Mark Bonifacio, President, BCS LLC06.02.21
In the seven or so months since my last column, the world has drastically changed—again. The next “phase” (or at least a different “phase”) of the pandemic has arrived, though no one can explain exactly what that phase is. Still, there are certain matters that remain virtually unchanged since late last year, as they are continuing to evolve.
While certainly disrupting the medtech space on many fronts, the pandemic also served as an accelerant to other issues that were already in motion.
M&A Activity
As a quick recap, prior to COVID-19 arriving in the United States last March, the medtech and life sciences industries were on a steady M&A roll, with deal volume at record levels and deals of all sizes in all sectors occurring practically every day. M&A activity paused for about two months or so (early March through mid-May 2020) and then slowly gained steam. Since last fall, medtech and life sciences M&A activity has remained on a steady roll and has been at or above pre-COVID-19 deal metrics on almost every front, plus or minus a few.
Deal volume continues to be robust, with transactions continuing virtually unabated from Q4 2020 through the first half of 2021. M&A drivers have remained the same for the most part: low interest rates, cash on balance sheets, asset competition between private equity (PE) and strategics, overall industry consolidation, and rapidly changing market dynamics (accelerated further by the global pandemic). However, inflation has become a growing concern over the last six months and is undoubtedly troubling many medtech professionals. There is talk of increasing the capital gains tax, which may prompt companies to complete their acquisitions before the calendar year ends. Time will tell, though a robust deal flow among OEMs and contract manufacturers (CMs) is projected for the rest of the year, barring any significant changes or setbacks in the economic rebound and pandemic recovery. Telehealth, IVD, cardiovascular, and neurovascular remain favorite investment areas for OEMs while CMs continue to pursue component and specialty service manufacturing capabilities.
PE is still influencing M&A activity within the CM space. Valuations continue to remain at pre-pandemic levels while leverage is at or near recent traditional ratios. In general, it remains a seller’s market. One item of interest worth mentioning is the arrival of SPACs—Special Purpose Acquisition Companies (a.k.a., “blank check companies”)—entities with no commercial operations that are created solely to raise capital through an IPO in order to acquire an existing firm. LumiraDx, a well-funded private diagnostic company, went public via a SPAC in April.
One of the most significant financial maneuvers of 2021 thus far has been Becton, Dickinson and Company’s planned spinoff of its Diabetes Care business into an independent, publicly traded company (“NewCo”), announced May 6. Post spin-off, BD will continue to focus on medical technologies and solutions through its Medical, Life Sciences, and Interventional segments. But the separation could add value to the two units, positioning them for sustainable and extended growth and enabling both to focus on their core markets, innovations, and distinct customer outcomes. Moreover, the spinoff will likely allow for more efficient capital and resource allocation based on disparate risk and return characteristics of the two businesses.
As a standalone entity, NewCo will be the global leader in insulin injection devices, manufacturing roughly 8 billion devices and serving about 30 million patients annually. In 2020, BD’s Diabetes Care business generated approximately $1.1 billion in revenues with 48 percent of that money generated outside the United States, with 17 percent of the revenues coming from emerging markets. NewCo will have manufacturing sites in the United States, Ireland, and China, and is expected to have offices in New Jersey and Massachusetts.
BD wasn’t the only OEM grabbing headlines in early 2021. Hologic made news in April with its fourth acquisition of the year, purchasing near-patient, acute care diagnostic firm Mobidiag Oy for roughly $795 million. This deal will give Hologic control of two automated PCR instruments used in the diagnosis of gastrointestinal and respiratory infections and management of antimicrobial resistance. Hologic has used the pandemic-driven growth of its diagnostics business to make a string of deals; the company set the tone for the year in the first week of January, announcing the $64 million acquisition of Somatex Medical Technologies GmbH and the $230 million takeover of Biotheranostics Inc. Its third deal occurred in March with the $159 million acquisition of privately held Diagenode.
Other OEMs adding to their portfolios through M&A this year were Boston Scientific Corp., Stryker Corp., PerkinElmer, and Haemonetics Corporation, among others.
Existing PE players in the CM space continue to look for tuck-in acquisitions and larger investors are still favoring companies with “niche” capabilities or a specific geographic footprint to add to their holdings.
One CM that continues to grow through acquisition is Seisa Medical Inc., a full-service manufacturer of Class II and Class III medical devices. In March, the firm acquired Bay Area-based businesses ProtoQuick Inc. and Peridot Corporation. The transactions add considerable expertise to Seisa’s plastics and metals capabilities while also giving the Bay Area companies’ customers the opportunity to leverage Seisa’s global infrastructure for high-volume production of Class II and Class III devices. This serves as a great example of adding capabilities and a strategic geographic location.
