The purpose of this report is to analyse the Nordic medical devices industry and to assess its investment potential. The report also aims at identifying specific companies in the industry that are candidates for investment. These candidates will be analysed in a separate more company specific analysis. To make the industry analysis more specific and relevant, 21 established medical devices companies in the Nordics have been included in the analysis. 

During the period from 2013 to 2022 the median return on capital for all 21 companies has been 17.1%. The median operating margin (EBIT) has been 14.3%. These numbers thus pass my initial hurdle for investment consideration; long term historic return on capital and operating margin above 10%.

The structure of the report is as follows: 

- The first chapter of the report, after the introduction, is a summary of the main conclusions and recommendations for the industry. 

- The next three chapters aim to give an overview and better high-level understanding of the industry. First there is an introduction of the 21 companies, that are being analysed, including revenue and a high-level description of the business. After that follows an overview of the industry and its history. This is followed by a high-level overview of the industry value chain.    

 - As the regulatory approval process is very strict and essential for the market access the regulatory processes in the US and the EU have been given a separate chapter.  

- This is followed by an in-depth analysis of the financial performance of the industry. Even the biggest ones among the Nordic companies are still relatively small on a global scale. To get a better picture of the financial performance of the biggest global players in the industry the top 10 global, listed companies were analysed in parallel as well. This gives a valuable idea of the potential ’end game’ for a successful and growing company in the industry.

- The medical devices market dynamics and the factors that are likely to impact future industry growth have been analysed in a final chapter of the analysis.  

- The conclusions from the analysis are summarised in the chapter Investment Considerations. In this chapter the rational for and against investing in the industry have been made. It’s important to point out that the investment horizon considered in this chapter is long term or at least 5 years.

The medical devices industry in the Nordics is attractive for investments. This analysis has identified 13 investment candidates out of 21 established and mature companies listed on the Nordic exchanges. These 13 companies will have to be individually analysed in detail to assess the potential of each company. Given the historic trends of financial performance and expected impact of the key factors influencing the future of the health care industry, these investment decisions have to be made very selectively.    

Further to these 13 companies there are another 15 ‘up and coming’ companies that are demonstrating growth and promising financial performance. These companies are on the track to reach threshold financial performance (return on capital and operating margin above 10%) within the next years and some of them are worth considering for investment already now. 

The margins and return on capital are strong for the majority of the companies in the industry. The median return on capital during the last 10 years has been 17.1%. Many companies also demonstrate strong growth numbers. There is, however, a trend of falling return on capital since 2016 with an exceptional low outcome of 11.3% in 2022. This raises some concerns about the industries long term returns and if the historically strong returns really can be maintained. 

When looking at the top 10 global listed companies in the industry we can see that the return on capital level is lower with a 10-year median of 8.6%. For the top 10 companies the trend has been declining during the 10 last years. Many of the top 10 companies have had to make major acquisitions to sustain growth. As they had to pay a premium for these acquisitions, high amounts of goodwill were created which increased the capital base and drove down the return. 

There thus seem to be a financial performance ‘sweet spot’ for smaller to mid-size companies when they are big enough to have reached an acceptable cost level but small enough to be able to grow faster than the market. Once the company becomes too big it becomes difficult to grow at a faster rate than the market and maintain an acceptable return on capital.  

The increasing spend on healthcare in the western world during the last decades has greatly benefited the industry. The scientific progress of the industry has also improved people’s quality of life and life expectancy. The ever-increasing health care spend does, however, start reaching unsustainable levels. It’s already at a level of 11% of GDP in the EU and an incredible 18% of GDP in the US.  At the same time there are many factors that risk increasing the demand for health care even further such as the ageing population and increase of obesity with resulting chronic diseases. 

This is likely to translate into more restrictive spending and cost pressure from the payers which means reduced gross margins for the medical device companies, although there is no evidence of falling gross margins yet. There are however also likely to be great opportunities for those companies that can supply products that can deliver true productivity improvements, reduce obesity and improved preventive and predictive care.            

So it’s attractive to invest in the Nordic medical devices industry but one has to be more selective than historically and also take height for increased price pressure from the payers and the risk of falling gross margins. One also has to monitor the development of the return on capital and be prepared to reassess the investment decision should the company become big, and stale and the returns start suffering.

The medical devices industry can be further classified into five categories: 

1. Disposable or high-volume consumables:
   Include products such as surgical gloves, syringes, catheters and needles
2. Surgical and medical instruments: 
   Product such as forceps, medical scissors and dental drills. They are generally multi-use and have to be sterilised in between uses. 
3. Therapeutic devices:
   Implantable and non-implantable devices to help people manage an illness or disability such as hearing aids, pacemakers, and prosthetics 
4. Capital equipment:
   Single purchase equipment that can be used repeatedly over several years. Equipment used in patient monitoring, diagnostics and imaging. Ranges from blood pressure monitors to MRI equipment    
5. Medical IT systems and software

There are in total 109 companies listed on the Nordic stock exchanges that fit this definition. The majority of these companies or 82 to be exact are listed on the Swedish stock exchange. Most of these companies are start-ups with no or low revenue. To get an in-depth understating of the industry and a representative picture of the financial performance of established companies in the industry, 21 companies were selected. These are companies that have an annual revenue above MSEK 500 (m€50) and that are at least 10 years old.      

The 20 companies have been listed in table 1 below in order of revenue 2022. The nationality, the company’s business and category have been indicated as well. 

The WHO definition of medical devices has been used in this report. According to WHO a medical device can be any instrument, apparatus, implement, machine, appliance, implant, reagent for in vitro use, software, material or other similar or related article, intended by the manufacturer to be used, alone or in combination for a medical purpose. 

