The Good, the Bad and the Big Deal

There are deals and then there are deals. The first half of 2015 has witnessed the culmination of industry-altering mergers. Consolidation is king in the medical device industry lately, but 2015 has posted some big numbers so far. According to a recent report from analysts at life-sciences market intelligence firm Evaluate Ltd. and its report arm EP Vantage, the first six months of this year have been earth-shaking.

“The first half of 2015 has seen some seismic changes to the medtech industry,” report authors wrote. “Most obviously, the sector has a new leader, with Medtronic displacing Johnson & Johnson as the company with the largest sales of medical technologies.”
Based on Evaluate’s figures, the first half of 2015 saw 86 mergers and acquisitions in the medtech industry. But, at $83 billion, the total value of the mergers closed in that period is “anything but average,” analysts noted. In fact, the $83 billion figure is more than has been recorded for any six-month period, and—notably—for any full-year period as well. According to Evaluate’s number crunchers, the pace of deals also puts 2015 on track to break the $100 billion barrier in terms of the total value of mergers closed.
“It will be many years before this total is surpassed,” analysts wrote.

The motivations for the larger deals to come down the pike this year have happened for “now-familiar reasons,” according to the report’s authors.

“It is increasingly important for a company to have as wide a range of products as possible so that hospitals and other payers can use it as a single supplier for all their needs—at least in a particular area, such as interventional cardiology or prosthetic joints,” wrote Evaluate’s industry watchers.  “Companies may also arrange defensive acquisitions to guard against being bought themselves, but this is less common than in the biopharma arena.”

Clearly, however, the reason 2015 will be remembered is  the Medtronic purchase of Covidien. The acquisition was the first in a decade to top $20 billion—by a wide margin at nearly $50 billion—and will “almost certainly hold the top spot” for a decade or more, analysts predicted.

As impressive as the deal numbers for the first half of the year are, much less so are the figures for venture-backed deals.
A total of  $1.6 billion was raised in venture funding in the first half, which the report’s authors characterized as a “woeful” figure. While in the first half of 2014 there were three rounds of $100 million-plus, for the same period this year, no company has broken the $60 million mark, according to Evaluate’s team.

“With the huge and exciting changes that have gripped the industry over the past year having for the most part been brought to their respective conclusions, the sector seems to have attained a level of stability,” said Elizabeth Cairns, EP Vantage medtech reporter and co-author of the report. “But startups are facing a worsening funding gap, and it will be crucial that this eases if a steady flow of safe and effective medical technologies is to be maintained.”

Evaluate analysts said venture capital (VC) funds are losing interest in medical devices—perhaps in favor of other areas of life science.

“Device makers’ dwindling appeal seems inversely proportionate to the current biotech bull run,” report authors noted. “Perhaps investors are being seduced by the rich returns of biotech, in spite of the higher risk, at the expense of medtech. Tech companies could also be providing competition, and with the convergence of these two areas—witness Apple and Google’s efforts to push into health—VCs who had previously favored medtech might go for computing instead.”

The downturn in venture funding that the medtech industry has been trying to climb out of hasn’t seen much improvement this year. In fact, the second quarter of this year recorded the lowest VC totals for any second quarter since post-crash 2008. This continues to put the medtech pipeline for innovation at risk. The folks at Evaluate say that large healthcare companies are trying to fill the void via corporate VC arms. Crowdfunding also is beginning to play more of a role in medtech. But the effort is still not enough, experts said.

“The larger medtech companies and crowdfunding efforts cannot make up for the collapse in financing from dedicated VC funds. If this situation is not reversed, the medtech industry could be heading for an innovation crunch… VCs need to start spending and start spending now,” analysts wrote.

But the pipeline of new products hasn’t dried up yet.

In fact, the U.S. Food and Drug Administration (FDA) granted either a first-time premarket approval or a humanitarian device exemption to 26 devices in the first half of 2015, compared with 33 during the whole of 2014 (which was a 43 percent increase compared to 2013). Those numbers put this year on track for the most device approvals in a decade, report authors predicted.
Either the level of innovation is increasing or getting products through FDA is easier, or at least quicker. In any case, there’s cause for cautious optimism.

For more extensive information, insight and detailed charts and graphs, Evaluate’s “2015: Mid-Year Medtech Review” can be found at www.evaluategroup.com/medtechhalfyear2015.