Florence Joffroy-Black and Dave Sheppard, MedWorld Advisors09.06.23
One of the most common questions we are asked as medtech merger and acquisition (M&A) advisors is the particular factors that drive M&A within the various industry segments, and whether these drivers (and the deals themselves) are sustainable.
These questions cannot be answered without first considering the types of buyers within the industry. For the most part, M&A is driven by large strategic companies (i.e., Medtronic, GE Healthcare, Boston Scientific, etc.); and private equity (PE) organizations (financial buyers with large amounts of cash— “dry powder”—to invest on behalf of their stakeholders).
Major medtech corporations often engage in acquisitions to drive their growth and market dominance. These deals not only redefine their business operations but also shape the industry at large through their portfolio additions and divestitures. The top five reasons for spawning inorganic growth through M&A include:
Innovation and technological advancements: Large strategics are notoriously slow in disrupting themselves. Therefore, their R&D efforts are often more focused on incremental product improvements than major new game-changing solutions. When it becomes obvious they may fall behind in technology for a given market segment, these companies usually will look to acquire the innovation to remain competitive and help drive future growth. Remember, strategics don’t like risk in R&D so they generally tend to shy away from investing internally in “bleeding-edge” solutions even if those solutions are potential disrupters.
These companies would rather buy a leading product platform even if it ultimately costs them more money (after de-risked development or market introduction). If the product is de-risked and the innovation simply needs channel investment, they will pay a premium because they know how to scale. Commercial execution is one of the core strengths of these medtech strategics.
Market expansion: Another key inorganic growth driver for major medtech organizations is the desire to expand their market share. Companies want to expand their market share either for geographic purposes or for market demographics. Purchasing a competitor in different geographies or one that caters to a different patient segment can drive growth and allow for more rapid expansion. Though large OEMs will never admit it (for antitrust purposes), acquisitions are sometimes conducted simply to eliminate a competitor. However, companies will never admit the truth—they’ll use many reasons for justifying the deal other than the obvious and many times, it works. Antitrust concerns can often prompt a large strategic to buy early-stage technology (for a premium) even pre-revenue or low revenue. It’s harder for regulators to clamp down on a deal if the selling company has no market share.
Portfolio enhancements: While large firms try not to have formalized bundling programs for their customers (for the obvious antitrust reasons), they to tend to find ways to maximize or optimize their value to customers if they have a larger set of products in their portfolio. Therefore, they are often seeking complementary product lines to add to their product catalog for selling more volume to the same customers.
Synergies: There it is—the dreaded “S” word in M&A. Everyone talks about synergies but few successfully achieve it. Nevertheless, synergies are a huge part of the rationalization for many large cap M&A activities. These may include elimination of redundancies in key departments (i.e., sales, marketing, finance, operations, human resources, etc.) or it may be the opportunity to benefit from economies of scale.
Either way, these “S” word descriptions will often be how key M&A staff in large companies justify actual acquisition costs.
Intellectual property (IP): Loyal MPO readers know the medical technology industry is a highly litigious environment. In fighting for market share, companies will often sue each other over a nanometer of similarity in their competitors’ products. IP in M&A can be used for offensive purposes—for example, to ensure a firm has the freedom to operate with a novel innovation and to build a barrier to keep competitors out (known as the picket fence strategy). It can also be used for defensive purposes such as buying IP that helps defend an organization’s legal position so they have the right to market a certain product or feature.
As previously mentioned, PE firms are also key drivers of M&A. Over the years, PE firms have demonstrated an increasing interest in the medical technology/healthcare industry. PE firms reach out to us every week looking for viable sellers in our markets. The promise of robust returns combined with the essential nature of healthcare makes it an attractive investment segment for many of these financial buyers. The top reasons for PE-driven transactions include:
Sticky customers: Medtech customers tend to be very loyal and change products very slowly. It happens both in the direct-to-end-user level and in the business-to-business OEM client market. For example, organizations that sell medical products directly to practitioners are well aware that medical professionals are very slow to change behavior (especially older medical professionals). However, companies that can get these product loyalists to adopt and use their (more modernized, digital) devices instead will likely retain their business over the long term. Medtech OEM suppliers know customers will likely keep purchasing products from them unless they make a major mistake. While OEM business people are not necessarily creatures of habit, it is simply too costly to change vendors in such a heavily regulated environment as healthcare unless there is a significant reason to do so. Therefore, PE firms will invest to ensure the relative certainty of future business.
Demographics: Everyone knows the key selling point in real estate is location, location, location. When it comes to the healthcare industry, it is simply demographics. The growing (and aging) world population provides a continuous demand for healthcare solutions and medical products that will not subside anytime soon (or ever, for that matter).
High profit margins: The medtech industry continues to boast some of the best profit margins across all market segments. This high yield makes for an attractive return on investment (ROI) for PE firms. Any experienced M&A practitioner knows that ROI (whether it’s called internal rate of return, net present value, or simply “making a lot of money”) drives high levels of acquisitions, as a successful ROI will lead to more M&A.
Accordingly, large industry strategics—due to their bigger-sized acquisitions—drive a significant portion of the overall dollar deal value, while PE firms—due to high M&A activity—drive a substantial percentage of deal volume each year. And due to profits and demographics, it is likely to be highly sustainable for the foreseeable future.
Florence Joffroy-Black, CM&AA, is a longtime marketing and M&A expert with significant experience in the medical technology industry, including working for multi-national corporations based in the United States, Germany, and Israel. She currently is CEO at MedWorld Advisors and can be reached at florencejblack@medworldadvisors.com.