As long as humans have been able to make tools they have been using these tools to solve medical problems. These tools have become more and more sophisticated over time and during the last 100 years there have been many scientific breakthroughs which have helped bring the medical profession and healthcare to new levels. Thanks to this progress the healthcare outcome and quality of life have improved for millions of people.  

The introduction of information technology in medical devices has been a major enabler for this progress and it’s natural to expect that the advent of artificial intelligence will take the complexity and sophistication of medical devices to the next level. 

If one looks at the Nordic countries Sweden stands out with a history of some major medical innovations such as the pacemaker, ultrasound, the gamma knife, ICU ventilators and the recent RefluxStop. The latter is an invention by the Swedish company Implantica and can be seen as a smart implant that treats acid reflux. 

Denmark has a long tradition in sound technology which Bang & Olufsen bear witness to. It’s thus no surprise that Denmark is home to 2 of the world’s biggest hearing aid manufacturers; Demand and GN Store Nord. 

There are many more innovations and new products coming. There are about 85 companies (listed) in the Nordics with products in various development stages. Many have already launched products with revenues and a few of them are already profitable.      

It’s clear that the industry has a strong track record of innovation and technological advances in the Nordics. This development is likely to continue in the future.     

The other thing the industry has going for it is the demographic trends. As we live longer and longer and many illnesses become curable or less fatal we need more medical care for chronic illnesses. We also live more active lives than previous generations and want to stay active much longer which means more need for joint replacements and implants.  

So demand is strong, technology allows for ever better products and investors are willing to fund new ventures in the industry. The only challenge is who is going to pay for the products?     

The ageing population is putting a strain on healthcare systems in the western world, where most of the spending on medical devices takes place. The demand for health care is increasing but health care budgets are limited and in many countries there is too low a supply of qualified medical professionals. The pie is not growing and the question is how big piece of the pie will be reserved for medical devices? One could argue that there is a stronger case for the society to increase the spending on curing child diseases than making it possible for pensioners to dance Salsa.      

The main factors that are likely to influence the payer’s decisions and drive the demand for medical devices are therefore:  

• Ability to demonstrate measurable improved outcomes
• Improved efficiency, or make more and/or faster with less
• Improved predictive accuracy 
• Preventive care 

Another important aspect for the industry is the regulatory approval process for new products. It’s clear that a medical implant will have a stricter approval process than let’s say a mobile phone. This approval process can be lengthy and a major cost item, in particular for a small start-up.

The industry’s high level value chain can be seen in figure 1 below. The Research & Product Development step is by far the longest and most costly. To go from a conceptual design to a regulatory market approval takes many years. The higher risk the product means for humans the longer and more complex the approval process. The regulatory approval process has been explained more in detail in chapter 6. The devices will also need to be patented to prevent any replicating of the device.  

The manufacturing process and suppliers have to be established and quality assured prior to submitting the request for regulatory approval. Depending on the complexity of the product the number of components included may be several hundred. The manufacturing of many of the components is therefore likely to be done by external suppliers. These suppliers will in their turn have material suppliers for resin, metals, chemicals,…etc.  Once all components have been manufactured they will be delivered to an assembly plan/ line where end testing will take place and documentation prepared. 

The product is then packed and depending on the end use of the product it may need to be steralised. Although the quality requirements on the components are high the cost of the manufacturing and the assembly are generally relatively low in relation to the price and other costs like marketing and sales.

Depending on the category of product different sales & distribution channels will be used. Low value products like disposables tend to be distributed through wholesale distributors whilst high value products like capital equipment and medical IT systems are likely to be sold and delivered directly to the hospital. These products may also need installation on site and user training before they can be used. 

The market segments are generally driven based on the body function the devise are aimed at treating. Some of the biggest segments are Cardiovascular, Diagnostics, Orthopedics and Ophthalmology. Even the bigger companies tend to specialize in one or a few segments given the amount of expertise and research that is required to remain competitive in a segment.

The regulatory process for medical devices is an essential step in the marketing of a new medical device. Without regulatory approval the product cannot be sold in its intended market. The approval is therefore crucial for the company to be able to sell its product. Is therefore of importance to get a better in depth understanding of the regulatory approval process.   

The description of the regulatory approval process has been limited to the two biggest medical device markets, the US and the EU.  

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US: 

The US is the world’s biggest market for medical devices. To be successful in the medical device industry a company must establish themselves in the US. In order to market a product the company has to go through one of the FDAs (Federal Drug Administration) approval process. The aim of the approval process is to assure that the device is effective and safe for the patients. 

Medical devices are divided into three classes depending on the risk to the patient. The class is based on the degree of required control to assure that the device is safe and effective.      

1. Class I devices:
   Minimal risk for causing harm to the patient and subject to the lowest level of controls. Some examples are bandages, latex gloves, bedpans, walking aids and manual stethoscopes. 47% of all medical devices fall under this category. 95% of these are exempt from the regulatory process which means that no pre-market notification application or FDA clearance is needed before marketing of the device. 
2. Class II devices:
   Moderate to higher risk for causing harm and subject to special controls. Some examples are scalpels, powered wheelchairs, pregnancy test kits, contact lenses and syringes. 43% of all medical devices fall under this category. The majority of class II devices will require a Premarket Notification, also referred to as 510(k). The manufacturer will need to notify the FDA of their intent to market the device. They must demonstrate to the FDA that the device is substantially equivalent (at least as safe and effective) to a device already on the market. 
3. Class III device:
   Pose the highest risk for causing harm. These devices usually sustain or support life, are implanted or present a substantial risk of illness or injury. Some examples are pacemakers, implants and stents. 10% of all medical devices fall under this category. An FDA premarket approval or PMA is required before a device can be marketed. The PMA application will need to be supported by human clinical trial data to show safety and efficacy for its intended use.   

