Wall Street Readies for Medical Device M&A Wave After Quiet Year

Medical-device makers are charging into 2021 poised for a fresh blast of deal making with soaring share prices and piles of cash at the ready.

The industry, which has surged more than 70% from a March bottom, is “ripe for deals,” according to BNP Paribas Asset Management portfolio manager Christian Fay. Analysts have also been quick to point out Abbott Laboratories, Johnson & Johnson and Zimmer Biomet Holdings Inc. among those most likely to take advantage of low interest rates and strong balance sheets.

Medical-device makers have drawn interest from investors who are looking for exposure to health care and want to avoid the risks involved with drug development and potential changes in federal health policies. With shares trading near recent highs, Wall Street sees an increase in deals activity on the horizon after a lull in 2020 as companies look to deploy cash.

Wall Street Readies for Medical Device M&A Wave After Quiet Year

The $8.9 billion iShares U.S. Medical Devices ETF (ticker IHI) has rallied 72% from a March 23 bottom. That compares with gains of 50% for large-cap health peers in the Health Care Select Sector SPDR Fund (XLV).

“Medtech M&A has been somewhat quiet overall which may see a pick-up into 2021 especially if the underlying markets prove to be as resilient as they have been subsequent to early first quarter timeframe,” Jefferies health-care stock strategist Jared Holz wrote last month.

Stryker Corp.’s $4.9 billion purchase of Wright Medical Group NV last year was among recent big moves that drew praise from Wall Street. Siemens Healthineers’ deal to buy Varian Medical Systems for about $16.2 billion in August and Baxter International Inc.’s reported interest in buying Omnicell Inc., a provider of medication-management services, may signal industry heavyweights are going to start doing more big deals soon.

Edwards Lifesciences Corp., Insulet Corp., Masimo Corp., iRhythm Technologies Inc., and Nevro Corp. “are really innovative companies that could make a difference for some of the bigger players,” BNP Paribas’s Fay said. He highlighted Boston Scientific Corp. among the companies that “need to do something.”

J&J’s $19 billion in cash and equivalents jumps off the page when screening for device makers with the most dry powder, data compiled by Bloomberg show. Stryker Corp.’s $7.1 billion, Medtronic Plc’s $6.4 billion, and Abbott Labs’ $4.5 billion trail J&J’s stockpile, though all four could deploy debt to strike additional or larger deals to avoid burning through their cash on hand.

The desire for a pickup in deal activity comes with the combination of cheap borrowing rates and an end to the pandemic that appears to be within sight. Vaccines from Pfizer Inc. and partner BioNTech SE are being deployed, and a shot from Moderna Inc. is expected to be approved for use within the week, increasing investor expectations that management teams can start looking beyond the pandemic.

“There’s a light at the end of the tunnel, and that visibility makes it easier for businesses to plan and spend money,” Brad Loncar, a chief executive officer at Loncar Investments, said by phone. “Those who have been on the fence because of the unknowns of the pandemic may be more interested in spending money.”

©2020 Bloomberg L.P.

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