Dive Brief:
- McKinsey analysts think big medtech deals could be back on the agenda, arguing mergers make sense at a time when companies are under pressure to improve margins and become preferred partners with health systems.
- Stung by mergers that caused distraction, confused customers and slowed growth, companies have largely focused on organic growth and tuck-in acquisitions in recent years, but the analysts make the case that the environment is right for the return of big-ticket deals.
- The M&A thesis is part of a broader call for the medtech industry to reinvent itself, including by moving away from incremental innovation and rethinking the “unwieldy” organizations they have established to support global expansions.
Dive Insight:
McKinsey provided the advice in a report about how medtech can thrive in the next decade. The analysts contrasted the growth that the industry enjoyed after it “reinvented itself” and accelerated innovation in the wake of the Great Recession to the share price stagnation it has suffered since 2019. With the industry underperforming the S&P 500, the analysts think medtech needs to remake itself once again.
Their proposal includes the revival of an old strategy. While the analysts acknowledge that big mergers have backfired in the past, they make the case that the current operating environment favors the scale that comes from combining two large organizations. The case rests on two pillars.
First, the analysts view big mergers as a way to improve margins, which have risen up the list of investor priorities in recent years. They see big deals as especially beneficial “when a particular geography or business unit is underperforming on profits,” explaining how the newly merged business can offer “an opportunity for new scale, capabilities and cost synergies.”
The second pillar of the argument is based on the “evolving relationship between medtech companies and their customers.” Adoption of value-based care and the rise of digital ecosystems are leading healthcare systems to see medtech companies as end-to-end partners, according to the analysts. Big deals can help organizations “integrate offerings across portfolios” and thereby become partners of choice.
In the near term, the cost of debt may limit M&A activity, but the analysts want companies to consider opportunities. The report cites the merger of “two midsize orthopedics companies” as an example of a deal that could create “newfound scale to provide higher service levels to customers.” The report did not name the firms, but Globus Medical recently bought NuVasive for $3.1 billion.
The recommendation is part of a raft of suggestions across the 84-page report, which overall makes the case for the industry to be bolder. That call is also reflected in the analysts’ advice on R&D, where they question whether companies have focused too much on incremental updates that “met with skepticism” from physicians and price pressure from purchasers.
“If the opportunity for adding meaningful value is low, leaders will need to consider shifting resources elsewhere. Going forward, companies should apply more scrutiny to resources dedicated to incremental innovation and consider if a business without ‘premium’ innovation has a role in the portfolio of the future,” the analysts wrote.