How carving-out a MedTech with private equity can boost value
Large medical technology (MedTech) corporations typically have several business units geared at a specific product-market combination or innovation. When one of these business units is not delivering value as expected, executives must choose on how best to proceed – with carving out a business in tandem with a private equity backer as one of the possible strategies.
“Business carve-outs are a great strategic approach to how private equity participation can revitalise the performance of a business,” said Raymond Berglund, a Managing Director at Alvarez & Marsal. In a broader corporate environment, MedTech units may lack the strategic focus and support, devoted resources or the much-needed energy and creativity of the workforce.
In a standalone environment, positive momentum be generated in four ways, according to Alvarez & Marsal’s Healthcare & Life Sciences team.
Innovation velocity represents the speed at which research and development investments begin to generate returns. Outside of a corporate setting there is ample opportunity to streamline the innovation processes. “The carved-out business will have a singular focus on its current and future market opportunities, without being burdened by internal competition for scarce corporate resources.”
Put simply, “a private equity-owned business can drive an innovation engine specifically tailored to the standalone business unit, and in turn, launch more products, services and solutions more quickly,” explained Berglund.
Better local market responsiveness is a result of aligned management and global product teams to deliver specialised and focused capabilities to the focus market segment. The business will have more freedom to choose where it wants to compete, which local requirements it should prioritise, and a dedicated commercial organisation to execute this strategy. Go-to-market initiatives are delivered faster compared to slower-moving global conglomerate competitors.
Rationalising product portfolios is a “prime opportunity” within carve-out businesses, said Berglund. “It is both practically and psychologically difficult to rationalise a product portfolio, and in a corporate setting it can be difficult to make bold decisions. Becoming a focused standalone entity can catalyse the tough decisions that could or should have been made in the past to streamline and refocus the portfolio offerings.”
Finally, unleashing the entrepreneurial spirit of an organisation cannot be underestimated as a result of the carve-out. “To unleash the creative and innovative spirit of an under-funded and potentially mismanaged business is a win for the employees and the customer base alike.”
Track record
Over the past years, Alvarez & Marsal has worked with several private equity firms on turning underperforming units into jewels. One example is Theramex (Teva’s women’s health business), which was picked up by CVC Capital Partners and saw its business improve, expand and operate more efficiently, as well as the carve-out of a standalone diabetes monitoring device business that is now performing with strength as a standalone organisation.
The key steps for success are, according to Berglund, setting up a robust carve-out plan, a quick separation from the previous business, installing a strong management team, and dedicating all company resources to a long term value creation plan. “With this in place, an exit plan at increased value is highly possible,” he said.
The good news for both MedTech leaders and investors? “There are many such opportunities in the MedTech industry, and at the other side of the table, the global private equity market is currently sitting on an estimated $1.7 trillion of ‘dry powder’ ready for deployment.”
