Offering his insights on this activity is Richard F. Mattern, a member with Bass, Berry & Sims PLC. Mattern practices in the firm’s Corporate & Securities Practice Group and is based in the firm’s Memphis, Tenn. office. He works within a range of industries, but maintains a particular focus on the medical device space.
Mattern took time to speak with MPO about the latest M&A activity, what he expects in 2017, and what we can look forward to in the years ahead.
Sean Fenske: Can you please briefly explain your role when helping clients with M&A in the medical device industry?
Richard Mattern: In short, M&A counsel runs the deal. More specifically, M&A counsel is responsible for understanding the client’s strategic objective, building and overseeing a team that can execute on that strategic objective, advising the board on its fiduciary duties, identifying risks through the diligence process, structuring the transaction to maximize benefits and minimize risks, drafting the definitive agreements, closing the transaction, and facilitating a successful integration. Each of these aspects is essential to a successful transaction and shapes nearly every decision made by M&A counsel.
Fenske: We’ve seen some major activity in the M&A space in the medical device industry only to have a comparatively quieter 2016. What do you expect for the remainder of 2017?
Mattern: For a number of reasons, I would expect 2017 to be a strong year for medical device M&A. First, the integration efforts from the 2015 M&A surge are (or should be) nearly complete. Thus, management will now have the necessary bandwidth to seek out additional opportunities. Second, certain macro-economic factors will spur additional M&A activity. Capital remains relatively accessible as interest rates remain at near historic lows, the IPO market remains choppy, significant cash is sitting on public company balance sheets, and private equity continues to invest in the sector. Similarly, the current political climate will support additional M&A activity. The Trump administration appears committed to scaling back regulation, including the potential repeal of the medical device tax, and lowering corporate tax rates.
Fenske: The one exception in 2016 has been Abbott. Given the challenges they are facing, however, did they possibly move too aggressively with their M&A strategy between their St. Jude and Alere buys?
Mattern: In 2016, Abbott struck deals with Alere (~$6B) and St. Jude Medical (~$30B). Doing a single deal of that magnitude is significant. Attempting two, especially when you layer on the challenges that came out of these deals—Alere was the subject of a DOJ probe (which has Abbott seeking to terminate the deal) and the allegations St. Jude cardiac devices were vulnerable to a potential cyber security attack—can open oneself up to criticism. However, it is premature to suggest that Abbott was too aggressive. The Abbott-St. Jude combination created a cardiovascular powerhouse, which will fortify their market position, drive revenue growth, and enhance product innovation. Furthermore, whether the Alere deal goes forward and the results of the DOJ probe will significantly shape how we judge Abbott’s 2016.
Fenske: How does a company use M&A as a growth strategy? What are the advantages?
Mattern: M&A can be an effective growth strategy. The impetus for a majority of M&A deals is generally to expand the product offerings by adding complimentary product lines, plugging holes in the current product offerings, or eliminating the operational or regulatory risks associated with R&D. M&A can also expand the end markets, geographic markets, and distribution channels. In the end, M&A should result in increased revenue at a specific cost and on a relatively short timeline. While growing product offerings, markets, and distribution channels can be accomplished organically, it generally takes more time and comes with a higher risk profile. Thus, M&A is effectively a one-stop solution for growth.
Fenske: Are there special considerations to keep in mind when doing M&A in the medical device industry?
Mattern: Integration and regulatory considerations are meaningful in medical device M&A. Integration considerations often require solutions for product and distribution channel overlap. Product overlap can result in cannibalization of an otherwise marketable product or may require a disposition of a valuable asset if there are antitrust concerns, each of which dilutes the benefit of the transaction. Distribution channel overlap may require moving from a distributor to a direct model, and/or revising sales territories, which could result in additional integration friction or costs. Generally integration considerations can be managed; however, the regulatory considerations can put the entire deal at risk or significantly alter the value proposition. Antitrust considerations can significantly delay deals and/or require certain assets to be sold (see Zimmer–Biomet deal). FDA considerations include the likelihood of the target’s product being approved and how to appropriately value when that risk exists (see Wright Medica–Biomimetic deal, and a host of pharma deals). Due to the global nature of most large medical device companies, FCPA risk must also be thoroughly vetted, otherwise you may have a significant impediment to consummation of the deal (see Abbott–Alere).
Fenske: Is the window for using M&A for the inversion deal that Medtronic did with Covidien closed with the new regulations that were put into place after that transaction?
Mattern: Inversion deals (acquiring a foreign company and redomesticating to the target company’s jurisdiction in order to recognize significant tax savings) are not dead, but they are severely wounded. Following the Medtronic–Covidien transaction, the Treasury department issued inversion regulations, which reduced the associated tax benefits and made it more difficult to effectuate. Those regulations effectively killed the AbbVie–Shire deal. Furthermore, the current political climate is very hostile to inversion deals. While on the campaign trail, President Trump labeled the Pfizer–Allergan deal and the related loss of jobs as “disgusting.” Secretary Clinton and Senator Sanders similarly blasted the deal. Thus, in the short-term, companies will be unlikely to utilize an inversion structure due to the loss of tax benefits and the likelihood of a very public reprisal.
Fenske: What do you see in terms of non-traditional companies (e.g., tech companies) making acquisitions of medical device firms? Is that something you expect or will they simply continue to partner?
Mattern: In 2016, there were several deals between tech companies and medical device or healthcare companies, including the Apple–Gliimpse, Nokia–Withings, and Logitech–Jaybird deals. Despite those deals, I think the vast majority of deals will continue to be partnerships or license arrangements. The cultural and operational differences between the sectors make those deals difficult to consummate. In contrast, licenses and partnerships tend to side-step those issues.
Fenske: Where are we headed with regard to medtech M&A? What’s on the horizon in the next five to ten years?
Mattern: I would expect continued consolidation. The fundamental drivers—access to capital, the ability to use M&A to expand the product offerings/extension of R&D without (or minimizing) the associated regulatory approval risk, and a generally supportive political environment—remain prevalent. However, I expect the pace to slow. Inversion deals, which fueled some of the prior M&A, won’t be a significant factor in the near term for reasons offered earlier. Furthermore, due to the prior consolidation, you have both a smaller pool of targets and, as a result, increased antitrust risk.