If the first half of 2021 is any indication of future M&A activity, medtech deal volume will likely be robust this year. But future tax policy uncertainty—specifically increases in capital gains—may cause some business owners to take some of their chips off the table. Baring any major backslide in the U.S. economy or pandemic, there should be no shortage of deals through H2.
Outsourcing, Supply Chains, and Labor
Some clarity has come to these three interconnected issues since the start of the pandemic. Discussions about outsourcing and supply chains cannot be productive without also considering the available pool of skilled and unskilled manufacturing labor. As demand for (all) goods is skyrocketing and the U.S. economy reopens, factories are having a hard time finding workers to meet demand. The added unemployment benefits has been blamed for the worker shortage, but many of these benefits are set to expire in many states. While this talent shortage is not new, the consequences are far reaching. A recent labor study concluded that 75 percent of skilled manufacturing laborers are over 45 years old. In early May, Deloitte and The Manufacturing Institute published a report warning the worker shortage will hurt revenue and production, and could ultimately cost the U.S. economy up to $1 trillion by 2030. Automation might help some, but it will not be adopted quickly enough to deal with the worker shortage. According to the report, 75 percent of manufacturing executives said they have trouble attracting and retaining workers. There continues to be a misconception that manufacturing jobs are low-paying, low-progressing, low-knowledge jobs—this is simply not true.
The report concludes by recommending ways manufacturers can attract talent, including launching recruitment efforts at high schools, considering flexible schedules to help work/life balance, and linking leadership performance to diversity, equity, and inclusion metrics.
To rebuild their talent pipeline, Carolyn Lee, executive director of The Manufacturing Institute, said manufacturers must proactively reach out to more diverse groups.
“Manufacturing has traditionally been older, whiter and more male,” said Lee, who comes from a manufacturing family herself. “It’s mathematically impossible for us to compete in the future without having a more diverse workforce going forward.”
If the medtech industry acts now to attract a more diverse workforce, it might be able to stave off product shortages and lost revenues. In the meantime, expect M&A activity to remain strong in the near term as medtech companies attempt to rebuild and enhance their pandemic-affected portfolios. Stand by—the second half of 2021 should prove interesting.
As president and founder of Bonifacio Consulting Services, Bonifacio and his team assist medical device OEMs and contract manufacturers grow operationally, organically and through mergers and acquisitions. Bonifacio leverages his engineering education, decades of global medical manufacturing and operating experience, along with his extensive international medtech network to provide unique value and industry knowledge. He is well-known in medical device manufacturing and is a regular speaker and contributor for industry events and publications.
While certainly disrupting the medtech space on many fronts, the pandemic also served as an accelerant to other issues that were already in motion.
M&A Activity
As a quick recap, prior to COVID-19 arriving in the United States last March, the medtech and life sciences industries were on a steady M&A roll, with deal volume at record levels and deals of all sizes in all sectors occurring practically every day. M&A activity paused for about two months or so (early March through mid-May 2020) and then slowly gained steam. Since last fall, medtech and life sciences M&A activity has remained on a steady roll and has been at or above pre-COVID-19 deal metrics on almost every front, plus or minus a few.
Deal volume continues to be robust, with transactions continuing virtually unabated from Q4 2020 through the first half of 2021. M&A drivers have remained the same for the most part: low interest rates, cash on balance sheets, asset competition between private equity (PE) and strategics, overall industry consolidation, and rapidly changing market dynamics (accelerated further by the global pandemic). However, inflation has become a growing concern over the last six months and is undoubtedly troubling many medtech professionals. There is talk of increasing the capital gains tax, which may prompt companies to complete their acquisitions before the calendar year ends. Time will tell, though a robust deal flow among OEMs and contract manufacturers (CMs) is projected for the rest of the year, barring any significant changes or setbacks in the economic rebound and pandemic recovery. Telehealth, IVD, cardiovascular, and neurovascular remain favorite investment areas for OEMs while CMs continue to pursue component and specialty service manufacturing capabilities.
PE is still influencing M&A activity within the CM space. Valuations continue to remain at pre-pandemic levels while leverage is at or near recent traditional ratios. In general, it remains a seller’s market. One item of interest worth mentioning is the arrival of SPACs—Special Purpose Acquisition Companies (a.k.a., “blank check companies”)—entities with no commercial operations that are created solely to raise capital through an IPO in order to acquire an existing firm. LumiraDx, a well-funded private diagnostic company, went public via a SPAC in April.
One of the most significant financial maneuvers of 2021 thus far has been Becton, Dickinson and Company’s planned spinoff of its Diabetes Care business into an independent, publicly traded company (“NewCo”), announced May 6. Post spin-off, BD will continue to focus on medical technologies and solutions through its Medical, Life Sciences, and Interventional segments. But the separation could add value to the two units, positioning them for sustainable and extended growth and enabling both to focus on their core markets, innovations, and distinct customer outcomes. Moreover, the spinoff will likely allow for more efficient capital and resource allocation based on disparate risk and return characteristics of the two businesses.
