Med tech deals expected to surge as reform woes wane

by Diana Bradley, Staff Writer | October 22, 2012
From the October 2012 issue of HealthCare Business News magazine

“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.”

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