Ian Bolland spoke to David Mardle, partner at Goodwin’s Technology and Life Sciences practice, about the health of the M&A market during the COVID-19 pandemic.
At a time when the UK, and the global economy, is experiencing one of its deepest recessions on record, it’s probably of little surprise that medtech is one area that is robust for mergers and acquisitions. The UK economy shrank by in excess of 20% during April to contribute to its deepest recession on record. But, throughout this period, medtech fared better than most.
Mardle explains that the robustness may be because of the broad range of sectors that medtech covers, while more digital health and technology that can be supported by video calling and other virtual operations boosting the digital aspect of the market.
He said: “I think the appetite for investing in the sector is robust and growing, it’s actually a growing sector as people become more comfortable and aware of the opportunities. When you talk about medtech you’re talking about a broad range – you’ve got software at one end and advanced engineering at the other and all sorts of things in the middle. There’s plenty of room for people to find something they are interested in.
“I do think that particular convergence in funds that have been successful in backing enterprise software businesses are pivoting into businesses which are playing on that interface between patient care and medical professional.
“Medtech as a space is actually doing really well as it’s not the high risk, really complicated science stuff that investors do struggle to get their heads round. You can talk to software people. If you’ve done software deals elsewhere you know how to calibrate the opportunity. Doing diagnostic plays that’s a bit more complicated, you need to know a bit about advanced manufacturing and engineering. Again, there are plenty of funds that do that so they’re all pivotal in working towards this. That’s driving a lot of attention and noise.
“Why are the buyers looking? The short answer is much of what they need to sell into their own supply chains, they don’t actually own. They need to go and buy it. They’ve got the distribution networks, they’ve got products going through the distribution networks, but they need more. I think that’s driving a huge amount of interest in businesses across the space but in medtech in particular.”
Though there might be lots of interest and deals closing in the sector, it’s not without its hurdles as people have been adapting to enforced changes because of the Coronavirus – the legal profession included as and when agreements have been signed. Inability to make site visits and travel has prolonged the process in some cases. Though some of the deals that were being closed under the more stringent lockdown regulations saw some of the groundwork done beforehand.
“There had already been some kind of physical interaction there in some trust building exercise in the conventional way and they’re closed out. The one’s being originated now, in some cases the people concerned have never met.
“There are a few legal processes that have had to be modified. From a UK lawyers’ point of view, we had 300 years of law that had to suddenly pivot into a digital environment. A classic example is we use deeds for our transactional paperwork, and it requires a witness for it to be effective, but you did not have the ability to have effective witnessing going on during lockdown.
“The practice of law has had to adopt more flexible approaches to get around these problems. It’s not a big issue in the scheme of things but it’s a good example of how a sudden correction in people’s behaviour in societal norms has these ripple-on effects.”
While many businesses are likely to face several challenges to get back on track following the economic hit brought on about the pandemic, Mardle feels that the challenges surrounding medtech aren’t specific to COVID-19 itself, though has identified at least three areas that SMEs and start-ups might find challenging.
“People, and the ability to get people by paying them and incentivising them in a world where there is a backdrop of economic bad news, and convincing those people you’re the right proposition because without the right people to scale the business up, your start-up is never really going to get the return that you need.
“Issues around getting access to capital, I think for medtech at least, is not the drama that it might be in other sectors for start-up businesses.
“Then you’ve got all of the issues surrounding getting engagement with third parties like potential customers and channels to market. That is an issue in medtech because many of the things that people are trying to do are disruptive of really quite well established businesses. If you’re building a robot to go into a hospital to do keyhole surgery, for example, and you’re a start-up then you’ve got to go and talk to people who are pretty conservative buyers, and you’re coming up against some very significant existing players such as large, often US, corporates.
This “traction issue” might be something that many medtech companies would identify as the most pressing challenge.
Mardle explained: “How do you get your customers? How do you get them to scale? Because that’s what allows you build some recurring revenue that allows you to raise more money which allows you to get more customers. Those issues are not COVID related. They’re probably made more difficult by COVID because it comes back to that standard thing of how do you meet these people? How do you build a rapport with them?”