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The MedTech & Life Sciences Watcher: Investment-Grade Firms Holding Up; Margin Improvement Opportunities Arise In MedTech; Life Sciences Reduces Guidance

Issue 1

Medical technology companies that we rate investment grade largely turned in solid performances in the second quarter and first half of 2023, with the opportunity of improved margins in the second half.  For the quarter ended June 30, 2023, the group mostly outperformed our revenue forecasts amid stronger than expected procedure volumes, aided by the improving staffing situation as well as loosening of the supply chain conditions (especially with better availability of microchips and other components). The industry average core constant currency growth was about 9%, significantly higher than the historical mid-single-digit rate.

Table 1

Medical technology revenue growth
Quarter ended June 30, 2023*
Core, constant currency Foreign exchange impact Other** As reported Core, constant currency fiscal 2023 guidance***

Abbott Laboratories (MedTech segment only)

14.2% -1.9% 1.2% 13.5% NA

Alcon Inc.

12.0% -3.0% 9.0% 9%-11%

Baxter International Inc.

4.0% -1.0% 3.0% About 1%-2%

Becton Dickinson & Co.****

6.3% -1.2% 1.6% 6.7% 5.5%-5.8%

Boston Scientific Corp.

11.6% -1.0% 0.3% 11.0% 10%-11%

Coloplast A/S

8.0% -1.0% 3.0% 10.0% About 8.0%

Convatec Group PLC*

6.6% -1.6% -3.9% 1.1% 6.0%-7.5%

Dentsply Sirona Inc.

2.3% -1.8% 0.5% About 3.0%

Edwards Lifesciences Corp.

12.0% -1.0% 11.0% 10%-13%

Elekta AB*

8.3% 6.8% 15.1% NA

GE Healthcare Technologies Inc.

9.0% -2.0% 7.0% 6%-8%

Hologic Inc.****

18.4% -0.2% -0.1% 18.1% Low double-digit to mid-teens

Johnson & Johnson (MedTech segment only)

9.9% -1.8% 4.8% 12.9% NA

Koninklijke Philips N.V.

9.4% -2.6% 0.2% 7.0% Mid-single digit

Medtronic PLC*

6.0% -0.6% -0.9% 4.5% 4.5%

Molnlycke Holding AB


Smith & Nephew PLC

7.8% -1.2% 6.6% 6%-7%


11.1% 0.0% 11.1% 6%-7%

Stryker Corp.

11.9% -0.7% 11.2% 9.5%-10.5%

Zimmer Biomet Holdings Inc.

6.0% -1.1% 4.9% 6.0%-6.5%
Median 9.0% -1.1% 9.0%
Average 9.2% -0.9% 8.6%
*Quarter ended June 30, 2023. For Medtronic PLC, quarter ended July 28, 2023. For Electa AB, quarter ended July 31, 2023. For Convatec Group PLC, six months ended June 30, 2023. **Impact of divestitures, acquisitions and one-time items. ***Per the last update. ****Excluding COVID-19 sales. NA--Not available.

We expect revenue growth to moderate to the mid-single-digit percentages.  We anticipate that the revenue growth rate will moderate in the second half of 2023 amid a tougher comparison to the second half of 2022. We also believe that the spike in procedure volumes starting in the second half of last year through the first half of 2023 includes some catch-up demand from drops during the COVID-19 pandemic. We forecast that this backlog will largely be absorbed by the second half of 2023 and lead to a more normalized revenue growth rate in 2024. Our base case also incorporates headwinds from the economic slowdown in China, as well as the expansion of value-based procurement by Chinese local and federal authorities that is affecting the pricing of medical devices and issuers' participation in this market.

But we expect margins to improve in the second half of 2023.  In contrast to the revenue growth trajectory, we project that the negative pressure from inflation, supply chain constraints, labor shortages, and currency effects will abate. Companies are reporting reduced freight costs and believe they will not need to resort to as much spot buying of components at elevated prices as supply chains loosen. This should lift cash flow given the improved working capital. The higher costs of components and inventory that elevated costs of goods and weighed on margins in the first half of 2023 should largely be utilized in the second half. However, for the full year, we project average adjusted EBITDA margins for the sector to decline slightly before gradually improving in 2024. We also expect free cash flow to improve in 2023 after a significant slowdown that stemmed from the need to increase inventories amid supply chain disruptions in 2022.

