Though the start of 2018 was tinged with uncertainty over changes in the global healthcare market and the fate of Obamacare’s medical device tax, the industry appears to be heading down a familiar path in its annual M&A jaunt. Reflecting on Q1, OEM and contract manufacturing consolidation look to be on a similar pace to last year’s record as M&A deals continue to flourish.
Stage Set for Growth
A number of factors indicate that medtech’s bull market is still going strong:
- A confluence of new technologies, innovation, connected health, informatics, robotics, biologics, and gene therapies are disrupting healthcare with varying degrees of influence. Some will impact the market sooner than others, but change certainly is coming, like it or not.
- The global aging population, coupled with longer life spans and a growing middle class (around the world, but especially in Asia and other developing countries) set a perfect stage for continued growth in the healthcare and medical technology markets.
- Private equity and strategic OEM buyers continue to compete for assets in all sectors of medical contract manufacturing, and OEMs are still broadening their portfolios or investing in new technologies in an area they already serve.
Notable First-Quarter Deals
In January, I predicted a strong year for M&A activity in the sector, and the first quarter’s deal-making proved me right (so far).
In January, Baxter International Inc. agreed to acquire two hemostat and sealant products from Mallinckrodt plc: RECOTHROM Thrombin topical (Recombinant), and PREVELEAK Surgical Sealant, which is used in vascular reconstruction. Sales of the proposed acquired products totaled roughly $56 million in the 12 months preceding Sept. 29, 2017. Upon closing, the deal is expected to be modestly accretive to Baxter’s 2018 adjusted earnings and increasingly accretive thereafter. Under the terms of the agreement, Baxter is buying the two products for $153 million and potential future contingent payments. The deal is expected to close by June 30.
Orthofix, meanwhile, is shelling out $105 million on Spinal Kinetics Inc. and its M6 cervical disc implant. The deal calls for $45 million in up-front cash, plus another $60 million in milestones pegged to U.S. Food and Drug Administration approval of the M6 cervical device and trailing 12-month sales targets. The transaction is expected to close in the second quarter.
Johnson & Johnson further distanced itself from its diabetes business in March by accepting a $2.1 billion offer for its LifeScan blood glucose monitoring unit from private equity firm Platinum Equity. The deal—likely to be approved in the coming months—emanated from a strategic review the company conducted of its LifeScan, Animas, and Calibra Medical diabetes businesses last year. That review prompted J&J to shutter its Animas insulin pump subsidiary in October 2017.
On the acquisition front, J&J beefed up its surgical robotics capabilities by purchasing French software-enabled surgery technology developer Orthotaxy. The deal, according to executives, aims to help the healthcare conglomerate create a more wide-ranging robot-assisted platform for total and partial knee replacement procedures. “Our goal is to bring to market a robotic-assisted surgery technology that is an integral part of a comprehensive orthopedics platform,” Ciro Römer, chairman of J&J’s DePuy Synthes orthopedics business, said when the acquisition was announced.
In the personalized medicine/CRO space, Precision Therapeutics (formerly Skyline Medical), converted a previous $500,000 loan with Helomics into a 5 percent equity stake, increasing the company’s ownership in the Pittsburgh, Pa.-based firm to 25 percent. The mid-March investment followed a January preferred stock purchase that gave Precision Therapeutics a 20 percent stake in the company. Helomics’ competitive advantage lies in its proprietary D-CHIP database, which contains de-identified data compiled from more than a decade of clinical testing of tumor responses to drugs, coupled to an Artificial Intelligence-powered bioinformatics engine that generates actionable scientific insights from this data.
LivaNova PLC bolstered its cardiac surgery platform with the (aptly timed) Valentine’s Day purchase of TandemLife, a privately held developer of advanced cardiopulmonary temporary support solutions. The Pittsburgh-based company offers four product systems, all built around a common pump and controller; the systems are complementary to LivaNova’s cardiac surgery offerings.
None of the first quarter deals will significantly reshape the industry, but the robust pace of activity shows M&A is still a prevalent R&D strategy among OEMs looking to acquire new technologies and/or expand their portfolios around the continuum of care or disease state “ownership” (offering products from diagnosis to treatment).