All new products that contain new materials or differ in design from products already on the market will be classified as a class III device. There is however a possibility to reclassify such an automatically classified device from class III to class II or a so called De Novo classification. For a De Novo device a less stringent clinical evidence will be required.

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EU:

The EU is the second biggest market for medical devices. Whilst the regulatory approval process is centralised in the US, with FDA as the authorising body, it’s decentralised in the EU. The application for marketing of a device can be made to a so-called Notified Body (NB) in any of the EU states. The Notified Body assesses if the device is in conformity with EC regulations. Once approved the manufacturer can put a CE mark (Conformité Européenne) on the product and it can be marketed everywhere in the EU.

The EU uses a similar classification system to the FDA, where the medical devices are divided into four classes depending on the risk to the patient. 

1. ‍Class I device:
   Low risk for causing harm to the patient and non-invasive. Some examples are bandages, compression hosiery or walking aids. Only self-declaration to the competent authority is required.
   
   Within class I there are two subgroups that require CE certification. These are class Is which includes sterile devices such as stethoscopes, colostomy bags or examination gloves. CE certification in conjunction with sterility standards are required. 
   
   The second subcategory is class Im which includes measuring devices such as thermometers and blood pressure measuring devices. CE certification in conjunction with metrology standards are required.‍
2. Class IIa device:
   Medium risk for causing harm to the patient. Mainly devices installed in the body for a short period of time. Some examples are blood transfusion tubes, catheters but also hearing-aides.
   Requires conformity assessment by the Notified Body. ‍
3. Class IIb device:
   Medium to high risk for the patient and often installed in the body for a longer period of time, generally 30 days or more. Some examples include ventilators, intraocular lenses, orthopedic nails and plates and intensive care monitoring equipment. The approval process is similar to a class IIa device with the added requirement of a device type examination by the Notified Body.    ‍
4. Class III:
   High risk for the patient. Some examples include balloon catheters, prosthetic heart valves, replacement joints and pacemakers. Requires full quality assurance system audit, clinical evidence as well as examination of the device and its design by the Notified Body. 

Depending on the type of medical device the approval process can be very long. Not only does the actual approval process take time but if the classification requires clinical evidence it may take several years of preparations just to be able to submit the approval request. 

For a small company or start up this could be very costly and with the risk that the device does not get approved. The period without revenue could be many years and will require funding. The risk for the investor reduces the further in the approval process the company’s product has come. The value of the company will increase as well and normally also its share price as the risk is being reduced. An investor will have to make a risk and reward analysis to decide at what point in time he/she wants to make the investment. One could play it safe and await full market access approval before making an investment but the reward is likely to be less spectacular. The return could still be acceptable though.

To get a better understanding of the industry’s long-term financial performance a selection of financial ratios has been calculated for all the 21 companies over a 10-year period, from 2013 to 2022. Tables with all the details as well as calculation methods can be found in Appendix 1. This period should be long enough to compensate for the exceptional pandemic year 2020 and short enough to make it relevant for giving an insight into the industry’s future potential. 

The 21 companies that were selected are considered as established companies. When looking more in detail it becomes clear that some of them are still relatively small and are still in a phase with strong growth. Others like Getinge, Arjo and Össor are more mature companies with lower growth rates. They also have lower margins and return on capital. These companies are among the biggest of the Nordic medical devices companies but on a global scale they are still relatively small. To get a better picture of the financial performance of the biggest global players in the industry the top 10 global listed companies were analysed as well. This gives a valuable idea of the potential ’end game’ for a successful and growing company in the industry. The 10 global companies are: Medtronic, Abbot Laboratories, Siemens Healthineers, Zimmer, Becton Dickinson, Stryker, Baxter, Philips, Boston Scientific and Danaher. Companies like Johnson & Johnson and GE Capital had to be left out as the medical devices business is only one of the company’s businesses and the available financial data pertains to the whole group.   

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Profitability: 

To assess profitability Gross Margin and Operating Margin (EBIT%) have been used. The average gross margin for the 10-year period 2013 to 2022 can be seen in graph 1. The gross margin varies a lot depending on the type of company. RaySearch Laboratories, which provides medical software solutions, has a gross margin of 93% whilst Elos Medtech, which is mainly a contract manufacturer, has a gross margin of 31%. The median gross margin is 63%.      

If we look at the gross margin for the top 10 global companies there are similarly big variations in gross margins. Zimmer, that makes implants has a gross margin of 71% whilst Siemens Healthliners that are big in medical imaging and radiology have a gross margin of 40%. The median gross margin for the 10 companies is 56%.  

If we instead look at the development of the median gross margin per year during the same 10 years (2013 – 2022) for the Nordic companies, see graph 3, one can see that the gross margin per year varies within the range of 59.9% to 63.4% without any clear trend. Gross margins seem

to have peaked in 2019 but the three following years are ‘pandemic years’ so it may be too early to conclude if gross margins reached a long term peak in 2019.    

If instead we look at the top 10 global companies we see a different picture. The median gross margin per year is at a lower level than for the Nordic companies. There is also an upward trend during the period 2013 – 2022. The gross margin in 2022 was lower than in 2021 but considerably higher than in 2019 which is the last full financial year before the beginning of the pandemic in 2020. The gross margin has thus been higher during the two pandemic affected years 2021 and 2022 than it was in 2019. 

It’s thus not possible to make any conclusive statement about the impact of the pandemic on gross margins. There is further little evidence of payer price pressure having an impact on gross margins.   

