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Co-written by Steve Holloway

This month, KPMG published its 2022 Healthcare and Life Sciences Investment Outlook. This report assessed the trends in M&A across the breadth of the Healthcare and Life Sciences sectors. These broader market trends form a backdrop to the medical imaging markets, although, as will become evident, the dynamics of these distinct markets are not always shared.

Overall, KPMG’s report was very positive. The professional services firm found that despite the headwinds presented by the coronavirus pandemic, 2020 and 2021 in particular, were very strong on a dealmaking front. There were 1,839 deals (not counting joint ventures, minority investments and venture funding) sealed in 2021, an increase of almost 300 compared to 2019. The most active quarter was Q420, with 511 deals made. No quarter in 2021 topped Q420, but the elevated level was more sustained, with dealmaking at a higher level than any of the preceding eight quarters, spare the aforementioned Q420.

Several drivers spurred this activity. The consultancy identifying the larger vendors’ need to look to acquisitions as a way to sustain innovation and replace lost revenue from maturing products, and portfolio shaping, as two of the key drivers of M&A in 2020 and 2021. KPMG suggested these factors would continue to be a driving force in the coming year and offered a bullish prognosis for 2022, asserting that deal volumes would continue to soar. The firm noted that low cost of capital and internal pressure to deploy capital meant that around 70 percent of respondents to its survey expect to increase their M&A activity in 2022, while more than half of PE investors said they would do at least 10% more deals than 2021. There are still some reasons for caution. Further variants of Covid could lead to vendors scaling back their plans or pausing moves. More predictable factors are also set to temper activity, with a diminishing supply of attractive prospects, and companies’ need to complete and integrate the acquisitions they have already made also set to retard activity.

The Signify View

While these trends may be true for the broader healthcare and lifesciences sector, there is some nuance within individual medical imaging markets. This is true for the large international modality vendors, for example.

One of the central reasons given by KPMG for vendors to embark upon acquisitions is the requirement to expand their portfolios, expand their capability and win new business in other adjacent markets. The large modality vendors, however, already address most of the individual product subsectors, offering providers very broad capability. This means that in many instances, there are limited benefits to be gained from making an acquisition. This is further compounded by the level of consolidation in the medical imaging modality markets. GE, Siemens Healthineers and Philips, have near complete portfolios. Canon’s acquisition of Toshiba and Fujifilm’s acquisition of Hitachi, which both took place since 2017, represented the last opportunity for major, global modality vendors to significantly broaden their portfolios by the acquisition of a competitor with a broadly complementary range.

There are exceptions to this rule, with GE’s 2021 acquisition of BK Medical showing that international modality vendors are still ready to make deals. However, these deals will be predominantly “tuck-in” deals to strengthen a vendor’s core capability in a product sector, such as a vendor with strength or experience in a specific clinical application, or to acquire technology assets and IP that will support the next generation of imaging modality products.

The other predominant deal type will involve moving into adjacent areas. One of the blueprints for this type of acquisition was Siemens Healthineers’ acquisition of Varian in 2020. This deal saw Siemens Healthineers add a market leading oncology therapy and care vendor to its arsenal, enabling the sale of end-to-end oncology solutions which complemented its core imaging and diagnostics focus. Other vendors could be looking to complete similar deals, either in oncology or other segments. KPMG’s warning that few acquisition targets remain rings true in oncology though, with only Elekta and Accuray as viable Varian alternatives for radiation therapy hardware.

Adjacency Approved

More likely, one of the large modality vendors could eye an acquisition of a vendor in another adjacent area, such as entering therapy with a cardiac care acquisition, for example. Another potential avenue for investment would be in surgery. This is a further area where Siemens has already made progress, acquiring surgical robotics specialist Corindus, in 2019. Imaging vendors are already selling into surgical rooms and interventional suites, so the addition of surgical robots, a technology which is rapidly gaining traction, could be a shrewd target for one of the large imaging vendors.

A further possibility would see one of the larger Chinese modality vendors such as Mindray or United Imaging swooping in to bolster their portfolio and presence on an international stage. A previous Premium Insight discussed the rationale for United Imaging making a bid for Siemens’ ultrasound unit based on rumours present at the time. While that hasn’t yet come to pass the, the arguments for a large Chinese vendor to make such an acquisition still stand, with either a larger company’s divestiture, or even a smaller challenger vendor both presenting intriguing possibilities; a combination of Mindray and Butterfly Network, or Exo or another handheld ultrasound vendor, for example.

Buying Power

Outside of modality imaging, there is different impetus for acquisitions. The healthcare IT sector has been one of the more buoyant M&A markets over the past two years. KPMG noted that it was the second most active subsector across the wider healthcare and lifesciences space, and among the most attractive targets for investment at present. The boom in telehealth as a result of the pandemic is responsible for much of this growth, but there have also been a number of high-profile deals done with imaging IT vendors, not least of which are the likes of Nuance and Microsoft and Intelerad’s spree of LumedX, Ambra, and Insignia Medical Systems.

