First-half medtech acquisition value surpasses 2013 total

Large medtech companies seem to have found some loose change down the back of the sofa. At the half-year point the combined value of acquisitions closed in the device space has reached $27.2bn, already much greater than the total for all of 2013.

This is all the more remarkable because it does not include the still-open megadeals contracted in the second quarter by Medtronic and Zimmer. Although only 82 medtech M&A transactions have been concluded in the first half, fewer than the 98 seen a year earlier, acquirers are picking their targets carefully, and when they find what they want they are willing to spend substantial amounts to secure it (see tables).

Top 10 takeouts closed in H1 2014
Acquirer Target Deal value ($m)
Thermo Fisher Scientific Life Technologies 13,600
Carlyle Group Ortho-Clinical Diagnostics business of Johnson & Johnson 4,150
Grifols Blood transfusion diagnostics business of Novartis 1,675
Smith & Nephew ArthroCare 1,500
Covidien Given Imaging 860
Ansell BarrierSafe Solutions International 615
bioMérieux BioFire Diagnostics 450
Essilor International Coastal Contacts 393
Cardinal Health AccessClosure 320
MicroPort Scientific OrthoRecon business of Wright Medical Group 290

This newfound willingness to splash the cash is also on display in the biopharma arena as the entire healthcare sector enters a new phase of consolidation (Huge second quarter for M&A sets 2014 on track for record year, July 9, 2014). Many of the most recently announced deals in both pharma and medtech have been at least partly driven by tax savings or the desire to put non-US cash to use, but there are interesting strategic motives at play too – on both the buying and selling sides.

Diagnostics divestments

The list of deals closed in 2014 is topped by Thermo Fisher Scientific’s takeout of the sequencing company Life Technologies, the third-largest deal ever completed in the medtech arena at $13.6bn.

The lure of scientific advances is always strong in a field where ever-increasing computational power can be exploited to great effect. Companies that can afford to invest in next-generation technology have a good chance of leaving their competitors behind.

In some cases it is the decision to sell that gives insight into the market. Johnson & Johnson and Novartis divested diagnostics businesses, though because each company still has a wide variety of operations it might not be fair to call these moves an effort to specialise. Instead they have more to do with the desire to slough off slow-growing assets (Carlyle's bid for Johnson & Johnson fixer-upper bucks market trends, January 17, 2014).

Top 10 take outs closed in 2013
Acquirer Target Deal Value ($m)
Baxter International Gambro 3,900
Stryker MAKO Surgical 1,650
Stryker Trauson 764
Bausch + Lomb Technolas Perfect Vision 645
CareFusion Vital Signs business of GE Healthcare 500
Kinetic Concepts Systagenix 485
Illumina Verinata Health 450
Abbott Laboratories OptiMedica 400
Argon Medical Devices Interventional Products business of Angiotech Pharmaceuticals 363
HeartWare CircuLite 350

The orthopaedics industry in particular is going through an extremely noticeable period of consolidation. Zimmer’s $13.4bn purchase of Biomet, announced in April, is intriguing because the companies are very similar – their product lines, especially in hip and knee implants, are so alike that the US Federal Trade Commission has begun an investigation that could yet see the deal called off (FTC starts Zimmer/Biomet inquisition, July 3, 2014).

The two ortho deals in top 10 so far this year have less overlap. Smith & Nephew bought the surgical tools company ArthroCare with the aim of merging the target’s radiofrequency knives with its mechanical saws. This RF-based technology has particular utility in sports medicine, one of the fastest-growing orthopaedic segments.

MicroPort Scientific showed similar thinking in its purchase of Wright Medical’s hip and knee business, OrthoRecon. The notion of buying a company or unit that is similar but not too similar could come to be a more successful strategy than the Zimmer-Biomet match.

Biggest since 2006?

This acquisition gold rush could well continue to play out during the second half of this year and quite possibly beyond. The Biomet takeout is not expected to close until 2015, but there is a chance that Medtronic could conclude its purchase of Covidien by the year-end. This alone would push the total for 2014 to nearly $70bn and all but guarantee that 2014 will be the biggest year for medtech mergers since the pre-crash days of 2006.

Medtech acquisitions of the past decade
Deal Completion Date Deal Value ($bn) Deal Count
H1 2014 27.2 82
2013 19.3 191
2012 42.6 229
2011 45.2 245
2010 22.6 257
2009 13.2 171
2008 26.4 215
2007 51.4 256
2006 69.9 210
   2006 (excluding Boston-Guidant)  42.9 209
2005 18.5 198
2004 19.8 149

One concern for deal bankers is the falling number of deals. The industry depends, to a far greater extent than biopharma, on takeovers to nurture smaller firms. Buying larger, more established groups is expensive but far less risky than opting for a smaller firm with a completely new device.

It has been true for a while that buyers are waiting for a target to achieve FDA approval for its product before pulling the trigger. The sector could be reinvigorated, and new technologies could reach patients faster, if more chances are taken on cheaper, smaller companies with exciting and potentially disruptive ideas.

This article was updated on August 6 2014.

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

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