If we move on to the average operating margin (EBIT) for the Nordic companies, graph 5, we can see that we have big variations between the various companies. There are several whose average operating margin for the period 2013 – 2022 fall well below 10%. At the same time there are several companies that have an operating margin above 25%. The median operating margin is 14.3%.       

Also for the top 10 global companies there are big variations in the average operating margins, spanning from 6% to 22%, see graph 6. The median operating margin for these companies is 15%. 

  As for gross margins it’s also worth looking at the development of the operating margin during the last 10 years. In graph 7 the median operating margin per year for the Nordic companies for the period 2013 – 2022 has been shown. The operating margin varies from 12.2% in 2015 to 16.9% 2018 but without any clear trend. The margin dipped to 12.7% during the first pandemic year but has recovered well and was well above the 2019 level in 2022. There is no clear trend during the 10-year period.     

Also for the operating margins it’s interesting to look at the development of the top 10 global companies during the same period. As can be seen in graph 8 the median operating margins for the top 10 companies are quite similar to the ones of the Nordic companies. It’s worth noticing that the median operating margin reached its highest level in 2022 since 2016. As for the Nordic companies there is no discernible trend in the margins during the 10-year period. 

By looking at the difference between the gross margin and the operating margin we can also form a view of the size of the Sales and Administration costs (S&A) and the Research and Development costs (R&D). For the Nordic companies the average margin difference during the 10 years varies between 21.2% and 80.7%. The median difference is 41.7%, meaning that S&A and Research cost makes up 41.7% of the revenue. 

For the top 10 global companies the cost for S&A and R&D is in the range from 24.7% to 54.7% with a median of 39.7%.    

To conclude gross margins are generally very high in the industry. As big R&D efforts are required to remain competitive, the administrative burden is high and many sales reps. are needed, a big part of that gross margin is being eaten up. Thanks to the big gross margins the operating margins are in general very healthy and around 14 - 15% as a whole for the industry.        

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Growth: 

Growth measured as the Cumulative Annual Growth Rate, CAGR, for the 21 Nordic companies have been shown in graph 9. The CAGR varies enormously between 1.6% for Getinge and 58% for Surgical Science, with a median CAGR of 11.6%. Getinge’s CAGR is influenced by the fact that they spun off Arjo at the end of 2017. Some of the higher CAGR numbers are driven by acquisitions. Both AddLife and AddVise for instance are ‘serial’ acquirers. Vitrolife made a major acquisition in 2021 and Surgical Science one in 2022.

The CAGR for the top 10 global companies can be seen in graph 10. The variations are much less as the CAGR goes from -3.2% for Philips to 9.4% for Beckton Dickinson. The median CGAR is 5.5%. Philips has transformed itself from an electronics company to a medical devices company during the period and divested the lighting business, hence the negative CGAR. Also for these companies acquisitions play an important role in the growth. Medtronic for instance increased its revenue between 2014 and 2016 by 70%, mainly due to the Covidien acquisition. Beckton Dickinson grew its revenue in 2018 by more than 30% mainly due to its acquisition of Bard.       

Leverage:

The leverage ratio measured as Net Debt to EBITDA in 2022 for the Nordic companies is shown in graph 11. Leverage is generally low and as many as 7 of them have negative net debt.    

The companies with the highest leverage are the Danish ones as well as the serial acquirers. 

For the top 10 global companies the picture is quite different. The leverage is generally higher than for the Nordic companies. Baxter and Philips have an exceptionally high leverage as they both had very low EBITDA in 2022. There are, however, several companies that have a leverage measure of 3 or above.    

‍Capital Efficiency: 

To assess capital efficiency, or how good the companies in the industry are at allocating it’s capital, their return on capital employed (ROCE) has been used, see graph 13.

The average return of capital per company for the last 10 years shows quite a big variation. There are in total 7 companies that have an average ROCE above 25% for the last 10 years. At the same time there are 6 companies that don’t even achieve 10%. The median for all 21 companies is 17.1%. 

If we look at the ROCE for the global top 10 companies for the same period we see a different picture (graph 2). All companies with the exception of Stryker and Siemens Healthliners have an average ROCE below 10%. The median is 8.6%. 

The general trend seems to be that the bigger and more mature the company becomes the lower the return on capital. There are exceptions to this trend such as Demant and Coloplast, the two biggest companies in the Nordics, that have both been around for more than 65 years and have an average ROCE above 22%. 

If instead we look at the trend for the ROCE for the last 10 years the picture we get is that the ROCE of the Nordic companies is in a downward trend. Graph 15 shows the median ROCE for the 21 companies per year for the last 10 years. ROCE seems to have peaked in 2016. One would expect the ROCE to take a dive during the pandemic year of 2020 as the operating margins took a hit that year. One would however not expect to see an even worse number in 2022.      

The median operating margin increased 2022 which means that the capital employed (Equity + Non-Current Liabilities) has increased even more. In fact whilst the median increase of the operating income in 2022 was 5% the median increase of equity was 16% and the median increase of debt was 8%.  There are several companies that made major acquisitions financed by debt or rights issue in 2021 and 2022, which has increased the capital employed. 2023 and 2024 will better show the impact on ROCE of these acquisitions and if the ROCE 2022 was just and exception. It does however seem to be evident that there has been a deterioration in the ROCE from the mid 2010’s.    

By looking at the median ROCE per year for the top 10 global companies we see a similar trend, see graph 16 albeit not that pronounced. The peak appears already in 2013.

The falling ROCE for these companies is mainly driven by the build-up of goodwill through acquisitions which have increased the capital employed more than the operating income. It would seem that for these companies to grow, they have had to make acquisitions. To make these acquisitions they have had to pay a premium.  

