Medical Device Companies | Thoughts on 2019 M&A Activity
While specialty physician practices, behavioral health businesses and healthcare IT deals have captured many recent headlines in middle market healthcare M&A, other sectors within healthcare are benefiting from strong tailwinds with less fanfare. As a leading healthcare services investment bank, MHT believes one space that is worth paying attention to is Medical Devices, where competitive dynamics, demographic shifts and new technologies are making it a compelling industry sub-sector to watch.
The medical device industry consists of instruments and machines that are used in the prevention, diagnosis or treatment of illness or disease, or for detecting, measuring, restoring, or addressing health issues. Reaching $156 billion in 2017, the U.S. medical device market represents approximately 40 percent of the global medical device market and is the largest medical device market in the world. Notably, U.S. exports of medical devices in key product categories totaled $41 billion in 2017.
Medical devices and related technologies are responsible for almost 500,000 jobs in the U.S. Importantly, for private equity firms interested in pursuing consolidation strategies, greater than 80 percent of medical device companies in the U.S. employ 50 workers or less, implying a meaningful amount of industry fragmentation at the smaller end of the U.S. medical device market, with a strong cohort of large strategic actors at the top of the market.
The competitive landscape for medical devices is driven by a broad, disparate set of sub-sector specific dynamics. Sales of conventional products such as surgical gloves and other general surgical supplies are competitive. These products, typically sold through specific distributors or purchased by group purchasing organizations (“GPOs”) tend to compete on price, and as such require large sale volumes to generate profit. At the other end of the spectrum, markets for more advanced devices often involve complex pricing negotiations/agreements, are more difficult to enter and are less competitive, allowing the manufacturers and marketers of those devices to charge premium prices.
Factors Driving Interest in Medical Technologies
In 2018, the market witnessed increasing investor interest in medical technologies, with notable deals completed by strategic acquirers and private equity investors including Boston Scientifics’ November announcement that it had reached an agreement to purchase U.K.-based BTG for $4.2 billion and GTCR/Regatta Medical’s investment in Resonetics. MHT Partners expects this dynamic to continue, as we see a number of new and related technologies come to market: connected devices generating reams of health-related data and new informatics solutions to process it; advances in robotics and biologics; and gene therapies and modification using CRISPR-related tools. New technologies will be given lift by a common refrain: global demographic shifts. An aging population coupled with longer life spans and a growing middle class in developing countries – especially in Asia sets the stage for continued growth in the medical device markets abroad, while the greying of the baby-boomer generation and expanded access to care drive increased demand in the U.S.
Heading into 2019, we anticipate continued private equity interest in the medical device sector, and that strategic acquirers will expand and diversify their portfolio of medical devices as they seek to supplement their R&D capabilities in an effort to provide a robust set of solutions in a particular therapy class. Notably, we think the “barbell-shaped” nature of the medical device industry lines up particularly well with lower middle market investment firms interested in rolling up their sleeves and building platforms. As many have observed, there are relatively few well-run medical device companies of scale. “Going small” and potentially looking abroad for medical device businesses could help investors uncover or increase value.
MHT Partners provides tailored advisory services to businesses in the middle market. If you would like to learn more about MHT’s healthcare services practice, please e-mail Taylor Curtis (firstname.lastname@example.org), Patrick Krause (email@example.com), or Alex Sauter (firstname.lastname@example.org).
 US Department of Commerce, International Trade Administration (ITA)