Medtech M&A: companies must choose their targets carefully

According to Deloitte’s annual productivity update, the compound annual growth rate (CAGR) for healthcare spending across 60 countries is predicted to increase by 5.4% between 2018 and 2022, compared to just 2.9% from 2013 to 2017. The overall share of gross domestic product devoted to health was forecast at 10.5% in 2019.

Digital technology has already disrupted major sectors of the economy. We are now witnessing a quantum leap in technologies such as genomics, nanotechnology, sensors and the Internet of Things, Big Data and advanced analytics, AI, robotics and 3D printing. Thanks to connected devices and Big Data, a revolution is underway in the healthcare sector.

Medtech is poised to grow at a 5.6% CAGR from 2017 to 2024. In 2019, worldwide medtech sales were predicted to hit $475 billion and reach $595 billion by 2024. The fastest growing device areas in terms of CAGR are predicted to be neurology (9.1%), diabetic care (7.8%) and general and plastic surgery/dental (tied at 6.5%). Further, by 2024 in vitro diagnostics is expected to be the largest medtech segment, with annual sales of $79.6 billion, followed by cardiology and diagnostic imaging. R&D spending in the sector is estimated to reach $39 billion by the same year.

Software as a medical device is a rapidly growing area of innovation; regulators across the globe are working to reduce the risks and promote agility. As more devices become connected in the Internet of Medical Things, the US Food and Drink Administration is strengthening its medical device cybersecurity programme to protect patients as part of the Medical Device Safety Action Plan.

M&A as a growth driver

According to ‘IP-related statistics from the recent past’, life sciences is the fastest growing field, with medtech leading in this sector.

This growth is attributed to significant investment in R&D and strategic M&A. A race has begun among large corporations to acquire medtech start-ups, with the biotech sector being one of the most active in M&A. An example of this is Boston Scientific, which acquired nine companies in this field in 2018, while medical equipment giant Medtronic acquired nine companies back in 2015. The key points for medtech M&A are as follows:

• as growth becomes elusive, M&A is becoming a must for scale players;
• industry consolidation is driving large deals by bigger cross-category medtech entities, while more focused ones execute smaller, more frequent deals;
• programmatic or selective M&A has produced excess total returns to shareholders, but execution will become harder due to a scarcity of growth assets;
• large deals are a bigger risk but offer higher returns as companies seek out new value pools to secure growth; and
• as mobile health becomes more ubiquitous, digital and mobile health solutions are becoming increasingly important to traditional medical device companies as investment, partnership and acquisition targets. Thus, M&A for non-traditional assets (eg, software or services) is rapidly accelerating.

Six of the top 10 tech giants are diversifying into healthcare and life sciences, with Amazon, Apple and Google all making significant acquisitions and adopting a data-driven approach to healthcare. Tech companies offer healthcare entities many opportunities, as they are aware of gaps in their understanding of clinical and regulatory practices and are open to partnering with established healthcare companies.

According to a Deloitte report, the acquisition value of medtech companies has dropped over the years. As a result, corporations are being smart when setting the acquisition value. Top players are taking into account the patent portfolio of the target company, as well as the technical and geographical coverage of its patents.

While acquisition valuations of medical device companies vary widely based on the internal criteria of acquiring entities, successful ones understand the importance of an IP portfolio (mainly patents) in deriving an accurate pre-acquisition valuation. This is important for businesses on both sides of the transaction.

Below are examples of the acquisition strategies of two major players.

Philips acquired the medtech start-up NightBalance in May 2018
NightBalance developed a sleep apnea wearable that is used to treat positional obstructive sleep apnea and snoring. Philips paid significant attention to the company’s patent offerings – it already had a strong patent portfolio of 10 patent families to support its technology. This was a lucrative deal for the company, expanding its sleep and respiratory care offerings.

Boston Scientific Corporation’s (BSC) acquisition of British Technology Group (BTG) in November 2018
BTG is well known for producing drugs to treat overdoses and rattlesnake bites. Its patent portfolio contains several high-quality patents, while a closer look reveals how BTG and BSC’s tech portfolios are complementary. BTG owns a patent portfolio of 1,487 active applications, which is about 9% of the number of the total patent assets held by BSC. This acquisition helped BSC to enhance its technology coverage and capabilities in interventional medicine.

Below is a list of factors that corporations should examine when considering an acquisition:

• product assessment;
• patent assessment;
• tech overlap;
• financial status; and
• team and leadership assessment (culture is equally important!)

Large corporations are looking for companies with a proper balance of products, patents and tech in their portfolio while considering the top contenders for acquisition.

Factors to consider when valuing a patent portfolio

We have defined the following parameters, which can be helpful when estimating the acquisition value of a patent asset:

• the patent should provide a competitive advantage that will block competing products – this can be analysed based on competitors’ overlapping products and patents and can help a company decide on the value these tech offerings would add to its business;
• the patent should have family in the country or region in which the acquirer wants to establish its base (eg, if a company wants to expand to China, acquiring strong Chinese tech/patents can back its products/services in the country);
• licensing potential of technology – this could be analysed based on its litigation/monetisation potential and number of patent citations, and ensures that the patent’s technology is not obsolete or that there are fewer alternatives in the market (thereby ensuring that the demand of the patent is high); and
• the remaining lifespan of the patent - it is recommended that at least five years is left, so that the acquirer can reap the licensing benefits.

The applicability of these parameters is illustrated by the following hypothetical example.

Philips is looking to acquire potential companies and start-ups related to medtech. Further, it wants to form an opinion based on the target company’s patent assets and its business potential. Which company should it go for?

While looking for potential acquisition contenders for Philips, GreyB comes across the patent portfolio of 4C Medical Technologies (4cmed).

The strength of patent protection is essentially the function of two variables – claim scope and validity.

Determining the value of the protected market share, which will change over time, depends on several factors. Companies must consider not only how likely the patent claims are to capture a share of the existing market, but also how rapidly new competing technologies will emerge. A company's ability to make predictions for this – and to justify them to potential acquirers – is limited by the amount of information that is available about competitor research and development. In addition, the company must be able to use that information to identify development trends and extrapolate threats of market share erosion by new technologies. 4cmed is desirable for the following reasons:

• it is a start-up founded in 2014, which has been going through various rounds of funding to show the need for investment;
• the company has also developed a novel technology for transcatheter mitral valve repair (TMVR). Moreover, it has developed the AltaValve device, which resolves complications presently associated with TMVR; and
• the TMVR tech area is expected to become a $5 billion market by 2021 – medical device companies such as Edwards Life sciences, Medtronic and Abbott have already spent hundreds of millions of dollars on it. Philips also works in TMVR solutions and hence this acquisition would add value to its product as well as to its patent portfolio.

• 4cmed also contains seven unique patent families with the fairly recent priority date of 2015. This would provide a strong base for Philips to develop its patent portfolio through R&D.

This makes 4cmed an exemplary lead, which could make it down to Philips’ shortlist based on favourable tech/patents. More companies could then be identified and the top five could then be analysed based on other factors such as financial status, their teams and leadership.

Comment

The medtech sector sits at the top of the growth chart and strategic M&A contributes heavily to its growth. It appears that companies are playing safe and want the best value for money.

Big corporations are taking a thorough approach to their acquisition targets based on the balance and value that they could add to their product and patent portfolio. It is therefore crucial to assign the correct value to patent offerings along with products and other assets in order to score a fair deal.