I. Sector Landscape and Outlook

Healthcare equipment provides a variety of advantages to patients by supporting healthcare providers to treat and diagnose patients and assisting patients in improving the quality of their life. The rise in the ageing population has led to a demand increase for healthcare services and equipment in Great Britain and across the world. Along with the ageing population, the high prevalence of the chronic disease has pushed the growth dynamics of the healthcare market in recent times. Also, a rise in the surgical procedure and complex surgeries are set to boost the global and the UK healthcare equipment market in the next few years.

The Medical device industry classified into various product type, which includes In-Vitro Diagnostics, Dental Equipment And Supplies, Ophthalmic Devices, Diagnostic Equipment, Cardiovascular Devices, Hospital Supplies, Surgical Equipment, Orthopaedic Devices, Patient Monitoring Devices, Diabetes Care Devices, Nephrology And Urology Devices, ENT Devices, Anesthesia And Respiratory Devices, Neurology Devices,  and Wound Care Devices.

Global medical equipment devices market size was valued at US$ 448.5 bn in 2019 and is expected to grow with a compounded average growth rate of 5.4% to US$ 614.8 bn by 2025 as estimated by MedTech Europe. On the other hand, the UK Healthcare devices market was valued at US$ 9.5 billion in 2017 and is expected to become a US$ 17.4 billion market by 2025, which reflects a CAGR of 4.7% over the forecasted period. The UK is the third-largest market in Europe after Germany and France in healthcare equipment. The expertise of British healthcare device manufacturers lies primarily in orthopaedics products along with imaging, cardiovascular device, and diagnostics.

 


The demand spurt for convenient healthcare diagnosis and treatment has led to a subsequent surge in need for healthcare equipment in the country. Further, the rise in healthcare expenditure has favourably impacted the growth of the healthcare equipment industry in recent years. Let’s look at the European healthcare market.

Healthcare Device Market in Europe

The European healthcare equipment market was valued at roughly €115 billion in 2017. The European region accounted for 27% of the total world healthcare equipment market and 2^nd largest after the United States (~43%). 

Fig. 3. European medical device market share by country


Source: MedTech Europe
 
We see the following key trends that could drive sector growth:

1. IVD devices have emerged as growth catalysts for the Healthcare Equipment Industry: In Vitro Diagnostic medical devices have emerged as solid catalysts for the industry across the world and in Britain too. IVD devices are efficient in finding diseases or other health issues and also widely used to monitor a person’s health conditions, treatment and prevention of diseases. Within the healthcare equipment market, this particular segment commands a significant share of ~ 13% globally and a substantial share in the UK healthcare equipment market as well. The IVD devices market is categorised into reagents, instruments and software & services and out of these three sub-segments, reagents devices hold the highest market share and software & services is estimated to grow at the fastest rate in the next five years.

 
Fig. 4. European in vitro diagnostic device (IVD)market by country
 

Source: MedTech Europe
 

2. Increase in incidences of chronic diseases: The increase in chronic disease like arthritis, cancer, cardiovascular disease, a neurodegenerative disorder, and diabetes is expected to drive the need of healthcare equipment in the near to medium term. According to the World Healthcare Organisation (WHO), around 75% of the ageing population of the UK suffers from chronic diseases and 50% with two or more problem. Thus, higher growth of such disease will drive demand for such equipment.

3. Ageing Population:  in 2018, the total British population was 66.4 million and expected to reach over 74 million by 2039, according to ONS. Also, the population is getting older, with a median age of 40.5 years, and around 18% of the total population is aged 65 or above. Further, the percentage of the population of 65 years or above are expected to reach ~ 21% of the total UK population by 2026, which implies a CAGR of 2.2% between forecasted period, and we note the majority of healthcare spending comes from people above the age of 60.

 
Fig. 5.  United Kingdom Population in 2018, by age group (in million)
 

Source: ONS
 

4. Preventive testing: We forecast rising awareness and the government’s recent steps to incentivize preventive testingand an increase in demand for medical devices.

5. COVID-19 pandemic led demand spurt for Personal Protective Equipment (PPE) and respiratory devices: COVID-19 is a respiratory disease that is different from Ebola virus disease, which is transmitted through infected bodily fluids. Due to these differences in transmission, the PPE requirements for COVID-19 are different from other virus diseases. The current global inventory of protective equipment is inadequate, primarily for masks and respirators; the supply of gowns and goggles is soon expected to be insufficient to cater to the demand glut.  Also, a surge in global demand is not only driven by the number of virus-infected cases but also by false or inaccurate information, panic buying, and stockpiling that will lead to a further shortage of PPE globally. Also, the capacity to expand PPE production is limited, and the current heightened demand for masks, gloves, gowns and respirators cannot be met if the widespread inappropriate use of PPE continues. However, companies have rushed to ensure availability of PPE in the next few months; therefore, a demand glut for PPE devices is set to drive revenue for PPE manufacturers in near-term. The pandemic has significantly increased demand for specimen collection tubes for COVID-19 testing. EKF Diagnostics Holdings plc- listed on the AIM segment of the London Stock Exchange which is in our coverage as well and is one of the beneficiaries from demand spurt for specimen collection tubes for COVID-19 testing. The company has received an initial order of US$ 1 million from a US-based company and is expected to increase significantly.
 

Opportunities in the UK market:Basically, the UK medical device market is an import-led and majority of domestically manufactured equipment is exported to other countries, primarily to the United States. However, consistent demand for imported equipment has made industry players and the regulatory system more open to new and innovative technologies.

UK listed Medical Equipment companies’ revenue surged with a CAGR of 11% over the past three years (2016-2019): There are 22 listed Healthcare equipment companies based out in the UK traded on globally recognised stock exchanges, and their combined revenue recorded a CAGR of 11% between (2016-2019). Total revenue growth of the listed players has outperformed the sector by ~6.5% during the same period. There are only three listed companies viz. Smith & Nephew, ConvaTec Group Plc and LivaNova Plc which have revenue in excess of US$ 1 billion individually. There are ~800 private players in the sector but none except AAH Pharmaceuticals Ltd has more than US$ 1 billion of revenue. This shows that the industry is highly fragmented and provides an opportunity for merger and acquisition activities.. In our base case, we anticipate the large top franchisee to gain market share as they benefit from gradual formalisation as smaller companies fold up into them via inorganic M&A or become their B2B customers.

 
II. Investment Theme and Stocks under Discussion (SN., CTEC, EKF, IDH)

After gauging through the industry dynamics, let’s take a detailed view of the companies in the operating in the sector in terms of their performance and outlook. To assess the same, companies’ stocks are evaluated based on Discounted Cash Flow (DCF).

Fig. 6. Relative Performance of the companies under discussion against FTSE 100