To conclude many of the Nordic companies demonstrate strong ROCE whilst the performance of the top 10 global companies is more average. There is a downward trend in ROCE for both group of companies. For the top 10 global companies this seems to be caused by a buildup of goodwill because of paying premiums for acquisitions. For the Nordic companies there was quite a dramatic fall in 2022 which seems to have been caused by acquisitions as well. The outcomes in 2023 and 2024 will likely tell us if this is only a temporary reduction or it’s a new ‘normal’ for the Nordic companies.       

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Conclusions:

The financial performance of the medical devices industry is generally strong. Gross margins are high and so far show very little impact of increased cost pressure from the payers. Due to the nature of the business the R&D, sales and administrative costs are high and eat up a big chunk of the gross margins but still leave enough left for strong operating margins. 

Many of the Nordic companies, mainly the smaller ones, show impressive historic growth whilst the bigger ones and most global companies have a much lower yearly growth. The bigger a company becomes the more challenging it becomes to grow faster than the market is growing and many times substantial growth can only be achieved through acquisitions. 

Leverage is generally low for the Nordic companies. Many of them have a negative net dept and have relied on equity to finance their growth. The leverage for the global companies is generally higher as they will have easier access to debt. There are some cases with exceptionally high leverage due to poor financial performance (low EBITDA). 

Return on capital is overall strong for the Nordic companies but more average for the top 10 global companies. The trend for both the Nordic companies and the global ones is negative. For the Nordic companies 2022 was a particular week year. 

There seems to be a financial performance ‘sweet spot’ for smaller to mid-size companies when they are big enough to have an acceptable cost level but small enough to be able to grow faster than the market. Once the company becomes big it will become difficult to grow at a faster rate than the market and growth above market growth rates has to be achieved through acquisitions. Companies often have to pay a premium for these acquisitions which means increased goodwill and a consequent increase in capital employed. It thus becomes harder to maintain an attractive level of return on capital.

The healthcare or life science industry, that medical devices are a subset of, is traditionally considered as being a defensive as industry as it benefits from a steady customer demand and less dependent on the ups and downs of the business cycle. As the spending on healthcare has been increasing faster than GDP for quite some time the market for medical devices combines the characteristics of stable customer demand with a growth in spending that is higher than the GDP growth.    

As seen in the previous chapter the revenue growth (CAGR) during the 10 last years has been strong for most companies included in the analysis, both the Nordic and global top 10. The growth numbers of some of these companies also include acquired growth but the overall picture is that of an industry with strong historical growth. 

The expected growth for the next 5 – 10 years looks equally promising. The forecasted CAGR varies between 4.9% (2023 to 2028, by Market Data Forecast) and 6.99% (2023 to 2030 by Market Research Future). Regardless of which institute or organization one looks at its clear that the expectations on the CAGR are high and well above the expected global GDP growth. There are a number of factors that have a potential to drive growth as has been analysed more in detail below.  

It is however important to note that the medical devices market has a characteristic that makes it different to most other markets. What makes the market different is that the customer or the patient is not the payer. Depending on the healthcare system a country has, the health care will be either financed through taxes or medical insurance or a combination of the two.

As a consequence there are several stakeholders involved that influence the buying decision such as: Insurance companies, government/ government agencies, hospital executives, doctors and group purchasing organisations. Most of them will be operating with limited budgets and with a strong cost focus.  

The market consequently has a supply of innovative products with ever increasing technical sophistication and ability to save and/ or prolong lives. The demand for the consumers for innovative and life prolonging products is for natural reasons very strong. The only problem is that the one who is holding the purse has to be more and more tight-fisted. 

The average health care spend in relation to GDP in the EU is around 11% (2020). In the US it’s almost 18% (17.8% in 2021). The health care costs have been increasing gradually over the last decades. In Sweden for instance the cost in real terms more than doubled between 2001 and 2020. There are several factors, see below, that risk further increasing this cost. For that to happen either taxes would have to increase or other government spending, e.g. defense or education would have to be reduced. In the case of insurance funded health care systems the insurance premiums would have to increase. 

It therefore seems that the only way the predicted growth numbers can materialise is if (new) products can reduce the cost somewhere else in the health care system.  

There are a number of factors that have an impact on the health care systems and the potential growth of the sales of medical devices.   

1. Ageing population 
2. Growing prevalence of chronic diseases and multi morbid patients 
3. High and increasing prevalence of obesity, which is also a major cause for 2 
4. Increased patient knowledge and more demanding patients, the ‘Google’-effect
5. Falling productivity in health care systems 
6. Lack of resources. 
   - Often low paid and physically demanding job
   - Changing demographics; fewer people to care for more
7. Strong demand for innovative products and therapies
8. Increasing emphasis on early diagnosis
9. Technological advances 
10. Growing health consciousness, preventive care.
11. Increased healthcare spending in fast growing economies such as China, India and other Asian countries.   
12. Performance driven healthcare 

These factors and the potential impact on medical devices are analysed in detail below. 

Ageing population 

As a result of improved medical care we live longer and longer. This is a great accomplishment of modern medicine. The flip side of that is that most of us will have to suffer from poor vision, bad hearing and deteriorating teeth for many years when we get old. We also want to stay active much longer and care more for our looks and physical wellbeing than previous generations. This means that many of us will also suffer from problems with our joints and backs. 

A longer life simply means longer exposure to health issues both serious and minor. 

The advantage with this age group is that they also have strong purchasing power. 

The ageing population is thus likely to benefit medical devices such as hearing aids, glasses, eye care, dental implants, continence care and prosthetic joints.    

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Growing prevalence of chronic diseases and multi morbid patients and 3. High and increasing prevalence of obesity 

As many chronic diseases such as diabetes, cardiovascular, joints, liver problems, stroke, cancer are caused by obesity and a sedentary lifestyle it makes sense to review these two factors together. 

