Global Healthcare Private Equity and M&A Report
Following a record-breaking 2021, private equity deal activity in the first half returned to earth, falling back in line with historical averages. Deal volume declined sharply in the third quarter as macroeconomic challenges intensified, and the third quarter saw the lowest quarterly deal count in medtech in the past five years (see Figure 1). Unlike other sectors, though, medical technology deal activity bounced back by the end of the year with 4 of the top 10 medtech buyouts by disclosed deal value occurring in the final quarter.
Apart from a slowdown in biopharma deal volume in Asia-Pacific, activity by sector and by geography was consistent with recent trends
The contraction in buyout activity in the third quarter was particularly noteworthy in Asia-Pacific deal volumes, with a dramatic pullback in China. Outside of China, activity in the region remained relatively stable. As discussed in the chapter “Asia-Pacific: Growing Signs of Healthcare Private Equity Strength and Maturity,” the regional downturn was driven primarily by adverse market conditions in China, including investors waiting for clarity on zero-Covid policies, slowing growth, tech trade embargoes, the expansion of China’s value-based pricing program, and a growing desire to diversify supply chains.
While activity in some sectors is US-centric, medtech continues to see broad global exposure. For example, only 2 of the top 10 deals were for North American targets in 2022. The largest deal of the year was MBK Partners’ acquisition of South Korea's Medit, which was announced in the fourth quarter. Medit is known as a low-cost provider of 3-D dental scanners, but its latest products have features that rival high-end designs.
Deal activity concentrated in OEMs with differentiated technology
In 2022, 9 of the 10 largest deals went to device original equipment manufacturers (OEMs). In most cases, these companies provide best-in-class products with strong technological barriers. This theme is highlighted in several large deals:
- In the fourth quarter, MBK Partners acquired Medit, the South Korea-based maker of 3-D dental scanners, for $2 billion. Medit is known for its best-in-class 3-D dental scanners.
- In the second quarter, ArchiMed took US-based Natus Medical private for $1.1 billion. Natus provides high-end medical screening products such as hearing tests, eye-imaging devices, and electroencephalogram (EEG) devices that are often considered the gold standard.
- In the first quarter, Warburg Pincus invested over $200 million in Micro Life Sciences, the parent of India’s largest medical devices company, Meril Group, valuing the company at a reported $1.8 billion. The medical device OEM focuses on best-in-class vascular intervention products, orthopedic implants, diagnostics, and surgical equipment.
- In the fourth quarter, Nordic Capital invested $300 million for a 25% stake in the Israel-based Equashield. Equashield provides a branded, high-end compounding robot, and its closed system offers branded consumables compatible only with its proprietary design.
Some of the companies listed above have patented technology or offer first-of-its-kind FDA-approved technology. This technical differentiation creates a high barrier for competitors, and these types of companies are well positioned to weather a potential downturn—especially if demand from the end markets these assets serve does not depend on discretionary spending.
Medical aesthetics OEM activity plays on growing aesthetics interest
Aesthetic device companies featured more prominently in 2022 than in the past. While aesthetic device companies saw little or no deal activity in 2020 or 2021, there were multiple deals for medical aesthetic assets, including several large deals. Moreover, dealmaking was not limited to the first half but persisted throughout the year.
The aesthetic device deals suggest investor confidence in the long-term allure of the aesthetics end market.
- In the fourth quarter, Bridgepoint Group acquired Laboratoires Vivacy, a medical aesthetics company based in France, for roughly $830 million. The company provides high-end injectable devices related to antiaging, ophthalmology, rheumatology, and gynecology. The deal provides an exit for TA Associates.
- In the first quarter, Bain Capital acquired a controlling stake in the publicly listed South Korean company Classys for over $500 million. Classys, a medical aesthetics OEM, is known for devices that enable fat-reduction procedures and facelifts.
- In the first quarter, Charme Capital Partners and Miura Partners acquired INDIBA, based in Spain, for more than $100 million. INDIBA sells a product for active cell therapy that shrinks fat cells and improves skin elasticity. The deal provides an exit for Magnum Capital Industrial Partners.
