In the medtech and related services sector in global healthcare private equity, 2018 saw solid volume at 67 deals, up from 51 in 2017. Disclosed values returned to 2014 heights, reaching $10.5 billion on the shoulders of five deals across the world worth more than $1 billion each (see Figure 7). Medtech values were led by several large public carve-outs and take-private transactions as large corporates looked to trim noncore assets.
Disclosed deal value reached the highest level since 2006 as a few large buyouts pushed provider sector deals to nearly double in size
Investors were attracted to the medtech sector’s high profit margins and recession-resistant characteristics in 2018. Total disclosed deal value in medtech spiked to $10.5 billion across a record 67 deals, compared with $6.5 billion across 51 deals in 2017. Deal value was boosted by five deals greater than $1 billion each, including one exceeding $2 billion, compared with just one deal greater than $1 billion in 2017.
A sharp increase in European deals to 23 in 2018 from 12 in 2017 drove the deal volume increase while activity in North America and Asia-Pacific accounted for a greater share of the increase in value. North American activity remained steady and continued to be the most active region for medtech deals, though Europe and Asia-Pacific experienced more growth.
The EU’s MDR, which passed in 2017, requiring both new and legacy medical devices to comply with more rigorous clinical data standards by 2020, provided clarity for investors, encouraging an uptick in deal activity. Both China and India also implemented new medical device regulations in 2017, which established more structured systems that investors felt more comfortable underwriting, leading to a number of higher-growth venture deals in Asia-Pacific.
Chinese investors continued to look abroad for investments in medtech capabilities that they could bring back to the Chinese market. For example, CDH Investments Management and China Grand Pharmaceutical and Healthcare Holdings acquired Australian medical device manufacturer Sirtex for $1.4 billion, with the intent of expanding its access to China. Sirtex manufactures implantable radioactive crystals for oncology treatments. In another such deal, the consortium of Inner Mongolia Furui Medical Science and Astorg Partners invested in Echosens, a French manufacturer of liver diagnostic equipment, for $203 million, with the intent of introducing that technology to China.
Competition for assets from both buyout firms as well as corporate acquirers continued to push prices higher. Part of the competition comes from corporate acquirers landing large assets, such as Fortive’s $2.8 billion acquisition (including earn-outs) of the Advanced Sterilization Products division from Johnson & Johnson.
Because of this strong competition, buyout firms continued to turn to public markets in order to find high-quality assets. A carve-out and 3 public-to-private transactions comprised 4 of the top 10 deals around the world, as corporates renewed their focus on their core businesses and divested noncore assets while smaller medtech firms without a category leadership position felt pressure to sell. The largest medtech buyout of the year was Platinum’s $2.1 billion carve-out of LifeScan, which makes blood glucose–monitoring devices, from Johnson & Johnson. Additionally, Altaris Capital Partners took US-based imaging company Analogic private for $1.1 billion, and Pacific Equity Partners acquired publicly traded Australian medical devices company LifeHealthcare.
While medtech investment success hinges on a strong underlying product or technology more so than any other factor, there are opportunities for funds to generate returns through cost transformations and commercial excellence improvement. Sponsors can turn around a company with poor cost management or improve salesforce efficiencies, but it requires a deep bench of operators with the requisite know-how.
Profitability and returns also hinge on category leadership, regardless of scale. Investors directed investments to category leaders even in niche spaces in the fragmented medtech market. Investing in an established category leader can remove a lot of uncertainty from the underwriting, prompting investors to seek even smaller assets that are niche category leaders. For example, Centre Lane Partners acquired Alternative Biomedical Solutions, a market leader in toxicology testing. And it also results in firms adding to existing portfolios in order to a build that desired category leadership, as was the case when Patricia Industries backed portfolio company Laborie Medical Technologies in acquiring Cogentix for $239 million.
This fragmentation translates into a significant role for derivative medtech services, ranging from contract manufacturing to specialty distribution. Assets in these segments are underdeveloped and lack scale, which makes them a good target for consolidation and deal making. A growing number of device manufacturers are reducing their manufacturing footprints and turning to contract manufacturing organizations to augment capacity, which helps spur PE firms to invest directly or build up their existing platforms. For example, in 2018, Kohlberg & Company acquired Cadence, a provider of advanced surgical components and finished devices, and GTCR-owned Regatta Medical acquired a majority stake in Resonetics, which uses its micro laser technology to provide contract manufacturing services to the medtech industry.
Further, investors looked to capitalize on the industry’s need for distribution infrastructure by continuing to invest in the specialty distribution space, as evidenced by Patricia Industries’ $500 million majority stake acquisition of Sarnova Holdings, a distributor of healthcare products in the emergency medical services and acute care markets.
Lastly, consumers have come to expect more choice in healthcare, giving rise to direct-to-consumer models in the consumer-focused medtech space. Buyout firms have looked to participate in and take advantage of this growing trend in recent years. In 2018, this was particularly true in dental as a consortium comprised of CD&R, Kleiner Perkins and Spark Capital Partners invested $380 million at a $3.2 billion valuation in SmileDirectClub, a provider of at-home teeth aligners.
Trends such as the sector’s high profit margins, recession-resistant characteristics and carve-out opportunities are likely to persist, supporting investment activity in medtech over the coming year as corporates refocus on the core. To be sure, headwinds such as downward pricing pressure due to consolidation among providers and payers do present challenges. To date, however, that has not undercut the investment opportunities. In fact, pricing pressure has forced many medtech companies to reduce G&A spending and inventory as well as raise their level of commercial effectiveness. As medical device companies hone their product development and manufacturing, sponsors will likely seek investment opportunities in medtech service providers such as CXOs as well as in other firms that improve operations through digital and IT solutions. These trends started to take hold in early 2019 as Nordic Capital acquired Orchid Orthopedic Solutions, a major manufacturing outsourcer for orthopedic medical devices. We expect to see a continued push into services as firms look for attractive consolidation opportunities in the sector.