Index suggests slower medtech growth for Germany

Growth in the German medical technology sector has lost momentum since 2016, according to the SHS Medical Technology Index.

The relative growth rate has been in decline for the past two years. The index value of 112% from 2016 fell to 110.5% in 2017 and to 109.7% in 2018.

The sector's dynamic growth may have been slowed by stricter regulatory requirements, which came into force in 2017 with the Medical Device Regulation. The development of the sector in relation to the economy as a whole is indicated in the Medical Technology Index published by SHS Gesellschaft für Beteiligungsmanagement, a late-stage venture and small cap investor with sector funds for the medical device industry in the DACH region.

The medical technology investor designed and calculated the index in cooperation with Christian Koziol, professor and chair of finance at the University of Tübingen, Germany. The index measures the medical technology sector's potential for innovation and growth based on the four indicators turnover, employment figures, patent approvals and share price development. The index is to be updated annually in the future.

Koziol said: "The medical technology sector is of major importance for Germany as an industrial location. The SHS Medical Technology Index is intended to quantify the growth, innovativeness and economic strength of the sector using economic indicators, to show its development over the period under review and to compare it to the economy as a whole. As such, the index can provide precise information on how Germany's medical technology sector is developing."

Growing complexity and an increasingly tight regulatory framework may have hampered  growth since its peak.

Hubertus Leonhardt, managing partner at private equity firm SHS, said: "The index curve clearly indicates that the medical technology sector has shown above-average growth. The sector is less volatile and cyclical, and also creates many jobs.”

The Medical Device Regulation, which has been in force since 2017, places significantly higher demands on approval and testing procedures than the previous directive did. This increases development time and costs, which can result in a financial burden and a difficult equity situation, especially for small and medium-sized companies. Many businesses of this size have difficulty managing the additional expenditures required for innovation projects and recertification of existing products.

Leonhardt added: "These companies in particular have an increasing need for strong and well-connected partners who can support them financially and strategically in overcoming regulatory hurdles and growing their business. However, we also see a trend towards small and medium-sized companies increasingly looking for acquisition opportunities. They are likely trying to reach critical mass. In addition to that, they can also gain market share and expand their product portfolio by way of mergers and acquisitions.”

In 2010, a total of 499 patents from the medical technology spectrum were approved, compared with 1,075 in 2016. This means the number of approvals more than doubled within six years with an increase of around 115%. By comparison, the number of patent approvals across all sectors of the economy only increased by about 50%, from 12,550 in 2010 to 18,728 in 2016. Therefore, the economy as a whole lagged far behind the medical technology sector.

The situation reversed starting in 2016. The growth momentum of total patent approvals in Germany continued in 2017 and 2018. The number increased by around 10% within two years and reached a new high of 20,804 in 2018. In contrast, the number of patent approvals from the medical technology sector stagnated. In line with the SHS Medical Technology Index, the development of patent approvals has also lost considerable momentum since 2016 and plateaued at a high level of over 1,000 approvals per year since then.

Hubertus Leonhardt, partner at medtech investor SHS, said: "The fact that there were not significantly more medical technology patents approved in 2017 and 2018 than in 2016 is no reason to sound the alarms.

“However, looking at the development of patent approvals in the medical technology sector also shows that fundamentally advantageous framework conditions can quickly be squandered, especially if an industry's innovativeness is inhibited by regulatory measures.

“This requires extreme sensitivity on the part of legislators and regulatory authorities, especially when the economic environment becomes rougher as a whole.”

In the future, the challenges of demographic change and developments in areas such as digital health and the management of chronic diseases will drive further growth in this sector, but Leonhardt suggests that the USA is reducing regulatory frameworks while the USA increases them.