Dispatches from AdvaMed2014
AdvaMed2014, the Advanced Medical Technology Association's annual conference, is taking place this week in Chicago. The event brings together thousands interested in medical technology's latest developments.
During a session yesterday, four active medtech investors discussed current trends in medtech investing and how recent consolidations among major device makers will impact investor backing and merger and acquisition activity moving forward.
1. M&A activity within medtech is high, but deal volume is lower than in the past. Bill Baker, a partner with KPMG, noted that activity has finally returned to pre-recession levels, with companies with the best market positions securing higher multiples than have been seen in recent years.
Peter Spring, a principal at Bain Capital Private Equity, agreed. "Companies that have an existing leadership position are even more valuable than they once were," he explained. Additionally, as regulatory approval processes become increasingly arduous, companies experienced with FDA approval are very attractive. "The competition for new products is so much more, to have the expertise around the regulatory system…is hugely valuable," he said.
Anne E. Sissel, a partner with Baxter's investment arm Baxter Ventures, said that while it's true we're seeing deals in the 4x revenue range, which is generally at or above pre-recession levels, the total volume of deals is down. Year to date deal volume is about three-quarters of where it was last year, she noted.
2. Acquisitions are increasingly driven by the bottom line. "Today what we're seeing is more investments moving more and more to the bottom line," said Ms. Sissel, pointing to Medtronic's $43 billion acquisition of Covidien, which Medtronic has said will result in $250 million in savings from increased efficiencies. "Today's bottom line is the bottom line, and I think we're going to see that going forward."
3. Investors must analyze deals in light of reimbursement changes. As healthcare providers deal with reimbursement pressures, and increasingly take on risk for the cost of care, medtech companies that provide the highest value in their category will be at a great advantage.
"There's also a lot of pressure on utilization of healthcare services," which results in providers pressuring medtech companies to charge less, said Nicholas Alexos, managing director at Madison Dearborn Partners. Companies that can offer competitive pricing and equal quality will be rewarded with higher sales volume.
4. Smaller companies offer the best upside investment opportunities. Bain's Mr. Spring said his firm is currently focusing its investments on smaller medtech companies. "There are certainly advantages of the largest companies, but what we're finding is that for the highest-value assets, the valuation is so high, it's hard to make an investment right now," he said. Instead smaller companies present "more opportunities for us as investors," he said.
Bain's investment model, or "thesis," includes active management of the companies they acquire to drive growth. Thus, it seeks companies with valuations that suggest room for improvement through better management and improved operations.
5. While a company's technology or therapeutic is very important, it's not the only consideration for investors. "So many think 'build it and they will come,'" says Ms. Sissel. "If I develop this product, there will be opportunities for financing; there will be opportunities for exit. It's more than just a compelling technology. That's a critical element, but it's just one step."
Mr. Alexos agreed. "Management is absolutely critical in my mind," he said, explaining two analogous companies can have very different performance based on their management teams. For example, he was involved in the acquisition of two emergency department staffing companies. One underperformed, and the other, TeamHealth, had a strong management team that was able to meet expectations. "I know some people identify management teams and try to identify opportunities in that space, and I think you're seeing more and more of that."