The Healthcare sector has experienced an extraordinary level of deal activity in the last 12 months, and this flurry of transactions shows no signs of abating. Ongoing structural changes in the healthcare marketplace, underpinned by favorable macro conditions, are providing significant tailwinds for both M&A and equity deals.
Ahead of Baird’s upcoming Healthcare Conference on Sept. 3 and 4, several of the firm’s veteran investment bankers discuss these tailwinds and explain why the last 12 months might be just the tip of the iceberg.
Biotech: Momentum to continue through 2015
Biotech has had a good year so far. 2014’s list of headline-dominating Biotech deals demonstrates investors’ strong appetite for high-quality assets. Corporate acquirors are turning to M&A to build out their product offerings or establish themselves as global leaders in their chosen categories. Buyers are willing to aggressively pursue targets, in-license at earlier stages, and pay a premium for exceptional assets – a marked change from the days when companies needed to be in phase two or phase three trials to capture investors’ attention. As for equity deals, we are finding that it is easier to bring in investors to IPOs and follow-ons when the company has a comprehensive platform with “multiple shots on goal.”
Baird foresees an active period for Biotech M&A and licensing in the remaining months of 2014 and into 2015. Although we may see some “choppiness” during the rest of 2014, we will see continued financing activity.
Subverticals that have been hot in the past 12 months – for example, cancer, central nervous system (CNS) and autoimmune – will continue to be attractive areas for investment, particularly because large pharma may target them for potential acquisitions. We are also seeing significant activity in ophthalmology and renal/kidney/liver. These are vibrant, interesting spaces and could become attractive areas for investment as the year comes to a close.
Healthcare IT & Services: Demand for new models drives deal flow
Within the Healthcare IT & Services space, there has been a significant shift in focus to building delivery networks, IT systems and analytics that manage populations versus episodes of care. The emergence of accountable care organizations (ACOs) and other shared risk programs has increased demand for new services and IT capabilities, and recent M&A and financing activity has been fueling the new models. Additionally, the growing prevalence of public and private healthcare insurance exchanges, as well as the expanding role of consumers in managing their healthcare, are creating new, large addressable markets and drawing significant investor/buyer interest.
These themes are driving a re-emergence of the growth healthcare IT IPO with the likes of Castlight and HealthEquity debuting in the public markets. Public markets have been very receptive to the de-leveraging IPO for many private equity backed issuers. Baird expects the public market appetite for healthcare IT will continue over the next 12 months.
Furthermore, over the last 12 months, more than 380 private placements totaling more than $2.2 billion in disclosed total capital has been invested in HCIT. Platforms with scale and offering the potential to put meaningful additional capital to work are attracting particular interest.
MedTech and Medical Device Outsourcing: Quest for breadth and scale driving M&A
The MedTech industry, which for many years experienced high single- or low double-digit growth rates, came under tremendous pressure from 2009 – 2012 as a result of a weak global economy, challenging reimbursement environment, increased pricing pressure, consolidated hospital base and declined physician preference. To stay competitive in the face of these challenges, the MedTech industry must address the following strategic questions: how to sustain innovation; how to demonstrate clinical and economic value; and how to increase growth.
Scale and product breadth are quickly becoming key competitive advantages in the global MedTech marketplace. Since M&A is the most direct pathway to successfully achieving those goals, there has been a record level of announced M&A in the MedTech sector, fueled in large part by the $48 billion takeover of Covidien by Medtronic and the $13.9 billion takeover of Biomet by Zimmer. These transactions may be precursors to a wave of large-scale consolidation effected to provide MedTech companies with lower operating costs and greater selling clout against a consolidated buying base that is driving down prices.
Top MedTech acquisition candidates will need to offer one or more of the following: (1) disruptive or game-changing technologies which have high growth and are in their early stages of adoption; (2) a limited product line that expands the acquiror’s market share for an existing product category or expands the breadth of products sold into the same channel or call point; and (3) access to a new geographic market. Such acquisition candidates will offer a pathway to increased top-line growth, higher margins or both.
As MedTech OEMs focus on reducing costs and quickening time-to-market for new products, they are deepening their relationships with the medical device outsourcing companies (“MDOs”) that supply them with certain components and assemblies. To deliver higher quantities of end products with consistent quality standards, MedTech OEMs are consolidating the number of MDOs with which they work. Scale and breadth of capabilities are, therefore, as important in the MDO sector as they are in the OEM sector. As the MedTech sector has witnessed increased M&A activity, so too has the MDO sector with such market-leading transactions as Accellent’s acquisition of Lake Region, which creates one of the world’s largest cardiovascular MDO businesses, and Tecomet’s acquisition of the Symmetry OEM Solutions business, which creates one of the world’s largest orthopedic MDO businesses. Due to the size and growth of the MDO market, the industry is also seeing broad strategic interest from private equity and industrial companies such as Nordson, Lubrizol, ITW and Parker Hannifin.
We anticipate that these forces will continue to spur robust M&A activity in the MedTech and Medical Device Outsourcing sectors.
To learn more about Baird’s Healthcare Investment Banking capabilities, visit healthcare.rwbaird.com.