As a standalone entity, NewCo will be the global leader in insulin injection devices, manufacturing roughly 8 billion devices and serving about 30 million patients annually. In 2020, BD’s Diabetes Care business generated approximately $1.1 billion in revenues with 48 percent of that money generated outside the United States, with 17 percent of the revenues coming from emerging markets. NewCo will have manufacturing sites in the United States, Ireland, and China, and is expected to have offices in New Jersey and Massachusetts.
BD wasn’t the only OEM grabbing headlines in early 2021. Hologic made news in April with its fourth acquisition of the year, purchasing near-patient, acute care diagnostic firm Mobidiag Oy for roughly $795 million. This deal will give Hologic control of two automated PCR instruments used in the diagnosis of gastrointestinal and respiratory infections and management of antimicrobial resistance. Hologic has used the pandemic-driven growth of its diagnostics business to make a string of deals; the company set the tone for the year in the first week of January, announcing the $64 million acquisition of Somatex Medical Technologies GmbH and the $230 million takeover of Biotheranostics Inc. Its third deal occurred in March with the $159 million acquisition of privately held Diagenode.
Other OEMs adding to their portfolios through M&A this year were Boston Scientific Corp., Stryker Corp., PerkinElmer, and Haemonetics Corporation, among others.
Existing PE players in the CM space continue to look for tuck-in acquisitions and larger investors are still favoring companies with “niche” capabilities or a specific geographic footprint to add to their holdings.
One CM that continues to grow through acquisition is Seisa Medical Inc., a full-service manufacturer of Class II and Class III medical devices. In March, the firm acquired Bay Area-based businesses ProtoQuick Inc. and Peridot Corporation. The transactions add considerable expertise to Seisa’s plastics and metals capabilities while also giving the Bay Area companies’ customers the opportunity to leverage Seisa’s global infrastructure for high-volume production of Class II and Class III devices. This serves as a great example of adding capabilities and a strategic geographic location.
If the first half of 2021 is any indication of future M&A activity, medtech deal volume will likely be robust this year. But future tax policy uncertainty—specifically increases in capital gains—may cause some business owners to take some of their chips off the table. Baring any major backslide in the U.S. economy or pandemic, there should be no shortage of deals through H2.
Outsourcing, Supply Chains, and Labor
Some clarity has come to these three interconnected issues since the start of the pandemic. Discussions about outsourcing and supply chains cannot be productive without also considering the available pool of skilled and unskilled manufacturing labor. As demand for (all) goods is skyrocketing and the U.S. economy reopens, factories are having a hard time finding workers to meet demand. The added unemployment benefits has been blamed for the worker shortage, but many of these benefits are set to expire in many states. While this talent shortage is not new, the consequences are far reaching. A recent labor study concluded that 75 percent of skilled manufacturing laborers are over 45 years old. In early May, Deloitte and The Manufacturing Institute published a report warning the worker shortage will hurt revenue and production, and could ultimately cost the U.S. economy up to $1 trillion by 2030. Automation might help some, but it will not be adopted quickly enough to deal with the worker shortage. According to the report, 75 percent of manufacturing executives said they have trouble attracting and retaining workers. There continues to be a misconception that manufacturing jobs are low-paying, low-progressing, low-knowledge jobs—this is simply not true.
The report concludes by recommending ways manufacturers can attract talent, including launching recruitment efforts at high schools, considering flexible schedules to help work/life balance, and linking leadership performance to diversity, equity, and inclusion metrics.
To rebuild their talent pipeline, Carolyn Lee, executive director of The Manufacturing Institute, said manufacturers must proactively reach out to more diverse groups.
“Manufacturing has traditionally been older, whiter and more male,” said Lee, who comes from a manufacturing family herself. “It’s mathematically impossible for us to compete in the future without having a more diverse workforce going forward.”
If the medtech industry acts now to attract a more diverse workforce, it might be able to stave off product shortages and lost revenues. In the meantime, expect M&A activity to remain strong in the near term as medtech companies attempt to rebuild and enhance their pandemic-affected portfolios. Stand by—the second half of 2021 should prove interesting.
As president and founder of Bonifacio Consulting Services, Bonifacio and his team assist medical device OEMs and contract manufacturers grow operationally, organically and through mergers and acquisitions. Bonifacio leverages his engineering education, decades of global medical manufacturing and operating experience, along with his extensive international medtech network to provide unique value and industry knowledge. He is well-known in medical device manufacturing and is a regular speaker and contributor for industry events and publications.