Diagnostics M&A expected to be strong in 2022 after dealmaking took off last year

Dive Brief:

Corporate and private equity dealmakers expect diagnostic deal volume to increase again as the COVID-19 testing windfall empowers businesses to add assets, according to a KPMG survey.
KPMG found 90% of diagnostic sector respondents expect the industry to top the 54 deals struck last year, with more than half of the respondents predicting a 10% or greater increase. The forecast is underpinned by a belief COVID-19 has equipped companies to strike more deals.
After reviewing its survey of the medical device industry, KPMG said the outlook for investment in the sector "appears to be positive," pointing to signs of interest in striking deals with manufacturers that are procedure-reliant to add technology and market share through tuck-in acquisitions.

Dive Insight:

Deal volumes and values took off in the diagnostic and medical device sectors last year. According to KPMG, the volume and value of medical device deals rose 13% and 65%, respectively, in 2021 compared to 2020. The step-up in diagnostic deal volume and value was steeper still, climbing respectively by 64% and 265% versus the prior year.

KPMG's survey suggests the diagnostic industry is set for another bumper year.

Asked how COVID-19 has changed their M&A strategy, 18% of respondents said it has enabled their organizations to ink more deals. Similar proportions of respondents said COVID-19 testing revenues have enabled them to make more non-accretive deals and strike larger acquisitions. Only 5% of respondents said there has been no change from historical investment activities, and no organizations have reduced dealmaking capacity.

The extra capacity is reflected in expectations for the level of M&A activity this year. While deal volumes soared in 2021, 12% of respondents expect them to increase by 20% or more this year. A further 46% of respondents expect volumes to rise by 10% to 20%. Only 12% of respondents predicted that volumes will be flat or down compared to 2021.

Companies are keen to strike deals despite expectations that valuations will rise.

In point-of-care testing, nearly all respondents said that they expect valuations to rise. Seventy-four percent of respondents tipped valuations to rise by more than 10%. KPMG received similar feedback on liquid biopsy and next-generation sequencing valuations, although, while almost everyone expects valuations to increase, the proportion of people predicting 10% and greater jumps is lower than in the POC testing space.

While the survey data points to a buoyant M&A market, the KPMG analysts identified several challenges that could stymie activity. Governments may start to turn off the COVID-19 test revenue spigot, reducing deal capacity while increasing the need for new growth drivers. The KPMG analysts also caution that the "number of attractive targets may be dwindling" after the "buying sprees" of recent years.

The deal dynamics in the medical device industry are different. KPMG focused its analysis on companies that make devices for use in nonemergent procedures, a subset of the industry that suffered throughout the waves of COVID-19 and subsequent hospital staffing shortages. Almost half of respondents believe the value of medical device manufacturers that are procedure reliant has fallen since the pandemic began.

Faced with the challenges, organizations went shopping last year, striking 203 deals at a combined value of $79 billion.

Based on the survey responses, the KPMG analysts see the greatest interest in 2022 in deals for technology and tuck-in acquisitions to add market share. The proportion of respondents open to striking "significantly sized" takeovers and mergers fell from 17% to 5% year on year.