Dave Sheppard, CM&AA, is a former medical technology Fortune 500 executive and is now focused on M&A as a managing director at MedWorld Advisors. He can be reached at davesheppard@medworldadvisors.com.
These questions cannot be answered without first considering the types of buyers within the industry. For the most part, M&A is driven by large strategic companies (i.e., Medtronic, GE Healthcare, Boston Scientific, etc.); and private equity (PE) organizations (financial buyers with large amounts of cash— “dry powder”—to invest on behalf of their stakeholders).
Major medtech corporations often engage in acquisitions to drive their growth and market dominance. These deals not only redefine their business operations but also shape the industry at large through their portfolio additions and divestitures. The top five reasons for spawning inorganic growth through M&A include:
Innovation and technological advancements: Large strategics are notoriously slow in disrupting themselves. Therefore, their R&D efforts are often more focused on incremental product improvements than major new game-changing solutions. When it becomes obvious they may fall behind in technology for a given market segment, these companies usually will look to acquire the innovation to remain competitive and help drive future growth. Remember, strategics don’t like risk in R&D so they generally tend to shy away from investing internally in “bleeding-edge” solutions even if those solutions are potential disrupters.
These companies would rather buy a leading product platform even if it ultimately costs them more money (after de-risked development or market introduction). If the product is de-risked and the innovation simply needs channel investment, they will pay a premium because they know how to scale. Commercial execution is one of the core strengths of these medtech strategics.
Market expansion: Another key inorganic growth driver for major medtech organizations is the desire to expand their market share. Companies want to expand their market share either for geographic purposes or for market demographics. Purchasing a competitor in different geographies or one that caters to a different patient segment can drive growth and allow for more rapid expansion. Though large OEMs will never admit it (for antitrust purposes), acquisitions are sometimes conducted simply to eliminate a competitor. However, companies will never admit the truth—they’ll use many reasons for justifying the deal other than the obvious and many times, it works. Antitrust concerns can often prompt a large strategic to buy early-stage technology (for a premium) even pre-revenue or low revenue. It’s harder for regulators to clamp down on a deal if the selling company has no market share.
Portfolio enhancements: While large firms try not to have formalized bundling programs for their customers (for the obvious antitrust reasons), they to tend to find ways to maximize or optimize their value to customers if they have a larger set of products in their portfolio. Therefore, they are often seeking complementary product lines to add to their product catalog for selling more volume to the same customers.
Synergies: There it is—the dreaded “S” word in M&A. Everyone talks about synergies but few successfully achieve it. Nevertheless, synergies are a huge part of the rationalization for many large cap M&A activities. These may include elimination of redundancies in key departments (i.e., sales, marketing, finance, operations, human resources, etc.) or it may be the opportunity to benefit from economies of scale.
Either way, these “S” word descriptions will often be how key M&A staff in large companies justify actual acquisition costs.
Intellectual property (IP): Loyal MPO readers know the medical technology industry is a highly litigious environment. In fighting for market share, companies will often sue each other over a nanometer of similarity in their competitors’ products. IP in M&A can be used for offensive purposes—for example, to ensure a firm has the freedom to operate with a novel innovation and to build a barrier to keep competitors out (known as the picket fence strategy). It can also be used for defensive purposes such as buying IP that helps defend an organization’s legal position so they have the right to market a certain product or feature.
As previously mentioned, PE firms are also key drivers of M&A. Over the years, PE firms have demonstrated an increasing interest in the medical technology/healthcare industry. PE firms reach out to us every week looking for viable sellers in our markets. The promise of robust returns combined with the essential nature of healthcare makes it an attractive investment segment for many of these financial buyers. The top reasons for PE-driven transactions include:
Sticky customers: Medtech customers tend to be very loyal and change products very slowly. It happens both in the direct-to-end-user level and in the business-to-business OEM client market. For example, organizations that sell medical products directly to practitioners are well aware that medical professionals are very slow to change behavior (especially older medical professionals). However, companies that can get these product loyalists to adopt and use their (more modernized, digital) devices instead will likely retain their business over the long term. Medtech OEM suppliers know customers will likely keep purchasing products from them unless they make a major mistake. While OEM business people are not necessarily creatures of habit, it is simply too costly to change vendors in such a heavily regulated environment as healthcare unless there is a significant reason to do so. Therefore, PE firms will invest to ensure the relative certainty of future business.
Demographics: Everyone knows the key selling point in real estate is location, location, location. When it comes to the healthcare industry, it is simply demographics. The growing (and aging) world population provides a continuous demand for healthcare solutions and medical products that will not subside anytime soon (or ever, for that matter).
High profit margins: The medtech industry continues to boast some of the best profit margins across all market segments. This high yield makes for an attractive return on investment (ROI) for PE firms. Any experienced M&A practitioner knows that ROI (whether it’s called internal rate of return, net present value, or simply “making a lot of money”) drives high levels of acquisitions, as a successful ROI will lead to more M&A.
Accordingly, large industry strategics—due to their bigger-sized acquisitions—drive a significant portion of the overall dollar deal value, while PE firms—due to high M&A activity—drive a substantial percentage of deal volume each year. And due to profits and demographics, it is likely to be highly sustainable for the foreseeable future.
Florence Joffroy-Black, CM&AA, is a longtime marketing and M&A expert with significant experience in the medical technology industry, including working for multi-national corporations based in the United States, Germany, and Israel. She currently is CEO at MedWorld Advisors and can be reached at florencejblack@medworldadvisors.com.
Dave Sheppard, CM&AA, is a former medical technology Fortune 500 executive and is now focused on M&A as a managing director at MedWorld Advisors. He can be reached at davesheppard@medworldadvisors.com.
