Mergers and acquisitions protect future of global medical devices market

Report reveals smaller medical device companies will find it harder to survive in an increasingly challenging marketplace as focus shifts to less developed countries

Tighter government budgets, healthcare reforms and the trend towards less-invasive treatments have impacted the global medical equipment and supplies market over recent years, leading to an increase in mergers and acquisitions (M&A) and forcing companies to diversify into new and more-specialist areas.

But, while European and US markets have proved challenging, new opportunities are emerging in China, India and Brazil, offering a lifeline for manufacturers both in the UK and overseas.

A new report from Clearwater Corporate Finance’s healthcare team reveals that in 2012 there were 330 M&A deals in the worldwide medical equipment and supplies sector, compared to 443 in 2012 -a decline of 26%. However, deals worth more than £500m accounted for 74% of this activity in 2012, higher than the 63% recorded in 2011. Half of all the deals last year were in the key subsectors of general equipment and supplies, patient monitoring equipment and therapies, and life science tools and services, indicating the likely future direction of the market.

Despite the considerable political and economic pressures swirling the globe, M&A activity in the medical equipment and supplies sector continued to hold up well in 2012, largely driven by continued consolidation within the industry; a trend expected to continue over the next few years

The Medical Equipment and Supplies Report 2013 says that, while activity has dropped off in the last 12 months, the sector remains ‘attractive’ within the broader healthcare marketplace. Currently worth £214billion, it is expected to be worth £276billion by 2016.

The report states: “The ageing population, increased consumer awareness of health-related issues, and the often essential nature of the spend required, coupled with legislative and policy changes, is increasing demand for healthcare products and services.

“Positive market dynamics, notwithstanding the background of budget pressure, is driving significant M&A activity as companies seek to consolidate their position in a growing UK market.”

In terms of deal activity, with record levels of cash on corporate balance sheets, more than a fifth of companies in the sector have made multiple transactions over the last couple of years. In fact some have acquired four or more companies, while Essilor International acquired 14.

Recent deals have included 2IL’s purchase of Corin; Ambu’s acquisition of King Systems from Consort

Medical for a consideration of £104m; Stryker Corporation’s acquisition of Trauson Holdings Company for £480m; McKesson’s purchase of PSS World Medical; and the strategic alliance between Medtronic and Life Tech Scientific Corporation.

The majority of acquirers in 2012 came from the US (53%), while France, the UK, Germany and the Netherlands accounted for 23% of the deals. By contrast, companies in emerging markets like China are predominately acquiring inbound opportunities. Targets for M&A activity are again mainly based in the US, with Germany, the UK, China, Sweden, Japan and the Netherlands accounting for 25% of all activity.

Experts predict that over the coming years and months the European market will remain challenging, leading to large and medium-sized companies looking for more niche areas to exploit. These used to be the province of only players that sought less-crowded markets, but now the likes of Medtronic and Boston Scientific are increasingly entering this space.

Medium to smaller companies will have a tougher time gaining access to key healthcare call points without a proven and sizeable sales force armed with a battery of products to gain the time and interest of providers

In terms of worldwide opportunities, China, India and Brazil will become the most important markets, offering the greatest chance for future growth. This is due to a stronger economic growth compared to other regions, government funding and reforms, changing consumer lifestyles, the increasing penetration of medical insurance products, and the rise in disposable incomes. Singapore, Taiwan, Hong Kong, South Korea, Germany and Canada are also important regions for growth. And, while the US remains the world’s largest market, it is expected to see reduced activity due to the Obamacare health reforms which come into force over the next year.

In terms of M&A activity, this is expected to continue apace to reflect this change in direction. Ramesh Jassal, senior healthcare analyst for Clearwater Corporate Finance: “Despite the considerable political and economic pressures swirling the globe, M&A activity in the medical equipment and supplies sector continued to hold up well in 2012, largely driven by continued consolidation within the industry; a trend expected to continue over the next few years.

“We expect a lot of deal activity in fields such as early diagnosis, patient homecare devices, and technologies that provide early detection. We also expect to see consolidation around technologies that reduce surgical intervention and long hospital stays which, in turn, reduce waiting times and unnecessary admissions.”

The report states that companies that want to increase their market share over the next few years are creating growth strategies based around restructuring internal operations to shed non-performing assets and increase margins through productivity gains and more creative approaches. They are also diversifying product portfolios to spread the risk and penetrating into those new emerging markets in less developed countries. And M&A activity will continue to drive growth further.

We expect a lot of deal activity in fields such as early diagnosis, patient homecare devices, and technologies that provide early detection. We also expect to see consolidation around technologies that reduce surgical intervention and long hospital stays which, in turn, reduce waiting times and unnecessary admissions

“With accumulated cash reserves, large companies will increasingly look to M&A activities to reposition themselves,” the report states.

“Medium to smaller companies will have a tougher time gaining access to key healthcare call points without a proven and sizeable sales force armed with a battery of products to gain the time and interest of providers.”

This will mean many smaller companies having to consider combining with larger players.

“Smaller companies, especially those with new technology, will find remaining independent to be more expensive and risky,” the report adds.

“These firms should realistically assess their future and devise strategies by creating alliances and partnerships with large corporates early and have a clear exit strategy in place to create value for investors.

“The other challenge for smaller companies is that the healthcare landscape puts a premium on having sufficient financial ability to fund regulatory, sales and marketing requirements. This is especially the case in the current tight economic climate where access to capital can be difficult.”

‘Hot’ sectors for 2013 and beyond that will provide greater opportunities include the shoulder replacement market, particularly in the US; cardiovascular devices; and spinal procedures, in particular spinal fusion and fixation devices.

For the full report, which includes indepth reviews of the markets in the US and India, click here.

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