During the recent past, the Medi-cal Device sector has proved it
self to be one of the stalwarts of the health care M&A market. In the past three quarters, for example, this sector has contributed the largest number of deals to the total number announced in each quarter. And during Q2:01, it accounted for 39% of all the dollars spent in health care mergers and acquisitions.
We wish to examine the prices that have been recently paid in the Medical Device M&A market. Accordingly, we studied 53 deals that were announced during the past 18 months and came with enough information to generate price to revenue (P/R) multiples. The median P/R in this sampling was 1.85x, the average 3.96x.
Of these 53 deals, 28 targeted privately held companies while the remainder targeted publicly held corporations. The chart below reveals that the deals targeting publicly traded companies had lower P/R multiples than their privately traded counterparts.
Although buyers may have viewed privately traded companies, particularly start-ups, as more attractive and therefore worth the higher, riskier multiples, the size of such deals tended to be smaller. The price for privately held companies in our sampling ranges between $600,000 and $721 million ($13.6 million median, $87.5 million average) while the price for publicly traded corporations ranges between $1.3 million and $4.2 billion ($70 million median, $524.3 million average). Pricing appears to become more conservative as the financial stakes rise.
The revenue a target company generates may also influence pricing in a conservative direction. As can be seen in the chart opposite, companies with revenues of over $50 million had lower multiples and a smaller range between the median and the average than those companies with an annual revenue of less than $50 million. Apart from a conservative bias in pricing (gamble less as the stakes increase), part of the reason for this skewing may lie in the fact that a number of the companies with revenues under $50 million were start-ups and others just past the development stage who had a nominal revenue stream.
The kind of device the target manufactures can certainly influence the price paid. Devices dealing with cardiac care or diabetes, for example, generally command higher P/R multiples than manufacturers of orthotic devices or dental implants. For example, in the table on page 3, both MedTronic’s (NYSE: MDT) acquisition of MiniMed (NASDAQ: MNMD) and Johnson and Johnson’s acquisition of Inverness’ (AMEX: IMA) diabetes care unit, both diabetes care businesses, scored higher than average P/R ratios, 10.25x and 8.02, respectively. By contrast DENTSPLY’s (NASDAQ: XRAY) acquisition of Degussa’s (Frankfurt: 542190) dental business, at 1.14x, had a lower than industry P/R multiple.
The table on page 3 displays the top 20 deals in the Medical Device sector since the beginning of 2000. Note that 13 of the targets are publicly traded, and seven privately held. Conversely, all but one of the acquirers are publicly traded.
Although M&A activity in the Medical Device sector has been slow during August, we expect it to pick up as we progress into the fall and continue to be one of the more robust sectors in the health care M&A market for the foreseeable future.