Notwithstanding Thursday morning’s announcement by Thermo Fisher Scientific of a $912 million acquisition of real-world evidence and intelligence firm CorEvitas, a dealmaking resurgence has yet to materialize in medtech.
After slackening considerably last year, the pace of medtech mergers and acquisitions (M&A) seemed poised for a pickup in 2023. However, the M&A slump has only intensified over the last six months. Meanwhile, a recent analysis shows venture financings for medical device and diagnostics firms have plunged and public exits are nonexistent.
“Unless the second half picks up the pace, 2023 will see the lowest spend for a decade, and the fewest deals since [we] began tracking the sector,” Evaluate Medtech warned this week.
According to data compiled by the research firm, 2021 was a banner year for M&A in the medtech sector, with $80.5 billion deployed across 156 deals.
The following year saw a significant decline, with 81 deals valued at $64.8 billion. During the first half of this year, just 42 medtech deals valued at $13.1 billion were closed.
The few mergers that have come to fruition have not involved innovation-led acquisitions but rather simple divestitures, Evaluate observed. Included in that group were the two largest medtech deals of the first half – Bain Capital’s $3.1 billion purchase of Olympus’ microscopy division and Thermo Fisher’s $2.8 billion pick up of European diagnostics firm The Binding Site Group from Nordic Capital.
Noting the presence of private equity (PE) in both deals, Evaluate wrote that it’s “surprising that in these times of depressed valuations, more companies are not taking the opportunity to buy in.”
Indeed, this year was expected to bring the potential for a return to much higher average deal counts and overall transaction values. Large-cap diagnostics (Dx) companies headed into 2023 with the strongest balance sheets in their history, noted analysts from SVB Securities in a report from earlier this year that also focused on the life science tools (LST) sector.
That strength resulted from contributions from COVID-19 testing and vaccine revenue, as well as “opportunistic equity and debt raises during a period of low-interest rates,” wrote Puneet Souda, SVB’s lead analyst for LST and Dx.
“With this backdrop in mind, the conditions appear ripe for a return to historical M&A activity in 2023 and 2024 despite elevated interest rates as large-cap names in LST and Dx seek to deploy their cash balance or lever themselves for the appropriate asset (public or private),” Souda wrote at the time.
Souda added that “a long list of small-caps” could also be willing sellers “as pandemic high multiples become a distant memory and the ability to raise capital gets limited.”
The SVB team forecasted eight to nine LST/Dx transactions of $100 million or above occurring this year, up from five in 2022, with an average deal value of nearly $2 billion and overall transaction value across the sector of $18 billion.
Fundamentals had also looked strong for a rebound this year in biopharma dealmaking, as another Evaluate report made clear, although that too has been a disappointment thus far.
As to why medtech M&A has yet to rebound from its near-trough level of 2022, “perhaps Illumina’s disastrous, and likely to be unwound, acquisition of Grail is putting buyers off,” Evaluate speculated.
In April, the Federal Trade Commission (FTC) ordered Illumina to divest Grail, a multi-cancer early detection test company purchased in 2021 for $7.1 billion, due to its potential to “stifle competition” for cancer tests in the U.S. As for the back half of the year, aside from the aforementioned Thermo Fisher-CorEvitas deal, few recently opened transactions appear on the horizon.
Meanwhile, the venture funding climate has also cooled considerably. At $2.5 billion across 64 raises, medtech VC investment stands at its lowest first-half total since 2015, Evaluate noted. Coronary imaging firm Heartflow claimed the biggest raise of the last six months at just $215 million.
That pales in comparison to Grail’s $900 million raise in 2017 and Verily Life Science’s $1 billion raise in 2019. The list of private company financings includes three robotic surgery firms, an encouraging sign for this segment, although comparatively few for digital health players.
The news gets even worse for private medtech companies hoping to raise money in the public markets. IPOs have dwindled to the point that just two device makers even considered public floats in the first half.
“The industry must ask itself what needs to change to permit the window to reopen,” Evaluate wrote.
