Medtech: Consolidation and Trends

By Edouard Barret and Gabriel Le Gloahec

The rapid technological developments of the last decades have catalysed a development of a new industry: medtech. The constant innovation around us has contributed to bigger and better applications of technology to people’s wellbeing, which constitutes a large part of the human experience. This exciting and growing extension of healthcare as we know it has presented an intangible benefit for us in the form of better health outcomes, but also tangible opportunities for entrepreneurs and investors to profit from this burgeoning, high-tech industry. Throughout this article we will describe the Medtech industry trends, and the role of private equity in this industry, with a special look at KKR’s involvement and projects.

Medtech Industry Trends

The medtech industry is experiencing  rapid growth due to technological advancements and constant innovation of medtech applications. The emergence of versatile technologies such as wearables, augmented reality, and artificial intelligence have created a convergence of healthcare and technology with their application to healthcare-related problems, such as in the neurostimulation market, dominated by Boston Scientific (BSX), as well as in the prosthetic markets. Robotics technology in particular is gaining in importance, with Mako Surgical and its hip-replacement robotic arm technology being purchased by Stryker (SYK) for $1.65 billion, and the Mazor Robotic acquisition by Medtronic (MDT). Furthermore a consumer focused decentralization has occurred through patient empowerment with online shopping and self-diagnosis equipment, presenting a large market opportunity by creating more sales channels for companies such as Tactile Systems Technology (TCMD) with their lymphedema treatments, and IntriCon (IIN) with its OTC hearing aids. As a result, the industry is expected to grow at an astounding 5.6% per year (CAGR) between 2017-2024, taking market share from traditional healthcare solutions as well as benefiting from healthcare demand growing as a whole. It is estimated that the medical devices and technology market will reach $500 billion in sales by 2021 (Sturman).

The medtech industry trend can also be characterised by a rapid consolidation. Money is tight, the largest medical device companies are merging, and it’s hard to see where regulation is going. A large market concentration with constant need to innovate to avoid being left behind, and the unexpected effects produced from these regulatory developments, have caused the industry to consolidate amid the millions of dollars in megadeals. Interestingly, there is a difficulty of valuation during this period of uncertainty due to concerns regarding regulation (FDA’s new 510(k) clearance process making it more costly for approval of products), with these regulatory threats as well as the capital intensity of the industry leaving small companies vulnerable, unless they join the trend by combining resources and properly positioning their businesses to meet emerging opportunities.

P.E Trends in Medtech

As a result, this industry has become ripe for P.E investment, due to the capital requirements of firms and the potential upside for P.E firms in these growing markets. In fact, the digital health and medtech space is intrinsically a high-risk/high-reward business, which has seen $23 billion poured in investments over the last five years. The smaller companies are well-positioned with their technologies to be acquired and/or scaled up quickly to be sold off again, helped by P.E firms with their capital challenges. Medtech products also usually face a long cycle of development, and therefore are more likely to rely on corporate backing to stay afloat at some point in their lifetime (Hartford).

There are other considerations for why this industry is attractive for PE. Other than the sales growth outlined above, there’s the encouraging trends in demographics, healthcare spending, and emerging global markets that make the medtech industry even more attractive to investment. The world population is aging, driven by increasing life expectancy and declining fertility rates, and this represents a major demand driver for medical devices. The U.S. elderly population (persons aged 65 and above) totaled 49 million in 2016 (15% of the population) and the elderly account for a disproportionate 1/3 of total healthcare consumption (Rajbhandary). This partly explains the next encouraging trend of growth in total U.S. healthcare expenditure from $3.3 trillion in 2016 to an expected $5.7 trillion in 2026 (an average annual growth rate of 5.5%). Finally, trends in emerging economies (all regions except Sub-Saharan Africa) are also positive, seeing an increase in healthcare spending as a percentage of total output over the last two decades (Rajbhandary).

KKR Investment in Medtech

The clearest testimonial for medtech is the increasing amount of investments that KKR have been making in the industry within the last year. Examples include investments in Envision Healthcare, Air Medical Group Holdings, Cohera Medical, and Signostics with capital injections ranging upward from $35 million. They also acquired WebMD, popular website where almost every conceivable disease and their symptoms are listed, for a $2.8 billion valuation.

In late 2017, KKR launched a specific fund dedicated to investing in industries like medtech: the KKR Health Care Strategic Growth Fund. This fund, which will invest the funds in healthcare growth equity investment opportunities in America, will receive $1,45 billion, of which $265 million was sourced from KKR itself, and the rest was from existing institutional investors such as public pensions, insurance companies, family offices, and high net-worth individuals. The fund has a special focus on clinical and technological innovations, cost containment and consolidation of therapeutic offerings or care providers.

The largest acquisition performed by KKR in the medtech industry is the acquisition of Thermo-Fischer, for which KKR paid $1,1bn in cash. Thermo Fischer was a unit of the larger group PHC Holdings, which is itself owned by the Japanese conglomerates Mitsui and Panasonic, and was in the anatomical pathology business. Thermo-Fischer for produces microscope slides, and other laboratory instruments.

Conclusion:

To conclude, it is quite obvious that medtech is an industry which holds a promising future, and therefore the private equity industry is heavily investing. We can firstly observe market trends in the medtech industry which show rapid expansion, and strong consolidation. These results can be associated to various sources, ranging from technological innovations to demographics, but nevertheless this industry is becoming a very profitable industry for private equity activity.

Editor: Stefan Larsen

Authors: Edouard Barret, Gabriel Le Gloahec

Sources:

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