Industry Caps Third Quarter with Flurry of M&A Deals

There never seems to be a shortage of discussion topics in the medical device industry.

U.S. Food and Drug Administration (FDA) regulations and overall medical innovation have always proved to be reliable conversation starters, though M&A/consolidation and, in recent years, the 2.3 percent excise tax also have provided plenty of fodder. As the last quarter of the year gets underway, many of the industry’s main talking points remain unchanged from earlier in the year: The macroeconomic backdrop both domestically and internationally is still relatively stable and hasn’t strayed far from where things were in the second quarter. Interest rates are holding steady at historically low levels, and inflation remains in check for all but a few outlier economies. Finally, both private investors and strategic OEMs in the medtech space remain mostly bullish and continue to be active in M&A.

The year’s final quarter could get interesting, however, as the final weeks of the two-year medical device tax suspension come to pass. The suspension is set to expire on Dec. 31.   

Latest Deals and Market Update
Last month, Wayne, Pa.-based Teleflex Inc. significantly increased its urological solutions offering with its $1.1 billion acquisition of NeoTract Inc. Under the terms of the agreement, Teleflex will acquire NeoTract for an upfront cash payment of $725 million at closing, and up to an additional $375 million upon the achievement of certain commercial milestones related to sales through the end of 2020. The Boards of Directors of both Teleflex and NeoTract unanimously approved the deal. Privately held NeoTract, founded in 2004, developed and commercialized the FDA-cleared UroLift System, a minimally invasive technology for treating lower urinary tract symptoms due to benign prostatic hyperplasia (BPH). Performed primarily through a transurethral outpatient procedure, the UroLift System delivers a permanent implant that holds open the urethra, reducing the prostate obstruction without cutting, heating, or removing prostate tissue. Pleasanton, Calif.-based NeoTract has been in hypergrowth mode lately, racking up approximately $51 million  in sales last year compared to roughly $18 million in 2015—a 178 percent year-over-year growth. During 2017, NeoTract’s revenues are expected to range between $115 million and $120 million, and executives are already forecasting sales to grow at least 40 percent next year.

Teleflex Chairman and CEO Benson Smith compared the NeoTract acquisition to past deals for Vascular Solutions Inc., Vidacare Corporation, and LMA International N.V., calling the transaction an opportunity to acquire a company that meets the company’s key M&A objectives, which include obtaining a product portfolio that fits into existing strategic business unit franchises and call points; products that provide a superior clinical benefit to existing alternatives and a cost benefit to hospitals; long product lifecycles that benefit from patent protection; and the ability to further improve finances. “This transaction increases our scale within a call point that we already know quite well, and creates value for Teleflex shareholders by generating attractive financial returns,” Smith noted when the deal was announced in early September. Certainly, the purchase appears to be a good move for Teleflex, as it gives the company a differentiated technology with which to compete in a $30 billion market and promising growth rates (NeoTract’s sales have swelled more than 20 percent in 14 of the last 15 quarters). Neotract’s UroLift System is quickly becoming the standard of care for BPH with impressive uptake by any standards.

Continuing with significant OEM acquisitions, Cardinal continued to add to its device offerings by finalizing the $6.1 billion acquisition of Medtronic’s Patient Care, Deep Vein Thrombosis and Nutritional Insufficiency business in late July. The deal was funded with a combination of $4.5 billion in new senior unsecured notes, existing cash and borrowings. The Patient Care, Deep Vein Thrombosis and Nutritional Insufficiency business encompassed 23 product categories across multiple market sites of care, including numerous brands such as Curity, Kendall, Dover, Argyle, and Kangaroo—labels used in nearly every U.S. hospital.

Other medtech distributors may soon follow Cardinal’s lead on the acquisitions trail, quite possibly targeting spin-outs, orphans, or other carve-outs from OEMs. I suspect there will continue to be more opportunity in the carve-out space as some of the recent large acquisitions further shape companies, and OEMs like Medtronic focus on core growth businesses while shedding non-core, non-strategic assets.

M&A activity continues to be robust on the contract manufacturer (CM) side and is moving at a similar pace to 2016 with valuations holding at lofty levels in many cases, particularly for pure-play medical CMs. The contract manufacturing sector remains a fertile but sometimes expensive hunting ground for existing private equity (PE) platforms (i.e., Medplast, Qure Medical, among others), strategic platforms (TE Connectivity, Molex, Nordson Corporation, FlexMedical, etc.) as well as other PEs and private funding (family organizations) looking to enter the space.

