Medtech M&A picks up in the second half but still disappoints

2013 defied the most doom-laden predictions of being the worst year in a decade in terms of device maker acquisitions – but only just. With the pure medtech buys closed in 2013 worth less than half the 2012 total, the sector made a pretty dismal showing, despite two deals worth more than $1bn closing in the second half (see tables).

And the lack of big deals has not been balanced with an uptick in smaller transactions; the resistance to mergers appears across the board. A recovery of sorts appears to be under way in pharma, with the prices paid for acquisitions increasing as the market expands (Pharma M&A values buoyed by climbing asset prices, January 23, 2014). Medtech is still stuck in the doldrums.

Medtech acquisitions of last decade 
Year completed Deal value ($bn) Deal count
2013 19.3 181
2012 42.5 216
2011 44.5 236
2010 22.6 243
2009 13.2 160
2008 26.4 211
2007 51.3 247
2006 69.9 206
2006 (excluding Boston-Guidant) 42.9 205
2005 21.4 192
2004 18.9 143
2003 10.9 130

If the deal count is down – 16% on 2012 – the total value of medtech acquisitions has fallen even further. Just $19.3bn was spent in total last year, less than half 2012’s total. It should be noted that this analysis excludes conglomerates; only those companies listed in EvaluateMedTech as pure medtech have been included. The only pure medtech megamerger worth more than $20bn, Boston Scientific’s purchase of Guidant in 2006, has also been excluded.

One factor that could explain the dearth of mergers is the lure of a public listing. Medtech shares have performed well over the past year – though not to the same extent as biotech shares – and device makers, most recently Lombard Medical Technologies, are starting to notice the potential benefits of a presence on Nasdaq.

Top deals

The biggest spender of 2013 is Baxter International, whose purchase of Gambro launched it onto the hospital dialysis market and was by far the largest it has ever made. The company may have cause to regret entering this sector, though – cuts in US reimbursement for dialysis procedures could force the closure of some of Baxter’s clinics (Event – US dialysis Medicare cut could be counterproductive, October 23, 2013).

Baxter is one of only two large-cap pure medtech firms in the top 10, the other being Abbott Laboratories, which bought the laser cataract surgery specialist OptiMedica for nearly a tenth of the price of the sector’s biggest deal. The rest are either private or mid-cap firms.

Top 10 takeouts closed in 2013
Acquiring company Target company or business unit Deal value ($m)
Baxter International Gambro 3,900
Stryker Mako Surgical 1,650
Bayer Conceptus 1,100
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

Stryker appears twice in the table with buys in the surgical and trauma areas worth $2.4bn in total. The larger deal, the acquisition of the robotics firm Mako Surgical, was particularly generous, with the buyer offering a massive 86% share price premium.

The surgical robotics sector still has a lot to prove, with some research suggesting that the technologies cannot offer an improvement over the performance of human surgeons; Stryker obviously feels that the techniques will be valuable in the future (Stryker takes a stride into the future with $1.65bn Mako buy, September 26, 2013).

Its earlier purchase of Hong Kong’s Trauson looks a safer bet, with the orthopaedics sector growing nicely. Furthermore, a base in an emerging market is unlikely to be a bad idea, particularly as Stryker has opted for a Chinese company; the recent woes of US and European healthcare companies as they try to make their way in China have been well publicised.

Innovation in danger

Looking at the fluctuations in deal sizes over the past decade is also instructive. An analysis considering only those deals whose value is known shows that the drop in the number of mergers is seen across all divisions. Companies’ resistance to multibillion dollar buys in a tough market is understandable, but they are also shying away from smaller acquisitions.

Medtech acquisitions of last decade by value
Year completed $1bn+ deal count $500m-$1bn deal count $250m-$500m deal count Up to $250m deal count
2013 3 3 15 64
2012 5 5 16 81
2011 8 10 19 83
2010 4 8 13 103
2009 2 5 7 67
2008 6 5 8 83
2007 12 9 7 119
2006 11 8 8 95
2005 6 6 11 103
2004 5 3 11 73
2003 2 3 7 59

The decline is particularly worrying for an industry built on takeovers. Even the largest medtech firms buy in technologies, and, rather than favouring the licensing deals common in pharma and biotech, the usual method is to purchase the company outright.

If the apparent unwillingness to buy even smaller one-product firms continues, it is hard to see where the new technologies of the future will come from. Naturally the larger companies develop devices in-house too, but they cannot compensate for the shortfall in bought-in innovations. An increase in the number of purchases in 2014 will be crucial for the future of the medtech sector.

All data sourced to EvaluateMedTech

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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