Experts Review Current Medtech M&A Trends

According to industry experts, the market for mergers and acquisitions (M&A) among medical device manufacturers remains strong, despite the ongoing credit crunch in the United States. However, the industry is not immune from the recent economic slowdown, which could have noteworthy implications for medtech M&A going forward.

Over the past year, say the experts, the number of medtech M&A deals has not declined significantly. “There is a lot of ongoing medtech M&A activity in the lower-middle and middle market areas—below the level of deals valued at $10 billion or more,” says Richard S. Cohen, president of the Walden Group Inc. (Tarrytown, NY), a strategic investment-banking firm. “The market is very, very active at lower levels, and intensely active in the middle level, so I wouldn't say there has been a slowdown at all.”

“In terms of acquisitions, I wouldn't say we're any less busy right now than we were a year ago,” says J. Casey McGlynn, a partner and chairman of life sciences group at Wilson Sonsini Goodrich and Rosati (Palo Alto, CA), “It certainly feels as though there is still quite a healthy medtech M&A market—even though the public markets seem to be more or less shut down.”

“In the first quarter of 2007, 39 medical device deals were announced. By comparison, in the first quarter of 2008, 35 medical device deals were announced—a slight decrease,” observes Ben Dunn, managing director of specialty investment banking firm Covington Associates (Boston). “But what's more telling is that the 39 deals of 2007 represented a transaction value of $15 billion, while the deals of 2008 are worth only $7 billion. So even though a substantial number of deals are still getting done, these figures suggest that a lot of the bigger, higher profile deals are not.”

The experts participated in a four-member roundtable discussion convened for the July/August issue of MX magazine. The discussion was moderated by MX editor in chief Steve Halasey. Panel members provided their views about the current climate surrounding medtech M&A, as well as the sectors most likely to see continued consolidation in the coming years.

“I agree that the medtech M&A market is as active as last year in many ways. But it's also a somewhat different market,” says Joseph E. Gilligan, a partner in the law firm of Hogan & Hartson (Washington, DC). “Strategic buyers have plenty of cash. In the past, strategic buyers were somewhat marginalized by the valuations put in place by some of the P/E players. But strategic buyers are generally cash-flow-positive businesses, and they're aggressively looking around as much this year as last year.

But according to Cohen, strategic buyers aren't necessarily seeking out opportunities for growth alone. “Overall, my sense is that acquirers are currently being less aggressive in seeking to grow by acquisition,” says Cohen. “Instead, they are being more defensive, more interested in fortifying their core operations.”

Medtech Company Cycle

According to the panelists, the medtech companies that are being readied as potential acquisition targets match the long-standing pattern of company growth in the industry. “The medtech industry's life cycle is well known,” says Gilligan. “Start-up companies move an idea through development to initial commercialization, and then they seek to be bought. For most companies there isn't an alternative path, because the costs of recruiting and maintaining independent sales forces and distribution channels and networks are just prohibitive. That ultimate obstacle remains the same as it ever was—with the same effects on company growth.”

“The medtech company life cycle in which small companies are sold to larger companies has been going on for years,” agrees Dunn. “And considering the high level of venture capital funding available to support the creation of new medtech ventures, that life cycle will go on for many more years. Over time, the number of small deals moves along at a pretty steady pace. That's how it goes.”

Nevertheless, current trends have altered the shape of M&A activities in at least one respect. “There is a limit to the number of deals involving large companies,” says Cohen. “There have been so many large transactions in the past few years that the market has become more concentrated, and there are now fewer large companies to combine. In addition to current economic conditions, this also helps to explain why fewer large deals are being done now. In effect, the really big deals that are logical have already been done.”

Advising Executives

Experts say that executives who are readying their companies for acquisition need to pay attention to fundamentals as well as current trends. “An inadequate IP portfolio is the number one failure that trips up medtech deals. And, I believe, it's also the number one factor that buyers are worried about,” says Gilligan. “A company might be able to complete a deal on the basis of valuation. But if it can't demonstrate that its IP is ready for prime time, then the deal's not moving forward.”

“We advise companies to ensure that they have a very strong and focused IP portfolio, rather than broad IP holdings that cover lots of different markets,” says Dunn. “Taking this step will help to ensure that the company's value proposition is very easy to understand.

“We always stress that in order to maximize company value, it's best to have as many alternatives as possible,” he adds.” Having alternatives might mean keeping a cash reserve so that if buyers aren't forthcoming, the company can always go it alone. It might also mean taking steps to make the company attractive to a group of potential acquirers.”

Companies also need to be prepared to entertain enquiries from prospective buyers located outside the Unites States. “For all of the sell-side transactions that we undertake, our financial advisors and others ensure that there is exposure to and significant participation by some of the major Euro zone companies,” says Gilligan.

“This is a multidimensional issue,” adds Cohen. “Because of the weakness of the dollar, American companies are less expensive for non-U.S. companies to acquire. In addition, foreign companies' products are becoming harder to sell in the United States because they're more expensive. So, foreign buyers are even further motivated to make an acquisition here.”

Cohen's firm has recently issued its Strategic Healthcare M&A Report for the second quarter of 2008. The report lists 32 M&A deals involving medical device and diagnostics companies, including 10 deals with a transaction value greater than $100 million. The full report can be accessed by visiting www.waldenmed.com/newsletters.asp.

In the roundtable discussion, the experts also offer recommendations about how company executives can best attract the attention of potential buyers. To read the expanded version of the roundtable, visit the MX Web site at www.devicelink.com/mx/archive/08/07/roundtable_x.html.

© 2008 Canon Communications LLC

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