Med tech deals expected to surge as reform woes wane

October 22, 2012
by Diana Bradley, Staff Writer
During the past twelve months, approximately350 to 400 med tech mergers and acquisitions were tracked by investment banking firm HT Capital Advisors, 250 of which took place in 2012 alone. This level of activity is similar to what Clyde Burkhardt, the firm’s senior managing director, witnessed last year.

“Things have picked up dramatically, not only as the economy has improved, but also because large companies like health care product manufacturer Johnson & Johnson are out there aggressively looking to expand their portfolio of products,” Burkhardt says. “On the other hand, smaller companies are receptive to selling because they need financial resources and distribution.”

Contrary to Burkhardt’s experience, many large companies are wary of acquiring new technologies, says Kerry Dustin, Chairman, Falls River Group LLC (FRG), a middle market merger and acquisition firm located in Naples, Florida and a member of IMAP Inc., a global partnership of M&A advisory firms.

“There isn’t much enthusiasm toward the acquisition of new technology in the med tech sector,” Dustin says. “The ‘not-invented-here’ mentality throughout business development and R&D departments has prevented a number of paradigm-shifting technologies from being acquired.”

Essentially, most major players don’t want outside technology coming in to compete with their cash cows (e.g., legacy CT or other imaging systems). And since smaller companies and startups are often unable to build the sales forces necessary to enter the market in an efficient manner, they shut down before their technologies are brought to market, explains Dustin.

“Larger companies are less likely to accept change,” he says. “Distribution is more difficult to find than capital.”

On a global scale, there is tremendous buyer interest in med tech by Israel, Russia, Japan, China and India, as well as the more mature markets in the U.S. and EU region, according to Dustin. FRG particularly sees fast growth in companies dealing with endoscopy, imaging, bio-pharma, vaccines and devices.

“Many have well-established revenues, most have early-stage revenues and need or want a partner to help accelerate growth,” says Dustin.

M&A highlights 2011/2012
In June, JNJ’s $19.7 billion acquisition of Synthes Inc., a global manufacturer of orthopedic devices, took the trophy as 2011/2012’s blockbuster deal. Synthes and the DePuy Companies of JNJ together comprise the largest business within JNJ’s medical devices and diagnostics segment. DePuy offers a diverse orthopedics portfolio, while Synthes is recognized for its innovations in trauma, spine, cranio-maxillofacial and power tools.

“As one comprehensive enterprise, DePuy Synthes is dedicated to advancing patient care through innovative, total solutions that are developed from a deep understanding of our customers’ needs,” says Michel Orsinger, worldwide chairman, DePuy Synthes Companies of JNJ. “The combination of these two respected leaders – Synthes and DePuy -- will enable us to better serve clinicians and patients worldwide, bring new innovations to the marketplace in orthopedics and neurologics, and strengthen our ability to compete in developing markets.”

Despite record levels of cash on corporate balance sheets, no other eye-popping deals have occurred thus far in 2012. Dustin blames this on the political uncertainty in the U.S. and the debt crisis in Europe.

“The development and innovation culture within the major med tech device developers and manufacturers is broken,” he says. “They don’t want internal competition for their high-dollar legacy systems and thus avoid making many of these acquisitions. Even if there may not be an internal competition, it’s often difficult for the major med tech companies to see the market potential for new devices.”

Some other significant deals have occurred this year, including Hologic Inc.’s August acquisition of Gen-Probe Incorporated, for a total net purchase price of approximately $3.8 billion. Hologic develops, manufactures and supplies premium diagnostic products, medical imaging systems, and surgical products; while Gen-Probe makes genetic tests for screening blood and diagnosing infectious diseases.

“This is a very interesting transaction, dramatically expanding Hologic’s molecular diagnostic area,” says

Meanwhile, Thermo Fisher Scientific Inc., the world’s second-largest maker of health care equipment, agreed to acquire One Lambda Inc. in July for about $925 million to expand in specialty diagnostics. One Lambda is a leader in the field of transplant diagnostics, which assess whether a patient is an appropriate organ match. The company had revenues of $182 million in 2011. Burkhardt says this was a wise acquisition.

“As we have heard from other market studies, [transplant diagnostics] is a $500 million market, and it’s growing dramatically,” he says.

Additionally, in June, Boston Scientific Corporation completed its acquisition of Cameron Health Inc., a San Clemente, Calif.-based device manufacturer that has developed a new implantable cardioverter defibrillator. Boston Scientific has agreed to pay $150 million to acquire Cameron Health and another $150 million if the device receives FDA approval. The company could pay up to $1 billion in milestone

“This deal was venture capital backed and the venture capitalists had many people talking to them,” says Burkhardt.

Other companies have gone on acquisition sprees such as Covidien, which has bought 11 companies since August 2011, including Entellus Medical Inc. for $35 million; BARRX Medical Inc. for $413 million; superDimension Ltd. for $300 million; Newport Medical Instruments Inc. for $108 million; Oridion Systems
Ltd. for $320 million; Maya Medical Inc. for $230 million; and MindFrame Inc. for $75 million.

Future speculation
Looking ahead, Dustin speculates med tech M&A activity will likely rise over the next few years, returning back to normal levels after a brief spike, but mostly in the health care service providers’ segment due to industry consolidation. Once the provider consolidation settles down, he says they will be focused on using technology to deliver services and contain costs.

But med tech M&As will grow against a backdrop of uncertainty. It is the Patient Protection and Affordable Care Act’s (ACA) 2.3 percent medical device tax, set to go into effect in 2013 that elicits the most complaints from the med tech community. Solely impacting medical devices not sold directly to consumers, the excise tax was devised as a funding mechanism for the ACA.

This tax may make the medical device industry considerably less appealing to venture capitalists, according to a study reported in the August MoneyTree Report “Money Drought.”

The life sciences sector – which includes both medical devices and biotechnology firms – has seen a 39 percent drop in dollars and a 22 percent drop in deals during Q2, compared to the same quarter last year, the study reports. The tax may be to blame.

In addition, for more than a year, the federal capital gains tax rate, currently at a record low of 15 percent, has been driving acquisitions. However, it is set to expire at the end of this year. If Congress doesn’t act, the tax will automatically go up to 20 percent, and if President Obama is reelected, this number may dramatically increase to 30 percent, according to Burkhardt. This fear is driving entrepreneurs as well as venture capital backers to be receptive to selling now, but they’ve got a small time frame left, and must act by the end of the year.

With the U.S. Supreme Court affirming the health care reform mandate, Dustin expects to see a rise in M&A activity over the next two to five years.

“Due to the uncertainty between the direction and implications of health care reform, a lot of activity was put on hold,” he says. “Now that those concerns seemed to have waned, we expect a rapid influx of med tech deals.”

As the market becomes more comfortable with the implications of health care reform, there will be industry consolidation. Dustin adds, though, it will likely take place in the insurance and provider side of the health care service industry before moving to med tech.

“The mandate has changed the economics for business in this industry, and with such a rapid influx of newly insured individuals, and a new payment structure, we are likely to see rapid industry consolidation,” he says. This means that buyers of med tech will be focused on consolidation– not implementing new technology.

Further, Electronic Health Records (EHRs) and telemedicine are at the forefront of health care IT for the next decade as doctors look to be more efficient and economical with their time.

“As [the interest in EHRs and telemedicine] grows, merger and acquisition activity will surround those [companies] with the biggest growth prospects,” Dustin says.