Are MedTech’s Mega-Deals Gone For Good?
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MedTech mergers and acquisitions (M&A) almost always make headlines, as they tend to reflect the sector’s dynamic nature and companies’ constant pursuit of inorganic growth and innovation. But it is up to the U.S. Federal Trade Commission (FTC) and European Commission (through its Commissioner for Competition) to ensure these transactions do not compromise market competition and consumer (patient) interest.
Given our role in M&A middle market healthcare and life sciences deals, it is interesting to observe the dynamics of larger transactions. We’ve noticed there is often a “waterfall” effect when these proposed purchases fall through for anti-competitive reasons.
Both the FTC and the European Commission have significant roles in shaping competitive dynamics in healthcare’s various market segments. Sometimes that role is obvious while at other times, it is more subtle.
Consider, for example, some of the speculation about acquisitions that have never taken place. One of the largest of those was the Stryker Corp.’s supposed buyout of Smith+Nephew. If a deal of this size were to occur, there would certainly be quite an extensive list of pros and cons. So what exactly stops these mega-mergers? It’s hard to know for sure but it may very well be fear of the FTC and the European Commission.
There are definitely regulatory impacts to consider with large M&A transactions. Some recent examples include Illumina Inc.’s $8 billion deal for GRAIL; CooperCompanies’ $875 million purchase of Cook Medical’s Reproductive Health business; and Globus Medical’s $3.1 billion acquisition of NuVasive Inc. Each transaction has its own dynamics, which we will explain in detail.
Illumina Inc. – GRAIL: Both the EU and the FTC had concerns with this acquisition. Ostensibly, it seemed unusual that both agencies took issue with the deal because it was more of a vertical integration that would have had less impact on direct competition. But the transaction size caught the attention of both regulatory bodies, narrowing their focus to the acquisition’s potential impacts on supplier-customer relationships. Both agencies expressed concern over potential preferential treatment (to GRAIL) or other competition-curbing actions, which would likely lead to a monopoly in the rapidly growing early cancer detection market.
Although Illumina closed the deal, it has been quite a controversial integration and post-merger period for the pair. The transaction angered shareholders, the FTC, and the EU Commission, the latter of which blocked the merger last fall (the decision is under appeal) and fined Illumina €432 million ($476 million) and GRAIL €1,000 this past summer for finalizing the deal without first securing regulatory approval. “EU merger rules require that merging companies not implement mergers until approved by the Commission,” the EU Commission said upon imposing the fine. “Illumina strategically weighed the risk of a gun-jumping fine against the risk of having to pay a high break-up fee if it failed to takeover GRAIL. It also considered the potential profits it could obtain by jumping the gun, even if it were ultimately forced to divest GRAIL. It then intentionally decided to proceed and to close the deal while the Commission was still investigating the transaction that was ultimately prohibited. This is a very serious infringement, which requires the imposition of a proportionate fine, with the aim of deterring such conduct.”
In prohibiting the merger itself, the Commission said it blocked the deal to preserve market competition. “… GRAIL is developing a blood-based early cancer detection test. If successful, these tests will revolutionize our fight against cancer and help to save millions of lives” EU Commission Executive Vice-President Margrethe Vestager, competition policy head, said in a prepared statement. “Illumina is currently the only credible supplier of a technology allowing to develop and process these tests. With this transaction, Illumina would have an incentive to cut off GRAIL's rivals from accessing its technology, or otherwise disadvantage them. It is vital to preserve competition between early cancer detection test developers at this critical stage of development. As Illumina did not put forward remedies that would have solved our concerns, we prohibited the merger.”
Amid the uproar, Illumina shareholders—led by activist investor Carl Icahn—have forced the resignations of Board Chairman John W. Thompson and CEO Francis deSouza. Moreover, the FTC ordered Illumina in August this year to divest GRAIL. Going forward, it will be interesting to watch Illumina’s battle with regulators play out both in the United States and abroad. Many industry observers predict GRAIL will be back on its own by mid-2024.
Cooper Companies – Cook Medical: The FTC’s investigation into Cooper Companies’ proposed acquisition of Cook Medical’s reproductive health business was a major contributor to the deal’s demise. In announcing the proposed merger last February, Cook Medical executives said the pairing would provide patients with a more complete range of solutions. The FTC, however, enlisted Australian and British regulators to review the acquisition to ensure in-vitro fertilization (IVF) market competitiveness. “The FTC is committed to protecting patients from higher costs and preserving the incentive to innovate. This deal termination protects competition and is a win for patients,” FTC Bureau of Competition Director Holly Vedova said in an Aug. 1 (2023) statement. Neither Cook Medical nor CooperCompanies have commented on the failed acquisition.
Globus – Nuvasive: As noted by their listing in ODT’s 2023 Top 10 Orthopedic Device Companies Report, both firms were significant players in the spinal device market. Thus, it was not surprising this merger attracted the FTC’s attention. Within months of the deal’s February announcement, reports were circulating that the FTC was considering filing a lawsuit to challenge the union, and surgeons were worried about fewer treatment options. The FTC likely considered these factors—as well as potential cost increases and impact on product innovation—in ultimately sanctioning the acquisition (it closed on Sept. 1).
We suspected the deal would past muster with regulators, since the combination will lead to a more competitive company that will better be able to compete with Stryker Corp., Johnson & Johnson’s DePuy Synthes, Zimvie Inc., Medtronic, and others. Naturally, there will be some “fall-out” due to redundancies in R&D, sales, marketing, etc. Often in these types of industry-consolidating events, the newly laid off staff begin to innovate and form new companies, which leads to more market disruption due to new technology creation by smaller players.
One deal we didn’t mention earlier was that of Orthofix Medical Inc. and Seaspine Holdings Corporation. While announced last fall, this union officially closed in January this year. Considering the aforementioned couplings’ many challenges, it is worth noting the Orthofix – Seaspine deal had few, if any, hiccups in its trajectory to regulatory authorization and swift closing. Both companies were fairly prominent in the spine industry but they each were smaller than Globus and Nuvasive. Consequenty, the only (obvious) conclusion to be drawn from this comparison is that size matters (isn’t that kind of a universal rule?).
In summary, the FTC and the EU’s scrutiny of healthcare/life sciences M&A plays a vital role in shaping the industry’s core markets. Blocking the CooperCompanies-Cook Medical deal, pressuring Illumina to divest GRAIL, and scrutinizing the Globus-Nuvasive merger are illustrative of these respective regulatory bodies’ commitment to their mandate. Through careful analysis and a willingness to take decisive action, these governing bodies help ensure that M&A activity fosters innovation and better treatment options and does not limit market competition. These types of transactions should not taken lightly because there must be balance in regulatory actions in order to maintain a thriving, competitive, and prosperous market for all involved.
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.
To view this article in the Medical Product Outsourcing Magazine website, click here.
