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3 Stocks to Focus on With MedTech M&A Scaling New Heights

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Changes in consumer demand due to the pandemic and technological shifts continue to test the MedTech industry. This has created opportunities as well as challenges for existing business models, growth projections, and financial performance of Medical device industry players. To withstand the continued pandemic-led transformation, several of them are altering their business models, adding new segments through acquisitions to stay relevant in the current scenario.

Historically as well, MedTech companies have looked to mergers and acquisitions (M&A) as a key strategic lever to address the industry changes and drive financial performance. After slowing down M&A activities in early 2020 amid the COVID-19-induced chaos, acquisition-focused MedTech companies have reverted to their old pace. Per a report by EY, MedTech companies executed 288 deals across the sector from June 2020 to June 2021, the highest annual number since it began following MedTech M&A in 2007.

Here we have discussed three companies, Owens & Minor, Inc. OMI, Thermo Fisher Scientific, Inc. TMO and Medtronic plc MDT, which we think will gain enormously from the recent M&A deals.

MedTech’s M&A Frenzy Continues

When other major industries were and are still in a survival mode during the pandemic, MedTech has been seen taking no break from the sector’s core strategy of expansion through channels of high-synergy acquisitions. Various reports suggest that though the pace of M&A slowed down during the initial months of the pandemic, it still remains the key growth driver in the U.S. MedTech space.

According to KPMG, the volume and value of medical device deals rose 13% and 65%, respectively, in 2021 from 2020. The increase in diagnostic deal volumes and value climbed 64% and 265%, respectively, versus 2020.

According to a PwC report, healthcare services saw growth in both deal value and deal volume. Through mid-November, deal volume was up 57% year over year and deal value was up 227%. Moreover, diagnostics deals played a large role in the MedTech sector's M&A wave in 2021, fueled by buyers generating more revenues from the expansion of COVID-19 testing.

Rationale Behind MedTech M&A

MedTech companies continue to leverage M&A to drive growth and profitability. Mergers and acquisitions allow them to achieve financial and operational stability to become more focused and innovative. The need for optimizing portfolios, committing capital to achieve growth agendas, finding ways to unlock value in a high-multiple deal environment and safely navigating through regulatory uncertainties is further going to drive more deals within the sector.

MedTech players, in particular, are motivated to gain scale as a defense against reimbursement pressure and to accelerate revenue generation by investing in high-growth areas. Per an article by MEDTECHDIVE, Becton, Dickinson and Company BDX aims to spend $2 billion annually on tuck-in acquisitions that will help it expand in hot areas such as connected care devices.

In 2020 and 2021, BDX closed 13 deals and deployed close to $1 billion for M&A deals. The stepped-up activity led Becton, Dickinson and Company to expect M&A to add $200 million to sales in 2022.

Going by an article by Real Money, in 2022, MedTech M&A investments are expected to reach $350 billion to $400 billion, driven by all subsectors.

Stocks in Focus With Recent Deals

Here we have listed three stocks from the MedTech space that have recently announced M&A activities and might turn out to be prudent investment choices given their long-term growth potential.

A global healthcare solutions company, Owens & Minor is our first choice. In January 2022, OMI entered into a definitive agreement to acquire Apria for a total transaction value of around $1.60 billion (one of the sector’s biggest investments, according to GlobalData’s deals database). The transaction, subject to customary closing conditions, is expected to close during the first half of 2022. The acquisition will enable Owens & Minor to better serve the entire patient journey and will position the company as a leader in the home healthcare market. The buyout will further expand OMI’s patient direct platform with access to over 90 % of insured healthcare customers in the United States.

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Owens & Minor’s long-term expected earnings growth rate is pegged at 8.8%. Year to date, OMI has gained 17.6% against the industry’s 17% fall. The stock carries a Zacks Rank #3 (Hold).

Renowned scientific instrument maker and a world leader in serving science, Thermo Fisher, is the next stock investors can look at. In December 2021, Thermo Fisher completed the $17.4-billion acquisition of PPD, a provider of clinical research and laboratory services to pharma and biotech companies. Notably, PPD will become part of Thermo Fisher's laboratory products and services unit. With the addition of PPD, Thermo Fisher will offer a comprehensive suite of world-class services across the clinical development spectrum — from scientific discovery to assessment of safety, efficacy, and healthcare outcomes of the product being developed to the management of clinical trial logistics, and development and manufacturing of the drug product.

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TMO’s long-term expected earnings growth rate is pegged at 14%. Year to date, TMO has gained 29.2% against the industry’s 1.8% fall. The stock carries a Zacks Rank #3.

The renowned medical-device company, Medtronic, is our third pick. In January 2022, Medtronic made a major investment to advance in the prospering field of electrophysiology (“EP”). The company entered into a definitive agreement to acquire Boston, MA-based privately held medical technology company, Affera, which is working on the rapidly growing demands for cardiac arrhythmia treatment. The acquisition is expected to expand Medtronic’s portfolio of cardiac ablation products and accessories that targets a growing patient population. With this acquisition, Medtronic, which has an established footprint in the cardiac ablation space, will be able to enter into additional EP technology segments, such as mapping and navigation. Medtronic expects the acquisition to close in the first half of the company’s fiscal 2023, subject to the satisfaction of certain customary closing conditions.

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Medtronic’s long-term expected earnings growth rate is pegged at 7.6%. Year to date, MDT has lost 8.9% compared with the industry’s 17% fall. The stock carries a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.


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Becton, Dickinson and Company (BDX) : Free Stock Analysis Report

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