Why UK medtech is set to buck the trend for M&A activity

Jonny Parkinson, managing partner at Marktlink provides guidance for business owners and investors looking to use the growth opportunities available in medical technology.

Whilst deal activity and volume dropped in the medical technology sector in 2022, the year ended on a strong note with Johnson & Johnson’s $16.6 million acquisition of Abiomed. This deal alone made up 42% of medtech M&A spend and foreshadowed a rebound in activity in the space.

The medtech M&A outlook for 2023

Deal activity looks set to pick up in 2023 as companies seek innovative products and businesses to expand portfolios and reduce procedure costs. The industry has seen rapid advancements in recent years, particually when it comes to use of AI for imaging diagnostics, digital therapeutics and cell and gene therapy. These innovations are sparking the attention of investors and big medtech players are keen to acquire smaller players with technology which will help them disrupt.

Private equity interest remains high as the nature of the sector means it’s not particually sensitive to the economic climate. Regardless of economic circumstances, with an ageing population, an increasing number of people need medical procedures and technology is always required to make processes more efficient to meet demand.

Whilst big players are looking to acquire smaller businesses, many are also divesting assets as they restructure. For example, Medtronic has recently spun off two of its smaller businesses, in patient monitoring and respiratory intervention, to streamline its portfolio. This means that there are opportunities for businesses to acquire divested assets if they complement their portfolios. Increasingly, middle players will need to merge with others or acquire smaller businesses to stand out from the crowd.

There are an abundance of opportunities for medtech business owners and entrepreneurs across the board to add innovative services, build a presence in new areas and increase capabilities but preparation is key when it comes to executing a deal.

Preparing for an in-depth due diligence process

The healthcare industry is heavily regulated meaning that acquiring companies will carry out strict due diligence practices to ensure that the business complies with regulatory requirements. Business owners must be prepared for in-depth scrutiny of regulatory and quality documentation, contracts, patents, and intellectual property and should ensure that these are all in order before they even consider making an exit. Preempting any issues that could arise at an early stage will prevent delays and help to support a successful deal.

The due diligence process can be extremely time consuming, so it’s wise to only involve a few select individuals in the process and ensure that they are able to balance meeting due diligence demands with ensuring the continued smooth running of the business. The competitive nature of the sector is increasing pressure on buyers to move quickly, so business owners will be required to provide required documents in a timely manner.

Medtech transactions often involve products that are still in development, meaning that accurate valuations are more difficult, and more in-depth due diligence is required to review clinical trials and ensure compliance with regulation. For most buyers, the focus is on the potential of the technology to improve patient outcome, so this will need to be demonstrated effectively. 

Choosing the right buyer

With increased deal activity on the horizon, the sector is set to become even more competitive. For those on the sell-side, this means an increased choice of buyers. Business owners should leverage the competitive nature of the market, and do their research, to ensure that they achieve the best deal terms.

When choosing a buyer, business owners should consider their ambitions for the business and ensure that a deal aligns with the vision and values of the company. For example, if international expansion is part of the future vision for the business, this could be achieved by dealmaking with a business operating in a different region, or internationally. If retaining the identity and culture of the business is a top priority, then choosing a buyer which can do that is key. Business leaders also need to consider if there will be natural synergies with the acquiring business and where their products will fit into their offering.

All the above were important considerations in a recent transaction supported by Marktlink which saw the sale of Scholte Medical, a distributor of premium medical equipment and supplies, to OptiGroup. The owner was keen to join an international business and saw huge interest from the market as big players continue to seek acquisition of companies in a specific niche to enable them to offer full-service solutions. The level of interest gave the business owner a range of choices when selecting a buyer. OptiGroup was the successful bidder as a good fit for the company and its people. It was able to demonstrate how it would maintain the names and identity of the two businesses that made up Scholte Medical and presented attractive growth opportunities for these businesses.

Working with an adviser

Businesses on both the buying and selling sides should consider working with an M&A adviser who specialises in the medical sector. This will provide access to a network of connections and a wealth of industry knowledge. Executing a deal is a time-consuming process, and an adviser can help to reduce the burden on the management team so that they can focus attention on the successful running of the business. An adviser can also help to secure optimum deal terms, identify buyers, and acquisition targets, advise on regulation, assist in negotiations and identify the right financing structure.

It's set to be a brighter year for deal activity in the medtech and wider pharma, healthcare, and life sciences sectors. To utilise increased activity and opportunities, entrepreneurs in this space need to ensure they are prepared for due diligence, have researched potential buyers or acquisition targets, and have the right partner in place to navigate the process.