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Medical Device Manufacturing: Buy-Side Strategies

This is a continuation in a multi-part series that will focus on buy-side strategies in the medical device manufacturing industry, a member of the manufacturing sector.

The medical device manufacturing industry has been supported by an aging American population, rapid advancement in medical technology driven by artificial intelligence and big data breakthroughs, and a strong business investment. The United States is currently the largest medical device market (at roughly $180 billion in revenue) which generates significant demand from manufacturing expected to continue growing during periods of economic growth and maintain itself during economic decline due to the necessity of the products produced[1].

Buy Side M&A

When analyzing buy-side merger & acquisition activity in the medical device manufacturing space we can see that median deal sizes in the U.S. have been on the rise since hitting a low point in 2016.

Med Device Deal Count and Median Deal Size Buy Side[9]

Recent developments including the abolition of the MedTech Tax, a strong uptrend in M&A, a consolidation of PBM and Health Insurers, continued digitization and improvement in Medical technology, and a trade ‘war’ between the two largest economies on the planet will have varying impacts on the industry.

There has been a two-year suspension on the 2.3% Medical Device tax which was imposed on MedTech manufacturers. The U.S. Healthcare space has been driven by M&A activity lately. Median deal sizes surged in 2017. Major activities in this space include Becton, Dickinson and Company’s acquisition of C.R. Bard and Johnson & Johnson’s purchase of Actelion. Health insurers have sought to streamline the drug supply chain by collaborating with pharmacy benefit managers. CVS and Cigna have recently announced their intent to buyout Aetna and Express Scripts, respectively. Advancements in technology including big data analytics, bio printing, 3D printing, real time alerting and revenue cycle management are gaining greater prevalence in the medical technology industry. AI implementation has drastically reduced company cots and improved patient care. The Healthcare sector, however, is under crossfire in the trade war between the United States and China. The United States and China export $4.7 billion and $5 billion worth of MedTech goods to each other annually. Tariffs could jeopardize that.

Notable Buy-Side Deals

There have been many notable deals in 2018[2]. Baxter International Inc. acquired two hemostat and sealant products from Mallinckrodt plc. for $153 million. Private Equity firm Platinum Equity purchased J&J’s LifeScan blood glucose monitoring unit for $2.1 billion. This deal resulted from Johnson & Johnson distancing itself from its diabetes business. Johnson & Johnson purchased surgery technology developer Orthotaxy to improve surgical robotics capabilities. Regatta Medical made an investment in Resonetrics in February. Industrial firm NN Inc. purchased Bridgemedica LLC. Spectrum Plastics Group acquired Apex Resource Technologies. UFP Technologies Inc. purchased Dielectrics Inc.

The primary reasons firms are investing in the medical device manufacturing space are its stable business base, strong margins, need for consolidation to improve product and supply chains as well as a strong, regulated environment. Players outside of the industry, such as private equity firms, have also acquired businesses in this space and have invested heavily. Medical device manufacturers are expected to continue consolidating even as valuations remain high. Firms are pursuing smaller companies to acquire or invest in and are seeking more affordable targets in the EU or Asia.

Buyers are seeking to improve their economies of scale[3]. Between 230 and 270 transactions are expected to occur globally in 2018. The majority of these will promote vertical integration as companies in the healthcare industry seek to capture value across the entire chain[4]. The acquisition of Bridgemedica LLC by NN Inc is one such example. CEO Richard Holder believes the acquisition will expand NN Inc’s product design and development capabilities[5]. Other large firms are moving outside of their traditional OEM roles and supporting concept development and supply chain management[6]. The trend of acquiring smaller firms within the same space through backwards integration has been common—particularly in oversees acquisitions— since 2012[3]. This doesn’t rule out massive horizontal mergers. Nordson in 2017 paid $705 million to acquire the Advanced Technology Business of Vention to add to its product offerings as well as enhance balloon manufacturing, design and development[7]. Royal Philips just acquired Xhale Assurance Inc. to broaden its portfolio of oxygen saturation monitoring solutions[8]. Acquisitions are expected to remain the prime driving force behind industry growth despite high valuations. Consolidation within the medical OEM space is expected to continue through the rest of 2018.

Mohammed Siddiqui contributed to this report.

Sources

[1] Zacks Equity Research. (2018, September 12). Medical Device Industry Outlook – June 2018. Retrieved September 12, 2018, from https://www.zacks.com/commentary/167607/medical-device-industry-outlook

[2] Bonifacio, M. (2018, May 3). Medtech M&A Off to a Strong Start in 2018. Retrieved September 12, 2018, from https://www.mpo-mag.com/issues/2018-05-03/view_columns/medtech-ma-off-to-a-strong-start-in-2018

[3] Bussey, I., Szendroi, G., Williams, E., Stern, M., & Schofield, B. (2017). Medical Devices IMAP M&A Sector Report (pp. 1-20, Rep.). IMAP.

[4] Garthwaite, C., Busse, M., Starc, A., & McCareins, M. (2018, January 5). What’s Behind the Current Wave of Vertical Integration? Retrieved September 12, 2018, from https://insight.kellogg.northwestern.edu/article/whats-behind-the-current-wave-of-vertical-integration

[5] NN, Inc. (2018, February 22). Press Release. Retrieved September 12, 2018, from http://investors.nninc.com/phoenix.zhtml?c=110673&p=irol-newsArticle&ID=2334050

[6] Hartford Technologies. (2018, April 26). 5 Medical Device Manufacturing Trends for 2018. Retrieved September 12, 2018, from http://resources.hartfordtechnologies.com/blog/5-medical-device-manufacturing-trends-for-2018

[7] MPO Mag. (2017, February 21). Vention Medical Split and Sold to Nordson, MedPlast. Retrieved September 12, 2018, from https://www.mpo-mag.com/contents/view_breaking-news/2017-02-21/vention-medical-split-and-sold-to-nordon-medplast

[8] Royal Philips. (2018, August 29). Philips expands its Monitoring & Analytics business with the acquisition of Xhale Assurance Inc. Retrieved September 12, 2018, from https://www.philips.com/a-w/about/news/archive/standard/news/press/2018/20180829-philips-expands-its-monitoring-and-analytics-business-with-the-acquisition-of-xhale-assurance-inc.html

[8] PitchBook data gathered using the following search terms: “medical device manufacturing” OR “medical device manufacturer” OR “medical device development” OR “medical device design” OR “medical device industry” OR “medical device provider” AND “M&A/Control Transaction” AND “United States” retrieved September 12, 2018.

Corbin Bridge on Linkedin
Corbin Bridge
Corbin Bridge is a licensed investment banker at InvestmentBank.com. He has prior experience assisting private companies in developing and executing acquisition strategies. Corbin works with middle-market corporate clients looking to acquire, sell, divest or raise growth capital from qualified buyers and institutional investors. His areas of interest include Blockchain, AdTech, and Entertainment. Reliance Worldwide Investments, LLC a member of FINRA and SIPC and registered with the SEC and MSRB. Corbin resides in Las Vegas, Nevada.
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