- Medical device makers are gaining confidence in their earnings prospects and cash flow generation as patient volumes recover from the pandemic-driven slowdown, increasing the chances that the brisk M&A pace that kicked off 2021 will continue through the year, Moody's predicts in a new report.
- The ratings agency tallied 13 sizable transactions in the first quarter alone, valued at more than $10 billion in total.
- Many big medtechs have focused on repaying debt in recent years and have strengthened their balance sheets. Some have benefited from an inflow of COVID-19-related revenue, which will also increase their capacity for acquisitions, Moody's said in a quarterly report on the healthcare industry.
First-quarter earnings season started on a strong note this week in the medtech sector, with bellwethers Johnson & Johnson, Edwards Lifesciences and Intuitive Surgical all reporting a rebound in sales and pointing to a further recovery in elective procedures.
The rising optimism bodes well for continued momentum on the M&A front, Moody's said. Not only have companies begun to reinstate financial outlooks, but they are forecasting a return to growth. Still, financial guidance ranges in general are wider than they were before the pandemic.
"Medical device companies are increasingly confident that they will return to growth, even though COVID-19 remains prevalent, and the trajectory of the disease and vaccinations are uncertain," the ratings agency said.
The report noted that balance sheets largely improved in 2020, and most companies generated meaningful positive free cash flow, partly due to reduced working capital investments. Several companies raised equity last year, including Boston Scientific, Becton Dickinson and Danaher Corp.
Becton in particular began 2021 with significant cash on hand after repaying more than $1.5 billion of debt in the last year, Moody's said, and can be expected to use some of its $3.2 billion in cash, as of December, for M&A in the year ahead.
Hologic is among companies whose balance sheets have benefited from demand for COVID-19 diagnostic products, and it has reinvested part of its $850 million in cash on hand into M&A.
The first week of 2021 saw four key deals in the medtech sector: Dentsply's $1.04 billion purchase of Byte, Hologic's smaller Somatex and Biotheranostics buys, and Stryker's acquisition of OrthoSenser for an undisclosed sum.
Four additional transactions rounded out the month of January: Steris' $4.6 billion deal for Cantel Medical, Hillrom's purchase of Bardy Diagnostics for $375 million, Thermo Fisher's $400 million Mesa Biotech acquisition, and Boston Scientific's $925 million buyout of Preventice Solutions. Hillrom, however, has since indicated it may renegotiate or walk away from the Bardy deal, citing a Medicare contractor's reimbursement rate cut.
After a lull in February, M&A picked up again in March, with Hologic spending $159 million to buy Diagenode, Agilent buying Resolution Bioscience for $550 million, Boston Scientific acquiring Lumenis for $1.07 billion, and Becton picking up GSL Solutions for an undisclosed price.
Some of the largest deals of the year so far include two from companies looking to build out multiplex testing capabilities. Roche spent roughly $1.8 billion to pick up GenMark Diagnostics in March, and Italy's DiaSorin also dropped $1.8 billion in its acquisition of Luminex last week.
Going forward, Moody's expects most acquisitions to take the form of tuck-ins valued at under $1 billion for major medical device companies, though opportunities may arise for larger purchases focused in adjacent product areas. Most companies are not looking to add new product categories to their franchises, but acquisitions are likely in areas that should see fast growth after the pandemic, such as remote monitoring.