An Interview: 2019 in Review

2019 in Review: MedTech Market Conditions

An Interview with the partners: Larry Barr, Göran Brorsson, and Chuck Weikel

Middle Branch Partners:  There was a lot of talk of valuation multiples in the second half, so let’s start there.  What is going on?

Göran Brorsson:  There is a very limited supply of platform-ready deals and the number of buyers keeps getting bigger.  In Europe, new investors seem to be on every street corner and a few have paid, how shall I say, very high non-traditional multiples.  I do not know how some investors justify this except by long hold times and lower return expectations.  It is really unprecedented.     

What did you see and hear in North America on valuations in 2019?

Chuck Weikel:  There are not the extremely high outliers as there are in Europe, but we see the same marco forces at work here and higher valuations.  The base of “platform-ready” businesses is very limited and some are of a slightly lower quality than we might have seen a few years ago.  North American buyers are still very active and some new European buyers are now looking into the US.  But, given how sales processes are run here versus Europe, you don’t see the high end extremes you see with the supposedly less “competitive” – in terms of number of buyers - sales processes in Europe.

Larry Barr:  This may seem counter-intuitive at first, but a lot of the difference can be accounted for by the differences in US private equity firm’s business models.  And private equity drives this M&A market.  Many or most private equity firm sellers in the US have built into their business models set windows in time when they must sell.  So in the US this removes an option that is competitive to a sale – e.g. to retain the business.  This has the effect of reducing the market value.  

Göran Brorsson: In Europe owners (sellers) have less structured sales requirements – they can retain portfolio companies or more easily reinvest in the business.  And transaction costs are significantly higher there as well, so there is an inherent incentive for a longer hold time to amortize these costs.  The effect is that European buyers must deal not only with (i) other buyers but also (ii) sellers more likely not to sell.  So European buyers must provide a larger premium to bring sellers to market.

We have anecdotal evidence, but have not studied to prove it, that multiples in EU – EU deals are higher than in EU to USA deals.  But that would be consistent with these thoughts.

Chuck Weikel:  To summarize:

·      Not as many European sellers must sell on a time line.

·      Transaction costs are higher in Europe, often leading to longer hold times.

·      European funds as owners have generally have less structure around liquidity events.

·      And, we didn’t mention, the market is smaller.

But I do like the idea of negotiating a deal around a glass of wine in a French café!

MBP:  OK, French wine is fine with me.  What are some of the good vintages out there in MedTech right now? 

LB:  We still believe, overall, in the common sense that the market will trend toward new technologies and procedures.  Things like specialized materials, robotics, MIS and new diagnostic techniques.  I would take a look at the chart we have on our website here.  The higher growth is all there and the opportunities will be as well.  Few people know that Michelin (yes, the tire company) owns a MedTech materials business in the US. Watch out if they get real interest in building that!

GB:  In terms of manufacturing technologies this means DLMS – 3D and titanium MIM.  There was new interest in titanium MIM in 2019 as Stryker bought some assets in the market place.  The company has always had a consistent interest in the technology, it is just there are a very limited number of applications and firms working in this area.

CW:  In 2019 we also saw continuing interest in outsourcing (contract manufacturing) and new manufacturing technologies by the large OEMs.  The counter point to this is the truism, that the only way to do new business with the large OEM is to buy a supplier or have a technology they cannot live without, is in fact true.

MBP:  What about the smaller start-ups and venture investors?

CW:  Can you say digital health?  (Laughs)  There is money apparently all over Northern California looking for opportunities here.  Although I doubt it will all find a home or be productive but that is the nature of venture investing.

LB:  It really is fascinating how this market has evolved in the past few years.  All these MedTech startups have their roots not in MedTech but in all the unicorns apparently run wild out west.  Med device opportunities are very hard to fund and, quite frankly, take a different type of investor as well.

GB:  Right.  There are some very interesting European opportunities right now that North American sophisticated later stage investors should be interested in.

MBP:  Which brings us to market risks.  What do you see as downsides?

GB:  Well, I think we are all surprised where we are.  There doesn’t seem to be a downside in view yet. Eventually you would think there will have to be.  

MBP:  OK…

LB:  In July we said we thought there were issues with demand for commodities and a general softness in select industries.  The global economy seems to have powered through this.  Within MedTech most firms are coming off of a great 2019 so growth and profitability continues and people are generally happy.

CW:  I like happy people but the negatives are record Federal deficits, remaining softness in certain manufacturing sectors and a toxic politics.  Ah politics.  The story should really be how global capitalism, in its various forms, has returned unprecedented growth, perhaps juiced by the US Fed and tax cuts - not by political decisions.   

MBP:  What are industry investors to do?

GB:  Tough question.  I think there are numbers of opportunities in market niches.  These are perceived to have lower margins but if you study them closely there are a number of firms doing pretty well that are kind of off the radar.  These companies tend to have lower multiples too.

LB:  I would suggest investors look at out-of-the-box synergies.  As Göran suggests, combining a couple of the industry niche companies with product synergies might make sense.  For example, combining MedTech metals and plastics businesses that are product-complementary or could span industry segments.  That would provide a platform for growth.

CW:  Right, and some investors are starting to look seriously at some smaller or mid-size OEM branded product companies.  Historically, there has been limited interest here.

MBP:  Thanks gentlemen for your time.