Strong Q3/Q4 Expected in Med-Tech M&A

After record Med Tech M&A activity in Q1/Q2 characterized by bigger but fewer deals, a strong surge in middle market acquisitions and divestitures is predicted for the second half of 2013.  M&A is a key structural component of the medical device industry, where scope and scale are primary competitive advantages.  In many unpredictable economic cycles, healthcare M&A stays relatively constant, driven separately by demographics, new product introductions, and regulatory dynamics.

Active Large Deal Market:  2013 YTD global healthcare M&A totaled $156B, the highest YTD level on record, and more than twice the 2012 YTD volume of $72B. In particular, Abbott’s (ABT) spin-off of AbbVie was the fifth largest healthcare M&A deal on record.  Another notable transaction was the $8.7bn acquisition of Bausch & Lomb by Valeant Pharmaceuticals – 2013’s fourth largest healthcare deal.

Source: Dealogic LLC

Middle market acquirors seemed focused internally in Q1/Q2, addressing internal restructurings in the face of a weak global economy, the implementation of healthcare reform and new medical device taxes.  Offsetting these negatives and leading into the second half of 2013, have been strong and growth-focused acquirer stock performances.  To enhance topline growth, it is expected that companies like Abbott (ABT), Johnson & Johnson (JNJ), Boston Scientific (BSX), Covidien (COV), and Stryker (SYK), will actively pursue acquisition targets with renewed energy.

Large Cap Med Tech Stock ETF Performance (NYSE: IHI)

Source:  Yahoo Finance

Target Considerations:  The medical device and technology sector is already characterized by significant scope and scale advantages, recent regulatory and tax changes are making it even more difficult for smaller device companies to achieve operating scale.  Companies and investors have been united in their characterization of the slated 2.7% medical device tax as a job and innovation killer.  Margin pressures fall out in many ways for companies with successful devices, including more difficult growth funding, and less cash flow to invest in global sales and distribution – Where faster growth in emerging markets is becoming increasingly important.

This combination of acquirer and target dynamics is strongly suggestive that middle market Med Tech M&A will be resurgent sooner than later.