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Pulse of the industry: medical technology report 2012 - Mergers and acquisitions - EY - Global

Pulse of the industry: medical technology report 2012 – Industry performance

Mergers and acquisitions

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M&As in the US and Europe (US$b)

Source: EY, Capital IQ and Thomson ONE.

Merger and acquisition (M&A) activity among US and European medical technology companies remained vibrant in the year ended June 30, 2012. While 2011–12’s total of US$35.0 billion was well below the levels seen over the last two years, those two years were driven by megadeals done by Novartis (which paid US$41.2 billion to Nestlé for the remaining 75% of Alcon it didn’t already control) and Johnson & Johnson (which paid US$19.7 billion for Synthes). On a normalized basis (after removing the impact of the aforementioned megadeals), 2011–12’s total deal value was more in line with previous years — 25% below the prior year and 16% above the year before that.

Although no megadeals were consummated in 2011–12, there were eight transactions valued at more than US$1 billion, versus 12 the year before. The year’s largest deal was between private equity firm Apax Partners, two Canadian pension funds and Texas-based wound care company Kinetic Concepts Inc. (KCI). The US$6.3 billion Apax/KCI deal was particularly notable, as the US$6.3 billion represented one of the largest leveraged buyouts — across all industries — since the onset of the financial crisis in 2008. Two other private equity firms were also involved in multibillion-dollar M&As: Cinven sold off Swedish diagnostics company Phadia to Thermo Fisher Scientific for US$3.5 billion, and TPG Capital acquired in vitro diagnostics maker Immucor for nearly US$2 billion.

While private equity firms have long used debt to finance their acquisitions, a number of pure-play medtech companies also took advantage of historically low interest rates to purchase assets in 2011–12. Hologic, Thermo Fisher Scientific and Fresenius Medical Care floated debt offerings in excess of US$1 billion each to help fund the purchases of Gen-Probe, (announced prior to June 30) Phadia and Liberty Dialysis, respectively.

The total number of acquisitions leaped nearly 20% in the year ended 2011–12. While the total number of deals has increased, the number of privately held medtech firms acquired for at least US$5 million has also remained remarkably stable over the past several years. In fact, the number of private medtech companies being acquired for US$5 million or more actually jumped from 98 in 2007–08 to 105 in 2011–12, while the median deal price for those same periods shot up from US$32.2 million to US$51.6 million. So, despite real concerns about buyers becoming more selective and VCs holding portfolio companies longer, venture-backed companies are still being acquired, and at surprisingly favorable terms.

A number of current market trends portend sustained M&A activity. Health care reforms and budgetary challenges are intensifying financial pressures on payers and, ultimately, providers. As they look for ways to cut expenses and increase efficiencies, providers are increasingly turning to consolidation, physician gain-sharing agreements, price caps, vendor reductions and reduced utilization rates — all of which will continue to be a major drag on organic growth for medtech companies. These financial pressures are driving medtech companies to re-evaluate their portfolios, divest underperforming or non-core business units, or acquire assets in highgrowth technologies or desirable markets — possibly leading to more M&As ahead.

US and European M&As by type of buyer

Source: EY, Capital IQ and Thomson ONE.

Indeed, medical technology companies continue to attract interest from a wide array of acquirers. Private equity and “other” acquirers, such as Japanese companies Asahi Kasei, Fujifilm and Terumo, became more active since July 2010. And while medtech acquirers had been crowded out in the 2008–10 period by increased activity in other buyer segments, medtech firms rebounded in 2010–12 to customary levels of acquisition activity.

Selected M&As, July 2011–June 2012

Acquiring company Location Acquired company Location Value (US$m)
PE consortium led by Apax Partners United Kingdom Kinetic Concepts US - Texas $6,300
Hologic US – Massachusetts Gen-Probe US – California $3,800
Thermo Fisher Scientific US – Massachusetts Phadia Sweden $3,500
Agilent Technologies US – California Dako Denmark $2,200
Asahi Kasei Japan ZOLL Medical US - Massachusetts $2,200
Fresenius Medical Care Germany Liberty Dialysis US - Washington $2,100
TPG Capital US - Texas Immucor US - Georgia $1.939
Boston Scientific US - Massachusetts Cameron Health US - California $1,350
Fujifilm Japan SonoSite US - Washington $995
Corning Life Sciences US - New York *Discovery Labware (Becton Dickinson) US - New Jersey $730
Getinge Sweden Atrium Medical US - New Hampshire $680
Royal DSM Netherlands Kensey Nash US - Pennsylvania $360

Source: EY, Capital IQ and Thomson ONE.
Average deal size calculated using deals with announced values.
*Corning purchased the majority of BD’s Discovery Labware’s divisions.

