Tale of Two Acquisitions
How big MedTech is Evolving to Remain Competitive in the Age of Artificial Intelligence
Mergers and Acquisition (M&A) activity in MedTech remains strong as the big players look for options to grow. Investment in internal R&D remains flat and organic innovation is slowing down. At the same time, rapid advancement in technology, including Artificial Intelligence (AI), is happening outside and aggressively funded by early-stage venture capital.
Against this backdrop, two deals announced last month are noteworthy. The first is between Boston Scientific and BTG, plc., and the second between Medtronic and Nutrino.
Although these are not mega-deals (greater than US $10B in valuation), they reflect two very different, but complementary, growth strategies. The first illustrates achieving scale in a therapeutic area, while the second is about adding AI capabilities to an existing product portfolio to offer more personalized, effective treatment solutions.
Boston Scientific and BTG, plc. – Consolidation for Strength in a Therapeutic Area
“The acquisition of BTG and its rapidly growing peripheral interventional portfolio is an exciting extension of our category leadership strategy that will augment our capabilities in important areas of unmet need such as cancer and pulmonary embolism”
– CEO, Boston Scientific
Boston Scientific is a global MedTech leader with 2017 revenues of about $9B USD. They have a diversified portfolio of products in 7 business segments organized across 3 broad categories of Cardiovascular, Rhythm Management, and MedSurg. According to their 2017 Annual report, the top 4 business in Interventional Cardiology, Cardiac Rhythm Management, Endoscopy, and Peripheral Interventions contributed nearly 80% of the total revenue. Overall organic growth rate was at 7%, mainly driven by the MedSurg category. Cardiovascular category, which includes the Peripheral Interventional products, grew at 5%.
These are large, slow-growing, business segments. The CEO statement in their BTG deal announcement clearly shows they want to grow the Peripheral Interventional portfolio through strategic expansion in interventional oncology and pulmonary embolism.
BTG, plc., is a natural fit with high growth products in Interventional Oncology and Interventional Vascular. The total revenue, according to their 2018 Annual Report, was £ 621M (~ $795M USD) with a 10% growth rate. At 14%, the Interventional Medicine portfolio is growing even quicker. They also have interventional products for Emphysema and varicose veins, which could be additional growth opportunities for Boston Scientific. The cherry on top? Nearly $250M USD in licensing revenues from their pharmaceutical products!
Boston Scientific is paying $4.2B USD – all cash – for this deal, which is a valuation of 5 times sales and 22 times earnings. Not a bad deal for the portfolio synergy and growth potential! Needless to say, they will also be looking at cost savings by optimizing the two operations to impact the bottom line.
This deal is part of the ongoing trend among big MedTech players who want to acquire scale to focus in a high growth therapeutic area.
Recently, Johnson & Johnson acquired the Ophthalmology business from Abbott Medical Optics (AMO) to expand its reach into vision correction beyond contact lenses.
Medtronic and Nutrino – Artificial Intelligence for Enhancing Existing Product Portfolios
Medtronic is a leader in diabetes management. As the largest MedTech player, Medtronic has also grown through acquisitions over the last few years, which included the $43B Covidien deal in 2014. According to their 2018 Annual Report, the Diabetes Group had sales of $2.1B USD, growing at an impressive rate of 11%. Diabetes is a difficult chronic condition to manage since individual factors heavily influence the treatment routine. Medtronic already has industry-leading closed loop insulin pumps and continuous glucose monitoring (CGM) systems to manage a wide range of diabetes treatments. Now, they are looking to further differentiate their portfolio by integrating it with AI using an extensive nutritional database from Nutrino, a small private company based in Israel.
"Bringing Nutrino and their nutrition-related expertise into our organization will give us a substantial differentiator in the diabetes industry and accelerate our progress to help people with diabetes live with greater freedom and better health"
– Executive VP, Diabetes Group at Medtronic
The key thinking here is differentiation through personalization. Nutrition and lifestyle choices play a critical role in diabetes management at an individual level. AI can create an opportunity for delivering a more personalized treatment for each patient. In turn, this can help Medtronic show more effective results, which is an area of great interest to both physicians and insurance companies. Pure device innovation is no longer sufficient to demonstrate value, and big MedTech players are now recognizing the new challenge of outcome-driven healthcare delivery expected by the stakeholders.
What does this mean for Quality and Regulatory?
When business growth is driven by M&A, the expectation is to smoothly, and quickly, integrate the incoming Quality and Regulatory systems with the existing system. Often these systems are completely different, both in infrastructure and design, have different standards and many redundancies. Cost is always a challenge even though some funds may be available in the short term to support the integration. Typically, the end result is increased workload under tight timelines while managing the current business. Internally, it is a time of high stress inside these organizations, often unrecognized, and soon forgotten by the top leadership once the initial excitement of the news is over.
Senior leadership in Quality and Regulatory must continue to sustain a positive, supportive work environment. Open communication is critical to maintain morale amidst uncertainty about jobs during reorganization. This is the time to build a strong Quality Culture where everyone feels empowered to make a difference. Identifying gaps in resources and capabilities, and quickly getting help is important to prevent burnout. Timely recognition for going above-and-beyond can be very effective. Overall, it is more of a leadership challenge rather than a technical challenge of integrating and harmonizing procedures.
What Does the Future Hold?
Deal-making in MedTech is unlikely to slow down in the near term. It is critical to build new skills and organizational capabilities over the long term.
Boston Scientific 2017 Annual Report, February 2018
J&J Vision and Abbott Medical Announcement, September 2016
Medtronic and Nutrino Deal Announcement, November 2018
BTG 2018 Annual Report, February 2018
Medtronic Annual Report, 2018