Industry Description

The medical device industry (SIC 3840, NAICS 339112) consists of companies engaged in manufacturing medical and surgical instruments used to diagnose and treat healthcare patients. U.S. surgical and medical device manufacturers generate annual revenues of approximately $29 billion.[1]  Around 22 percent of industry sales are for surgical and orthopedic instruments, followed by catheters (18 percent), diagnostic apparatus (13 percent), syringes and needles (7 percent), blood transfusion and IV equipment (6 percent), and other apparatus (35 percent).[2]

The industry has been experiencing continued growth and was not severely affected by the recent recession.  On average, annual industry growth from 2007 through 2012 was 12.8 percent.[3] Analysts expect this growth to continue over the next five years.

The U.S. is both the largest producer and consumer of medical devices.[4] As of 2008, the U.S. medical device market as a whole was valued at over $100 billion, or 42 percent of the worldwide market.[5]  The U.S. exports over $30 billion in medical devices annually.[6]

The industry is heavily regulated.  In the United States, the Food and Drug Administration is responsible for oversight of the medical device industry.  In response, the industry devotes considerable resources to product approval processes, clinical trials, plant audits and inspections.  Medical device recalls are also common; there were 314 medical device recalls in the fourth quarter of 2012 alone.[7]  Recalls and lawsuits can have a significant impact on the value of medical device companies.

Research and development is also critical to medical device firms.  Companies compete by developing superior products and technology.  According to MPO Magazine, new product innovation plays the most prominent role in sustaining growth for medical device manufacturers.[8] Larger companies experience economies of scale in research and development, which is one of several factors that have led to increasing consolidation over the last five years.

The medical device industry is primarily composed of large corporations and start-ups, with few medium-sized companies.[9]  The top 10 medical device companies worldwide by sales revenue are:[10]

  1. Johnson & Johnson
  2. General Electric Co.
  3. Siemens AG
  4. Medtronic Inc.
  5. Baxter International Inc.
  6. Fresenius Medical Care AG & Co.
  7. Koninklijke Philips Electronics
  8. Covidien plc
  9. Novartis AG
  10. Cardinal Health Inc.

Industry Trends

Trends in the medical device industry have continued to change over the past several years, especially in response to shifting demographics and technology. A few of the most significant changes are:

  1. The aging population will require increased medical attention
    Older populations use a disproportionate share of medical services. As the U.S. population ages, the incidence of health issues will increase and drive up the demand for medical devices. The ongoing increase in the older demographic will help maintain high growth in the industry over the next several years. The global population is also aging, with the United Nations estimating that people age 60 and up will make up more than 15 percent of the world’s population by 2025.[11]
  2. Recent healthcare legislation will expand demand for medical devices
    Recent healthcare reform in the United States is expected to lead to an influx of newly insured patients which will in turn lead to increased demand for medical devices.
  3. Taxes will begin to eat into profits
    In order to offset the cost of 2010’s Affordable Care Act, the federal government instituted an excise tax on medical devices as of the beginning of 2013. The tax requires medical device companies to pay 2.3 percent of total revenues whether or not they generate a profit.  The tax is anticipated to cost the medical device industry approximately $20 billion, and an AdvaMed study indicated that the tax could lead to a loss of over 45,000 jobs.[12]
  4. Home health care product sales are expected to increase
    As a result of the aging population, medical treatment will be increasingly delivered out of medical facilities and in nursing homes, hospices and patients’ homes.  In turn, medical equipment that requires limited training and can be used in the home is expected to grow as a proportion of sales.[13]

Key Performance Metrics

The following are performance metrics that managers in the medical device industry use to benchmark their performance against others in the industry. These performance metrics are common to a broad range of industries:

  1. Operating margin
  2. Costs of goods sold percentage
  3. Days of inventory on hand
  4. Inventory turnover

Industry Organizations and Publications

Some organizations that publish helpful information about the medical device industry include:

  1. Medical Device Manufacturers Association:, a national trade association of entrepreneurial medical technology companies
  2. Advanced Medical Technology Association (AdvaMed):, a trade association of medical technology companies representing 80% of the medical technology firms in the United States
  3. Medical Device and Diagnostic Industry:, a magazine relating to medical device and in vitro diagnostic equipment manufacturers

Summary of Valuation Approaches

There are four commonly accepted valuation methods that should be considered when valuing a medical device manufacturing company.  These methods are:

  1. Asset-based valuation: This method calculates a business’s equity value as the fair market value of a company’s assets less the fair market value of its liabilities. This approach is also sometimes referred to as a “cost based approach”; that is, the business’s value is equal to the cost of acquiring its physical assets. This approach is seldom used for a medical device company because its value is more closely related to its earnings and cash flow.
  1. Income approach to value (capitalization of earnings): This method is most applicable to companies that face predictable and constant growth in earnings and have a long history of operations.  The business value under this method is equal to the cash flow projection for one year divided by a capitalization rate (i.e. the appropriate discount rate less the predicted growth rate).
  1. Income approach to value (discounted cash flow): The value of equity utilizing this method is equal to the present value of free cash flows available to equity holders over the life of the business. This method works well for both established companies with low growth rates as well as new companies with higher rates of growth, but requires predicting changes in future cash flows.
  1. Market approach to value: This method utilizes market indications of value based on metrics from guideline publicly traded device manufacturers and privately held businesses.  The financial metrics of public companies or those of private transactions can be used to create valuation multiples that are then used to calculate business value.