For the first time in human history we have access to more food than we can eat. The problem with that is that our ‘hunter and gatherer’ brains are programmed to eat as much as we can when there is food available. At the same time our brain is wired to economise energy. This then becomes a lethal combination. The increase in chronic diseases as a consequence of obesity is likely to only be in the early stages of a ‘ticking medical time bomb’. In the US, which is the worst hit country, 42% of the adult population have obesity. Even more worrying is that 20% of adolescents and children are suffering from obesity. 

Medical devices have played an important role in turning what used to be lethal diseases into chronic diseases. Innovative medical devices are likely to continue playing an important role in improving the treatment of these chronic diseases but the real game changer must be stopping obesity. It’s therefore not surprising that Novo Nordisk’s (a Danish pharmaceutical company) new obesity pill have received so much attention and helped driving the value of the company to reach the same magnitude as the whole Danish GDP.    

Products beyond obesity pills that are likely to benefit from the need to tackle obesity are gastric bands and gastric balloons as well as digital solutions, e.g. weigh loss apps. Another more long-term solution would be smart medical implants. For instance the Swedish company Implantica, whose founder developed the Swedish Adjustable Gastric Band which he later sold to Johnson & Johnson, is in the process of developing a smart implant for appetite control. This may all sound a bit like science fiction but the functionality is not that different to a pacemaker.      

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Increased patient knowledge. 

Patients today have access to a wealth of medical information through the internet. This makes the patient more educated and more demanding about his/ her diagnosis and care solution. The medical information on the internet is rarely curated and often gives the ‘worst case’ scenario. The consequence of this is over diagnosing where the approach goes from treating the probable to excluding the improbable. This requires diagnosis which is often ‘redundant’ and has a major negative impact on costs. 

It's a good thing that patients take ownership of their care and challenge the medical professionals. We don’t want to return to the times where the doctors were considered as omnipotent ‘demi-gods’ but there is a risk that the trend is going too far. 

One way to deal with this problem would be to make some of the ‘redundant’ diagnostic payable by the patient. 

A potential impact on medical devices of increased patient knowledge and interest in ones own health is increased demand for test and analytical equipment as well as equipment for self-monitoring and analysis (e.g. battery driven blood pressure monitor). 

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Falling productivity and 6. Lack of resources: 

Many countries or health care systems have a lack of medical staff and in particular nurses. The demand for resources over the coming years is expected to increase even further. The WHO estimates that by 2030 there will be a shortage of 10 million health care workers globally. The health care providers will however have to compete with other sectors such as industry for these resources. A competition that the health care providers are likely to lose. With the exception of senior doctors most jobs in the medical profession are physically demanding and poorly paid. Not the best selling arguments when you compete for resources.    

At the same time as there is a lack of resources the number of employees in the health care systems is paradoxically enough actually increasing. In Sweden for instance the number of doctors and nurses increased between 2017 and 2021 both in absolute numbers and in relation to the population. In England the number of employees in NHS increased from 1.05 million in 2017 to 1.27 million in April 2023, an increase of 21%. At the same time the population increased less than 1% (from 55.6 million to 56.0 million). 

The health care systems clearly face a productivity problem. I think one can easily exclude that the medical professionals have become lazier over time. The fall in productivity must be caused by an increased workload for the same number of patients or population. As seen under factor 4 more knowledgeable and demanding patients seem to be an important source. In her book ‘Dagbok från Akuten’ the Swedish nurse and journalist Hanne Kjöller describes how time and cost for every care incident is increased because the examining staff is so afraid to miss something that they over examine the patients. Time is spent filling out checklists and following manuals correctly to cover your back in case something goes wrong. Also every day, time is lost due to inefficient IT systems who do not communicate with each other.  

Progress made in technology and therapy has had a fantastic impact on the life expectancy and quality of life for millions but it has also meant that more options are available and more resources are being spent on care. We certainly don’t want to stop the trajectory of medical progress but we will have to become smarter and use less people.   

This means increased use of and improved digital solutions. The use of digital solutions should help the medical staff save time not make them lose time. Automation and the use of robots and AI are obvious solutions but also increased patient self-service through digital solutions (apps). Digital solutions may also allow better ability for patients to carry out self-monitoring. One of the side-effects of the pandemic has been that people have had to get used to doing more things online and through the use of apps. Valuable time could be released from the health care professionals if patients could do more self-monitoring and do less face-to-face consultations. This could lead to substantial productivity improvements in the health care systems.     

This should open up great opportunities for suppliers of medical devices. 

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Strong demand for innovative products and therapies

In order for the progress in the medical care to continue more innovative products and therapies are needed. These are likely to be costly. As highlighted above health care costs are already very high. The requirements from payers to demonstrate value or that costs can be reduced elsewhere in the system are therefore likely to increase. This will influence which new medical devices and therapies, that become commercially successful. 

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Increasing emphasis on early diagnosis

Traditionally health care has been all about curing sick patients. As patients generally only visit the doctor when they have had pain for quite some time the illness may already have progressed far, which makes the medical intervention more urgent and costly and the prospects of a full recovery smaller.  

In industry, such as a paper mill or a steel mill where a machine can cost several hundred million and a production stops are very costly, preventive and predictive maintenance is a standard procedure. The short, planned maintenance stop of the machine is much less costly than a machine breakdown which may stop the production for several days. There is no reason why the same principle couldn’t be applied to health care. The cost for check-ups and testing would go up but the cost of medical intervention should come down. 

