At DeviceTalks West 2018, a panel of experts gathered to discuss the state of M&A in medtech and the forces driving startups to seek an exit.
Buyouts like Medtronic‘s (NYSE:MDT) $1.7 billion acquisition of Mazor Robotics (NSDQ:MZOR) dominated the headlines in 2018, but industry veteran Shayan Bhattacharyya found himself intrigued by the smaller deals that didn’t make the press.
“The things that keep me interested are the deals that are the tuck-in, bolt-on acquisitions,” he said at DeviceTalks West 2018 in Costa Mesa, Calif., last month.
“The classic medtech model has been to go into a new therapeutic area,” he added. “But now we’re seeing complementary plays. Now that you have the product, how can you help a hospital or a practice manage patient flow better? I’ve seen a number of those smaller plays and that’s not to be ignored.”
Fellow panelists Josh Copp, a partner at McKinsey & Co., noted that while 2018 was a slower year for M&A in terms of value, it was on par with past years in volume. Much of that was driven by explosive growth in the digital health sector.
“The reason to highlight digital is if you look at the volume of deals in 2008 to 2012 versus 2013 to 2017, the fastest-growing subcategories are the digital or software-oriented ones, and also care services,” Copp said.
Alongside the growing digital health market, companies are also experiencing increased quality and regulatory requirements. This puts pressure on startups looking to be acquired, he added.
“It increases the difficulty for new products – particularly hardware and implantables – to get funded and get to market, because you have a much higher bar that you have to meet in terms of what you file for regulatory-wise and also the infrastructure you put in place to manage that product,” he said.
“It makes funding more challenging and that can push a company to have to be acquired sooner than they would otherwise ideally go,” noted Matt Arens, CEO of First Light Asset Management.
Arens also noted that he’s seen a change in the path that companies take to get to an exit. That path used to be very straightforward, he said.
“Almost every company followed the same path – you get an idea, you develop it, you move forward. You need funding, so you go to the capital markets. You go public. If it was a big victory, you remain public for a while. You hit your bumps in the road but you grow the business. You grow towards profitability and then the large company would come in and buy the company,” he explained. “Now it’s different. You don’t see the celebrations oftentimes the day companies go public because they realize they’re changing one set of headaches for a new set of headaches.”
Now, according to Arens, companies stay private for as long as they can and sometimes skip going public before being acquired.
Although that’s beginning to change, he acknowledged.
“Now, public markets have been pretty good and people are wading back into the water and that’s good,” Arens said. “There are stair steps in value creation for a company. You want to figure out what you need to get to that next stair step. If your plan includes four stair steps and one of them is going public, how confident can you be that you can hit each one of those steps in the value creation?”
Combined, these trends can present a challenge for cash-strapped startups, Copp said.
“We’ve highlighted increasing potential capital requirements and a less-willing public market. That creates a bit of tension. It’s a lot harder to get to an exit of some form,” he said.
Having worked for medtech titans like Boston Scientific (NYSE:BSX) and Medtronic, Bhattacharyya said that companies have to answer one crucial question for large organizations when they’re looking to be bought out.
“The question is not just, ‘Why should we invest?’ but, ‘Why now?’ Because the null hypothesis, when you’re sitting in the [business development] seat, is do nothing because the deal is going to be there,” he explained.
Arens supplied his own tip to companies hoping to be acquired.
“If you’re 5% market share in 20 different markets, who cares? If you can show with your limited resources that you can drive depth of adoption, then the larger company can look at it and say, ‘With our resources, we could do this on a broader scale,’” he said.