More revenue. More R&D spending. More employees.

Our latest Medtech Big 100 ranking contains encouraging news about the health of the medical device industry, mirroring anecdotal reports over recent months.

Well beyond the initial shock of the COVID-19 pandemic, medtech developers and manufacturers are managing the headwinds, and relief may finally be in sight.

As the Medical Design & Outsourcing and MassDevice team prepared our annual rankings and analysis, I spoke with Ryan Zimmerman, medtech analyst at BTIG. He pays close attention to companies across the sector, with a particular focus on orthopedic and surgical companies.

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You’ll find some of his commentary in our year-over-year analysis of the 2022 Medtech Big 100 ranking of the largest medical device companies, but I wanted to share more of our conversation (lightly edited for space and clarity) here.

MDO: When I talk with manufacturers and suppliers, I hear a lot of supply chain and labor shortage issues, but one surprise is how many companies are staffed up, stocked up and have so much work they can’t take on new business. I keep seeing these signs that there’s a big backlog, that the pump is primed.

Zimmerman: Staffing issues are still plaguing parts of the industry and inflation is a risk, and currencies for a lot of the large multinationals are risks. I don’t want to diminish those. And I’d say we’re probably in a tougher macro environment than we’ve seen over the past few years. That aside, there are pockets of good underlying fundamental growth on … a mix of some of the large companies, but also some of the more niche sub-segments.

MDO: What are some examples?

Zimmerman: Alcon — a large cap, the largest, pure-play ophthalmic company out in the medtech space — their underlying growth in their surgical business (and J&J, too, in vision) was very good this quarter. We saw essentially 20-plus-percent net of currencies in terms of implantable growth on Alcon. That’s the cataract IOLs, mostly coupled with high-double- or high-single-digit consumable growth, suggesting really good recovery outside the U.S. in cataract surgery. I thought that was very positive. Ophthalmology has been one area with all these issues. And Alcon’s not immune to it, but ophthalmology tends to be a little bit more immune to some of the staffing issues, partly we think because the procedures take place outside the hospital. … As of right now, yes, there may be a recession coming, but the consumer today is pretty healthy. And so, you know, companies like Alcon are seeing pretty good underlying growth numbers.

MDO: Where are you seeing a slower recovery?

Zimmerman: Spine’s taking a bit longer to come back despite getting through some of the worst of it. Patients aren’t necessarily rushing back to go have back surgery. There’s some thought that things have opened back up, life’s getting back normal, and the last thing I want to do is spend another eight or 10 weeks inside my house, dealing with the recovery of the surgery. There’s probably some truth to that.

MDO: What optimistic signs are you seeing in R&D?

Zimmerman: At Medtronic, certainly they are experiencing some headwinds, but the expectation is that R&D will continue to grow to fuel Medtronic’s innovation pipeline, which today is very robust. There’s a lot that Medtronic is going to be rolling out over the next 12, 24 months.

MDO: What other big medtech companies are making the same signals on R&D?

Zimmerman: Zimmer has been quite a turnaround story for some time now and has built a massive ecosystem around its knee implants. They’ve built the mymobility app, they’ve built partnerships with Apple. Um, they are now launching the Persona IQ, which is essentially the world’s first smart knee that will have sensors built inside the tibial components to provide data for patients. It’s in the limited launch, still early, but the idea being that we’re not necessarily moving away from robotics in ortho — that innovation cycle has come and it’s still taking place — but this next kind of iteration is the smart implant. You’re seeing Zimmer invest a lot to not only build that ecosystem, but to drive awareness of that.

MDO: Are there other examples?

