All-Time High For Medtech M&A

|
Includes: DHR, MDT, RHHBY, ZBH
by: EP Vantage

For the first time ever the total value of mergers in the medtech industry has breached the $100bn threshold – and not just breached it but shattered it. Deals worth more than $127bn were concluded last year, thanks largely to the record-breaking acquisition of Covidien by Medtronic (NYSE:MDT), though takeovers by Danaher (NYSE:DHR) and Zimmer (NYSE:ZBH) also played their parts.

But the trend to consolidation within the industry has been winding down across 2015, with not one billion-dollar acquisition announced in the final quarter – the first period without a megamerger since the beginning of 2013. The $127bn figure will stand as a record for many years yet.

This total was reached despite 2015 seeing fewer deals closed than any year since 2009. Even excluding the highly distorting Covidien deal the average amount paid (calculated using only the 96 deals whose value was made public) was $804m, again the highest on record.

A look at the quarterly graph bears this out: disregarding Covidien the totals for all four quarters of 2015 are higher than all but three periods within the preceding decade. The good times rolled fairly steadily throughout the year, itself a very unusual situation.

But they are about to roll to a halt. Considering announced rather than closed M&A, large-scale deals were contracted throughout the first three quarters but came to a dramatic stop after Dentsply said it would buy Sirona Dental Systems in mid-September.

Consolidation of the types seen in medtech over the last couple of years is by its nature cyclical. Companies feel the same pressures, from payers demanding lower prices to shareholders demanding lower tax expenditures to mergers in the hospital sector meaning medtechs have fewer customers for their equipment, and react in the same ways.

Medtech acquisitions of the past decade
Date closed Total value ($bn) Deal count
2015 127.1 196
2015 (excluding Medtronic-Covidien) 77.2 195
2014 39.7 208
2013 19.6 218
2012 44.9 244
2011 45.3 257
2010 22.6 265
2009 13.2 173
2008 26.4 223
2007 51.4 262
2006 70.0 220
2006 (excluding Boston-Guidant) 43.0 219
Click to enlarge
Click to enlarge

Now there will naturally come a period where many of the bigger groups, having acquired, must take time to absorb the companies, streamlining device manufacture and in most cases laying off unnecessary staff. This last might be a particular problem for the town of Warsaw, Indiana, where both Zimmer and Biomet were based before combining, though the orthopaedics groups insisted that layoffs would be minimal.

Of course, a large purchase does not mean forswearing further acquisitions entirely. Medtronic has been extraordinarily active as a buyer, closing eight mergers besides its integration of Covidien, and spending over $1bn among them.

Medtronic's 2015 spending spree
Date closed Target Sector(s) Value ($m)
26 January Covidien Anesthesia & Respiratory; Cardiology; General & Plastic Surgery; General Hospital & Healthcare Supply; Neurology; Patient Monitoring 49,900
2 October Twelve Cardiology 458
11 August RF Surgical Systems General & Plastic Surgery; General Hospital & Healthcare Supply 240
31 August Medina Medical Cardiology; Neurology 150
19 June Aptus Endosystems Cardiology 110
18 November Aircraft Medical Anesthesia & Respiratory; Ear, Nose & Throat; Endoscopy 110
28 September Lazarus Effect Cardiology 100
19 June CardioInsight Technologies Cardiology; Diagnostic Imaging 93
26 March Sophono Ear, Nose & Throat -
Click to enlarge
Click to enlarge

These nine deals puts it way out in front as the most prolific acquirer as well as the biggest spender. Roche and the sleep apnoea specialist ResMed were a distant joint second, completing four acquisitions each. The value of only one of these eight deals was announced: Roche bought GeneWeave Biosciences for $425m in August.

Medtronic is also a nice illustration of the two main reasons for M&A. The Covidien deal was about scale, dovetailing the two groups’ products to provide hospitals and other customers with a single vendor for many of their products, particularly in the areas of cardiology and neurology.

The other takeouts, though, were more to do with the promise of each company’s technology. Medtronic swooped on the stealth-mode Twelve to get hold of its catheter-mounted artificial mitral valve, for instance, gaining a presence in the technology area that arguably saw 2015’s most frenzied activity.

Top 10 takeouts closed in 2015
Acquirer Target Value ($bn)
Medtronic Covidien 49.9
Zimmer Biomet Biomet 14.0
Danaher Pall 13.8
Becton Dickinson CareFusion 12.2
LivaNova Sorin 3.4
Wright Medical Group Tornier 3.3
St. Jude Medical Thoratec 3.3
EQT Partners Audiology Solutions business of Siemens 2.7
Hill-Rom Welch Allyn 2.1
Cardinal Health Cordis business of Johnson & Johnson 1.9
Click to enlarge
Click to enlarge

What shows that 2015 was no ordinary year is the fact that all of the top 10 deals were worth in excess of $1bn. In fact there were no fewer than 18 billion-dollar babies last year, compared with seven in 2014 and four in 2013. The last year that saw anything like that number was 2007, when 14 billion-dollar transactions were concluded.

So 2015 is one for the record books on a number of counts. 2016 will not match it, and might well trail it significantly. That said, a shift from huge, industry-changing combinations to the smaller, technology-focused tuck-in deals, the prospect of which start-ups rely on to attract investment, might be no bad thing for the medical device sector.

To contact the writer of this story email Elizabeth Cairns in London at elizabethc@epvantage.com or follow @LizEPVantage on Twitter

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.