Dealmaking looks likely to continue within the imaging IT sector. It is a market that is mature and stable, with long deal cycles. Resultantly, the opportunities for vendors to increase their market shares organically is limited. Instead, vendors in the imaging IT space look likely to show their hands with tuck-in acquisitions in a bid to increase their market share and enable competition in larger, multi-product deals. This could see many of the smaller players, or those with strength in certain regional markets, increasingly consumed by larger players as they strive to increase their install base in this stable market, or increasingly starved off opportunities and run out of the market.

There are, however, also several larger deals to be done should an acquisitor have the long-term appetite. Change Healthcare’s imaging business could be one prize. Assuming Optum’s takeover of the revenue management business goes ahead and isn’t blocked by regulators, as seems possible given recent rumours, then Change could well look to spin out its imaging business. It is a similar story with IBM Watson Health’s imaging division. Following the divestiture of IBM Watson Health, the imaging business stands apart from the rest of the unit and could subsequently represent an attractive purchase for a vendor looking to expand its customer base and take advantage of IBM’s technology. Both vendors have reasonable market share in the prized US acute provider sector, potentially tempting an acquirer to dig into its pockets to gain a foothold.

AI Gearing up for a Feeding Frenzy?

Perhaps the most keenly observed imaging sector is medical imaging AI, a rapidly evolving and fragmented market that is starting to gather commercial pace. Many leading vendors have identified AI as an area of substantial promise for medical imaging, spurring a torrent of investment from venture capital and private equity. However, despite a gradual thinning of the field and emergence of strong potential candidates (see Medical Imaging’s Top Tier: The $100m Club), no major global imaging vendor has made a big acquisition of an AI vendor or AI orchestration platform yet; in fact, it is an imaging centre provider (RadNet) that has made the most bullish bet on imaging AI so far.

This hesitancy is due to three main fundamentals. Firstly, most vendors are still early in commercialisation and have, to date, no tangible customer base or scale to justify their inflated valuations. Secondly, reimbursement for AI use outside of a few select cases (FFR-CT (HeartFlow), CT-stroke detection (RapidAI, VizAI, et al.) has not been granted, adding greater risk to any investment requiring a long wait and uphill battle for an acquirer to commercialize at scale. Thirdly, healthcare provider customers have not made AI a significant enough priority in recent years to drive leading vendors to bring AI “in-house”. With many applications still in the pilot or assessment stage, a loose association or basic integration with existing imaging IT platforms has satiated most customers. Furthermore, the Covid pandemic has paused or extended many providers’ assessments of AI as a future investment, meaning imaging IT and modality vendors see no rush to dig deep into cash reserves to pay lofty AI valuations.

In 2022, while we expect to see a gradual consolidation of the AI segment via AI vendor to AI vendor mergers and partnerships, the oft-discussed feeding frenzy from imaging sector leaders is highly unlikely. Instead, many will stick to their holding pattern while continuing to strengthen partnerships and planning integration strategies, should the time come to aggressively acquire assets. Given the other market pressures facing the imaging market near term, some may also be holding on in the hope they can sweep up assets as investor confidence in start-up AI vendors falters and vendors burn through cash reserves quickly.

Caveat Emptor

Overall, many parts of the medical imaging market look less ripe for strong M&A activity than the broader healthcare and lifesciences sector. Several vendors have explicitly stated their acquisitive ambitions, and some vendors’ broader strategies into areas such as precision medicine and digital twins would require additional capability, but often these are more linked to the wider company rather than a vendor’s imaging division.

This run of acquisitions could peak in 2022. If these deals are to be done, vendors should focus on doing them quickly. For many of the medical imaging markets, growth is set to peak between 2024 and 2026 as the fruits of the rebound from the coronavirus pandemic, as well as purchasing based on pent-up demand take hold. If vendors are going to use an acquired company to take advantage of this growth, then they will need to do a deal soon.

These deals will happen. They may not be on the scale of some of the deals that have taken place in the past such as the combinations of Fujifilm and Hitachi and Canon and Toshiba, or of a similar complementary nature, but, as vendors look to move forward with their strategies, acquisitions will be a necessary step. However, unlike in KPMG’s assessment of the broader sector, this activity will not be universal, with imaging vendors having to be more selective in approaching what is sometimes a very limited pool of targets. Many vendors have the cash, but the creativity to make the right choices and execution to integrate is what will set them apart.

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This Insight is part of your subscription to Signify Premium Insights – Medical Imaging. This content is only available to individuals with an active account for this paid-for service and is the copyright of Signify Research. Content cannot be shared or distributed to non-subscribers or other third parties without express written consent from Signify Research. To view other recent Premium Insights that are part of the service please click here