Sundeep Lal, Senior Managing Director & Head of Healthcare & Life Sciences at Auctus Capital Partners09.13.19
As innovation continues to shape the corners of healthcare, a new generation of medtech leaders—small and large—is emerging globally, with external merger and acquisition deals as a new strategic imperative for growth.
In fact, among the 30 largest medtech companies, more than 60 percent attribute their revenue growth to M&A.1 The U.S. is home to the majority of these Medtech leaders—accounting for 77 percent of the global medtech deal share—which makes it the world’s largest market and the innovation capital for companies seeking both growth and investors.2
Medtech companies that selectively choose not to take advantage of M&A find it challenging to scale—and many of the smaller companies are forced to focus on organic growth due to balance sheet capacity issues, while large corporate giants turn to dealmakers around the world to continue scaling and discover more opportunities for deal making for growth.
As the increasing search for innovation continues, Medtech companies hoping to expand globally should take advantage of three key macro drivers for cross-border M&A.
1. Geographic Penetration
The largest and most profitable market, despite regulatory pressure, has always been the U.S., with the Asia-Pacific region displacing the EU as the number two in Medtech.
From a population standpoint, these developed markets (The U.S., Western EU, Japan, and Australia) make up more than 1 billion people, typically accounting for 80 percent of the global Medtech revenue. Emerging markets, however, possessing a much larger population of over 6.5 billion, represent less than 20 percent—and represent a large underpenetrated opportunity for global Medtech companies.
China represents the most obvious and immediate priority for many industry leaders aiming to penetrate emerging markets. In 2018, the Chinese Medtech market alone accounted for 42.48 billion3 with notable mega deals driving consistent growth year-over-year.
For example, in 2012, Medtronic acquired Chinese orthopedics company Kanghui for $755 million USD, with the goal of expanding care delivery in the orthopedics space in China.4 Similarly, Stryker acquired Hong Kong-based orthopedic company Trauson for $764 million USD in 2013 with the same goal.5
Other notables include Philips’ acquisition of patient monitoring company Shenzhen Goldway in 2018, which helped increased its sales by 30 percent following the transaction in 2018;6 J&J’s buyout of Guangzhou-based Bioseal Biotech, which develops a porcine plasma-derived biologic product that controls bleeding during surgery;7and Boston Scientific’s stake in Chinese endoscopy maker Frankenman Medical to enable minimally invasive solutions to Chinese patients.8
While these examples highlight multinational corporations’ interest in Chinese companies, the ability for corporate giants to reap results in high-risk high-reward markets spans the globe—and Medtech companies across the Lower Middle Market should follow suit.
By exploring opportunities in emerging markets, start-ups and smaller companies can offset regulatory risk and take advantage of growing middle-class economies to scale, among other growth opportunities that advisors with local partnerships and market-by-market approaches can support.
2. Sourcing Innovation from Wherever It Might Be
Over last twenty years, innovation has decentralized and moved steadily to different markets. Israel, for example, is a hotbed of medical device innovation, with international MedTech companies finding synergies in Israeli start-ups that are disrupting the current innovation landscape. Notable deals include Stryker’s recent $220 million USD acquisition of Israeli-based OrthoSpace9 , as well as Hoya leading 3NT Medical’s Series C round of funding of $15 million USD in May 2018.10
Additionally, Ireland, Singapore, China, and Korea have become innovation ecosystems that continue to be of interest to global majors looking to invest or acquire. These innovation ecosystems demonstrate strong support from local government in form of start-up grants and matching funding, an emergence of med-tech incubators, and a returning diaspora of experienced talent from the west. Equally critical are service providers that range from product development expertise to patent and legal advisory, to investment banks for capital raising and sell side M&A’s, along with the availability of investment from angels for seed rounds to sophisticated institutional investors for later stage funding.
Government agencies such as The Israel Innovation Authority and Enterprise Singapore are committed to enabling seed investments and resources for early stage start-ups. Simultaneously, angel networks are popping up all over around innovation ecosystems to support angel rounds in start-ups. Bansea, Asia’s oldest and largest network of angel investors exists to support regional start-ups in their local and international endeavors.
