The number of medical device merger & acquisition deals and their value fell during the 1st quarter, according to PricewaterhouseCoopers, but that doesn’t mean there wasn’t a lot of activity behind the scenes, Dimitri Drone, leader of PricewaterhouseCoopers’ Transaction Services Life Sciences sector, told MassDevice.com.
There were 7 deals worth $1.7 billion during the quarter, according to PwC’s US Pharmaceutical and Life Sciences Deals Insights Quarterly report, down from 8 deals worth $2.3 billion during Q1 2012.
Drone told us that, on its fact, the data is slightly misleading, because there’s a lot of behind-the-scenes activity that’s not reported.
"We’ve seen quite an uptick in deals that don’t get done, but that doesn’t make the newspaper," he told us. "We’re still seeing a fair amount of interest and similar numbers of deals now as we have in recent quarters. There’s a lot of talk about M&A among the people we interact with in medical devices."
The PwC report forecasts a return to on-paper M&A growth as the year progresses and large medtech makers "evaluate their product portfolios and seek to strengthen their existing product portfolios and enter into adjacent markets," according to the report.
Drone said the medical device industry is particularly suited to acquisitions, due to the plethora of smaller firms developing single technologies.
"Medical devices, of all the life science sub-sectors, most readily lends itself to M&A, because there are lots of smaller companies that are pretty easy to buy and integrate, and you can then take a pretty neat technology and roll it out through your own channels," he said.
Those economies of scale help drive higher valuations for medical device companies, because acquirers know the potential value of the technology once they can plug it into their global businesses, Drone added.
"A company that, on a stand-alone basis, might be with $100 million is worth $200 million to you, but $500 million in 5 years. It’s not uncommon for the premiums to be pretty significant."
A variety of factors have made strategic investments on the part of large-cap device makers more attractive in recent years, Drone noted.
"It’s a lot less risky than some of the other sub-sectors in life science, such as biotech, where every molecule stands on its own," he explained. "[With a strategic investment], you’ve got a better risk/reward ratio from day 1. If you get your hooks into a good technology, even if some one else comes along you still have those hooks in. If no one else comes along you’ve got the technology at a lower price.
"You can usually accomplish something similar to what you otherwise would with M&A, but with less funds. If you can take what would be a $100 million acquisition for a $20 million strategic investment, maybe you can do 5 of them now."