Zimmerman: Intuitive has also been sitting on an $8 billion-plus balance sheet of cash with no debt and has been really focused not so much on driving EPS growth or acquiring other assets. Their focus has been on building an ecosystem around the surgical robots as a way to provide a competitive mode. And so if you look at Intuitive’s R&D spend over the past from 2017 to 2020 and into this year, we’ve gone from about 10.5% percent of sales to — I’m modeling at the end of this year — 14%. And that’s at the same time that Intuitive’s revenue has gone from about $3.1 billion to $6 billion, their R&D spend is going up about 400 basis points as a percentage of sales. It’s a big amount of money. The question is, what are you getting for all this? Well, we may be getting a next-generation surgical robot from intuitive. That’s at least what the rumor mill is giving us. But beyond that, think about the ecosystem around the robot, you have analytics, you have AI, you have machine learning, you have advanced imaging. These are all things that have been added over the past few years to enhance the value of Intuitive’s robot in the face of many other companies that are launching their own robotic systems. And that has allowed intuitive to maintain its dominant position in the surgical robotics space.

MDO: From all the companies you cover, do you feel like cash positions are generally strong?

Zimmerman: We took the cash positions of all the large caps, and we tracked how those cash positions have grown from an absolute cash level since 2000 to today. Cash positions peaked in 2014, 2015. They came down in 2018, 2019. And since that time, they’ve recovered pretty nicely. The large caps are sitting on a decent amount of cash, and their leverage ratios in the same period of time have come down, so their debt levels have come down too. We thought — before interest rates really started to rise this year —  we would see a slew of M&A, and there’s been some, but not as much, which I’m a little surprised by because the markets really pulled back at the start of this year. So I thought, “This is going to be the time everyone’s gonna jump on a bunch of deals.” We saw some. Not as much as I expected, but generally speaking, the large caps are sitting on good cash positions. They’re vocal about wanting to buy growth assets and the public markets, at least — not the private — have come in enough that we think the valuations are more reasonable.

MDO: Some big healthcare spinoffs are coming from 3M and GE following recently completed spinoffs like ZimVie. What does this spinoff activity mean for the medtech industry?

Zimmerman: They can simplify the focus of the company … and they also a good thing in the sense that you take assets and you can clean them up. You can position them to drive value by spinning them out and then setting them up so that you can start to trim. What I mean by that is a lot of times, these assets are underfunded and undercapitalized inside a big company — take ZimVie, for example — and you can get rid of certain components of the business, say a low margin SKU, and start to lift margins as the company spins out. Spinouts tend to perform pretty well because they can be cleaned up, or the companies themselves know their low-margin assets that can be removed. In turn, you start to see better operational performance of these spinouts over the next year or two.

MDO: Can you talk more about ZimVie as an example?

Zimmerman: Inside of Zimmer, you know, there was an underperforming business in spine and dental that if they got rid of that, suddenly Zimmer’s growth is 50 to 100 basis points higher, so Zimmer looks better. ZimVie’s got a bunch of assets that nobody wants, that’s kind of slow growth. … Over the next year or two, as ZimVie gets to unload some of those old assets, their margins are going to pick up, their revenue growth’s going pick up. It’s kind of an easy playbook to generate value for that company and the legacy company, because the legacy company will still own part of that company, that stock. And they get the benefit of hopefully the stock value going up. … It’s very healthy for the industry.

MDO: What’s the driving force behind medtech spinoffs?

Zimmerman: The greatest determinant of returns in medtech over a multi-year period (has been) improved top-line performance. Despite strong margins or high EPS growth, top-line revenue growth is valued and generates higher returns in medtech historically, if I just look back the past five to 10 years. … A lot of what we see in med tech in terms of spinouts is a result of companies looking for a way to generate higher, faster growth. And it may also be because there are no buyers for the businesses that they’re looking to spin out, because they generally underperform or the investment required to turn it around is just too significant.

MDO: What do you take away from the general tone of executives on recent earnings calls?

Zimmerman: I personally think people were fearful going into this earnings season because of the lingering impacts of all the headwinds. And you generally saw a more resilient sector this earnings season that wasn’t as bad as we expected. Sure, currencies are concerning, inflation’s still concerning, but the supply chain has gotten marginally better — or at least it has not gotten materially worse. It feels like the big issue the first half of this year is around supply, and it feels like the supply chain headwinds may be easing in the back half of the year. And so that’s probably the bigger takeaway.