Driven by low interest rates, there were eight 2011–12 deals of US$1 billion or more. As in prior years, the top M&As involved a variety of acquirers, ranging from medtech industry stalwarts to diversified conglomerates to private equity firms. A number of industrial conglomerates (Asahi Kasei, Fujifilm, Royal DSM and Corning) were attracted to medtech assets to further diversify their business portfolios. However, it was noteworthy that three of the most prolific acquirers in recent years — Covidien, Johnson & Johnson and Medtronic — were not involved with any of the biggest deals of 2011–12.

US mergers and acquisitions

Source: EY, Capital IQ and Thomson ONE.

The value of M&As involving US medtech companies dropped 45% to US$30.6 billion in 2011–12 from the previous year. However, after normalizing the data for the US$19.7 billion Johnson & Johnson/ Synthes megadeal, the total value of M&As declined by just 16%. While the average (mean) deal size fell, the median deal size remained exactly the same yearover- year at US$53 million, and the total number of M&As (including those with unannounced deal terms) edged up from 228 to 245.

European mergers and acquisitions

Source: EY, Capital IQ and Thomson ONE.

European medtech M&A fell to US$9.4 billion in 2011–12, a 40% decline relative to the previous 12-month period. This figure was not only the second-lowest M&A total in the past five years, but also 26% lower than the average over this five-year period, even with megadeals removed. However, on the positive side, the total number of deals — including deals with and without announced deal terms — skyrocketed from 122 to 184. French ophthalmic company Essilor International was the busiest acquirer with 21 announced M&As, while Fresenius Medical Care spent more than any other European company (US$2.5 billion). Both the average (mean) and median deal size dropped (by 56% and 7%, respectively).

Milestone payments remained prevalent in medtech M&As ...

Source: EY, Capital IQ and Thomson ONE.

... as their share of total deal value rose to nearly 50%

Source: EY, Capital IQ and Thomson ONE.

Medtech acquirers continued to use milestone payments and structured earn-outs to bridge valuation gaps and share risk with sellers. Roughly 30% of announced 2011–12 M&As had milestone clauses, while the potential value of milestone payments accounted for nearly half of the total potential value of those transactions. Acquirers will likely continue to use such milestone provisions, particularly in early-stage transactions where the perceived risk is higher.

US and European M&As by segment

  July 2007 - June 2011 July 2011 - June 2012
Segment Number of deals Value (US$m) % of total deal value Number of deals Value (US$m) % of total deal value
Therapeutic devices 344 $128,525 68% 126 $15,778 53%
      Ophthalmic 33 $56,295 30% 10 $187 1%
      Orthopedic 54 $27,670 15% 17 $370 1%
      Cardiovascular 72 $17,120 9% 18 $4,708 16%
      Respiratory 16 $5,987 3% 5 $59 0%
      Non-disease specific 48 $2,178 1% 32 $1,512 5%
      Multiple 11 $3,472 2% 11 $1,859 6%
      Hematology/renal 13 $3,054 2% 5 $72 0%
      Wound care 21 $2,891 2% 7 $6,495 22%
      Oncology 10 $881 0% 2 $335 1%
      All others 66 $8,977 5% 19 $182 1%
Research and other equipment 75 $38,409 20% 19 $1,069 4%
Non-imaging diagnostics 113 $13,140 7% 46 $10,881 36%
Other 43 $7,136 4% 21 $479 2%
Imaging 50 $2,571 1% 21 $1,671 6%

Source: Ernst & Youn, Capital IQ and Thomson ONE.
Table only shows deals where values were publicly disclosed.
Figures may be inconsistent due to rounding.

Not surprisingly, non-imaging diagnostic medtech companies once again attracted the largest number of total deals and share of M&A dollars during the 12-month period ending June 2012 as the segment is often perceived to hold comparatively easier regulatory and reimbursement pathways, as well as growth opportunities from trends such as personalized medicine. Diagnostic companies also captured the largest amount of M&A dollars between July 2007 and June 2011 (omitting Novartis/Alcon’s US$51.8 billion impact on ophthalmic’s performance).

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