M&A momentum in the medical device sector

October 2015  |  FEATURE  |  MERGERS & ACQUISITIONS

Financier Worldwide Magazine

Historically diverse and innovative, but consistently subject to regulatory hurdles and demands for reform, the medical device sector is ever-evolving and 2015 trends have been no exception.

Chief among these are three trends identified by boutique consultancy firm Cipher: a move from innovation to iteration; an increased focus on globalisation and end-to-end solutions driving acquisitive growth strategies; and due diligence becoming a larger piece of corporate strategy for medical device corporate growth.

Such developments, particularly in the mergers & acquisitions (M&A) space, amount to heady stuff for an industry expected to reach a market size of $133bn in the US by 2016 – 38 percent of the global device market. Across the Atlantic, the medical devices industry is a major source of jobs, employing 575,000 people in the EU with sales amounting to €100bn.

M&A momentum

This M&A momentum is the focus of new report by Frost & Sullivan – ‘Investment Analysis of the European Medical Device Sector’ – which, following a record year for medical technology in 2014, suggests that the contribution of US buyers to M&A in Europe is expected to increase, largely due to the competitive nature of the US market. Furthermore, the analysis reveals that investments in the sector, particularly in cost-efficiency technologies, are “witnessing a gradual spike as efforts to cut reimbursements as well as healthcare costs take shape”.

Frost & Sullivan also found that, in addition to growing regulatory demands, pricing pressures and a large amount of uncertainty around returns is causing private equity investors to move away from the medical device sector. “Analysis shows that deals are continuing to decrease, implying that big investments that usually happen in the last quarter are slowly phasing out,” explains Saneesh Edacherian, a senior financial analyst at Frost & Sullivan. Investors are shifting focus from early-stage to late-stage start-ups as failure rates and investments rise and exit options drop. “M&As will be the primary exit options for companies in the European medical device sector,” suggests Mr Edacherian.

2014: all-time high M&A

According to recent research by McKinsey, there were multiple factors driving the M&A activity seen in 2014: slower growth in core businesses due to price pressures; provider consolidation; tax optimisation strategies and a favourable interest rate environment; as well as the need to access growing device segments combined with more confidence among executives in the sector in capturing cost synergies.

In terms of M&A activity seen so far in 2015, while not comparable to the mega mergers of 2014, there have been “several deals designed to facilitate expansion into growth markets” according to Ajay Gupta, a director in McKinsey’s Pharmaceuticals & Medical Products practice in Chicago.

“As in 2014, the increase in M&A activity by original equipment manufacturers (OEMs) has continued,” says Sowmya Rajagopalan, a research manager at Frost & Sullivan. “The acquisitions have been largely to do with new and complimentary areas of focus and geographic expansion and tax inversion.”

Medtronic and Covidien

One large-scale M&A deal which did take place in 2015 was Medtronic’s acquisition of Covidien, a transaction which resulted in the creation of the medical device sector’s largest company. Although a number of industry analysts have suggested that the deal is an indication of the overall health of the medical device sector, others, such as Ms Rajagopalan, are unconvinced as to whether the Medtronic/Covidien deal represents the shape of things to come. “We do not consider the Medtronic acquisition of Covidien, or Zimmer’s acquisition of Biomet, as paving the way for acquisitions in the future. These were stand alone acquisitions that were large, but tax inversion, market consolidation cannot be the trend to grow in the medical device sector,” says Ms Rajagopalan.

Future M&A activity

For now, M&A momentum in the medical device sector is showing no major signs of abating, despite the perhaps unavoidable dip from the record levels seen in 2014. That said, among sector participants, there is a range of opinion as to how investments strategies will be deployed in the coming years.

“M&A in the medical device sector will likely continue in the years ahead,” vouches Mr Gupta. This continuing M&A activity, he reasons, will be driven by multiple investment strategies including gaining access to meaningful innovation; access to attractive sub-segments for established category leaders; geographic expansion, achieving greater intra-segment and cross-segment scale; further tax leverage; renewed interest services growth ‘beyond the product’; as well as continued confidence in integration execution and performance. “There is also likely to be greater pressure on mid-caps to achieve greater scale. At the same time there will be some divestitures – driven by the need for focus as well as being the consequence of some of the larger industry deals,” adds Mr Gupta.

Looking ahead, the need for companies to pursue innovative products and technologies is likely to have a considerable bearing on future acquisitions in the medical device sector, according to Ms Rajagopalan. “In today's competitive environment,” she attests, “first to the market supports long term growth – hence, acquisitions have to be part of growth, at least in the short term.”

© Financier Worldwide

BY

Fraser Tennant