Guest blog from James Knott, Catalyst Corporate Finance
The global medical device market saw a significant increase in M&A activity during 2012, with deal volumes up 31% on 2011. The total value of deals completed was £15.5 billion compared to £26.2 billion in 2011. The fall is primarily due to a couple of mega deals in 2011, such as Johnson and Johnson’s £12.2 billion acquisition of Synthes Inc, the likes of which were not repeated in 2012, when the largest deal was Hologic Inc’s £2.3 billion acquisition of diagnostics specialist Gen-Probe Inc.
The strong growth being demonstrated by the medical device market will continue. Growth is underpinned by demographic changes, especially in the developed world, where the average age continues to increase and there is a growing prevalence of obesity. These shifts are causing an increased strain on health authorities, which are under pressure to deal with a rise in patient numbers and reduced spending in line with government austerity measures. The need for effective low-cost solutions is driving innovation in the medical device sector.
UK companies increasingly attractive acquisition targets
The UK has demonstrated very positive M&A trends from 2011 to 2012. Whereas only nine UK-based companies were acquired in 2011, this increased dramatically in 2012 to 23. This spike in activity is thought to have been driven by acquirers looking to take advantage of favourable tax breaks, such as the so-called patent box, and also by a recognition of the abundance of innovative new technologies being developed at specialist UK based companies. A good example of this was US-based ConvaTec’s acquisition of Trio Healthcare International, a privately owned UK company with an innovative range of accessory products for ostomy care. ConvaTec was attracted to Trio’s product range, which includes specialist new products that will significantly enhance its portfolio, and hence enhance ConvaTec’s reputation as a global leader in ostomy care.
The constant quest for innovation has been a key driver for M&A activity, with large corporations looking to acquire new technologies rather than develop them in-house. This is partly driven by the speed at which the market is moving and the pressure on larger players to continue to be at the forefront of development. Alongside this, it is often economically more efficient to acquire, especially in the short term, rather than spend hundreds of millions of pounds on R&D, although this will continue to play a part in longer-term product development.
The BRIC countries remain a strategic focus for acquirers
The BRIC (Brazil, Russia, India and China) countries continue to be a major focus for large corporates looking to gain access to these particularly high-growth economies. Target companies in these territories accounted for 5% of all medical device deals by volume in 2011, and this almost doubled to 9% in 2012. This significant increase in activity demonstrates that large corporates looking to enter these economies are doing so via acquisitions which, in the short term, are far more time efficient and financially attractive than developing a local presence organically.
Major corporates continue to deploy capital
The major medical device corporates played a key role in driving M&A activity last year and this will continue in 2013. Strong results from a number of significant businesses in the sector continue to boost cash reserves, and the need to improve and innovate continually means they remain on the look out for opportunities to make acquisitions. Underlying market growth will also continue to attract financial sponsors (including private equity), although this will continue to be in a discreet number of subsectors such as wound care. Many of these sponsors are eager to write cheques and enter the medical device space to take advantage of the significant growth opportunities discussed above.
Growth set to continue in 2013
All signs point to medical device M&A activity increasing further in 2013. Given the UK’s growing reputation as a hotbed for innovative new technology, we expect our shores to continue to attract attention from both overseas and domestic acquirers.