The medical aesthetics space will be interesting to watch going forward. On one hand, these assets may face headwinds in a potential downturn if demand slows for these procedures. On the other hand, these services may cater to a demographic whose discretionary spending is less impacted during recessions. Regardless of the short-term considerations, there are long-term tailwinds to aesthetic services including shifting consumer attitudes about wellness and healthy aging, growing awareness of products, and expanded access to services.
The changing OEM landscape creates opportunities for private equity
For years, medtech original equipment manufacturers have been stratified between the large, diversified firms and their much smaller peers. In a list of the 100 largest publicly traded medtech companies, Medtronic, No. 1 on the list with over $31 billion in revenue, is more than 130 times larger than Cardiovascular Systems, the No. 100 company. Historically, these larger OEMs have leveraged their scale to enable long-standing, sticky relationships with large health systems, and created broad product portfolios to meet those customers’ needs.
That said, the healthcare landscape is changing, and OEMs are adapting in several ways. Public medtech companies cite several trends that are driving changes to their operations. These trends suggest ways for private equity to participate in medtech in 2023 and beyond.
Pursuing niche OEM opportunities
Much of the medtech buyout activity from 2022 focused on OEMs that served niche applications, ranging from cardiology to medical aesthetics to dental imaging. Given the momentum behind this theme that carried into Q4, we expect to see continued opportunities for private equity sponsors to invest behind smaller OEMs serving end markets with favorable tailwinds.
Shifting the site of care closer to the patient
Medtronic’s president of the Americas region recently said, “All of us have realized there is going to be a pivot where the site of care is going to be much closer to the patient’s home.” As sites of care continue to shift to patient homes and ambulatory surgery centers, there are opportunities to buy out assets that enable care delivery in lower-cost sites, such as remote patient monitoring.
Outsourcing the value chain
OEMs are increasingly outsourcing parts of their value chain, from research to manufacturing. Contract manufacturing organizations and contract development and manufacturing organizations are poised to be a bright spot as OEMs look to reduce the time and cost required to bring products to market, in addition to seeking out specialty manufacturing capabilities that OEMs typically lack.
Making supply chains more diversified and resilient
As supply chains remain tangled, we anticipate continued appetite for assets that enable supply chain resilience. OEMs are interested in diversifying their supply chains to more regions, so suppliers outside of China may be particularly appealing.
Finding ways to play corporate portfolio realignment
In 2022, several major medtech companies reconsidered their portfolios and made plans to spin off businesses. These announcements include the following:
- 3M plans to spin off its $8.6 billion healthcare division that manufactures bandages, surgical supplies, and biopharmaceuticals.
- GE completed its spin-off of its healthcare business, which offers a range of products focused mostly on medical diagnostic imaging and was valued at nearly $30 billion on its IPO date.
- Johnson & Johnson plans to spin off its consumer health unit, which generated $14.6 billion in revenue in 2021, into a new company called Kenvue.
- Medtronic plans to spin off at least two units—patient monitoring and respiratory interventions—that contributed $2.2 billion in revenue in its 2022 fiscal year.
Portfolio realignment presents both buying and selling opportunities for private equity. On one hand, some of the newly created spin-offs may be small enough for a take-private play. Coverage from Bloomberg suggests both corporate sponsors and private equity funds are evaluating the Medtronic spin-offs for acquisition. Depending on the state of the new offerings’ finances, certain funds may have a more tailored value-creation plan to optimize profitability. However, portfolio realignment may also present exit opportunities. Johnson & Johnson and Medtronic have both continued to be acquisitive of companies closer to their medtech core even as they spin off noncore assets.
While healthcare has historically been resilient during recessions, medtech is not insulated. As demonstrated during the 2008–09 recession, large equipment manufacturers are likely to be impacted as hospitals prioritize capital equipment repairs over replacement to reduce spending. In the event of a recession, history suggests we could see a bifurcated deal market, with some megadeal carve-outs accompanied by a softness in some subsectors.
In 2023, private equity sponsors will be likely to participate in the opportunities created by corporate activity as public medtech OEMs hone their product mix, reduce their manufacturing footprint, and optimize their outsourcing strategies. We expect sponsor-driven activity in medtech to rebound as sponsors find creative ways to play to their strengths.