Medtech M&A Update 

By Karl Freimuth 

2018 Year in Review & 2019 Outlook

2018 was a robust year for M&A activity in the medtech sector.  Several noteworthy trades were completed in the sector, including Avalign Technologies (orthopedic) acquired by Linden, DJO Global (orthopedic) acquired by Colfax, Integer’s orthopedic and surgical division acquired by Medplast / Viant, Cadence (broad portfolio of medical and surgical devices, diagnostics) acquired by Kohlberg, and Paragon Medical (surgical instruments and implantable components) acquired by NN Corporation. Livingstone anticipates continued consolidation in medtech sector with several companies expected to come to market in 2019.

Multiples

Livingstone analyzed 30+ medtech acquisitions completed in 2018.  The mean EV/revenue and EV/EBITDA multiples were 2.3x and 12.4x, respectively, for transactions with available valuation metrics. The M&A market was indeed white hot in 2018, and Livingstone expects premier medtech assets to be in high demand in 2019 – at comparable valuation multiples supported by a supply-demand imbalance of too few medtech assets available for sale in a market replete with an overabundance of acquisitive strategic and private equity suitors.

In addition to traditional strategic medtech consolidators and private equity investors, Livingstone interacted with several diversified industrial companies with domestic and multi-national operations interested in acquiring medtech companies.  Diversified industrial companies with existing medtech divisions have become prominent players in medtech M&A processes, showing the courage and willingness to pay premium medtech prices to support growth within a broader portfolio of assets.  This trend should continue in 2019, benefiting sellers interested in pursuing a sale to a strategic buyer.

Buyer diversification

Medtech growth sectors

Based on Livingstone’s activity in the medtech sector, we believe the following verticals should continue to attract significant interest from acquirers and capital providers within the medtech sector: Robotic surgery and related components, stents, nitonol implants, clot removal devices, sensors, AFib devices, cardiovascular implants/components, point of care diagnostics, diabetes management, remote monitoring tools, orthopedic implants, spinal cord therapy, and transcatheter aortic valve replacement (TAVR).

Skilled labor shortages

According to the US Department of Labor, US unemployment rates were at 4.0% in January 2019, keeping unemployment rates at near 5-year lows.  For medtech manufacturing companies, the ability to hire and retain labor talent remains a top concern for owners and managers seeking to keep up with growth trends in the medical device industry.  Key factors for medtech companies include investments in training programs, competitive wage/benefit packages, development/apprenticeship programs for young workers, and affiliations with trade schools.

Pricing & profitability pressure

The shift to value-based healthcare is affecting margins across health care systems for providers and manufacturers.  For manufacturers in particular, Livingstone has observed centralized procurement entities negotiating larger purchases at volume discounts, exerting pressure on medtech companies’ profit margins. How manufacturers react to this pressure – be it through any available price increases and/or internal cost savings measures – to maintain or increase profitability margins will come into focus in the coming years.

US FDA regulatory change on the horizon 

On November 26, 2018, the FDA announced changes to modernize the 510(k) clearance pathway, which accounts for the majority of devices that the FDA reviews.  The following is a summary of the FDA’s proposed changes to the 510(k) pathway.

Background driving changes to regulatory framework: The FDA is pursuing changes to the 510(k) framework to reflect advances in technology, safety and the capabilities of a new generation of medical devices. In short, the FDA believes that it’s time to fundamentally modernize an approach first adopted in 1976, when Congress considered the vast diversity of devices that would become subject to the FDA’s regulatory oversight, and established many of the predicate devices that served as the basis for 510(k) clearances during the last 40 years.

The staff of the FDA’s Center for Devices and Radiological Health (CDRH) has leveraged a risk-based paradigm to develop an innovative and forward-leaning regulatory policy that meets its gold standard for safety and effectiveness.  Many of these efforts aim at adopting a more modern process that allows the FDA to more readily incorporate new technologies that improve the safety and performance of medical devices into new predicates to serve as benchmarks for future clearances. For instance, the FDA has promoted new ways to safely advance medical devices to diagnose cancer, repair damaged hearts, and manage diabetes. 

Advances in material science, digital health, 3D printing, and other technologies continue to drive an unparalleled period of invention in medical devices. It’s vital that the FDA’s regulatory approach continue to evolve and modernize to safely and efficiently advance these opportunities. Not only must the FDA keep pace with this complexity and innovation, but the organization must also stay ahead of the new and evolving risks that sometimes accompany this progress. 

In early 2019, the FDA intends to finalize guidance establishing an alternative 510(k) pathway that allows manufacturers of certain well-understood device types to rely on objective safety and performance criteria to demonstrate substantial equivalence as a way to make it more efficient to adopt modern criteria as the basis for the predicates that are used to support new products.

The FDA believes this approach is the future of the 510(k) program. Rather than looking to the past as a baseline for safety and effectiveness – and relying on predicate devices that are sometimes decades old as the point of comparison – the FDA’s premarket review would be based on a contemporary baseline that looks to the future and a baseline that can be updated as technologies advance. Sometimes, by relying on old predicates, it can actually make it more difficult for more advanced technology to reach patients since it’s harder for an innovative product to bridge to an outdated technology reflected in a decades-old predicate. The new proposed approach enables the FDA to help improve safety and performance, as appropriate, and ensure new products can more easily reflect beneficial new advances.

To provide additional context, the FDA regulates more than 190,000 different devices, which are manufactured by more than 18,000 firms in more than 21,000 medical device facilities worldwide. These products provide immense and often life-saving benefits to millions of patients. On average, the FDA approves, clears or grants marketing authorization to approximately 12 new or modified devices every business day (CDRH cleared 3,173 devices through the 510(k) pathway, representing 82% of the total devices cleared or approved, in 2017) after carefully determining -- based on valid scientific evidence -- that the devices are safe and effective. How changes in the FDA’s 510(k) clearance pathway impacts medtech OEMs and CMOs should be an interesting storyline in 2019.

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