtech companies,”
McKinsey, June 11, 2024.

6 Value creation priorities shaping medtech

Web <2024>
<MedTechValue>
Exhibit 4 of <4>
Exhibit <4>

Companies are achieving commercial gains from generative AI use.

Examples of generative AI use in medtech commercial activities, by use case

Typical impact
Revenue Cost Cost
Definition enhancement reduction avoidance

Field force Rep copilot 5–10% productivity 2–5% increased new patient
Timely insights and recommendations to reps via gain by reducing reps’ share by helping reps capture
conversational interface information burden more opportunities

Next-best action ~5–10% sales uplift

Account-level prioritization and recommendations with reps following
to boost interaction effectiveness and sales the recommendations

Sales ops/ Tender excellence 2× speed improve- Increased effectiveness of

customer Evaluate RFPs,1 creating transparency on effec- ment in first response pre-tender engagement
service tiveness of pre-tender engagement and likelihood leading to increased win rate
to win; shape win themes; and draft content

Marketing Content generator 20–60% reduction in Up to ~20% reduction in

Automate generation of personalized content for creative-agency content cycle time
a variety of channels spend

Medical, legal, and regulatory affairs assistant 3.5× increase in 20–30% time savings for
Streamline review tasks to increase content healthcare provider reviewers
throughput satisfaction

1
Requests for proposals.

McKinsey & Company

Gen AI can generate value along four drivers of level (such as proposed message and content,
commercial excellence: right customers, right timing, preferred channel) can replace existing
content, right frequency and channel, and right call plans.
investment. Here are some of the most promising
use cases: 3. Tender excellence. Analytics can identify
high-potential prospects (beyond size) and
1. Rep copilot. Intelligence can assist sales reps thereby focus sales reps on highest-potential
in identifying the right customers to engage opportunities with new and existing customers.
by enabling efficient retrieval of customer
information and autogeneration of draft 4. Content generator. Improved automation can
account plans. be achieved through the integration of gen AI
into each step of the marketing content
2. Next-best action. Fully automated next-best- creation process.
action recommendations at the individual buyer

Value creation priorities shaping medtech 7

 Leading medtech companies are beginning to Other markets, such as Indonesia and Saudi Arabia,
Find more content like this on the
capture significant value from gen AI and are are following the China model. Localization presents
McKinsey Insights App
setting a benchmark for the industry. A substantial challenges for some companies, but for others, it’s
opportunity remains for other medtech companies an opportunity to challenge the entire enterprise
to catch up and realize the full potential of footprint and double down on investments into their
AI-powered commercial capabilities. largest markets, such as localization of innovation
and R&D to fuel local growth.

Adapting to geopolitical uncertainty Partner with local organizations

In addition to the supply chain, medtech is also Given the complexity associated with global
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facing challenges in managing infrastructure and footprints, leading global medtechs are becoming
demand driven by geopolitical uncertainty. Some much more creative around what third-party
of the hurdles for medtech companies include new partners can do, beyond simply moving boxes;
competition (particularly from emerging companies some are investing in local partners that can unlock
in China and India), regulatory changes, and significant growth and cover more of the value chain
increasing regionalization of growth (for example, for them.
tenders in Europe and volume-based procurement
in China). Reduce complexity (and sometimes,
their geographic footprint)
As medtech companies navigate these Managing tail-end countries has long been a
geographical dynamics, top performers are doing strategy in the medtech industry; however, this
four things well: approach has always resulted in lower volumes and
stranded costs. Being bold here matters, not just
Demonstrate discipline around in the choices a company makes around smaller
‘must win’ geographies markets but also in understanding how complex
They focus on the largest markets and ensure that global footprints contribute to functional and supply
their portfolio, commercial model, and operations chain complexity and cost.
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 As these value creation themes unfold, medtech
of growth. companies that embrace and respond effectively
to change will be well positioned to achieve
Lean into localization sustainable growth to meet the needs of patients
Every company operating in China has, in one way or and other stakeholders in the years ahead.
another, needed to make choices around this trend.

Delphine Nain Zurkiya is a senior partner in McKinsey’s Boston office, where Tommy Reid is a partner; Gerti Pellumbi is a
senior partner in the Washington, DC, office; and Peter Pfeiffer is a senior partner in the New Jersey office.

The authors wish to thank Abhi Patangay, Brett Klosterhoff, Christian Zerbi, Elea Medina, Marcel Meuer, Mike Ennen,
Mohammad Behnam, and Richard Bartlett for their contributions to this article.

This article was edited by Jermey Matthews, an editor in the Boston office.

Designed by McKinsey Global Publishing

Copyright © 2024 McKinsey & Company. All rights reserved.

8 Value creation priorities shaping medtech