Mergers and acquisitions (M&A) will become a bigger theme, potentially pressuring ratings.   As the operating conditions improve, we assess that investment-grade companies focus could shift toward M&A. Although we believe that most investment-grade MedTech issuers have a significant pipeline of new products and that their appetite for large-scale acquisitions is relatively limited, most will continue to pursue their expansion targets through tuck-in deals. Some issuers that outlined their M&A priorities:

  • Zimmer Biomet Holdings Inc. has indicated that it could be more active in M&A in the coming years. Zimmer derives most of its revenue from mature segments (hip and knee implants accounted for 67% of 2022 revenue), characterized by relatively slow growth and significant pricing pressure. We expect the company's long-term strategy will focus on diversifying its portfolio into adjacent products in faster expanding categories such as trauma and sports medicine, relying on M&A.
  • After spinning off from General Electric Co., we think GE Healthcare Technologies Inc. could also expand its M&A activity in the coming years to diversify its portfolio. Although leverage is closely aligned with the rating threshold of 3.75x, we expect it will have some capacity under the threshold by year-end. That said, we expect the company will likely prioritize debt repayment over the near term.
  • Medtronic PLC indicated that it might seek to supplement organic growth with external growth opportunities in line with its strategy to increase its exposure to high growth areas. We believe its recently announced acquisition of EOFlow for about $738 million that adds to its M&A spending of approximately $1.9 billion in fiscal 2023 reflects a somewhat stronger appetite for tuck-in acquisitions. At the same time, Medtronic announced the separation of some slower-expanding businesses, which we believe will offset the impact of acquisitions on leverage.
  • Boston Scientific Corp. will likely remain acquisitive. The company conducted roughly $3.8 billion in acquisitions across 2021-2022. We believe it will likely exceed this over the next two years to further expand its portfolio and product pipeline. In the last year, it has expanded its capacity for mergers and acquisitions at the rating.

Life sciences issuers pulled back on their second-half guidance.  Expectations coming into 2023 were for a strong second half for large life sciences companies. While most rated issuers have performed in line with or exceeded expectations, a broad pullback on annual guidance accompanied second-quarter earnings for Thermo Fisher Scientific Inc., Danaher Corp., Revvity Inc., and Agilent Technologies Inc., stemming from a slower-than-expected recovery in spending in China and more cautious spending behavior among biopharmaceutical customers.

We do not expect this to have a ratings impact because most large life sciences issuers have sizable leverage cushions at the current ratings and substantial free cash flow that can reduce net leverage if accompanied by slower share repurchasing or M&A activity. Additionally, much of the slowdown cited in China relates to reduced purchasing of consumables as customers utilized inventory. Accordingly, purchasing activity will need to pick up once inventory levels are further depleted.

Table 2

Life sciences revenue growth
Revenue growth, quarter ended June 30, 2023*
--Fiscal 2023 revenue guidance****
Core, excluding COVID-19-related sales, constant currency Impact of COVID-19-related sales Foreign exchange impact Other** As reported Core, exlcuding COVID-`9-related sales, constant currency Constant currency

Agilent Technologies Inc.

-2.3% -0.5% 0.1% -2.7% 0.8%-1.5% -0.7% to 0%

Bio-Rad Laboratories Inc.

4.6% -4.7% -1.1% -0.2% -1.4% 4.5% 0.8%

Danaher Corp.

2.0% -9.0% -0.5% -7.5% Low-single-digit Low-single-digit decline

Illumina Inc.

2.0% -1.1% 0.3% 1.2% 1.0%

Thermo Fisher Scientific Inc.

2.0% -5.0% 0.0% 1.0% -3.0% 2%-4% -3% to -2%

Revvity Inc.

6.0% -26.0% 0.0% -1.0% -20.8% 4%-6% -15% to -14%

Roche Holding AG (diagnostics division only)**

6.0% -29.0% -6.0% -29.0% NA NA

Sartorius AG

Upper-single-digit decline NA -2.2% Approx. 1% -19.7% Mid- to high-single-digit decline Low- to mid-teens-digit decline

Werfen S.A.

Median 2.0% -0.8% -5.3%
Average 2.9% -1.5% -10.3%
*Quarter ended June 30, 2023. For Thermo Fisher Scientific Inc., quarter ended July 1, 2023. For Illumina Inc. and Revvity Inc., quarter ended July 2, 2023. For Agilent Technologies Inc., quarter ended July 31, 2023. **For Roche Holding AG, six months ended June 30, 2023. ***Impact of divestitures, acquisitions and one-time items. ****As per the last update. NA--Not available.

