Pace of Medtech M&A Activity Not Likely to Abate in 2017

Predicting the future can be risky and fraught with difficulty, especially in the healthcare sector. A myriad of unforeseen factors can affect outcomes, botching even the most conservative of forecasts.

Some prophecies have better odds than others. Consider, for example, the consolidation that has reshaped the medical device sector over the last few years. Chances are good that this industry-wide condensation will continue this year as existing platforms, new private equity players, and sector-related strategies all vie for assets. The only uncertainty is the pace at which this activity will occur.

From Trend to Norm
The mergers and acquisitions of medtech OEMs and contract manufacturers (CMs) last year progressed at a blistering pace, and it appears that rate could continue in 2017, barring any major political upheaval or unforeseen chaos. The CM market in particular seems poised to continue this rapid pace of consolidation.

Medtech industry executive Bill Ellerkamp detailed much of the recent activity in the medical device outsourcing market in his article in the January/February issue of MPO. Since that time—merely several weeks ago—Vention Medical closed its deal for Lithotech Medical, an Israeli-based developer of complex nitinol wire-based technologies [Editor’s Note: Vention has since been acquired itself.]; Ampersand Capital Partners made an undisclosed investment in Corpus Medical Inc., a Silicon Valley-based contract development and manufacturing organization focused on interventional medical devices, catheter-based delivery systems, and implants; and Medtronic plc is reportedly shopping around the Medical Supplies business it inherited with the blockbuster Covidien acquisition.

The overall backdrop for these deals continues to remain strong. Low interest rates, deal leverage multiples, cash on private equity and strategic balance sheets, continued OEM consolidation, outside U.S. suppliers and investors looking for U.S. beachheads are all contributing to this high demand.

Driving this consolidation is a highly fragmented space (especially when compared with automotive, aerospace, consumer, etc.), the need for some business sophistication for owners/operators and “mom and pop”-type operations, and perhaps most importantly, macro-economic pressure to reduce healthcare costs worldwide (with a particular focus in the United States, where overall healthcare gross domestic product spending approaches 18 percent).

All of these factors point to more future deals. Stay tuned.

Trade Stance Spurring Uncertainty
One issue that may have significant repercussions on the medtech M&A market is the changing landscape on free trade and the trade agreements currently in place.

The U.S. medical device industry is expected to remain highly competitive globally, partially due to national characteristics that allow companies to bring new and innovative technologies to market. The industry has increasingly embraced globalization, and an ever-growing number of multinational firms are aggressively pursuing markets around the world. These firms are focusing greater attention on international sales, joint ventures, mergers, and acquisitions. Global demand for medical devices is driven by rising expenditures and healthcare-related investments in developing markets through infrastructure (new hospitals and clinics), public health insurance, and an overall greater focus on health. In addition, global demand is likely to grow due to lifestyle diseases, aging populations in major markets, new and significant emerging markets, and rising global income levels in developing countries, according to a U.S. Department of Commerce report. Further, the worldwide convergence of standards and regulatory requirements should help facilitate global market growth and further trade opportunities. The medtech industry must not lose sight of this.

America’s main global competition currently comes from Germany (Siemens AG and B. Braun), Japan (Hitachi Medical Corporation, Toshiba Medical Systems Corporation), and The Netherlands (Royal Philips). Notably because of its past and recent acquisitions, Philips currently produces more medical devices in the United States than in the European Union. While most projections show the United States maintaining its competitive advantage in the foreseeable future, international markets and low-cost device producers are expected to remain competitive, therefore giving America a run for her money.

With the Trump administration ending the Trans-Pacific Partnership (TPP) and threatening to restructure the North American Free Trade Agreement (NAFTA), many multinational medtech firms and others that rely on these agreements remain on edge, since many of their strategic manufacturing models and current supply chain models rely on these agreements.

The U.S. Commerce Department reports that trade between the United States and its NAFTA partners has soared since the agreement was enacted: U.S. goods exports to NAFTA partners have increased by almost 300 percent from 1993 to 2014, going from $142 billion to $552 billion during that time period. Moreover, U.S. trade with Canada and Mexico exceeds U.S. trade with the European Union and Japan combined. Federal statistics show that annual exports of U.S. medical devices to Canada have more than tripled since the year before NAFTA was signed into law, and exports of medtech products to Mexico have more than quadrupled.

According to the Plastics Industry Association (PIA), NAFTA is responsible for 47.2 percent of the U.S. plastics industry’s $59.1 billion in global exports. The top three plastics exports markets are Mexico, Canada, and China, generating an overall trade surplus of nearly $39 billion. Plastics play a large role in many medical devices and single-use products.

The TPP agreement removes tariffs on medical devices, supports increased regulatory coherence among member states, and widens stakeholder influence and transparency toward reimbursement and pricing. Ultimately, the TPP would have resulted in quicker approvals of medical devices, benefiting U.S. companies that export to signatory partner countries.

Many trade organizations are now cautious as the nascent Trump administration looks to overhaul all or some of these agreements. Although I strongly believe these pacts can be improved, it is important for the president and Congress to consider the long-term impacts of nixing the TPP before making any final decisions. As the former owner and operator of a medical device CM that took advantage of NAFTA to supply high-value components to other NAFTA trade partners, I join the growing chorus of business folks urging the new administration to carefully consider all implications of upending or exiting these agreements. A hasty decision could jeopardize American leadership and rivalry in a globalized economy. 

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Mark Bonifacio is founder and president of Bonifacio Consulting Services LLC, a global consulting and advisory firm to medical device OEMs, contract manufacturers, private equity, and other investors in the medtech manufacturing sector. Bonifacio has a B.S. in plastics engineering from the University of Lowell (now UMASS-Lowell), and more than 25 years of experience in medical device manufacturing across many therapeutic disciplines and market segments. After working for major medical device OEMs, Bonifacio co-founded APEC, a Baldwin Park, Calif.-based contract manufacturer, and sold it to Helix Medical (now Freudenberg Medical) in 2007. He founded Bonifacio Consulting Services in 2008. BCS is headquartered in Boston, Mass., and has offices in California, Florida, and China.