Device companies are cash-rich and looking to acquire. Here’s why that is good.
Last week, I joined a panel of industry leaders at Biomed Boston to discuss the state of medtech investment, including Todd Usen of Activ Surgical, Bruno Stembaum from Bank of America and Brian Johnson of MassMEDIC.
We touched on a range of important topics throughout the course of the discussion, but the big headline was that we are in the midst of a frothy market for new entrants and investment because of a strong IPO and M&A environment. That conclusion is supported by a seemingly weekly cadence of multi-million-and-billion-dollar acquisitions by large medtech players in the sector.
But on the drive home, I got thinking – what’s driving these deals and why is this good for innovation?
There are a couple of key environmental factors driving this rise in acquisitions.
First, the cash position of large cap medtech companies is at an all-time high, with many of them sitting on hundreds of millions (and in some cases billions) of dollars. Second, the low cost of borrowing capital is adding to these piles of cash and putting pressure on enterprise companies to spend it.
For public companies that must show quarter over quarter growth and traction, one plus one equals three. The combination of cheap, easy money on hand and the benefits of adding market share through acquisition on the other make M&A an appealing growth strategy. This abundance of cash at the larger companies is certainly driving activity, with mid-year data from EY showing there are already more deals (33) in 2021 than all of 2020 (25).
This consolidation also creates a virtuous supply chain cycle where large companies grow larger and wield greater clout for increasingly rare raw materials and parts.
But the question remains: are ever-growing companies good for innovation?
Opportunities for Innovators
While there are certainly large cap companies that have large R&D budgets and remain almost mission-driven in their commitment to positive clinical outcomes, the near universal truth is that large public companies must meet investor expectations.
That means they will often focus on what they do well, like hammering out efficiencies in execution and cornering the market for their product portfolio. This inevitably creates openings for startups and innovators to pursue new ideas.
Agile, nimble entrepreneurs with a vision can often chart a course through the big guys to serve emerging needs or those that rarely get attention. Examples are our use of new biomaterials to extend the life of catheters and thereby improve the outcomes and economics of vascular access. Another is Cardiva Medical’s ability to demonstrate a clear clinical and economic benefit within a relatively mature vascular closure market.
It is these pockets of innovation that I find exciting and why I believe patients are being well-served by the current appetite for growth by acquisition. As the big guys keep swallowing up the mid-size companies, then shifting focus to maximizing market share, it creates opportunities for growth and exploration.
At the same time, investors are encouraged by all the M&A and IPOs, giving them confidence to put their money in play. This in turn leads to a high number and valuation for venture deals.
With this level of interest and excitement, the number of new start-ups has been increasing at a blistering pace. But it’s important for both entrepreneurs and investors to be disciplined in the opportunities that they pursue. Due diligence is critical as “irrational exuberance” could lead to undisciplined evaluation of opportunities and tip the scales towards more losing ventures than winning ones.
Entrepreneurs in particular must be sure to develop products that deliver both clinical and economic value. This requires a deep understanding of the reimbursement landscape and the ability to tell their economic value story early in the company’s growth. Longer term, they must plan for how best to commercialize their products and scale the company efficiently.
Likewise, investors must not compromise on the quality of the team they choose to invest in. Instead, remain patient and adhere to the firm’s investment thesis. This disciplined focus will ensure they find the signal amidst the noise.
The Future Is Bright
This cycle of innovation, investment and exit should continue over the next few years. Ultimately, it’s great for all the constituents along the continuum of healthcare.
More investment in innovative products will improve patient care, boost clinical outcomes and lower total medical expenses. Large and mid-cap medical device companies will find more companies to acquire. And investors will be rewarded for their risk.
For those seeking to change the standard of care in their respective fields and the patients they serve, the time is now.
Photo: Nicolas Mero, Getty Images