These organizations provide more than just financial leverage; they enable innovation through education, networking opportunities, conferences, workshops, and partnerships with innovation centers that promote successful culture and business. A locally connected advisory can better tap relationships for resources — within healthcare systems, regional channel partners, government stakeholders and investors — to source innovation wherever it may be.
3. Addressing an Emerging Need for Value Segment Products
While geographic penetration and sourcing innovation are key factors that influence M&A activity, large companies are also fixated on delivering value segment products to middle markets in developing nations.
Value segment products are defined as products that are affordable and accessible to much of the population, unlike premium products which are targeted to the top of the pyramid. Currently, Medtech majors are focused on commercializing premium products in emerging markets. Since regulations in the U.S. and EU require significant investment in clinical trials for FDA-approval and CE-marked products, these innovations are often priced accordingly to compensate for the tremendous costs that go into development.
While Medtech majors are aware of pricing issues in emerging markets, the decision to set or lower pricing is not trivial and often times is compounded by developed markets’ cost structures and global margin requirements.
One strategy that has been tested is the leveraging of an innovation acquired in China—and utilizing a lower cost structure—to enter other emerging markets, such as by Medtronic and Stryker via their acquisitions in China. As a result, M&A in China is helping drive both geographic penetration locally, as well as creation of dual value segment brands in emerging markets. It is a tactic that corporations can implement in order to deliver value segment products globally.
As growth-hungry Medtechs prowl globally, the above trends can be leveraged to better guide innovation strategy and M&A tactics. Younger Medtechs searching for synergies within a partner or aspiring for exits should align themselves thoughtfully to attract larger Medtech companies and strategic buyers.
References:
1 McKinsey, 2018
2 CB Insights, 2017
3 China Med Device, 2018
4 Med City News, 2012
5 Reuters, 2013
6 MedTech Insight, 2008
7 Fierce BioTech, 2012
8 Mass Device, 2015
9 Verdict Medical Devices, 2019
10 PRNewswire, 2018
Sundeep Lal, Ph.D., MBA is the senior managing director & head of Healthcare & Life Sciences at Auctus Capital Partners.
In fact, among the 30 largest medtech companies, more than 60 percent attribute their revenue growth to M&A.1 The U.S. is home to the majority of these Medtech leaders—accounting for 77 percent of the global medtech deal share—which makes it the world’s largest market and the innovation capital for companies seeking both growth and investors.2
Medtech companies that selectively choose not to take advantage of M&A find it challenging to scale—and many of the smaller companies are forced to focus on organic growth due to balance sheet capacity issues, while large corporate giants turn to dealmakers around the world to continue scaling and discover more opportunities for deal making for growth.
As the increasing search for innovation continues, Medtech companies hoping to expand globally should take advantage of three key macro drivers for cross-border M&A.
1. Geographic Penetration
The largest and most profitable market, despite regulatory pressure, has always been the U.S., with the Asia-Pacific region displacing the EU as the number two in Medtech.
From a population standpoint, these developed markets (The U.S., Western EU, Japan, and Australia) make up more than 1 billion people, typically accounting for 80 percent of the global Medtech revenue. Emerging markets, however, possessing a much larger population of over 6.5 billion, represent less than 20 percent—and represent a large underpenetrated opportunity for global Medtech companies.
China represents the most obvious and immediate priority for many industry leaders aiming to penetrate emerging markets. In 2018, the Chinese Medtech market alone accounted for 42.48 billion3 with notable mega deals driving consistent growth year-over-year.
For example, in 2012, Medtronic acquired Chinese orthopedics company Kanghui for $755 million USD, with the goal of expanding care delivery in the orthopedics space in China.4 Similarly, Stryker acquired Hong Kong-based orthopedic company Trauson for $764 million USD in 2013 with the same goal.5
Other notables include Philips’ acquisition of patient monitoring company Shenzhen Goldway in 2018, which helped increased its sales by 30 percent following the transaction in 2018;6 J&J’s buyout of Guangzhou-based Bioseal Biotech, which develops a porcine plasma-derived biologic product that controls bleeding during surgery;7and Boston Scientific’s stake in Chinese endoscopy maker Frankenman Medical to enable minimally invasive solutions to Chinese patients.8
While these examples highlight multinational corporations’ interest in Chinese companies, the ability for corporate giants to reap results in high-risk high-reward markets spans the globe—and Medtech companies across the Lower Middle Market should follow suit.
