Medtech M&A to take off after pandemic slowed deals in 2020: EY

Dive Brief:

After medtech M&A slowed last year due to the coronavirus pandemic, dealmaking is likely to jump in 2021 as companies gain footing and rebound financially from a volatile 2020, according to a report from EY.
Medtech companies have a record high of roughly $500 billion in M&A firepower, including large amounts of liquidity, and subsectors like diagnostic and digital health or remote patient monitoring could become top targets.
John Babbitt, EY's MedTech leader for the Americas, said that while some companies will look for tuck-in acquisitions — much like the deals that have already been announced this year — at least a handful of deals over $1 billion should be expected.

Dive Insight:

Before the pandemic took hold in the U.S., 2020 was set up to be a strong year for medtech M&A. Many companies across the industry were ending 2019 in a solid position, with some trading at 52-week highs and the industry overall growing revenue at over 6%, according to Babbitt.

However, the economic hit from the pandemic and large drop-off in elective care threw that trajectory off course.

In 2020, the number of deals dropped from 31 in 2019 to 23, and the total value of deals dropped from $46 billion to $31 billion, according to the report. The year was saved by a flurry of acquisitions in the third quarter after nearly no activity in the first half of 2020.

While the value of deals made during the first half of last year totaled about $2 billion, the value of deals made in the third quarter alone totaled $26 billion, EY noted.

Because telehealth is not typically considered part of the medtech industry, the data does not include Teladoc's $18.5 billion buy of remote patient monitoring company Livongo, which was one of the largest healthcare deals of 2020.

Ricky Zipp/MedTech DIve, data courtesy of EY, Capital IQ and Informa’s Biomedtracker. Only deals with publicly disclosed values were included. — Only deals with publicly disclosed values were included.

Ricky Zipp/MedTech DIve, data courtesy of EY, Capital IQ and Informa’s Biomedtracker.

Now, due to low activity in the industry and the build-up of liquidity throughout last year, M&A could take off.

Companies' sales performances should also improve as tuck-ins are made and the pressures from the pandemic normalize. Those trends should add to available resources and be a driver of future deals, according to EY.

"There's a lot of liquidity in the market," Babbitt said. "There are only so many levers that CEOs and CFOs can pull to enhance growth coming out of COVID. We do think, from what we're hearing, that M&A is going to be one of the levers that they're going to be relatively aggressive on."

Continued pressures from the pandemic could limit the number of deals in 2021, such as a slow rollout of COVID-19 vaccines and high hospitalization rates that lead to further elective care declines, according to EY. High medtech valuations could also slow deal-making.

Wall Street analysts have already taken a rosy 2021 outlook for medtech, even as COVID-19 cases continue to climb and hospitals fill up. While the industry will face economic challenges in the early months of the year, analysts from William Blair, J.P. Morgan and BofA Securities believe that the industry can rebound in the second half when elective care should return and COVID-19 vaccines become more widely available.

Jim Welch, EY's global medtech leader, said that the diagnostics space will be a top target as these companies remained resilient throughout 2020. The subsector was a hot area prior to the pandemic.

"The long-term prospects for the diagnostics market continue to be very positive," Welch said. "The fundamentals of that part of the industry are still incredibly strong. And to be quite honest with you, the resiliency that part of the industry has shown in order to deliver testing at scale and innovation in ways that we never thought they would have done before, I think just delivers more confidence to them."

Diagnostics companies like Quidel and Quest Diagnostics have seen success because of their COVID-19 offerings, with these new products offsetting losses in their core business lines.

While analysts have raised concerns that increased vaccine administration will limit testing demand, the industry has pushed back against these claims.

Babbitt said that traditional healthcare companies will also likely target digital health and remote patient monitoring companies, which have seen usage skyrocket during the pandemic due to patients staying home and away from healthcare providers. These types of deals already began at the end of last year with Philips' $2.8 billion purchase of remote cardiac monitoring company BioTelemetry.