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Technological advances:  

Technological advances have been enabling the development of more and more complex and sophisticated medical devices and will continue to do so. Increased proliferation of digital solutions and apps, automation, robots and AI will allow for medical devices to become even more sophisticated and effective. As already pointed out such solutions will increasingly have to be supported by a strong business case for the payers to approve the use of them.  

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Growing health consciousness, preventive care.

As pointed out under 8 there is a strong argument from industry for increasing the use of preventive and predictive health care. The analogy is very applicable as the earlier an illness can be detected the bigger the likelihood of curing the illness and the less costly both from a financial and human perspective. 

At the same time people are becoming more health conscious. As our scientific knowledge increase we understand better and better what is causing certain illnesses and how important a healthy lifestyle is for our overall health. Whilst our parents’ generation often would only go to the doctor when they were seriously ill or had severe pain, we now more and more want to eliminate any potential sources or risks for getting an illness in the first place. This plays well into the need for more preventive and predictive care. There just has to be some reasonability check on the type of tests and to what length the examination should go.  

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Increased healthcare spending in fast growing economies

As countries outside of Nort America and Europe become wealthier people will demand better healthcare and the health care spend will increase which will benefit those medical devices companies that have established operations there. 

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Performance driven healthcare 

For a non-health care professional with a business experience it can be quite mind-boggling to realise that 11% of GDP is spent without any real performance measurements of the outcome of the care. To quote the management guru Peter Drucker ‘You can’t manage something you can’t measure’. To manage and prioritise the scarce health care resources, a fact based measuring the outcome of medical devices and therapy should be a must. The enabler for this is patient data. The challenge is to get access to medical data that are being held by the healthcare providers. There are however developments ongoing that will make ‘impersonalised’ patient data available for use beyond the walls of the hospitals. 

Digital solutions and medical devices that can use patient data and algorithms based on the data are likely to benefit from this development.     

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Conclusion: 

Growth forecasts for the medical devices industry for the next 5 to 10 years look promising. At the same time the increasing cost of healthcare is a big issue for most countries in the developed world and there is a need to reduce costs, instead. On the surface these two factors look contradictory. For the medical devices market to grow at a level that is consistently above the level of GDP some other healthcare costs will have to shrink. It’s likely that the medical devices products that will do well are the ones which can demonstrate that the overall health care costs will be reduced. The following products or companies developing and supplying them look likely to be the winners: 

• Devices (including digital solutions) that truly can increase total productivity for the medical professionals as well as reducing overall costs, e.g. devices aimed at self-service.  
• Devices that can reduce obesity 
• Devices aimed at preventive and predictive care as well as self-monitoring 
• Devices that can demonstrate a considerably better outcome and/ or lower cost than the standard of care device
• Devices aimed at older people

So, should one invest in this industry? 

To make the characteristics of the industry more visible the information gathered so far has been summarised in an Industry SWOT analysis, see figure 2.  

The industry faces both opportunities and challenges in the future. One big attractiveness of the industry is it’s high gross margins. Due to increased cost focus among the payers the gross margins are likely to come under pressure although this has not been seen in the numbers yet. At the same time intelligent use of AI could allow the various administrative functions to become more efficient and reduce these costs and compensate for the reduced gross margins. This should protect the operating margins or potentially even improve them. 

The companies that are likely to do best are the ones that supply devices that respond to the expected market drivers of the industry such as the ageing population, falling productivity and efficiency, obesity, preventive care, predictive care and early diagnosis. 

As devices will have to become more innovative and/ or integrated into the human body to replace existing standard-of-care products, several of the administrative activities in a medical devices company are likely to become more resource intensive. To counter this companies will have to rely more on automated processes and use of AI. 

As we have seen from the analysis of the financial numbers profitability, return on capital and growth for the 21 Nordic companies in the analysis are overall strong. The companies that have a less impressive financial performance tend to be the bigger more mature companies such as Getinge, Arjo and Össur. If we look at the top 10 global companies we see a similar pattern where only 2 out of 10 companies have a return on capital above 10%. It would seem that the only way these giants can achieve substantial growth is through expensive acquisitions that drive up the capital base and consequently reduce the return on capital.   

There are however some exceptions to this ‘rule’. The two biggest Nordic companies Demant and Coloplast demonstrate strong financial performance. They are also companies whose products address the ageing population or at least partly (Coloplast). 

Overall the medical devices industry is attractive to invest in. Such investments have to be made selectively as several companies show mediocre financial performance and do not demonstrate growth potential. Investments should focus on companies with consistently strong financial performance and with products in segments where there are strong growth expectations. 

The Nordic companies that meet these criteria and would be candidates for investment and would merit further in-depth specific company analysis are:

Getinge, Arjo, Össur, AddVise, Elos Medtech, Boule Diagnostics and Surgical Science were excluded because of mediocre financial performance and/ or week growth. 

AddLife is a conglomerate made up of 26 smaller companies in Labtech and Medtech. It will require further analysis of the majority of these individual companies to form a picture of how each business fits into the factors that are expected to drive growth or not. 

GN Store Nord was excluded as the medical devices (hearing aid) part of the business only makes up a third of the total business. The performance of the business will be more driven by how the Audio business is doing. GN Store Nord may still be a good investment candidate but should be analysed as technology or durable consumer goods business.    

There are also some question marks around the Coloplast business as several products could come under price reduction pressure from the payers. 

Beyond the group of medical devices companies included in the analysis there are several companies in the Nordic markets that are ‘on their way up’ that are worth considering for investment. They may not be mature enough yet to have reached their full financial performance potential. Some of them look set to reach that potential within the next couple of years. Some examples are shown in table 3: 

There are also several companies that have very interesting products but that have just recently been launched or have not yet, or only partly, gone through the regulatory approval processes. Some examples of these companies are shown in table 4:

Appendix 1: Percentage each business segment makes up of total revenue. 

