Reflection, actually, is a valuable forecasting tool, as it can help analysts better understand market trends and determine their potential impact(s) going forward. Retrospection also is an amusing way to keep track of one’s soothsaying acumen. Those who missed the mark last year with their predictions will get a shot at redemption in 2019, since some of the same topics and uncertainties from the past 12 months are once again confronting the medtech industry.
Political unpredictability greatly impacted the sector in 2018. Trade wars with China, a revised North American Free Trade Agreement (NAFTA), and tariffs all dominated the headlines last year. M&A continued to be strong and significantly shaped the industry; advanced technology, artificial intelligence (AI), connected health, and security were top trends. Generally speaking—despite the stock market pull back at the end of 2018—the medtech sector fared better than most industries last year.
A Shifting Political Landscape
2018 was the GOP’s final year for full party control. Riding a wave of national discontent, Democrats wrested a U.S. House of Representatives majority from Republicans during the mid-term elections but failed to gain a similar margin in the U.S. Senate.
Healthcare and medtech initiatives remain a mystery, though Democrats have voiced their desire to strengthen the Affordable Care Act, expand Medicare, and lower drug prices (they remain divided, however, on a strategy to implement their objectives). There may be a push for unique device identifiers for medical devices to be included on hospital claims forms, but there’s no guarantee such legislation will be drafted in the 116th Congress.
Two weeks before Christmas last year, the House and Senate temporarily delayed the reinstatement of the Device Tax through the end of this year — much to medtech companies’ delight. Another multi-year moratorium is unlikely, but then again, stranger things have happened in Washington.
With party divisiveness at an all-time high, it’s doubtful the Congressional power split will produce tangible results. I believe the government shutdown—the longest in American history—is a harbinger of things to come. Progress could be further stymied by the looming 2020 presidential election as candidates begin strategizing and launching their campaigns throughout the year.
On the legislative front: Trump passed the Tax Cuts and Jobs Act in 2018, and there was much uncertainty regarding its effect (if any) on the medtech sector. While the stock market pulled back somewhat surprisingly in 2018, public companies participated in stock buybacks, continued M&A and R&D spending, and venture capital investing remained robust.
Medtech’s M&A Outlook
2019 is starting out as a sellers’ market, but the market could shift as the months pass. The year began with some big M&A deals and activity, even ahead of the annual J.P. Morgan Healthcare conference in January.
As I predicted in 2018, I foresee further consolidation across the entire medtech industry. But as interest rates rise and some uncertainty returns to the stock market, valuations will peak, particularly for smaller deals and mostly in the contract manufacturing space. Exceptions will occur when there is a compelling case for significant synergies or a must-have portfolio/technology grab.
A shining example of this quest for scale was Boston Scientific Corp’s 2018 spending spree. The company closed 11 deals last year, including the blockbuster $4.2 billion purchase of U.K.-based BTG plc, a developer of acute-care pharmaceuticals and minimally invasive cancer and vascular disease treatments. Boston Scientific’s M&A targets last year shows the company is fully aware of the importance of scale and comprehensive product offerings in the face of value-based healthcare. The execution, outcome, and integration of these deals remains to be seen but this uncertainty is unlikely to slow down Boston Scientific’s acquisition strategy or that of their competitors this year.
The availability of prime assets (i.e., actionability) will continue to be a top consideration for active buyers in the medical technology sector. Thus far in 2019, I’ve noticed the most active buyers in the space are more focused with larger-deal teams looking for acquisitions and partners, as well as building relationships and keeping a pulse on the market.
Last year, I mentioned cross-border deal-making. In this regard, 2018 proved to be no different than 2017, and I continue to believe that 2019 will show more of the same as both foreign (European Union/ China) OEMs and contract manufacturers will continue to look to U.S. markets for acquisitive growth. Many of the same multinationals mentioned last year (Molex Inc., TE Connectivity Ltd., Nordson Corporation, Jabil Inc., NN Inc., among others) continue to look for bolt-on innovation and/or technologies/capabilities to better scale their medtech offerings. European and Asian buyers continue to look to the North American market to acquire assets that give them a geographic footprint and access to U.S. customers and markets. To a lesser extent, American buyers will continue to seek a foothold in the European or Asian markets. It will be interesting to see how escalated trade tensions with China will impact M&A.
Shandong Weigao Group Medical Polymer Co. (the Medtronic of China) employed a cross-border acquisition strategy in purchasing Frisco, Texas-based Argon Medical Devices Holdings Inc. for $850 million in September 2017. In addition to gaining access to Argon’s U.S. customers, the deal provided Argon with “significant growth opportunities” for its single-use specialty medical products in China.
Other deals that reflect the need/desire for scale and bolt-on innovation include Resmed’s $225 million purchase of Propeller Health (broadening Resmed’s connected health and COPD portfolio), and PE-owned Cirtec Medical Corporation’s acquisition of Massachusetts-based Metrigraphics LLC, a manufacturer of ultra-high precision, custom micron-scale circuits and components. There certainly will be more deals of this nature to come in 2019.
One of the constants affecting the industry in recent years is change, and that constant will more than likely be a driving force again in 2019, barring any escalation of trade tensions with China, a significant negative event, or global economic slowdown. Private equity’s appetite for deal flow, strategics looking for new technology or areas of growth, historically low interest rates, cash on balance sheets, and foreign buyers looking to the United States for acquisitive growth are all positive signs that M&A will remain strong this year.
Technology and Manufacturing Forecast
The hot topic for the past few years has been 3D-printed devices and connected health. I believe that robotics and AI/machine learning will take center stage in 2019, since we are already seeing the early adoption of some very interesting technologies in these areas. As with all new technologies—but especially in medtech—moral, social, ethical, and security concerns might slow adoption, and government regulation or legislation will influence its acceptance. Security currently seems to be a serious concern, though it is unclear how this issue will impact the medical technology industry. There will continue to be plenty of robust discussion around this topic in 2019 and beyond. What we are seeing in life sciences with gene-editing and CRISPR technologies is just an example of the “tip” of this iceberg. Nonetheless, the 2019 global business climate and macro market drivers—especially for healthcare—remain robust, facilitating the adoption of micro-technology, AI, robotics, telemedicine, and advanced wearables.
In closing, 2019 will almost surely bring some surprises and exciting developments to the industry. The convergence of an aging global population, rapid advancements in technology, and more access to healthcare with rising middle classes around the world will undoubtedly promulgate continued change. I’m interested to see the events that develop in the first quarter and how they’ll set the stage for the year. I’m sure there will be more interesting deals of size and scale in 2019 as companies continue to secure long-term growth.
Here’s to the future.
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. Bonifacio leverages his education, decades of global manufacturing experience, and extensive international network to provide unique value. He is well known in medical device manufacturing and is a regular speaker and contributor for industry events and publications.