Mergers and acquisitions (M&A) is a hot topic in the medtech industry. Stryker recently announced a planned acquisition of Wright Medical for approximately $5 billion, which will bolster its orthopedic portfolio and transform it into the upper echelon of leadership within the category. This follows a trend that we’re tracking closely as the industry continues to evolve.
One of the most packed sessions at the recent AdvaMed Medtech Conference was the session devoted to M&A. At a lively Q&A panel, senior representatives from Boston Scientific, Johnson & Johnson, and Medtronic described market-level opportunities and risks, as well as company-specific insights. In particular, they noted the importance of execution, and how a well-designed M&A strategy combined with a strong implementation capability brings value to all stakeholders and helps companies avoid pitfalls.
Historically, the number of deals in medtech M&A has been reasonably consistent, typically landing between 185 and 250 transactions per year for the past 10 years, according to Bloomberg, Evaluate MedTech and ZS data. 2017 was the peak year for medtech M&A deal values, totaling nearly $100 billion, and punctuated by mega-deals such as Abbott’s spree to acquire both St. Jude for $25 billion and Alere for $5.3 billion. 2018 had only $27 billion in total deals, including the divestiture of LifeScan to Platinum Equity for $2.1 billion, a couple of deals for Roche totaling about $4.3 billion, Medtronic’s acquisition of Mazor for $1.7 billion and Stryker’s acquisition of K2M for $1.3 billion.
The first three quarters of 2019 have shown a fast clip in number of deals (already over 110), and higher total deal value than in all of 2018, at about $35 billion in total value. The number of transactions is still similar to historical norms, but the average deal size is significantly higher. Of course, we can only report on publicly disclosed numbers, although we wouldn’t necessarily expect any significant difference in year-over-year disclosure effects. This increase in deal size is a recognition that there are some big bets to be made to position strategic investors for success in the future, and that incremental innovation from internal R&D organizations will only get them partway toward their goals. The timing is right for key players to allocate significant funding to M&A activity.
Three of 2019’s largest public transactions are in line with major growth drivers in the industry, including JnJ’s big bet on surgical robots with its acquisition of Auris for $5.7 billion, private equity’s Veritas and Evergreen purchasing healthcare IT company Athena Health for $5.7 billion and Boston Scientific’s purchase of interventional medicine company BTG for $4.2 billion. Other trends include major purchases in orthopedics, sterilization and home dialysis.
Already in the first few weeks of the fourth quarter, three big acquisitions are worth noting: 3M announced closing its $6.7 billion acquisition of Acelity, making it the largest medtech transaction yet this year. Also, Google announced its intention to acquire Fitbit for $2.1 billion, and Stryker did the same with Wright as mentioned above. Those large deals are generally made by those looking for a significant transformation in some or all aspects of their business. For example, last year’s Medtronic deal leapfrogged the company into the robotics business, in which it sees large growth and high barriers to entry. Similarly, the Google deal puts it in prime position to take the consumer-oriented health and fitness brand to the next level, including an increasing number of medical applications.
Others are following more of an incremental tuck-in acquisition strategy, in which relatively small-scale acquisitions serve to supplement ongoing R&D initiatives and plug gaps in specific product portfolios. This ultimately accelerates innovation and reduces time to market. Tuck-ins generally result in fewer implementation challenges and quicker returns on investment, relative to larger transformational mergers, and as a result are more palatable to many leaders making M&A decisions.
As R&D efficiency declines for large strategic investors, the need for external innovation increases. At the same time, small companies often aim to be targets of strategic investors as a key component of their respective exit strategies. The recent trends should bode well for smaller companies looking to be acquired as their exit strategy. Strategic investors continue to be hungry for innovation and expand their traditional medtech capabilities, such as those related to digital health and population health.
Companies can set themselves up for long-term success with better M&A strategies, internal processes, and capabilities, so that the transactions themselves are well planned and organized, rather than chaotic one-off events. Over the next few months, we’ll be delving deeper into the various components of M&A success and best practices, from upstream landscape assessment to downstream operations. The successful execution of these strategies will help maximize M&A value for all stakeholders and lead to cutting-edge healthcare for a broader array of patients and consumers.