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Appendix 2: Financial ratios and methods of calculation 

Calculation methods: 

1. ROCE, Return on Capital Employed, illustrated for 2022 =
   EBIT 2022/ ((Capital Employed 2022 + Capital Employed 2021)/2)
   Capital employed = (Total Assets - Short Term Liabilities – Deferred Tax Liabilities)
    
2. ROE, Return on Equity, for 2022 = Net Profit 2022 / ((Equity 2022 + Equity 2021)/2)
   
   
3. EBITDA = Earnings Before Interests, Taxes, Depreciations and Amortisations. Any non-recurring costs (e.g. restructuring) or non-cash profit (e.g. revaluation of forest assets) are eliminated from the costs/ earnings.
    
4. EBIT = Earnings before Interest and Taxes. Major non-cash profits (e.g. revaluation of forest assets) are eliminated from the earnings.
   

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Appendix 3 – Detailed analysis of Nordic Capital financial performance 

Business Units: 

1. Kraft paper is used mainly for packaging such as bags. 53% of revenue 
2. Grease proof paper for food, e.g., muffins. 47% of revenue 

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Ownership:  

The company made an IPO in October 2020. Shanying International Holding is the biggest owner (through Sutriv Holding) with 48% of the shares and the votes. The other big owners are all institutional investors such as mutual funds. Prior to the IPO Shanying was the sole owner. They bought the company in 2017 from Holding Blanc Bleu and Petek GmbH.

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Growth: 

As seen in table 6 the average growth during the 8 past years has been 9.3%. Revenue fell during the Pandemic year 2020. It recovered a bit in 2021 and increased by 44% in 2022.
In chapter 6 Industry Financials we saw that the industry revenue increase YoY in 2022 was mainly due to price increases. In the case of Nordic Paper there was also an acquisition made at end of 2021. The acquisition of Glassine Canada Inc. added approx.. 440 MSEK to the revenue in 2022 or roughly 14% of the total revenue increase of 44%.

More than 90% of the company’s revenue is exported. In the period 2016 to 2022 the Swedish krona fell against most other currencies. E.g., the Euro gained from SEK 9.57 in December 2016 to 11.19 in December 2022. That’s an increase of 16% or a CAGR of 2.5% per year. 

If we instead look at tons sold the picture is a bit different. In 2016 the sales volume was 263 ktons. In 2022 after the acquisition of the Glassine Canada the sales volume was 285 ktons or an increase with 7.5%. The corresponding CAGR was 1%. If we make a high-level adjustment for the total sales volume in 2022 would be approx. 40 tons less or 245 tons which is less than the volumes in 2016! Volumes have actually decreased.  

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Profitability:  

The operating margin (EBIT) was in average 13.6% during the 8 years period as shown in graph 10.

Overall strong operating margins throughout the period but with quite poor performance during the pandemic years 2020 and 2021. 

One contributing factor to the strong operating margins are the relative low levels of depreciations of the assets.     

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Capital Efficiency: 

The high ROCE is driven by high operating margin (EBIT) and low capital employed. The capital employed, or the denominator in the ratio, is mainly corresponding to shareholders equity, long-term debt minus cash on hand. There has been very little change in the sum of this three between 2015 and 2019. In 2019 the company had no long-term debt. This changed in 2020 just before the IPO. The company then took a bank loan of 950 MSEK in order to pay the owners a dividend of 950 MSEK. This corresponds to almost 4 times the net result in 2020 or 40% of the market value of all shares. The ROCE has come down since then.  

If we look at the asset side of the equation one can see that the balance sheet value of the fixed assets hasn’t really changed since 2014. At the end of 2014 the value of buildings, land, machinery, equipment and ongoing constructions was MSEK 642. End of 2022 that value was MSEK 742 which includes assets of MSEK 100 though the acquisition of Glassine Canada. The company has only invested enough to cover the yearly depreciations. The value of the fixed assets in relation to the revenue 2022 was 0.17 (742/4440). The same ratio for Billerud is 0.69 or four times higher, as an example. According to an analysis of the IPO document made by Affärsvärlden in October 2020 (Svensson, 2020) prior to the IPO the company had identified a need to invest MSEK 1,200 in one of their factories (out of four). That was twice the amount of the total current value of their fixed assets. This investment hasn’t happened yet. All this points to a business that seems to have been ‘under invested’ for a long time.%. Nordic Paper seems to have prioritized high dividends to the owners and only invested the bare minimum to keep the operations running. This is concerning for the future. The MSEK 950 dividend the owners paid themselves just before the IPO would have been better spent investing in machinery and equipment. It’s also questionable how willing the banks will be to lend more money to Nordic Paper if they just use the money to pay their owners. 

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Conclusions:

Nordic Paper has been a veritable cash cow for the owners prior to the IPO. The investments seem to have been neglected as most cash has been distributed to the owners. To make matters worse the company has borrowed a substantial amount of money to pay the owners a huge dividend just before the IPO.

The strong growth rate seen in the period 2014 to 2022 has mainly been driven by acquisition and favorable currency and price movements. The underlying volumes or delivered tons have actually decreased (in the period from 2016 to 2022). The price and currency factors may also act in the opposite direction for the company if the Krona strengthens or prices fall. As a consequence, profitability would take a hit.  

As profitability has been reduced in 2020 and 2021 and debt has been added ROCE has been reduced as well. If one were to add the investments of MSEK 1,200 identified in 2020 to the capital employed the ROCE would fall even further.  

As the previous owner has maintained a 48% stake and the next 9 biggest owners that together hold 31.1% are all institutions the strategy of the company is not likely to change dramatically.

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