Medtech dealmakers made a slow start in 2020. Halfway in, the total value of all medical device takeovers tracked by PwC was less than $2 billion. The only major deals were in the diagnostics space, where Thermo Fisher Scientific made an ultimately doomed bid to buy Qiagen for $11.5 billion and Invitae inked a $1.4 billion takeover of ArcherDX.
However, the start of the second half of 2020 marked a radical increase in activity.
In the first week of August, Teladoc struck an $18.5 billion deal to buy digital health player Livongo and Siemens Healthineers made a $16.4 billion move for Varian Medical Systems. With Illumina following up with an $8 billion offer for Grail in September, deals worth $42.9 billion were unveiled in quick succession.
PwC tracked $35 billion worth of deals across all of pharma, biotech, medical devices, diagnostics and related sectors over the first six months of 2020. Medtech blasted past that figure in just seven weeks as summer began to turn to fall. The rapid rise in dealmaking activity was driven by takeovers that companies only started thinking seriously about after the pandemic began disrupting the medtech industry. Here, we look at the key deals and what they mean for the future of medtech.
Buyers with $16B war chests
Siemens Healthineers' takeover of Varian was the first of the flurry of multi-billion dollar deals unveiled early in the second half of 2020. The deal will give Siemens Healthineers control of a suite of cancer treatment technologies that Varian predicts will generate annual revenues of $7 billion by 2030. This year, however, Varian looks likely to barely break $3 billion, in part due to the negative effect of the pandemic.
COVID-19 is a key factor in the deal. Siemens Healthineers CEO Bernd Montag sought a meeting with Dow Wilson, his counterpart at Varian, in January but was rebuffed. Wilson told Montag the Varian management team was focused on running its business.
Wilson was more receptive when Montag sent a text message in late May to request a call. By that point, Wilson had seen the share price of Varian fall by as much as 37% compared to the start of the year as the impact of coronavirus began to become clear. The text led to a takeover offer, which Varian considered in light of "the uncertainty and challenges created by the current economic environment and impact of the COVID-19 pandemic."
While negotiating with Siemens Healthineers, Wilson received an unsolicited email from the representative of another undisclosed company that went on to offer $175 a share to buy Varian, subject to due diligence. Siemens Healthineers ultimately landed its target with an offer of $177.50. The presence of a second bidder that potentially still has the desire and means to do a deal worth around $16 billion suggests more major medtech takeovers may be in the pipeline.
Seizing the digital health opportunity
The story of Teladoc's takeover of Livongo is another mid-pandemic tale. Teladoc began evaluating the merits of buying Livongo or one of "three large, privately-held companies in the virtual care space" in April. By that point, it was clear that measures taken to slow the spread of the virus could accelerate the shift toward digital health and telemedicine.
While weighing whether to buy Livongo, Teladoc's management debated topics including the "the significant impact of the COVID-19 pandemic on the virtual care industry, heightened competitive environment [and] implications for Teladoc's key strategic priorities."
Livongo and Teladoc agreed to merge in part on a belief that COVID-19 has created an "unprecedented opportunity to enhance their respective competitive positions in a rapidly evolving industry and strategic environment." With the pandemic adding to existing tailwinds, Livongo expects to grow annual sales from $598 million in 2021 to $3.4 billion in 2025 and $11.4 billion in 2030.
Teladoc was the only company that tried to buy Livongo but there are nonetheless signs that there may be more consolidation in the digital health space. Livongo expects new market entrants to slow its growth and pressure margins, setting the stage for acquisitions as companies seek to add scale and take out competitors.
Liquid biopsy consolidation
Illumina continued the recent string of big-ticket deals by agreeing to pay $8 billion for Grail, a liquid biopsy company. Grail spun out of Illumina in 2016 and filed to go public weeks ago. Before Grail could wrap up the IPO, Illumina struck a deal to buy the 85% of the company it does not already own.
The takeover received a frosty reception from investors and analysts. Shares in Illumina fell following news of the deal as analysts at Cowen said "that in this instance '1+1' could actually equal less than 2." Doubts about the deal are underpinned by concerns that Illumina lacks the capabilities to make a commercial success of Grail's Galleri multi-cancer screening test and will undermine its core business by going into competition with its customers and taking on significant R&D costs.
Illumina's willingness to take on perceived risks has raised questions about whether the sequencing giant has doubts about its core business. Management has downplayed such concerns. "Is this move any reflection of how we think about the core market? And is that what's driving this? And I'd say not at all. We remain confident in our core market," Illumina CEO Francis deSouza told investors on a call earlier this month.
Cowen analysts expect the takeover to spark "a new era of consolidation in the space," with Illumina potentially contributing to the process by buying up other liquid biopsy startups. After years spent getting the technology ready for market, the liquid biopsy space could now become a major driver of medtech M&A.
Barriers to closing deals
Recent events show efforts to consolidate the liquid biopsy space and other medtech sectors could hit stumbling blocks. Investors torpedoed Thermo Fisher’s takeover of Qiagen, while competition regulators thwarted Illumina's proposed $1.2 billion takeover of Pacific Biosciences of California and have held up Stryker’s 2019 acquisition of Wright Medical.
Companies may be willing to take on such challenges to position themselves to grow through and beyond the pandemic. Having missed out on Qiagen, Thermo Fisher has capacity to do a big deal and analysts at PwC went into 2020 identifying GE Healthcare and industrial products companies as part of a clutch of companies likely to strike $2 billion to $5 billion takeovers.