How badly has Covid-19 impacted M&A activity in the MedTech sector?
In summer 2020, we have seen a strong decline in transactions. But by the end of August, the market came back very strongly, driven by private equity actors flush with cash. Not just the activity recovered surprisingly quickly, valuations did too. When you look at the valuations of listed companies, medtech and pharma have suffered much less than other industries such as automotive. For medtech companies that suffered a decline in sales, for example, those active in orthodontics supplies, it was clear that business will come back as soon as people are allowed to go back to the dentist again. And some companies have seen their sales increase dramatically, for example those in the field of hygiene, protective equipment, or in vitro diagnostics. Their valuations quickly climbed above the levels seen before the crisis.

“Valuations will come back down again, based on the economic logic the buyers face.”

According to the Deals Monitor Europe you just published, the median valuation of MedTech companies stands at 20.5x EBITDA. This is a lot higher than the long-term multiple of 15.8x. Do you think this is a new normal or will valuations eventually revert to the mean?
I think, and this is my personal opinion, that valuations will come back down again, based on the economic logic the buyers face. If you pay 20 times the operating profit, you would need to hold this asset for 20 years to get your money back. Or, you need dramatic growth for your investment to make sense. Now some companies have had a lot of tailwinds, of course. Two German companies I’ve looked at that manufacture reagents for PCR tests have seen their annual sales triple in 2020. But these are special situations that won’t continue forever. Some private equity firms seem to be betting on less expensive add-on acquisitions to justify the high prices they pay now for a platform investment since this would lower the average entry multiple for the combined asset. Combined with synergies between these companies and some top-line growth, they will be able to achieve a decent return upon the sale of the combined entity. On the other hand, PE firms are also very active selling their assets now at high valuations, in many cases after a much shorter holding period than what is usual for them. They seem to anticipate that they won’t get a better price if they hold on to their investments for one to two years longer, which would result in a lower IRR overall. My expectation is that in 2022, or 2023 at the latest, valuations will start to correct.

There is a marked difference in stock quote valuations between biotech and pharma companies with multiples around 12x and MedTech and Pharma Services, which includes Healthcare IT, valued much higher. What explains this difference?
Biotech companies offer promising growth opportunities, and BioNTech is a perfect example of this potential. But these companies are inherently higher risk than MedTech, which is a much more stable business that still grows nicely. Generalist financial investors, unlike pharma companies that need to buy innovative companies and have in-depth knowledge, are inherently unfamiliar with the biotech or even the R&D-driven pharma industry. MedTech products are simply easier to grasp and still face lower regulatory uncertainties. We’ve looked at the M&A activity in MedTech the past 15 years, and it shows a clear positive trend, driven amongst others by Private Equity investors.

At what point do MedTech companies become interesting takeover targets for financial investors?
They don’t have to be that large, I’d say a decent two-digit million sales number already qualifies them for a structured M&A process. Many MedTech companies with a modest size are global market leaders in their niche. Take the example of LAP, a company that manufactures laser measurement and positioning systems used in industrial production and patient positioning in scanners and radiation therapies. With only 300 employees, they are present in Europe, the US and Asia, and are the world’s leading supplier of these systems. The problem we have in Germany is that IPOs of MedTech and other innovative growth companies are rare, because investor appetite is somewhat lackluster. Especially Diagnostics companies prefer to list on Euronext in Amsterdam/Paris instead or Biotechs in the UK. But a well-established IPO path would benefit financial investors as well.

Can SPACs provide an easier way to go public?
I’d say SPACS have established themselves in 2021, but not so much in Germany and Continental Europe, yet. There have been a few Private Equity players that have launched their own SPACS. The tradeoff between an IPO and a listing via a SPAC is the following: An IPO and the bookbuilding process that precedes it is a somewhat risky affair, it can fall apart in the last second. Taking a company public with a SPAC gives the sponsor more deal security, but it also costs money, as the SPAC investors need to get their reward, too. It still needs to be seen if the deal security overcompensates for that financial cost and if SPACS will flourish in the future.

“Regulation will drive a lot of transactions.”

With 68 MedTech transactions in the first half of 2021, the European market was almost as active as the very strong second half of 2020. Do you think this high level of activity is likely to continue?
The activity is very high at the moment, and I don’t think this is likely to change soon. Private owners of SMEs that think about succession planning, for example, and might sell their company, were still a bit skeptical about the market some months ago. Now they have heard about the good prices that were paid, and in the meantime they are more inclined to sell. As mentioned before, Private Equity owners continue to bring assets to the market as well. And on the buyer’s side, there is still an enormous pressure to invest. There are funds that have missed many opportunities and are now hell-bent to close a deal. And we get more demand from strategic buyers as well, companies that have done their homework and realize that life goes on despite Covid. Technology is pushing them to act, too, they need to digitize their processes. For example, people have talked about digital solutions for clinical trials management and communication between doctors and patients for years, but now the industry, including MedTech, is forced to act. Finally, I think that regulation will drive a lot of transactions, too.

How is that?
The new MDR regulation to bring MedTech products to the market is more stringent than its predecessor and has considerably increased the cost of market access. The standards have become more comparable to those of pharmaceutical products, you need to have painstakingly documented patients studies. It has become a question of size if you can afford to do all of this. There is still a large backlog of products on the market that need to be recertified. Due to this, some smaller companies will put themselves or entire product families up for sale, and I’ve heard of many potential buyers that say they’re ready to do such transactions if there is a good fit with their own portfolio.