The postponement of non-urgent medical procedures in the early days of the Covid-19 pandemic led to a lull in MedTech transaction activity in the first half of 2020 but makers of medical devices returned in force in the second half of the year. 2021 has seen transactions continue to surge.

Q1 was the busiest quarter for MedTech M&A since 2016, with as many as ten deals announced in the first six weeks of the year alone, valued at some USD10 billion.

Two distinct trends are evident:

• those players whose products have been in high demand during the pandemic have seen revenues grow strongly and are now eager to put strengthened balance sheets and cash reserves to work
• those who experienced a dip in demand are now looking for opportunities to invest in targets that offer them the chance to return to high growth

Consolidation

Although we are seeing some substantial deals, megadeals remain rare and the accent continues to be on a higher number of smaller deals.

This trend is likely to continue as the market stabilises following the crisis, particularly where small and medium sized players are concerned.

Private equity (PE) players, with record levels of dry powder, are active in the sector, particularly those looking to pursue buy and build strategies. For example, there is the recently proposed USD30bn acquisition of medical supply maker and distributor Medline by a group of private equity firms, including Blackstone, Carlyle and Hellman & Friedman or Permira’s bid to acquire LivaNova, a MedTech company active in the fields of cardiac surgery and neuromodulation.

Innovation is driving deals

Innovation is another driver of deals. Boston Scientific, which acquired both surgical laser group, Lumenis, and the cardiac monitoring business, Preventice, in Q1 to boost its portfolio of innovative products, stands out as a company pursuing a “try before you buy” strategy, often making minority investments in targets ahead of a full acquisition.

Digital health remains a hot segment of the market, where increased M&A activity is likely, particularly as the growth of virtual clinical trials drives demand for digital gadgets and know-how.

Activity in diagnostics has also partly been driven by the pandemic and we have seen substantial deals here, including the DiaSorin/Luminex and Roche/GenMark transactions, both valued at USD1.8bn, and Hologic’s EUR668 million acquisition of Mobidiag.

Higher regulatory hurdles

Regulation can be a constraint on M&A activity. Illumina’s long struggle to gain clearance in Europe and the U.S. to bring the Grail cancer testing business it hived off in 2016 back within the group shows that antitrust authorities are taking a tough stance where MedTech is concerned.

Siemens Healthineers has also been forced to accept a range of testing remedies by the EU to get clearance for its acquisition of Varian, the radiation oncology and software business.

As many governments tighten their controls on foreign direct investment on national security and public interest grounds, we expect to see deals involving important medical infrastructure and technology subjected to increased scrutiny, in the UK, Germany, France, Italy and the U.S., amongst others.

However, the burden of regulation can also drive consolidation. For example, the investment required to introduce transformative technologies such as Artificial Intelligence into the business may drive combinations and partnerships, just as the new European medical device regulation regime may also prompt smaller players to combine to cope with regulatory requirements.