By exploring opportunities in emerging markets, start-ups and smaller companies can offset regulatory risk and take advantage of growing middle-class economies to scale, among other growth opportunities that advisors with local partnerships and market-by-market approaches can support.
2. Sourcing Innovation from Wherever It Might Be
Over last twenty years, innovation has decentralized and moved steadily to different markets. Israel, for example, is a hotbed of medical device innovation, with international MedTech companies finding synergies in Israeli start-ups that are disrupting the current innovation landscape. Notable deals include Stryker’s recent $220 million USD acquisition of Israeli-based OrthoSpace9 , as well as Hoya leading 3NT Medical’s Series C round of funding of $15 million USD in May 2018.10
Additionally, Ireland, Singapore, China, and Korea have become innovation ecosystems that continue to be of interest to global majors looking to invest or acquire. These innovation ecosystems demonstrate strong support from local government in form of start-up grants and matching funding, an emergence of med-tech incubators, and a returning diaspora of experienced talent from the west. Equally critical are service providers that range from product development expertise to patent and legal advisory, to investment banks for capital raising and sell side M&A’s, along with the availability of investment from angels for seed rounds to sophisticated institutional investors for later stage funding.
Government agencies such as The Israel Innovation Authority and Enterprise Singapore are committed to enabling seed investments and resources for early stage start-ups. Simultaneously, angel networks are popping up all over around innovation ecosystems to support angel rounds in start-ups. Bansea, Asia’s oldest and largest network of angel investors exists to support regional start-ups in their local and international endeavors.
These organizations provide more than just financial leverage; they enable innovation through education, networking opportunities, conferences, workshops, and partnerships with innovation centers that promote successful culture and business. A locally connected advisory can better tap relationships for resources — within healthcare systems, regional channel partners, government stakeholders and investors — to source innovation wherever it may be.
3. Addressing an Emerging Need for Value Segment Products
While geographic penetration and sourcing innovation are key factors that influence M&A activity, large companies are also fixated on delivering value segment products to middle markets in developing nations.
Value segment products are defined as products that are affordable and accessible to much of the population, unlike premium products which are targeted to the top of the pyramid. Currently, Medtech majors are focused on commercializing premium products in emerging markets. Since regulations in the U.S. and EU require significant investment in clinical trials for FDA-approval and CE-marked products, these innovations are often priced accordingly to compensate for the tremendous costs that go into development.
While Medtech majors are aware of pricing issues in emerging markets, the decision to set or lower pricing is not trivial and often times is compounded by developed markets’ cost structures and global margin requirements.
One strategy that has been tested is the leveraging of an innovation acquired in China—and utilizing a lower cost structure—to enter other emerging markets, such as by Medtronic and Stryker via their acquisitions in China. As a result, M&A in China is helping drive both geographic penetration locally, as well as creation of dual value segment brands in emerging markets. It is a tactic that corporations can implement in order to deliver value segment products globally.
As growth-hungry Medtechs prowl globally, the above trends can be leveraged to better guide innovation strategy and M&A tactics. Younger Medtechs searching for synergies within a partner or aspiring for exits should align themselves thoughtfully to attract larger Medtech companies and strategic buyers.
References:
1 McKinsey, 2018
2 CB Insights, 2017
3 China Med Device, 2018
4 Med City News, 2012
5 Reuters, 2013
6 MedTech Insight, 2008
7 Fierce BioTech, 2012
8 Mass Device, 2015
9 Verdict Medical Devices, 2019
10 PRNewswire, 2018
Sundeep Lal, Ph.D., MBA is the senior managing director & head of Healthcare & Life Sciences at Auctus Capital Partners.
