M&A in Turbulent Times—Bullish or Bearish?
As noted by GlobalData and highlighted on MPO’s website in mid-March, M&A deal volume in the medical device contract manufacturing market rebounded dramatically last year, reaching a record $1.6 billion. The recovery was hardly surprising, considering the sector’s pandemic-induced contraction in 2020—attributable to the spate of cancelled/postponed elective surgeries.
Obviously, OEMs welcomed the recovery, as the accompanying elective surgery backlog will almost certainly create high demand as COVID-19 transitions from pandemic to endemic status. But it remains to be seen how long the 2021 M&A recovery will last—will 2022’s deal value top last year’s or will the upturn lose steam as the seasons progress and the world grapples with lingering supply chain issues, 40-year-high inflation (U.S.), and an increasingly bloody war in Ukraine?
Unfortunately, there are no easy answers to that question.
At the moment, it appears the M&A trajectory will continue its ascent in 2022, mainly because it’s both a buyer’s and seller’s market.
A Good Time to Buy
Despite all the world’s uncertainty and unrest, the market remains strong for medtech buyers. Various factors are contributing to this favorable environment, including flexible valuations, timing, and the natural business cycle.
Valuations are likely to be slightly more flexible this year due to higher valuation multiples arising from 2021’s bustling deal activity and big expectations from both sellers and investors. Thankfully, many medtech buyers are very disciplined so the valuations did not “bubble” like they have in past real estate markets. However, there was strong upward pressure on purchase prices, especially in competitive bid situations. While there will continue to be some competitive acquisitions, financial buyers are more disciplined this year because of other economic uncertainties roiling the financial seas.
In addition to flexible valuations, the timing is now right for (some) sellers. In any given year, there will always be business owners who are eyeing retirement or longing to begin a new chapter in their careers. Some of these folks planned to sell their businesses last year but held off to recoup revenue lost to COVID-19. Companies with ties to respiratory technology have (naturally) been more attractive to buyers during the pandemic than those whose products are tied to elective procedures. A natural balance, though, is beginning to return to the M&A arena.
As that balance returns, there will undoubtedly be companies in various stages of the business growth cycle (early-stage firms, particularly) that may not be ready for a full exit but need an investor or reliable strategic partner to help advance their development. Keep an eye out for these companies because the right ones can generate a rewarding ROI.
A Good Time to Sell
While the medtech M&A market has certainly improved for buyers, potential sellers are now much better off as well. Medical device companies are highly coveted commodities for many reasons—the most important being their long-term growth prospects. The world’s aging population and rising caseloads of chronic conditions practically ensures a financially secure future for healthcare companies.
Augmenting medtech’s future growth prospects are historically high purchase prices for companies. While some businesses may not draw a record multiple in 2022, they could very well obtain an enterprise value that is higher than it was in the past decade (or will be in the next few years). It is always better to sell during these types of cycles than when overall investment figures are trending lower.
It is also better to sell to a wider audience, and the potential client list is currently diverse, with both private equity firms and strategics (i.e., competitors, OEMs, large companies) viable and often eager potential buyers. All parties continue to have available capital to make significant purchases to inorganically grow their funds/organizations.
Buyers are now more likely to be particularly interested in companies that have mastered the supply chain challenges of the last two years and/or found solutions to reduce the risks associated with current world affairs. Such problem-solvers will most certainly be in high demand this year.
A Certain Future of Uncertainty
There are reasons to be both bullish and bearish about medtech M&A this year. Enough issues abound to create uncertainty about the future and give industry analysts reasons to question the strength and span of the investment market’s post-COVID-19 recovery.
Since macro (professional) economists are not fortune-tellers, they are subject to error in their market forecasts. The only (obvious) known fact is that no one really knows when the next downturn will arrive. Usually, prolonged periods of inflation—which has begun—and higher interest rates (just starting now) often lead to periods of slow growth and/or a recession, and recessions often lead to periods of decreased M&A activity, even in the medtech industry.
Nevertheless, it is worthwhile to remember the medical technology industry has been one of the best performing sectors since World War II. The post-war dynamics triggered a global baby boom and a gradual improvement in the standard of living and healthcare services. Thanks to the medtech industry’s contributions, Baby Boomers are living longer than ever before and leveraging the kinds of advancements once only dreamed about. In addition, the middle class is growing in emerging markets like India, China, Indonesia, and Brazil.
Moreover, COVID-19 has either created or quickly advanced certain parts of the medtech industry. Telehealth, for example, achieved a decade’s worth of progress in just a few months, while companies developing respiratory-related products could hardly keep up with demand during the pandemic’s peak. Overall, COVID-19 has forced companies to get their products to market quicker than expected and devise creative solutions to unexpected kinks in the supply chain. Both of these pandemic-bred skills will be invaluable to medtech companies in the future and make them attractive investment targets. Short-term down cycles will only be a temporary setback to potential buyers looking to enter the healthcare arena or expand their existing portfolios.
Medtech M&A should remain strong for the rest of this year, barring any further unexpected surprises from the already jumbled supply chain and anxious geopolitical climate. But surprises can be beneficial, too; it just depends on the nature of the surprise.
Bring on the unexpected.
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 or at www.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.
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