M&A activity heated up over the summer with PE-backed Resonetics picking up Aduro Laser and MedPlast acquiring Coastal Life Technologies. The former union enables Resonetics to provide additional resources and equipment to expand the capacity of Aduro’s business model. With the acquisition, Resonetics markets a solution for quick-turn and high-volume laser cut tubing that can be used extensively in catheter delivery systems, Nitinol implants, and single-use instruments. The firm also is expanding Aduro’s capacity with a new facility, additional equipment, and more engineering resources.

Fresh off the heels of the transformational acquisition of Vention’s contract manufacturing units earlier this year, Medplast’s deal for Coastal Life Technologies extends Medplast’s assortment of manufacturing sites to 23 global facilities. “Coastal Life adds another valuable capability to our suite of services that will benefit our customers,” Bill Flaherty, president of the Medical Device Solutions Unit of Medplast, said in announcing the July purchase. “It has strong operational device assembly competencies that will enrich our overall quality and productivity, and bring us another step closer to becoming the first end-to-end contract manufacturing services provider in the medical device industry.” MedPlast brokered the Coastal Life deal only three months after purchasing Vention Medical’s Device Manufacturing Services business and six months after joining forces with PE heavyweights Water Street Healthcare Partners and JLL Partners. The Vention and Coastal Life acquisitions more than doubles the size of Medplast from a sales dollar perspective.

Also in July, Nexcore Technology LLC, an EMS supplier to the medical device industry and portfolio firm of Kidd & Company LLC, purchased Phase 2 Medical, an assembler and manufacturer of various single-use instruments and disposable medical devices. This is a transformational deal for Nexcore, as it paired with a company that is more than twice its size and has a facility in Tijuana, Mexico. Finally, in an attempt to gain a foothold in the North American medical market, Japanese plastics firm Enplas Corp. acquired biotech and medical injection molder PolyLinks Inc. The pairing gives Enplas a 45,000-square-foot manufacturing facility with three cleanrooms and the ability to build tooling in-house. Enplas already operates an injection molding plant in Marietta, Ga., which provides ultra-high precision gears to the automotive, office automation, and other industries. Enplas’s 2016 sales exceeded $400 million.

This brief M&A review is only a partial look at the activity and variety of stakeholders investing in the medtech space to add strategic platforms to their portfolio or access the North American device sector. I’m sure many more deals will unfold in the months ahead.

A Return of the Medical Device Tax?
Medtech OEMs have enjoyed a two-year “holiday” from the controversial 2.3 percent device tax, but they are close to reliving their worst nightmare, as the levy is now less than three months away from reinstatement. Barring a last-minute legislative miracle, suspension of the tax is set to expire on Dec. 31, making for a very unhappy new year (2018). Legislation that would have permanently repealed this tax was introduced by Senate Republicans earlier this summer but failed. I have been wrong before on this tax, so I won’t hazard a guess on its fate in this current political environment. While most, if not all, medical device representatives agree that the tax is a detriment to the industry, it is hard to predict whether the levy will actually return next year. To be safe, PWC and other accounting firms are already offering to help their medtech clients with compliance upon reinstatement of the tax. Not a bad idea, considering the current Congress’ track record of broken promises and legislative failures.

The final quarter of 2017 should be an interesting one. With the pace of M&A expected to continue, and uncertainty mounting over the future of the medical device tax, there will, as always, continue to be plenty to talk about as the industry moves forward and confronts its various challenges. Some of the topics may even sound familiar. So will some of the possible solutions. 

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Mark Bonifacio is founder and president of Bonifacio Consulting Services LLC, a global consulting and advisory firm to medical device OEMs, contract manufacturers, private equity, and other investors in the medical technology sector. Bonifacio is a long time medtech industry engineer and leader with more than 25 years of experience in medical device manufacturing across many therapeutic disciplines and market segments. After working for major medical device OEMs, Bonifacio co-founded APEC, (Baldwin Park, Calif.), a medical device injection molder and contract manufacturer, and injection molder, and sold it to what is now Freudenberg Medical in 2007. He founded Bonifacio Consulting Services (BCS) in 2008. BCS also has offices in Boston, Mass., California, Florida, and China. Bonifacio has a B.S. in plastics engineering from the University of Lowell (now UMASS-Lowell).