On March 16th, Johnson & Johnson ("JNJ") received a $2.1b offer for its glucose monitoring business ("LifeScan") from private equity firm Platinum Equity. This isn't too surprising since JNJ announced last year it was thinking about selling the business in order to focus on its core segments. The $2.1b enterprise value for LifeScan reflects a 1.4x multiple on trailing 12-months revenue, which compares to the 1.1x multiple that Panasonic paid for Bayer Diabetes, another diabetes diagnostics business. At face value, this seems to suggest the appetite for medical devices continues to recover. Global M&A activity in healthcare products has stabilized and increased steadily since the financial crisis by all measures -- dollar volume, deal count, and average premium paid per target. See the charts below which show annual data; most recent data dips because those represent YTD figures through March 18, 2018.
However, let's keep in mind that global M&A activity in general has also recovered as the chart below indicates.
The gradual recovery in M&A isn't specific to medical devices, so we don’t think there is a special surge in the sector as of yet. Instead, we are excited about something else in the healthcare device space - the inevitable convergence of health monitoring devices and wearable consumer products.
Think of the number of sensors inside a modern car - roughly 60-100. By contrast, the average sensors that people wear to monitor their health is about zero. Clearly, there is an opportunity for wearable devices to commingle with an industry as massive and important as healthcare (U.S. expenditures for healthcare are over $3 trillion). According to this industry report, the global wearable medical devices market will grow at a 17.4% CAGR for the next decade and reach $23.8 billion by 2025, driven by a higher prevalence of chronic diseases, increased awareness of healthcare issues, and advances in wearable medical devices. Major tech companies like Apple and Google have been snapping up healthcare companies for the past several years, including glucose measuring technologies. Here is a brief run-down of how Silicon Valley is approaching healthcare. While this is exciting for the tech giants since a successful health monitoring device would undoubtedly boost sales and retention of its products, it would also mean doctors could pay closer attention to patient well-being and thus potentially improve long-term outcomes while lowering costs for the overall system.
So, then what's significant about the JNJ deal? Well…at first glance, not much. Based on Platinum Equity's past and present portfolio, we don't see much to suggest that Platinum will somehow combine LifeScan's services with a consumer product (there may be interesting opportunities in the data/software side of the company). Rather, we think a larger wave of M&A in medical devices is yet to come as the tech giants, who are flush with cash, are ready to bid premiums for targets in an increasingly competitive space. From an investor perspective, we would look for companies with technologies that are focused on healthcare monitoring and/or data analysis, are easy to implement with a consumer product, and have relatively low regulatory barriers.
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As international equity investors, the team at R Squared Capital Management (former team at Julius Baer / Artio Global) utilizes fundamental and macro analysis in our quest to correctly identify structural tailwinds and headwinds at the geographic, sector and company levels.
FROM THE DESK OF DAEIL CHA
Daeil Cha is a Partner and Analyst at R Squared Capital Management.
Prior to joining R Squared, Daeil was an Analyst at Suffolk Capital Management.
Daeil received an MBA from Columbia University and a Bachelor of Arts in Psychology, with a focus on Neuroscience, from Princeton University.
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