What's in store for MedTech mergers and acquisitions this year?
At the start of 2021, our partners sat down to discuss the state of the market and expectations for 2021. Here are their thoughts:
MedTech M&A: What happened in 2020?
Chuck Weikel - Welcome to MedTech in 2021! Believe it or not we are finally here. Anyone feel bad about that?
Göran Brorsson & Larry Barr - No!
Chuck Weikel - What trends and market conditions do you see for the new year?
Larry Barr - 2021 is certain to be another year of change. However, I believe these will be positive changes as opposed to last year when it seemed at some points we did not know what to expect next.
Chuck Weikel - What do you mean?
Larry Barr - As the MedTech community, we experienced a lot last year. We saw softening in demand at the OEM and contract manufacturing level. Although I have no scientific data to point to, these declines have averaged about 10 to 20%. The good news here has been that the OEMs and CMs have worked together in what is really an unprecedented way to soften the impact on their supply chains and this has mitigated the financial impact. I believe leaders in the industry at all levels have learned these lessons and are trying to mitigate the future impact of these forces where they can.
Göran Brorsson - I would say in Europe we have seen a great many unexpected things. We have experienced similar declines while companies have also worked with customers to mitigate these declines. Of course, Europe has a number of different approaches because we are a number of different nations and views. Certainly MedTech M&A volume is off too, but there remain a number of active projects that are focused in- and outside Europe. These are typically often driven by PE owned companies. This has created some continuity and we will build on this going forward.
MedTech Industry Trends in 2021
Chuck Weikel - I believe the big question for 2021 will be reversing the decline in demand from last year. This will be the key issue for MedTech, not letting the weakness in 2020 bleed into 2021. How do we do this?
Larry Barr - We need to get balance back into our hospital system in the US - meaning the balance between discretionary and non-discretionary procedures. This is a huge driver. It is possible the market will correct for this but it may also take some level of government guidance to help with the transition. It would be ironic if some of the structural changes we all want to see result from the turmoil of Covid in our healthcare system.
Göran Brorsson - Agreed. One sure thing is a bet on a clean return to the past will be a losing bet. As always, a question will be how large and disruptive these changes will be because they have direct costs associated with them. I mean by this that many OEMs have had discussions about their supply chain strategy post-Covid. For example, right now many OEMs have intensified their focus on larger contract manufacturers with a wider offering, de-emphasizing or eliminating smaller, weaker ones from their supply chain. This isn’t news and was an existing trend before Covid. What happens when this movement intensifies post-Covid? I expect this process to increase in 2021 and in the coming years.
Larry Barr - That is a good point: there is nothing new under the sun and the issue is really about intensifying the rate of change. Many owners, rightfully, have chosen not to entertain big strategy items right now—like M&A. This creates an opportunity for others who have a vision and the resources to perform. Of course, this opportunity will be mitigated by risks.
Chuck Weikel - Risk, my favorite subject! My belief is that Covid has permanently changed the structure of the general economy and therefore MedTech. Economic dislocations create costs and these costs must be borne my someone—but the question is who. Providers and OEMs will drive these transitions and get the first cut at allocating costs between themselves, customers and supply chains.
Larry Barr - What are some of the other risks?
Göran Brorsson - I believe R&D for new products will slow down at the OEM level, but only marginally. An important factor in this is the more complex and demanding regulatory criteria we are seeing with the MDR and FDA requirement. This will mean limited growth in some of the high tech areas the industry has relied upon for the last decade. I believe the trend toward outsourced product development & design may see a boost as a result.
Chuck Weikel - 2008/9 taught us that MedTech is not an island and we are impacted by the general economy (and macro trends) more than some would like to admit. 2008/9 ended the myth that trauma-related orthopedic procedures are independent of the economy. For example, if you smash up yourself on a motorcycle, then you need to get fixed irrespective of the general economic conditions. Obviously this is correct. But when fewer people are engaging in risky behavior (motorcycle riding), there are fewer smash ups, and consequently less demand for trauma. My understanding is that this effect is being experienced right now at the hospital level in a number of clinical areas.
MedTech M&A Multiples in 2021
Larry Barr - Enough economics. What do you think will generally happen to MedTech M&A multiples this year?
Göran Brorsson – Honestly, I do not see much change. Last year saw a decline in activity, but companies for sale (supply) declined in tandem with active acquirers (demand). My answer is that multiples will not change much after the run up in the past 5 years. This is very much supported by the low interest rates we will continue to see in the future.
Chuck Weikel - I agree… but what if there is a general decline in economic conditions or a another “black swan” event? I believe the immediate direct impact to MedTech M&A would be a reduction in debt capital as lenders pull in and might reduce transaction multiples by a turn or two—or more. As an industry, we underestimate how impacted MedTech market valuations are by credit conditions at lenders. This would be also problematic in closing smaller deals since many of the sellers of these businesses see values at 10x to 12x, which they generally are not since they not able to support a significant debt load.
Larry Barr - Ok, it all makes sense, but I am going to say something slightly different. I do not see an immediate decline but a kind of secondary M&A market developing where companies that have structural issues are valued at significantly discounted multiples. This is something we have not dramatically seen in MedTech M&A in the past. But last year we saw it and I expect more of these situations this year.
Chuck Weikel - OK, guys thanks for the input. The past is gone, let’s focus on developing a vibrant future with many opportunities for our clients in 2021.
Middle Branch Partners is a boutique investment bank that focuses solely on MedTech M&A. We have active offices in the USA and Europe and would welcome the opportunity to discuss market conditions more thoroughly with you. Contact us here.
