Medical Technology M&A Gains Momentum as the Broader Market Shows Signs of Recovery

Mergers and acquisitions are a routine path for medtech providers that want to enhance their innovation capabilities, according to a new PitchBook report.

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In the medical technology industry, mergers and acquisitions have picked up steam as the overall dealmaking environment slowly recovers from the 2022 market downturn.

Venture capital firms, which account for the majority of medical technology investors, made a total investment of $1.8 billion in medtech in the first quarter, up 9.2 percent from the fourth quarter of 2022, according to PitchBook’s inaugural report on the industry. Medical technology companies provide medical devices, implants, diagnostics, imaging software, and portable therapies.

The increase in dealmaking activities within the sector has coincided with a broader recovery in the overall dealmaking landscape, following the low point hit in 2022. In March, U.S. M&A deal value totaled $155.3 billion, more than January and February combined, according to data from Ernst & Young. The rebound of the M&A market will especially benefit dealmakers in the medical technology sector because the industry “has massive incumbents that have the capital to buy or build their way to innovation,” the PitchBook report said.

“M&A has historically been, and will remain, a core strategy of the largest medtech companies,” Aaron DeGagne, emerging technology analyst at PitchBook, wrote in the report. “Incumbents often acquire new technologies that can be scaled through their existing distribution networks beyond what the startups could accomplish themselves.”

DeGagne added that from an investment perspective, “medtech also benefits from favorable long-term dynamics related to higher rates of coverage by government payers, aging populations demanding increasingly complex care, and the industry’s strong pricing power.”

The report said that within the medtech sector, there are abundant dealmaking opportunities in genomic health, portable and wearable treatment, precision medicine, connected implants, and medical imaging software powered by artificial intelligence.

In the first quarter, dealmaking activity in the sector was predominantly driven by companies that provide surgical devices and medical imaging tools, with the former representing $756 million and the latter $459 million in deal value. In PitchBook’s estimation, the market for surgical devices and imaging tools will reach $110 billion and $12 billion by 2030, respectively.

According to DeGagne, surgical device providers have established a robust business model that provides them with stable cash flows. The medical imaging industry, on the other hand, “has been supported by the buzz around artificial intelligence” and has recently attracted a lot of VC funding, he told II in an interview.

But challenges still exist for dealmakers in the industry. According to the report, investors across different sectors are still grappling with a deteriorating macro environment, which has kept the initial public offering market frozen due to uncertainty over inflation and interest rates.

“There are also reasons affecting medtech in particular, such as the challenging financial health of health system end-markets,” DeGagne said, adding that there has been at least a year and a half of negative margins for hospitals, which are the largest customers for medical technology tools.

“The labor shortage has affected [hospitals] a lot,” DeGagne said. “Investment at the level seen in 2021 and 2022, with a combined $18.3 billion of deal funding across two years, is unlikely to be repeated.”