In a year with some massive acquisitions in medtech, there are still questions around an overall drop in M&A activity.
According to Pete Cataldo, managing director and medtech head of Truist, deal volume in the sector fell 65% in the first half of 2023. However, despite high interest rates and a volatile stock market, there appears to remain a market for medtech M&A.
For instance, this year brought the merger of orthopedic giants Globus Medical and Nuvasive and Johnson & Johnson’s $16.6 billion acquisition of Abiomed.
The possibilities for M&A are still there, and some of medtech’s biggest names are taking different approaches.
At AdvaMed’s The MedTech Conference, Cataldo moderated a panel called “Medtech M&A: Trends, Strategies, and Opportunities.” It featured Medtronic CEO Geoff Martha, Zimmer Biomet SVP and Chief Strategy Officer Rachel Ellingson and Smith+Nephew CEO Deepak Nath.
Each of those companies have approached the market in a different way. Zimmer Biomet struck a deal to acquire Ossis in May, while Medtronic agreed to buy EOFlow for $738 million that same month. It’s been more quiet for Smith+Nephew, though, especially in 2023.
On the panel, part of the event’s “CEOs Unplugged” series, the medtech leaders each shared their views on the current M&A climate.
Operating in the current economy
Ellingson attributed the M&A slowdown in large part to current levels of uncertainty. That includes rising interest rates that impact financing and stock market conditions that hurt these types of deals.
She said rising costs in general and uncertainty clouding the environment mix together to stunt M&A.
“It’s really hard to have a good valuation discussion, particularly if you’re a public company,” Ellingson said. “If their valuation has been reset, it takes them a little bit of time to decide whether it’s truly a reset or not. Fifty-two-week highs aren’t that far away from where they are currently.”
“But, I do want to say, I think I’m probably one of the more bullish that it starts to come back,” she continued. “I believe larger companies need growth at their core and growth at the size and scale that actually moves the needle. Without acquisitions, that’s really hard to do.”
Nath echoed Ellingson’s sentiment, saying that while he believes the deals will start to bounce back, there are short-term hurdles to clear. One, for instance, he said, is the GLP-1 drug craze that has raised a few questions about a medtech impact.
But, Nath remains confident the overhang of GLP-1s and other roadblocks will pass.
“M&A has always been a source of value creation in medtech,” Nath said. “Clearly, growth is a factor in medtech. Despite our focus on margins that we see today, there’s only so much you can rely on with internal sources. I think the long-term view is good.”
Martha agreed with his fellow executives on the current climate.
“For medtech, obviously, M&A is a big piece of what we do,” he said. “Just hearing these two, I would concur that especially the large-cap companies are looking at M&A strategically. I’m optimistic about the future.”
Differing medtech M&A, spinoff and sale strategies
Cataldo pointed to the less active approaches of Smith+Nephew and Medtronic (which has yet to close the EOFlow deal) and questioned why that was the case.
Nath says COVID-19 and its impact on the orthopedics business played a huge role in the reluctance to dive into acquisitions. He said his attention has been directed at putting the existing business back on strong footing before seeking to augment it.
Still, Smith+Nephew keeps tabs on its options, like any other company. Nath maintains that conversations are taking place around M&A and the company could yet find the right opportunity.
“We all have companies we’re in discussions with and companies on our target list,” Nath said. “There’s a process we built to refresh our thinking. These are our long-term considerations and we haven’t taken our eye off the ball.”
Medtronic, while actively pursuing acquisitions, also shifted focus to divestitures and spinoffs. The company launched renal care spinoff Mozarc Medical with DaVita this year and has looked to divest its Patient Monitoring and Respiratory Care business units. Rumors surfaced this month of a potential deal with a private equity firm on that front.
Martha doesn’t see a slow-down in M&A, but rather a more methodical allocation of resources.
“On the deals you see, the count is lower,” Martha said. “But, the amount of money we’re spending is in line with historical trends, pre-COVID. … We are, for a variety of reasons, looking to do more impactful, fewer deals. More impactful in the short-term meaning, though. You’re going to feel them in our P&L earlier.”
Like Medtronic, Zimmer Biomet executed its own spinoff last year. Ellingson explained why that benefitted Zimmer Biomet more than selling the business.
“You control your own destiny,” she explained. There’s no counterparty you’re negotiating against. That high level of execution, one transaction, you don’t have to deal with multiple transactions. It’s also it’s a nice tax-efficient vehicle actually for creating value for all stakeholders.”
Utilizing strategic investment and early-stage medtech M&A
When looking at opportunities to invest in technologies rather than acquire, Nath said Smith+Nephew always looks at growth sources as the first filter. Second, the company must answer why a technology or asset would be better in its own hands versus somewhere else.
Third, and finally, he looks at the timeframe. Nath sees practicalities in what the company is willing to pay and looks at risk — technical, political, market risk — and the company must ask itself if it has the fortitude and ability to make long-term investments like that over time.
For early-stage M&A, Ellingson wants to know about paths to leadership, revenue growth and EPS growth. Whether it’s venture-stage, early-stage or any level, Zimmer Biomet wants to see opportunities and risk returns.
She explained that regulatory risks, reimbursement risks and more contribute to the decisionmaking over investing or buying at any stage.
“Is the juice worth the squeeze? We do plenty of early-stage deals — probably 20 deals over the last five years — but it’s just as hard to integrate a larger deal, post-commercial, than to do an earlier-stage deal,” Ellingson said. “I just think the bar might be a little higher.”
For Medtronic in these early-stage scenarios, Martha says there’s a bit more of a challenge today, considering the current climate. But, he feels it will work its way out and the company will remain confident in executing investments and M&A for pre-approval technologies and companies.
“In certain circumstances where it’s a high-growth market, we’re well-positioned,” Martha said. “We feel good about our team. We’ll take more risks in pre-revenue technology but, if it’s a new business model or something like that, it’s much harder. Then, you start thinking, I want a little revenue with a validated plan. That’s the next point for us.”
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