The return of the medtech megadeal

Mergers worth more than $1bn are making up an ever-greater proportion of the total M&A deals in the medtech industry. This holds true whether they are analysed by the number of deals announced or their total value.

And the annual figures show a clear recurring pattern. The proportion of the total cash going into megamergers increased steadily until it reached unprecedented heights in 2014, when the Medtronic-Covidien and Zimmer-Biomet tie-ups were announced, among others. There was then a retrenchment – but since 2015 the preponderance of megadeals has crept upwards once more, and in percentage terms the first half of this year has seen even more than 2014 (see graphs below).

In an industry reliant on the acquisition of innovative start-ups by larger groups to foster innovation, it is good to see the smallest deals, those worth up to $100m, making up most of the mergers each year.

That said, arranging the number of deals in each size category as a percentage of a year’s total number of deals shows a clear growth since 2012 in the number of megadeals. It also shows that in 2017, for the first time, the number of deals in the smallest category made up less than half of the total.

A look at the raw numbers shows that the number of deals in the smallest bracket has dropped markedly in 2017: just 15 have been announced in the first half of this year, compared with a six-month average of 32 since 2012.

The number of M&As in the middle brackets – $100-250m and $250m to $1bn – are also below the average figures, though not by so much. The big deals, however, are increasing in number, with seven contracted in the first six months of 2017 versus an average, since 2012, of five.

Why are buyers seemingly prioritising scale-building deals over smaller takeouts? Brian Chapman, a partner at the consulting group ZS, says it might have as much to do with the start-ups as with the acquirers.

“I’ve heard more start-ups talk about remaining independent,” he tells EP Vantage. “Are small companies having a hard time getting bought? I’m not sure.” He also says that anecdotally, partnering and licensing deals, once the preserve of biopharma, have become more common in medtech. Witness the collaborations between glucose sensor, insulin pump and software developers, for instance, in the race to create an artificial pancreas.

Whether the drop in smaller deals is indeed the result of smaller groups choosing not to chase a trade sale, or whether they have little choice as the big groups are not buying, there is certainly a dropping off.

Cutting the data by the total spend in these brackets shows the vast amounts companies pump into consolidation. 2014 was a record-breaker, and while the total spent on deals broke the $100bn barrier for the first time the value spent on deals in the three smallest brackets actually fell, from $13.7bn in 2013 to $11.9bn the year after.

2015 saw a regression to the mean, with spending on the $1bn-plus category shrinking and the very smallest deals in particular seeing an impressive total – $2.2bn was spent on eight-figure purchases in 2015, more than any other year since 2012.

Ignoring the outlier of 2014, the spend on the biggest deals increased in a neat line from 2012 to 2016. And, judging by the transactions announced in the past six months, 2017 is on course to continue that trend. If the second half of this year sees the same pattern as the first, around $78bn will be spent on billion-dollar mergers, and $87bn on deals of all sizes. 

Looking at these same data as a proportion of all deals shows this more starkly: 89% of the total spend on M&A in the first half of this year went towards megadeals – the exact same proportion seen in 2014. And compared with 2014 the spend on the smallest category, those worth up to $100m, was even lower.

If a company has announced a huge megamerger it will be focused on closing the deal and integrating its purchase, so it stands to reason that more big deals in a year means fewer small ones. But companies need to buy in innovation as well as simply grappling for market share.

It is likely that the dearth of smaller deals is related to the increasing tendency of venture investors to avoid smaller funding rounds for start-ups, instead banding together in ever-larger, ever-later VC rounds for established and therefore less risky companies. After all, if an early-stage group cannot find the cash to sustain itself it will not last long enough to attract a buyer.

The bigger groups might do well to look at their biggest-selling devices and ask themselves how many were developed in-house and how many were bought in from smaller innovators.

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

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