Dan Heilman

In 2014, $20 billion was generated in 65 of the most significant medtech merger-and-acquisition (M&A) deals, almost twice as much as the value of the 65 biggest medtech deals the year before.

Whether and how that momentum can be maintained was the topic of a panel discussion at Wednesday’s Medtech Investing Conference in Minneapolis.

The market for venture-backed medtech companies has been positive recently after a period of stagnation that coincided with the economic downturn of the late 2000s, said Justin Klein, MD, JD, a partner with venture capital firm New Enterprise Associates.

“Companies that have managed to get financed and get their products approved have demonstrated value in the marketplace and reached a level of maturity that make them attractive targets for acquirers,” Klein said.

That situation is partly due to the low cost of capital and the need for growth among high-cap companies, making scale and diversity the winners in the current climate.

“The need for growth is still there,” said Jeffery G. Barton, vice president of licensing and acquisition for Abbott Laboratories. “Tech companies create a good platform and create competition for assets.”

Covidien, the medical device maker recently purchased by Medtronic, also saw a flurry of deals prior to being sold, but Chuck Brynelsen, president of Covidien’s Early Technologies division, said the company will likely slow its acquisition pace while it settles in

“There have been instances where we’ve looked across the aisle at Medtronic and realized we’re competing with ourselves,” Brynelson said. “Now that we’re integrating the companies, we have a company that has twice as much need for growth and very little overlap. We’ll continue to be as active as we were in the past.”

Consideration should be given to consolidation among the large-cap companies best positioned to commercialize and distribute technologies while, at the same time, recognizing the need to achieve the most value by thinking very carefully about when to finance a company, Klein said.

“There are multiple proof points that we need to achieve,” he explained. “Gross margins, the opportunity to scale a product initially and over time. That’s part of how, over time, a company or technology (that’s for sale) has a lot of profit-and-loss sensitivity in the timing and scale of an acquisition.”

The life sciences segment has seen a pattern of divestitures following acquisitions. Will medtech follow suit? Probably not, according to Barton, who noted that divestitures will still remain more common than asset swaps in medtech deals.

But, Klein noted, there will be select opportunities where investors can take products that might not have a perfect strategic fit and combine them with established products.

“We’re looking at companies that are not only attractive acquisition targets but also are growing in a space where there are relatively few midcap device companies that are in a position to evolve,” he said.

A sustained lack of strong growth among larger medtech companies has elevated the need to find new technologies. As the IPO market comes back, acquiring companies have an enhanced financing alternative. Martin pointed out that acquirers have been disciplined and patient, and are looking more at earlier-stage companies.

“Once a company goes public, that means that there’s more data out there,” Barton said. “By the time a company goes public, it’s generally generated a profit, or at least has revenue. The market sets a value, and that can bring some reality to the valuation, which can make a transaction go more smoothly.”

Dan Heilman is a freelance contributor to MD+DI. 

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