Q1 M&A activity was just as robust among contract manufacturers. In February, GTCR’s Regatta Medical made a strategic investment in Resonetics, and diversified global industrial firm NN Inc. completed the purchase of Bridgemedica LLC, a provider of design, development engineering, manufacturing, and packaging services to the medtech sector. The deal—expected to add breadth to NN’s medical and life science sales—could be the first of many as the company attempts to augment its (medical) organic growth.
Spectrum Plastics Group—itself a merger byproduct (Pexco LLC-PPC Industries Inc.)—didn’t waste any time entering the M&A fray, expanding its specialty products and design engineering offerings through the acquisition of Apex Resource Technologies just two weeks after it was purchased by private equity group AEA Investors in late January. The Apex acquisition is Spectrum’s first under new ownership and likely won’t be its last.
UFP Technologies Inc., a Newburyport, Mass.-based designer and custom converter of foams, plastics, and specialty materials, added to the February flurry of M&A activity with its purchase of Dielectrics Inc. UFP executives said the deal will help the company “create more powerful synergies” and address customer needs in a more comprehensive manner. Founded in 1954, Dielectrics designs, develops, and manufactures medical devices using thermoplastic materials. “In addition to its strong medical customer relationships, Dielectrics brings a superb management team and profitable book of business,” R. Jeffrey Bailly, chairman, CEO, and president of UFP Technologies, said. “We are committed to expanding our medical business, due to its excellent growth potential and high barriers to entry. It’s our largest market, and we expect this acquisition to enhance our manufacturing capabilities and add to our earnings right away.”
Clearly, there are many forces that helped shape the first quarter’s numerous deals. Perhaps most importantly, the hookups prove there are various types of entities attracted to the medtech industry for its attractive margins, stable business base (compared to other industries), regulated environment (a double-edged sword at times), and need for continued consolidation. Such lure is evidenced by entrants like UFP, a diverse industrial smaller public company with $200 million in annual sales (after the Dielectrics acquisition) as well as NN, a similar global industrial player looking to grow the medical portion of its revenue. Expect to see more deals in the future from these and other similar players.
In addition to robust M&A activity, the first quarter also logged considerable medtech private equity investment (AEA-Spectrum and GTCR-Resonetics). Ampersand Capital Partners, Golden Gate Capital, Riverside Partners, Onex Corporation, Sverica Capital Management LLC, and others have already successfully invested in the space and are looking to repeat their achievements if possible.
The transactions detailed in this column are just a fraction of the total that transpired during the first three months of 2018. There certainly will be more as the year progresses, with some likely initiated by non-conventional players.
While valuations remain on the high side, many pureplay medical operations are trading at multiples in the low teens—and higher in some instances where additional synergies or a strong strategic fit (1+1=4) exist. How long this will continue is hard to predict, though the durability of these valuations may hinge on interest rates and leverage ratio levels. However, the amount of free cash on private equity and strategic OEM balance sheets indicate this ride is not yet over. As OEMs continue to consolidate, contract manufacturing mergers will likely continue as well.
The availability of actionable assets always remains a challenge—especially for mature, well-run companies of any scale. Buyers are now pursuing smaller assets than they may have in the past, and also are considering European Union (EU) assets that may be a bit more affordable. Cross-border activity between Asia, EU, and the United States remains robust as well and should continue throughout 2018.
I’ll check back in later this year near the end of Q3 to review the latest deals, analyze the trends driving those purchases, and speculate on the impact Congressional midterm elections may have on 2019 and beyond.
As president and founder of Bonifacio Consulting Services, Mark Bonifacio works with medical device OEMs and contract manufacturers to help them grow organically and through mergers and acquisitions. Mark leverages his education, decades of global manufacturing experience, and extensive international network to provide unique value. In his early career, Mark worked for several major medical device OEMs, then co-founded APEC, a medical device contract manufacturer. Mark built APEC from the ground up, and sold it to Freudenberg Medical in 2007. He established Bonifacio Consulting Services soon after. Today, Mark assists organizations in business growth, strategy and tactical execution, M&A, joint ventures, and licensing. He also advises on cost-reduction initiatives, operational, and organizational improvements. Notable clients include TE Connectivity, MedPlast, Wendel, Onex, Medtronic and Millipore, among others. With a B.S. in plastics engineering from the University of Lowell (now UMASS-Lowell), Mark brings deep engineering and operational expertise along with an entrepreneurial drive. Mark is well known in medical device manufacturing and is a regular speaker and contributor for industry events and publications.