M&A in diagnostics expected to be strong in 2022 after trading took off last year

Diving Brief:

  • According to a KPMG survey, corporate and private equity dealmakers expect diagnostics deal volume to surge again as the windfall from COVID-19 testing allows firms to add assets.
  • KPMG found that 90% of diagnostics sector respondents expect the industry to surpass the 54 deals struck last year, with more than half of respondents predicting an increase of 10% or more. The forecast is underpinned by the belief that COVID-19 has equipped companies to strike more deals.
  • After reviewing its survey of the medical device industry, KPMG said the outlook for investment in the sector “appears to be positive”, pointing to signs of interest in striking deals with manufacturers that depend on the procedure to add technology and market share through tuck-in acquisitions.

Overview of the dive:

Transaction volumes and values ​​took off last year in the diagnostics and medical devices sectors. According to KPMG, the volume and value of medical device transactions increased by 13% and 65%, respectively, in 2021 compared to 2020. The increase in volume and value of diagnostics transactions was even stronger, climbing 64% and 265% respectively compared to 2020. the previous year.

The KPMG survey suggests the diagnostics industry is poised for another bumper year.

Asked how COVID-19 has changed their M&A strategy, 18% of respondents said it has allowed their organizations to close more deals. Similar proportions of respondents said revenue from COVID-19 testing has enabled them to close more non-accretive deals and complete larger acquisitions. Only 5% of respondents said there had been no change from historical investment activities and that no organization had reduced its trading capacity.

The additional capacity is reflected in expectations for the level of M&A activity this year. While trading volumes have skyrocketed in 2021, 12% of respondents expect them to increase by 20% or more this year. Additionally, 46% of respondents expect volumes to increase by 10% to 20%. Only 12% of respondents predict that volumes will be flat or down from 2021.

Companies are keen to strike deals despite expectations of rising valuations.

In point-of-service testing, almost all respondents said they expected valuations to rise. Seventy-four percent of respondents estimated that valuations would increase by more than 10%. KPMG received similar comments on the ratings for liquid biopsy and next-generation sequencing, although while nearly everyone expects ratings to rise, the proportion of people predicting 10% jumps and more is less than that in the POC test space.

While survey data points to a buoyant M&A market, KPMG analysts have identified several challenges that could hamper activity. Governments can start to fade the COVID-19 test revenue tap, reducing transaction capacity while increasing the need for new growth engines. KPMG analysts also warn that “the number of attractive targets could decline” after the “buying sprees” of recent years.

The dynamics of transactions in the medical device industry are different. KPMG focused its analysis on companies that manufacture devices for use in elective procedures, a subset of the industry who suffered throughout the waves of COVID-19 and subsequent hospital staffing shortages. Nearly half of respondents believe the value of procedure-dependent medical device makers has fallen since the pandemic began.

Facing the challenges, the organizations shopped around last year, closing 203 deals with a combined value of $79 billion.

Based on survey responses, KPMG analysts see the greatest interest in 2022 for technology deals and add-on acquisitions to add market share. The proportion of respondents open to “significantly sized” takeovers and mergers fell from 17% to 5% year-on-year.

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