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Buyers and sellers are becoming more active in the orthopedic market after several years of relative quiet. ORTHOWORLD reported on 29 announced M&A deals and 24 closed transactions in 2023, marking the first time activity increased since the pandemic.
The investment bubble that resulted from a buildup of capital during the pandemic burst after 2021, but average investments increased by 72% as buyers focused on late-stage companies that could provide immediate profits.
Spine, which has accounted for the highest number of M&A transactions since 2016, was among the most active segments in 2023 due to companies’ desire to drive implant sales through the acquisition of digital technology capabilities. Globus Medical grabbed the second spot by revenue in the spine market after its merger with NuVasive, which closed in September 2023.
Here are several other recent deals that made a splash within orthopedic markets:
- Smith+Nephew acquired CartiHeal last November to capture the company’s novel technology for regenerating cartilage in the knee.
- Enovis acquired LimaCorporate in January to gain additional traction in the extremities and reconstruction segments.
- Stryker acquired France-based SERF in December to add to its hip replacement portfolio across Europe.
- restor3d acquired Conformis last year to scale Conformis’ portfolio of personalized orthopedic devices.
- AMETEK acquired Paragon Medical, a provider of highly-engineered medical components and instruments.
- Elos Medtech acquired Klingel to strengthen its R&D capabilities and new technology expertise.
- Intech acquired Lenkbar to combine broad capabilities in precision machining with expertise in grinding of cutting tools.
ORTHOWORLD expects M&A deal volume to hold steady in 2024 and become more active next year due to consistent interest in orthopedic targets.
Resetting Expectations
Larry Barr, Partner of Middle Branch Partners, a Chicago-based advisory firm that specializes in medtech M&A transactions, said most of the current activity is on the buy side of the market but also pointed out that he’s managing a promising sell-side pipeline involving closely held, privately owned businesses valued between $5 million and $50 million.
Many of these businesses are determined to stay independent or are postponing the decision to sell, according to Barr.
“Last year, there was significant market uncertainty, rising interest rates and fears of a recession,” he said. “That led many OEMs to rationalize their inventory levels and put a hold on deliveries. Potential sellers were worried about how their businesses would appear after experiencing one or two flat quarters. Now, we’re beginning to see an increase in activity.”
Recent inflated interest rates are gradually decreasing, although Barr believes years of record-low rates created unrealistic expectations among the market’s players.
“For the past decade we’ve had almost zero interest rates, which many people have grown accustomed to as the norm,” he said. “Now, we’re in a normalized environment. People are still adjusting to this new reality and its impact on their businesses, profitability and valuations.”
Orthopedic valuations and multiples compare favorably to overall medtech, according to ORTHOWORLD, which noted that commercialized targets generate the most interest.
Barr said larger deals saw 18 to 20 times the earnings multiple and middle market transactions used to be around 13 to 15 times the multiple. Overall valuations have pulled back from those levels, but that hasn’t lowered expectations among sellers.
“Company reps might hear about a competing business that sold for 14 times earnings two years ago and wonder why they can’t get the same deal,” Barr said. “It’s important to understand that the market is changing, and every business is different.”
Building Value
Companies in the spine, extremities and trauma segments remain viable targets for M&A opportunities, according to Barr. He said interest remains strong in additive manufacturing companies, especially on the contract manufacturing side of orthopedics, and pointed to a recent flurry of acquisitions in the space. He added that buyers are focused more on targets with specific additive manufacturing capabilities to bolster their portfolios of 3D-printed devices.
Barr believes M&A activity in the medtech sector will pick up in the second half of this year, but expects the orthopedic market to remain relatively quiet until 2025. He said a few large contract manufacturers could come up for sale within a year, and pointed to AMETEK’s recent acquisition of Paragon Medical as an example of activity among large players in the space.
Barr said many well-regarded mid-sized companies — Autocam Medical, Micropulse and Precision Medical Technologies, for example — are on buyers’ radars but are determined to remain independent and have no interest in selling.
“Smaller deals might take place, but will depend on whether the acquisition adds a new customer or a specific capability that the buyer currently lacks,” he added.
Amid the consolidation of the contract manufacturing market, Barr said that acquiring a mid-sized shop wouldn’t necessarily provide substantial growth and move the revenue needle.
“Contract manufacturers need to evaluate what their clients need and ways to become better suppliers to increase revenues,” Barr said. “They should focus on optimizing their core areas of strength. Simply adding another facility isn’t the solution to future success.”
For example, he said, Tecomet is closely tied to the big five players in orthopedics, and Avalign Technologies is focused on partnering with the community of challenger companies.
“There’s a lot of opportunity at the challenger level to offer various services, especially in product design and development,” Barr added.
He pointed to Resonetics, which focuses on design and development business through its Lightspeed Lab, a team of engineers and product development technicians who provide quick-turn prototyping services. The Lab contributes significantly to the company’s revenue stream and boosts its bottom line.
“It’s a model that the larger companies in the contract manufacturing sector could adopt to enhance their offerings and performance,” Barr said.
Looking Ahead
The upcoming presidential election is causing consternation on both sides of the aisle during what’s sure to be a heated campaign cycle. Barr believes the super-charged political climate shouldn’t impact the M&A market, although that wasn’t the case four years ago.
After the 2020 election, Barr said several orthopedic companies rushed to sell because they anticipated that the incoming Biden administration would significantly raise taxes. “Ultimately, that never happened,” he added. “My advice is to make decisions based on known factors rather than speculation.”
What do you know about your business? How is it performing? Who are your customers and what do they need? From where are future growth opportunities coming? Decisions about exiting the market or investing in acquisition targets should largely be based on known factors.
Barr acknowledged that it sometimes makes sense to take a calculated risk because you believe it will attract more business and add revenue. “If you have financial flexibility, the risk might be worth taking,” he said. “However, generally speaking, it’s best to base M&A decisions on what you know and can reasonably predict.”
