Making Sense of Medtech M&A and Trade Wars

Originally published in MPO magazine on October 16, 2018.

It’s time for some retrospection.

As we slide into the home stretch of 2018, I thought I’d share my thoughts about the events that have already transpired within the medical device industry and the issues likely to impact the sector beyond the mid-term elections into next year.

Tariffs and Trade Wars

The Trump administration’s trade wars are beginning to impact various industries. Ford, for instance, estimates that steel tariffs have cost the company $1 billion, and Walmart is bracing for higher consumer prices, but the effect on medtech is still uncertain. I wrote this column while visiting several manufacturing plants in China and Vietnam; not surprisingly, companies there are concerned that increased tariffs and trade wars with the United States will significantly impact China’s manufacturing sector. The exact consequences, however, remain to be seen.

Much of the uncertainty likely stems from the evolving nature of the tariffs and trade wars. Case in point: In mid-September, U.S. Treasury Secretary Steve Mnuchin invited high-level Chinese officials to a new round of talks in an apparent effort to stave off a wider and more significant expansion of the tariffs. Yet less than two weeks later, China called off the talks and imposed a 10 percent tariff on $60 billion of U.S. products then shortly thereafter cut import charges on numerous non-American goods, a move most likely designed to protect Chinese consumers against their country’s escalating trade war with America.

Trump has faced pressure in the United States to back off the fight, but that isn’t likely to happen. During a Sept. 26 press conference, the president insisted the trade conflict has not impacted the U.S. economy, despite claims to the contrary.

The tariffs have not really affected the medtech industry so far, though some medical imaging, X-ray machines, and other products are falling victim to the hostilities. One area that most certainly has been affected by the tariffs is tooling (molds) exports from China. The 25 percent tax—imposed with Trump’s first $50 billion batch of springtime tariffs—has, basically, put tooling prices close to par with U.S. toolmakers. And while prices are closing in, I’m not sure the United States can ramp up production to truly overcome the handicap. Mold-making capacity has mostly shifted to China over the last two decades. Consequently, U.S. lead times can still be two to three times as long as some China mold-makers, and with the glut of extra capacity, lead times from China are now even faster.

It seems highly probable that tariffs will remain a concern for the medical device industry for the near future. I hope Chinese and American leaders can come to a long-term agreement and end the stand-off that threatens both economic growth and international relations. Most business leaders I’ve talked to would rather see both sides negotiate an agreement rather than fuel an escalating trade war. U.S. medical device companies have well-established deep supply chains in Asia that cannot pivot on a dime. The coming months (and years?) should prove interesting.

M&A Update

Medical device merger and acquisition activity was steady over the spring and summer, as OEMs and contract manufacturers (CMs) shopped for new partners and strategic buyers and private equity competed for assets. Valuations among the best-in-class pure-play medtech CMs and OEMs remained very strong. Traditional industrial players like TE Connectivity Ltd., Carlisle Companies Inc., Molex Inc., Jabil, and Flex, among others, continued to add to their recently acquired medical portfolios. As interest rates begin to climb, I anticipate a possible pull back in the lofty valuations. However, cash on balance sheets of strategics and private equity firms remains strong, and there is a considerable amount of money on the sidelines looking for an investment home.

There have been numerous notable deals over the last five months. Boston Scientific Corp. had a busy summer, purchasing three companies in three different clinical areas. In July, the company acquired the remaining 65 percent stake in Cryterion Medical Inc., an atrial fibrillation treatment firm vying for a stake in the $5 billion global electrophysiology market. Boston Scientific had been an investor in Cryterion since its inception in 2016. That same month, Boston Scientific bought Claret Medical Inc., a privately-held developer and commercializer of the Sentinel Cerebral Embolic Protection System. The device is used to protect the brain during certain interventional procedures, predominately in patients undergoing transcatheter aortic valve replacement. The deal’s $220 million transaction price consisted of upfront cash as well as a potential reimbursement-based milestone payment of up to $50 million. Boston Scientific followed that purchase with the August acquisition of Augmenix Inc., a privately-held developer and commercializer of the SpaceOAR System, a therapy used to reduce common and debilitating side effects of prostate cancer radiotherapy. The transaction consisted of an upfront cash payment of $500 million and up to $100 million for reaching sales-based milestones.

Stryker Corporation added some heat to the summertime OEM buying spree by forking over $1.4 billion for K2M Group Holdings Inc., a key player in the $10 billion spinal market. The 14-year-old company will add roughly $300 million in sales to Stryker’s Spine division and enhance the larger firm’s portfolio with complementary spinal and minimally invasive products.

In June, Danaher spinout Fortive Corp. made a binding offer to J&J subsidiary Ethicon Inc. to purchase its Advanced Sterilization Products (ASP) business for approximately $2.7 billion in cash. Based on financial data provided by J&J, ASP generated roughly $775 million (unaudited) in 2017 revenue and an adjusted EBITDA margin of 25 percent (unaudited).

On the contract manufacturing front, MedPlast LLC acquired Integer Holdings Corporation’s Advanced Surgical and Orthopedics (AS&O) business in May—its third acquisition in the past year. In 2017, MedPlast bought Vention Medical’s device manufacturing services business and Coastal Life Technologies to extend its portfolio of services into assembly and packaging. The strategic acquisitions follow MedPlast’s partnership in 2016 with Water Street Healthcare Partners and JLL Partners, two strategic investment firms specializing in the healthcare industry. MedPlast recently completed the AS&O transaction with the announcement of its new entity Viant, along with a new Massachusetts-based headquarters. The Water Street and JLL-owned Viant is on its way toward $1 billion in medical device revenue.

Fresh off the heels of its new private equity ownership by GTCR, Resonetics acquired Medelec, a Swiss supplier of metal tubing and other components to the medical device industry. Besides fabricating a range of tubing from flat stock, Medelec provides Resonetics with additional manufacturing capabilities, including laser cutting and welding and computer numerical control machining.

Conclusion

The general backdrop hasn’t changed much in the past few months. Even though interest rates are on the rise, the U.S. economy remains robust and unemployment remains low. Cash positions remain strong on many balance sheets, making it relatively easy to access for strategics and financial sponsors alike. The historical valuations in the medtech sector are beginning to peak; I believe leverage will begin to tighten since many of the premium assets in the space have been acquired.

There definitely will be more deals as the year draws to a close. And while it may be difficult to predict election outcomes these days, it wouldn’t be out of the ordinary to expect more consolidation in the medtech space. That’s one prediction I know will come true. 

About the Author

As president of Bonifacio Consulting Services, Mark Bonifacio works with medical device OEMs and contract manufacturers to help them grow organically and through mergers and acquisitions. Mark leverages his education, decades of global manufacturing experience, and extensive international network to provide unique value. In his early career, Mark worked for several major medical device OEMs, then co-founded APEC, a medical device contract manufacturer. Mark built APEC from the ground up, and sold it to Freudenberg Medical in 2007. He established Bonifacio Consulting Services soon after. Today, Mark assists organizations in business growth, strategy and tactical execution, M&A, joint ventures, and licensing. He also advises on cost-reduction initiatives, operational, and organizational improvements. Notable clients include TE Connectivity, MedPlast, Wendel, Onex, Medtronic and Millipore, among others. With a B.S. in plastics engineering from the University of Lowell (now UMASS-Lowell), Mark brings deep engineering and operational expertise along with an entrepreneurial drive. Mark is well known in medical device manufacturing and is a regular speaker and contributor for industry events and publications.