Big medical device companies may be preparing for a "surge of acquisitions" as a combination of ready capital and distressed assets makes M&A more attractive, according to EY.
The consultancy, in its annual medtech report, said small and mid-sized companies may be questioning their ability to survive the COVID-19 pandemic, which has simultaneously closed off financing options and put a dent in sales of many devices.
The pressures on smaller companies come at a time when big players have taken advantage of low interest rates to take on debt, creating a pool of potential buyers with considerable capital to deploy.
The July 2019 to June 2020 period covered by the EY report was a slow time for medtech M&A. Looking back on that period, EY identified Stryker as the most active acquirer among top medtech companies.
But overall, deal value fell 60% compared to the previous 12 months. The decline reflects the total absence of deals worth in excess of $10 billion and a 41% drop in the value of smaller takeovers. For around one-third of the analyzed period, medtech companies were contending with the coronavirus pandemic.
Other reports have already shown deal values slumped amid disruption caused by the COVID-19 crisis. A flurry of deals in the summer pointed to a potential rebound in activity. EY's report has data to back up the impression that medtech M&A could be on the rise.
The report identifies two drivers of M&A. The 2019-2020 period saw medtech financing more than double to hit a record $57.1 billion. The surge was driven by debt financing and follow-on public stock offerings, leading EY to identify big medtech companies as the recipients of most of the money.
EY said it is unclear whether the big companies will use their increased financial firepower for M&A or to insulate themselves from the effects of the pandemic. However, there is evidence of capacity for M&A. Four other groups expressed an interest in buying Qiagen before Thermo Fisher Scientific struck its ultimately doomed $11.5 billion deal. And another undisclosed company was willing to offer around $16 billion for Varian Medical Systems before Siemens Healthineers had its buyout bid accepted.
The evidence points to a pool of companies with sizable M&A war chests. There is also evidence that companies may be willing to sell. Uncertainty created by COVID-19 was a factor in Varian’s interest in Siemens Healthineers' offer and smaller companies may face additional pandemic pressures.
The second driver of M&A relates to those additional pressures. While overall medtech funding soared in the 2019-2020 period, the venture cash and IPO proceeds that fund smaller companies fell. If small companies are unable to raise money, and face uncertain commercial prospects due to COVID-19, M&A may emerge as their best option.
"If we as an industry get some sense of normalcy into the fall, the high level of available capital could trigger an M&A acceleration," John Babitt, EY Americas strategy and transactions medtech leader, said in the report.
The report also identified evidence that medtech companies see opportunities to create innovative new products. R&D investment increased by 11.5% in 2019. The jump marks the second since the financial crisis that EY has tracked a double-digit increase in R&D spending. From 2000 to 2007, R&D spending growth never dropped below 10%. From 2008 to 2018, it rarely threatened to top 10%.
EY analysts identified the slump in R&D spending growth in their 2017 and 2018 reports, arguing that the prioritization of share buybacks and dividends threatened the future growth of the industry. The analysts welcomed the return to double-digit spending growth in 2019, hailing it as a "positive sign" that suggests "confidence in medtech's ability to keep creating innovative and profitable new products."