Benchmark Statistics

The following benchmarking data is based on the financial performance of various medical device manufacturers: [14]

Gross Profit %45.2%44.8%46.0%45.2%46.8%
Operating profit %7.6%8.2%8.6%7.9%8.1%
Owners Compensation/Sales %5.4%5.6%5.9%4.4%5.4%
Sales/Fixed assets8.810.110.810.312.4
Current ratio2.

Before using this data for specific valuation purposes it should be evaluated for appropriateness.

Availability of Publicly Traded Comparable Companies

Most of the top medical device manufacturers are publicly traded, and are often divisions or subsidiaries of large corporations with diverse holdings. The availability of financial data for publicly traded medical device manufacturers makes it possible to compare a subject company to industry benchmarks and apply industry multiples.  However, when valuing a medical device business, it is important to use benchmarks and multiples based on companies that are similar to the subject company and be aware that multiples of certain publicly traded corporations as a whole may not necessarily reflect those of their medical device divisions.

The top five publicly traded companies with significant medical device operations, ranked by market capitalization, are:[15]

  1. General Electric Co. ($243.0 billion)
  2. Johnson & Johnson ($209.9 billion)
  3. Novartis AG ($161.6 billion)
  4. Siemens AG ($87.2 billion)
  5. Abbott Laboratories ($53.7 billion)

The price to earnings ratios of these companies range from 9.1 to 19.6.[16]  As a whole, publicly traded companies in the medical appliances and equipment industry have a price to earnings ratio of 15.8.[17]

Availability of Private Purchase Transactions

In addition to public companies, data regarding privately held companies can also provide a useful benchmark when valuing a medical device manufacturer.  The size and scope of private companies that have been bought and sold over the last five years varies greatly, both in terms of their sales and the purchase price paid for the companies.

Fulcrum identified 20 private purchases of medical device companies over the five year period from January 1, 2008 through December 31, 2012.  These transactions show the following ranges:[18]

  1. Total deal values ranged from $2.5 million to $400 million.
  1. Market value of invested capital (MVIC) to net sales ranged from 0.5 to 9.8 times with a median of 2.0.
  1. MVIC to earnings before interest, taxes and depreciation (EBITDA) ranged from 9.1 to 75.5 times with a median of 11.3.

This range of market multiples is too variant to be useful without further analysis. As with selecting publicly traded guideline companies, care should be given to select private transactions that share similarities with the subject company.  The financial metrics of a potential guideline transaction should be compared with those of the subject. Additionally, industry economic conditions vary over time, which can affect medical device manufacturers as investment opportunities.  Specific factors that are unique for each business must be considered.

Fulcrum Inquiry performs business appraisals for medical device manufacturers and other businesses.


[1] Industry Statistics Sampler: NAICS 339112, Surgical and medical instrument manufacturing, U.S. Census Bureau

[2] Ibid.

[3] “Growth in Technology and Healthcare Paving the Way for New IPOs,” January 2013, IBISWorld

[4] Medical Device Industry Assessment, International Trade Association

[5] Ibid.

[6] “The U.S. Medical Device Industry in 2012: Challenges at Home and Abroad” MDDI Medical Device and Diagnostic Industry News Products and Suppliers, July 17, 2012.

[7] “Report: Repeat Recalls by Device Companies at 30-Month High,” Regulatory Focus, February 14, 2013.

[8] “The Top 30 Global Medical Device Companies,” MPO Magazine, July/August 2006

[9] Medical Device Industry Assessment, International Trade Association

[10] “Top 40 Medical Device Companies,” Medical Device and Diagnostic Industry,

[11] “The U.S. Medical Device Industry in 2012: Challenges at Home and Abroad” MDDI Medical Device and Diagnostic Industry News Products and Suppliers, July 17, 2012.

[12] Ibid.

[13] Medical Equipment Industry Definition, International Trade Association

[14] RMA (The Risk Management Association)

[15] Google Finance

[16] Ibid.

[17] Medical Appliances & Equipment Overview: Industry Center – Yahoo! Finance

[18] Private transaction data obtained from Pratt’s Stats available through