For many medical technology companies, Mergers and acquisitions continue to be a key growth engine and will likely see increased activity as these players strive to meet the industry’s overall high growth expectations. Yet this period is an era when growth assets are scarce, so those that are available carry high valuations. At the same time, venture capital financing is slowing down and this combination makes it increasingly difficult to execute traditional product-oriented agreements to support growth for companies. In an environment of industry headlines that appear to exhibit continuous consolidation, what should medical technology executives keep in mind when considering their own M&A programs?
We analyzed a wide range of medical technology transactions and performance data and found five key points for considering medical technology mergers and acquisitions:
- As growth becomes elusive, mergers and acquisitions are becoming a must for players of scale.
- Industry consolidation results in large bets with large trades by larger cross-category medical technology players, while more targeted players execute smaller and more frequent trades.
- Programmatic or selective mergers and acquisitions have produced excessive total returns to shareholders (TRS), but execution will become more difficult due to the scarcity of growth assets.
- Large trades are still a high risk but very profitable tactic.
- Mergers and acquisitions of “non-traditional” assets (eg, software or services) are accelerating rapidly in medical technology, as companies seek new pools of value to ensure their growth.
Large-scale medical technology companies must do mergers and acquisitions
Looking at the top 30 medical technology companies in terms of revenue, over 60% of their growth from 2011 to 2016 is due to mergers and acquisitions (net of divestitures). These leading companies are using mergers and acquisitions as a way to stay on top: the activity of these participants accounted for some 70% of total medical technology M&A transactions during this period. We also analyzed 54 pure-play medical technology companies that were publicly traded over a ten-year period (2006 to 2016) to assess their approaches to mergers and acquisitions (Exhibit 1). Only 20% of them relied on a predominantly “organic” approach and hardly used mergers and acquisitions. Companies that were active throughout the period and took an organic approach were smaller – only 2 companies that grew organically reached $ 2 billion or more in annual revenue in 2016.
The type of M&A program that medical technology companies pursue is largely determined by their size.
Of the 54 pure-play medical technology companies described earlier, 24 had annual sales of $ 1 billion or less in 2006. Of these smaller companies, nearly 90 percent pursued an organic growth plan or business. selective approach to mergers and acquisitions from 2006 to 2016. For the ten companies exceeding $ 5 billion in annual revenue, 90% took a programmatic or large-scale approach. The more mature and large the company, the more intensive the M&A program. We have also found that medical technology companies pursuing a M&A strategy of many smaller transactions (with a number of transactions commensurate with their size) tend to see an excess of TRS compared to the industry as a whole. health equipment.
Programmatic and selective approaches to mergers and acquisitions have produced excessive TRS, but the execution of these approaches will need to adapt given the scarcity of growth assets.
Historically, programmatic mergers and acquisitions focused on acquiring small companies with innovative products have created excess TRS. However, this approach will become more difficult as innovative assets become scarce and venture capital funding slows down for product-driven medical technology. This scarcity of potential targets can lead to further consolidations and large deals as medical technology companies continue to grow.
In addition, large contracts in medical technology remain a high-risk and potentially very profitable tactic.
Companies that have closed large deals over the past decade have generally found it difficult to create value, with an average annual TRS approximately 2% lower than the larger healthcare equipment market. In addition, the performance of large-scale approaches is below the overall post-acquisition medical technology index, with an annual TRS 7% lower on average than the market in the two-year period following the operation. . This scope contrasts sharply with the short-term shareholder reaction to these transactions, which has generally been neutral to positive (averaging around 1% excess TRS). These results demonstrate the challenges of executing, integrating and capturing the synergies expected for large transactions in medical technology. Specifically, shorter product life cycles with the risk of early obsolescence, fragmentation and call-point specialization, as well as specialized requirements for R&D and clinical development of new medical technologies, combine to introduce challenges to generate synergies from large contracts.
Medical technology as a category is increasingly buying new value pools to expand offerings beyond traditional products and tap into new sources of innovation
Service and software offerings represent around 15% of medical technology offerings from 2013 to 2017 (to date), up over 20% from the previous five-year period, 2008 to 2012 (Table 2). This increase is largely due to a higher number of digital technology or service offerings, which have increased by around 45%: for example, Cochlear-Sycle, Medtronic Diabetes and ResMed-Brightree. As we recently described, these digital software and games take a variety of forms, from acquiring cybersecurity expertise to improve the security of networked devices, to acquiring digital inventory management tools to increase inventory efficiency. Although still modest in volume as the industry continues to experiment, these types of transactions are likely to become even more important as assets with innovative products become scarce and business models are shaped by evolution. revenue streams from data services, digital offerings and advanced analytics. .
Transactions of this nature require a fundamentally different set of assumptions and skills across the spectrum of M&A activity, from target sourcing to integration. For example, when acquiring an advanced analytics asset, how can companies ensure that the R&D organization anticipates the technical integration of a next-generation device? Acquiring the necessary skills is a challenge that many traditional medical technology companies face when embarking on new businesses in software and services: for example, effectively integrating a new asset into technology functions. traditional medicine, such as R&D or quality, put in place the right funding mechanism to support innovation, or establish a business model that drives adoption of the software or services. In relation to this synthesis, it should also be noted that mergers and acquisitions are not the only way to access these non-traditional fields – we have seen an increase in partnerships between medical technology and other participants, this which begins to blur the competitive lines. Whether it’s the latest merger for Google or IBM, or innovative new collaborations between medical technology companies and hospital systems, alternative transaction structures to traditional mergers and acquisitions are also on the rise. As transactions increase in size and scale, their impact on value creation will become more important and will require careful planning and integration planning to ensure value is realized.
Mergers and acquisitions remain an essential tool for medical technology companies to accelerate their growth expectations and create shareholder value. Successful mergers and acquisitions, especially in the context of a shift to new offerings beyond traditional devices, will require both careful execution of conventional transactions and rethinking the capabilities of your business development team, as well as to ensure it has the tools to research, evaluate and integrate offers of all shapes and sizes. How well is your M&A program positioned to meet your growth aspirations?