Table 3

Recent rating actions for medical technology and life sciences companies
Company/analyst Rating action Commentary

Agilent Technologies (BBB+/Positive/--) Analyst: Patrick Bell

Outlook revised to positive from stable On July 21, 2023, we affirmed our 'BBB+' ratings and revised the outlook to positive from stable on overall improvement in its business. Agilent improved diversification, increased the proportion of recurring revenues, improved profitability, and demonstrated a conservative financial policy with leverage remaining below 1.5x for more than a decade. We believe the company is positioned to benefit from broad industry tailwinds, a highly effective growth strategy in China, and its position as a leader in key product lines, including spectroscopy and gas and liquid chromatography. Like other life sciences companies, however, Agilent faces industry headwinds related to more cautious purchasing decisions and lower expectations for growth in China. We expect flat to slightly negative revenue growth and significant margin contraction in 2023 before returning to mid-single-digit percentage revenue growth and improved profitability in 2024 and beyond.

Alcon Inc. (BBB+/Stable/--) Analyst: Paloma Aparcio

Upgraded to ‘BBB+’ from ‘BBB’ On June 5, we upgraded Alcon on solid business and financial performance during challenging macroeconomic times. We anticipate further growth potential driven by innovation: Alcon’s resilient performance has been on the back of its value-added product proposition and solid commercial capabilities. We expect robust top-line growth and margin expansion because of its strategy to continue penetrating the advanced technological intraocular lenses market, gain share in the contact lenses space, expand in ocular health through acquisitions and keep a disciplined cost management. Alcon will continue keeping leverage between 2x and 3x. Its funding policies will remain prudent with organic growth complemented by bolt-on acquisitions of $800 million-$1 billion in the next two years. We also note its diligent expense management and mitigating actions from the past that assured controlled leverage. During challenging macroeconomic times, Alcon managed to keep leverage under 3x given its continuous and highly disciplined expense management and a rapid response to mitigate inflation and supply chain challenges, for example, by quickly stocking up on electric chips.

Sartorius AG (BBB/Stable/--) Analyst: Francesco Massarotti

New rating On Aug. 29, we assigned our 'BBB' long-term issuer credit rating to Sartorius after its acquisition of French gene and cell therapy technology specialist Polyplus. We expect Sartorius to benefit from the bioprocessing market expansion over the medium term. Despite a temporary slowdown in 2023 driven by biopharma companies' build-up of extra stocks over 2022 and the dissipation of pandemic-related revenue, we expect the bioprocessing market to expand 10% per year over the medium term. This will be supported by demographics, the increasing need for drugs, and the expanding role of biotechnologies and biopharmaceuticals in the development of new therapies and vaccines. Sartorius benefits from an established position in a fast-expanding market. The share of biopharma is 30% of the total drug market, we expect it to reach 35% by 2026. With leading market shares in its main product categories (fluid management, filtration, and fermentation), Sartorius is well positioned to capture expected industry growth. Sartorius, as a leading provider of single-use solutions, benefits from the increasing adoption of single-use processes in biopharma as it offers major advantages such as speed and ease of use in development and production, lower capital costs, lower waste, and reduced quality risk owing to potential contamination.


Upgraded to 'BBB' from 'BBB-' On May 18, we upgraded STERIS on solid operating performance and expected low leverage. We forecast robust sales growth. STERIS is the largest player in medical sterilization, and we expect it can deliver robust organic revenue growth in fiscal years 2024-2025 (ending March 31), benefiting from the recovery in the medical procedures and higher pharmaceutical and biologic manufacturing activity. Its financial policy supports leverage under 2.5x. We believe continued solid operating performance and a moderate acquisition policy support the company's ability to maintain leverage below 2.5x. We believe STERIS’ recent acquisition of Becton Dickinson & Co.'s surgical instrumentation platform assets for $540 million is in line with the company’s expansion strategy. Pro forma for the acquisition (assuming it is completed as announced and incorporating a full year of contributions from the acquired assets), we forecast S&P Global Ratings-adjusted leverage will be about 2.1x as of the end of fiscal 2024. We also believe the company is relatively well positioned to meet the proposed regulation to reduce ethylene oxide emissions that come out of commercial sterilizers. Although the proposal may require additional investments, we believe those over the past few years to improve its environmental standards and employee safety should position it better than other market participants.

Chart 1


This report does not constitute a rating action.

Primary Credit Analyst:Alice Kedem, Boston + 1 (617) 530 8315;
Secondary Contacts:Arthur C Wong, Toronto + 1 (416) 507 2561;
Ryan Gilmore, Washington D.C. + 1 (212) 438 0602;
Tuomas E Ekholm, CFA, Frankfurt + 49 693 399 9123;
Paloma Aparicio, Madrid + 34 696 748 969;
Patrick Bell, New York (1) 212-438-2082;
Research Assistant:Deepesh Pamnani, Pune

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