Trump Effect Could Dampen December M&A Mania in Medtech

Looking forward to tax breaks promised by the incoming administration, device companies may put off plans to consolidate until next year.

Nancy Crotti

As 2016 winds down, the traditional M&A madness that occurs in the month of December may not happen, as companies await tax breaks and other benefits from the incoming administration of president-elect Donald J. Trump.

Not that 2016 needs the boost. While nothing rivaled Medtronic's nearly $50 billion acquisition of Covidien in 2015, this year has produced some whoppers, including Abbott Laboratories' $25 billion acquisition of St. Jude Medical, which could close by the end of the year.

Still, 2016 hasn't recorded as many multi-billion deals as previous years, according to medtech industry analyst Clyde "Burke" Burkhardt, senior managing director of HT Capital Advisors in New York. However, the volume of deals remained about the same as in 2015 at about 215, Burkhardt noted.

The build-up to the presidential election led some smaller companies to seek suitors, spurred by fears that their value would fall and regulations would rise with a Hillary Clinton win, Burkhardt added.

This year also saw some larger companies spin off businesses, further boosting M&A activity. For example, Becton, Dickinson and Co. announced in March that it will sell 50.1% of its respiratory solutions business to funds managed by private equity firm Apax Partners, forming a joint venture that will operate a new independent company. 

Abbott's bid for St. Jude has resulted in more spinoffs. Abbott intends to sell its vision care business to Johnson & Johnson in a $4.325 billion deal expected to close in early 2017. Under pressure from the EU to keep competition alive, Abbott and St. Jude also agreed to sell their vascular closure portfolio and other assets to Japanese multinational Terumo for $1.12 billion. The sale includes St. Jude's Angio-Seal and FemoSeal vascular closure products, as well as Abbott's Vado Steerable Sheath, which would compete with St. Jude's market-leading devices.

The outlook for medtech going into 2017 looks sunny, particularly because of an incoming Trump administration and continued Congressional domination by Republicans.

Trump's presidency promises a permanent repeal of the medical device tax imposed by Obamacare and an easing of medtech regulations. However, it may dampen the traditional flood of M&A deals in December, according to Burkhardt. While some companies may go for it  to save on their 2016 taxes, he believes most will put it off as the election fallout begins in earnest in January.

J&J will probably go shopping. CFO Dominic Caruso told analysts during a third-quarter earnings call in October that the company is looking for "bolt-on acquisitions" in orthopedics and general surgery, according to a transcriptby Seeking Alpha. It could also supplement its electrophysiology business with a structural heart acquisition, Caruso said.

"Generally speaking, we look for a very good year M&A-wise in 2017," Burkhardt said.

Nancy Crotti is a contributor to Qmed.

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