Unless there’s a major shift in in merger and acquisition activity in the next few months, 2013 may turn out to be the most disappointing year in about a decade for medtech M&A, according to a report by EvaluateMedTech.
The medical device industry has managed to stay abreast of the new 2.3% medical device tax and companies have slugged along despite a drop in investment activity in the 1st half of the year, but trends in industry M&A suggest that 2013 is going to be a wash.
The good news is that the impact of the medical device tax has not been as extreme as some had warned, the report noted. The bad news is that a combination of regulatory, pricing and budget pressures have been weighing down the industry as a whole.
"When the US medical device sales tax went into effect in January, it was expected that the medtech sector would face difficulties in the first half of 2013," report author Elizabeth Cairns said in prepared remarks. "While the most dire predictions about the effect of the tax have not come true, it’s still been a disappointing start to the year. There is, however, hope that the 2nd half of the year will bring improvements, particularly in research and development where the flow of new innovations will resume."
The value of medtech mergers competed during the 1st half of the year is so low that, without a major shift in the 2nd half the year 2013 will be the worst medical device M&A year since 2003, according to the report. Many industry players are "going the other way," splitting their businesses and splitting off smaller arms in order to specialize in what they’re best at.
Some deals have managed to come down the line recently, including Baxter‘s (NYSE:BAX) $3.9 billion acquisition of Gambro AB, which was months in the making. Just last week C.R. Bard (NYSE:BCR) announced its $262 million buyout of Rochester Medical (NSDQ:ROCM), a move that got both companies some love from Wall Street. Earlier this summer Abbott (NYSE:ABT) closed its $310 million acquisition of Idev Technologies and Medtronic (NYSE:MDT) bought Cardiocom LLC for $200 million in cash.
Yet the overall value of the deals sank hard in the 1st half of the year, and it’ll take a huge boost to catch up to previous years. There were 88 deals in the 1st half of 2013, amounting to a total value of about $6 billion. Only 1 deal was worth $1 billion or more, as Thermo Fisher‘s (NYSE:TMO) $13.6 billion buyout of Life Technologies (NSDQ:LIFE) isn’t slated to close until early 2014.
The trend suggests that medtech M&A this year may not top $10 billion, a steep decline from last year’s $45 billion, which was spread across 210 deals. Last year was also a steep decline from 2011, when 231 deals garnered about $76 billion. The biggest medtech merger in the 1st half of 2013 was the $1.1 billion
It’s a surprising departure from what analysts had expected, given that companies often resort to mergers as a means of boosting sales when the top line’s under pressure, the report noted.
"The value of acquisitions in the medical technology space was already trending downwards," according to the report. "Even excluding the distorting effect of the mega-merger between Sanofi and Genzyme in 2011, the spend in 2012 was 20% lower than the year before. But if 2013 does not improve, the year-on-year drop in total spend will be 72%."