Value Of Medtech Mergers Down 80%

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Includes: ABT, DHR, MDT, PCRFY, RMD, SIRO, STJ, SYK, XRAY, ZBH
by: EP Vantage

There was no way 2016 was going to even come close to the vast total value of medtech M&As closed in 2015, but even so at less than $17bn the total for the first half is tiny. At the half-year point in 2015, deals worth $34bn had been closed – even after excluding the most mega of megamergers, that of Medtronic (NYSE:MDT) and Covidien.

Including the Medtronic-Covidien tie-up, the total for H1 2015 was $84bn, meaning the H1 2016 total is only a fifth of what it was a year ago. Sector-wide pushes for scale are cyclical by nature, and to some extent the low-hanging fruit has already been plucked. And promisingly, the number of deals has remained fairly steady (see tables) – the sector may be returning to the mid-size deals that best reward innovation.

Medtech acquisitions of the last decade

Completion Date

Value ($bn)

Count

H1 2016

16.9

106

2015

127.4

213

2015 (excluding Medtronic-Covidien)

77.5

212

2014

40.2

212

2013

19.7

227

2012

44.6

244

2011

47.7

261

2010

20.5

265

2009

13.2

174

2008

27.7

226

2007

51.5

266

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Counting only those deals whose value was made public, the average size of the acquisitions closed in the last half-year was $401m, less than half that for H1 2015, even excluding the $50bn Covidien acquisition. But 106 deals were signed, compared with 96 this time last year.

This is probably a good sign. With the larger groups having moved on from the large scale-building they have pursued over the last couple of years there is now more room for the kinds of smaller, technology focused acquisitions that are the bread and butter of the medtech sector.

Medtech acquisitions - H1 2016 v H1 2015

Completion Date

Value ($bn)

No of deals

No of deals with known value

Average deal size ($m)

H1 2016

16.9

106

42

401

H1 2015

84.1

96

42

2,003

2015 (excluding Medtronic-Covidien)

34.2

95

41

835

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For every medtech start-up whose management is determined to make a go of it, intending to list at the first opportunity and eventually become a big-cap multinational, there are dozens whose ambition extends no further than developing a product, proving it works and selling themselves.

A trade sale of a start-up with a single invention, or maybe a handful of devices, is often the best way to bring the technology to the widest group of patients. The resurgence of smaller deals is, hopefully, a return to business as usual.

Dental, diagnostics and diabetes

Of course, some large mergers have been conducted. Dentsply’s (NASDAQ:XRAY) $5.5bn merger with Sirona Systems (NASDAQ:SIRO) has completed to produce the second largest maker of dental products with worldwide sales of $2.4bn last year. With an impressive growth rate of 13%, Dentsply Sirona is forecast to leapfrog Danaher (NYSE:DHR) to take the top spot in 2022 when it will do $5.6bn of business according to EvaluateMedTech data.

That deal was the only one of the top 10 mergers to be a strict scale play. All the others were more to do with repositioning; either gaining access to a new suite of technologies or pivoting to address a different, and growing, market.

Previously known mainly for its orthopedics products, Stryker (NYSE:SYK) smartly moved towards the fast-expanding hospital sector with two deals inside a month, buying ICU device maker Sage Products and Physio-Control, which sells equipment including defibrillators and heart monitors for use by paramedics and the military as well as in hospitals.

Likewise Panasonic (OTCPK:PCRFY) pivoted towards diabetes – a safe bet for an expanding market if ever there was one. Resmed (NYSE:RMD), previously known for sleep apnea devices, bought informatics specialist Brightree after the catastrophic failure of its ventilation device in a clinical trial for heart failure (ResMed crashes after death rate increase, May 15, 2015).

Top 10 deals closed in H1 2016

Acquirer

Target

Value ($m)

Dentsply Sirona

Sirona Dental Systems

5,506

Stryker

Sage Products

2,775

Thermo Fisher Scientific

Affymetrix

1,300

Stryker

Physio-Control

1,280

Panasonic

Diabetes Care business of Bayer

1,110

ResMed

Brightree

800

NuVasive

Ellipse Technologies

410

DiaSorin

Focus Diagnostics, subsidiary of Quest Diagnostics

300

Smith & Nephew

Blue Belt Technologies

275

Conmed

SurgiQuest

265

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Otherwise the reasoning behind most of the mergers was largely to do with obtaining innovative technology.

Thermo Fisher Scientific paid a generous premium for genomics analysis group Affymetrix despite it being unprofitable, so it could get hold of promising technologies including non-invasive prenatal testing for diagnosing fetal genetic abnormalities from the mother’s blood. Smith & Nephew moved into robotic surgery by acquiring Blue Belt Technologies, whose tech, used to help perform orthopedic procedures, should mesh well with S&N’s core products.

Top 10 deals 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

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That said, there are scale-building deals in the pipeline, with Abbott’s (NYSE:ABT) $25bn purchase of St. Jude Medical (NYSE:STJ) to close in the coming months.

Other companies have announced bolt-on deals that do not move them into new areas, such as Zimmer Biomet (NYSE:ZBH) buying LDR for $1bn and Medtronic (MDT) taking out HeartWare for slightly less. These are not scale plays, exactly, and they do bring in innovative tech, but they are not direction-changers.

Still, compared with the vast deals of last year, almost all of which were intra-segment consolidation, this is reassuring. It would not be a disaster if tuck-in technology-focused acquisitions take over from the headline-grabbers.

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