The med-tech world has witnessed an M&A tidal wave over the past year. That—coupled with strong appetite for venture capital financing—should bode well for the med-tech sector; however, a number of challenges could hinder industry growth in coming years.
That's according to the Pulse of the Industry, the 2016 edition of the EY annual medical technology industry report that examined the landscape in the 12 months through June 30, 2016.
In its ninth year, the report sees a med-tech environment that is evolving as a result of the rise of "smart" devices and increased consumer engagement. Further, companies are inking alliances with partners outside the traditional med-tech sphere, including Johnson & Johnson's tie up with Verily Life Sciences, formerly Google Life Sciences, to create Verb Surgical, Inc, which will focus on surgical platforms.
On the money side, industry saw solid venture capital financing, while public med techs in the U.S. and Europe also experienced a decline in global revenues, which dipped 1.2 percent to $337 billion.
Meanwhile, net income dipped 15.5 percent to $14 billion, with six companies reporting net losses in excess of $100 million. Of particular worry was the finding that non-commercial leaders in both the U.S. and Europe have less than two years of cash on hand.
Overall financing for the 12-month period was a weak area for the sector, reaching only $20.4 billion. That marked the lowest total since 2010-11.
Proceeds from initial public offerings also fell off, declining 74 percent from the previous year to $590 million. Novocure and Penumbra were IPO bright spots, grossing $165 million and $138 million, respectively.
"The data suggest med tech has likely entered the 'bust' part of health care IPOs' notorious boom-and-bust cycle," the report noted.
In addition, there were few large debt financings over the 12-month period, despite favorable market conditions. Stryker and Thermo Fisher Scientific led the way, raising about 60 percent of the year's total debt.
Optimism still to be found
Despite the IPO drop off and lack of debt financings, there the report saw a cause for "guarded optimism," with the record $5.6 billion raised in venture capital. It marks the third consecutive uptick in such financing, with six companies raising rounds of $100 million or more. An additional 16 saw rounds of $50 million or more.
Those seeking early-stage funding also saw a successful year, with first and second rounds accounting for $1.8 billion in cumulative venture funding. That's up from $1.3 billion the previous year.
Investors were keen on diagnostics for cancer treatment. For example, Arch Venture Partners, Sutter Hill Ventures, Jeff Bezos and Bill Gates took an interest in Illumina spinout Grail Bio, which is developing a test to detect asymptomatic cancers via circulating tumor DNA. The company raised $100 million.
The report noted that these financings are illustrative of emerging trends. First, biopharma companies are seeing investing in molecular diagnostics and research and tools subsectors, with an eye toward improving disease detection and patient segmentation. Also, corporate and strategic investors see the value in early-stage med techs and are the primary reason for the cash flowing into these companies.
European companies also enjoyed financing success, seeing a 12 percent gain in overall financing, raising $1.2 billion in venture capital. Although the latter figure is much less than seen in the U.S., it represents the best venture total for the region in the past decade.
M&A activity stays brisk
Although 2015 didn't break records over the previous year, which saw Medtronic swallow Covidien, it did see a continued uptick in non-megamergers. "Deals valued at less than US$10 billion reached an aggregate total of US$46.5 billion, eclipsing the previous high set in 2011–12 and establishing a new record for the sector," according to the report.
The sector saw a record number of M&A deals with 213, up about 37 percent over the previous year's 156. While the average deal size dipped slightly—from $230 million to $220 million--a more diverse array of companies has entered the M&A game, with mid-tier players joining larger companies in hammering out deals.
Bolt-on deals continue to prove popular, even as the number of deals valued at more than $1 billion fell from 14 in 2014-15 to 11 last year. "[G]rowth by acquisition is still med tech's go-to strategy, one that shows no sign of changing in the near term," according to the report.
Abbott Laboratories was the most willing to go beyond bolt-ons, inking a $30.7 billion deal to buy St. Paul, Minn.-based St. Jude Medical Inc. It also said it would pay $8.4 billion for Waltham, Mass.-based Alere Inc.–a deal that appears to be unraveling. Meanwhile, Dublin-based Medtronic plc continued its buying spree, announcing 12 buyouts over the year. That's up from nine the year before.
Also of note was the rise of the China-based buyers. These entities went on a buying spree over the 12-month period, scooping up 15 U.S. or European med-tech companies and an additional 26 in other regions.
And that buyout trend is unlikely to let up, said John Babitt, EY Americas med tech leader. "In this environment, companies must invest more in partnerships, M&A and research and development, rather than continuing a status quo that relies heavily on returning cash to shareholders," he added.