As expected, MedTech mergers and acquisitions (M&A) are
heating up in 2013. Finally, the much-hyped takeover battle for
Life Technologies Corporation
) came to an end last month with
Thermo Fisher Scientific
) emerging as the clear winner.
For most of the last seven years, Thermo Fisher has supported its
business momentum by acquiring several entities. Nevertheless, the
proposed acquisition of Life Technologies is the biggest-ever deal
for the company since its inception in 2006. The takeover will
inevitably strengthen Thermo Fisher's global foothold and
It's a Buyer's Market
Medical device M&As are not stopping there. Wary of an
uncertain economy, MedTech companies have resorted to the
acquisition route to harness their strength and diversify
Last month, in a bid to strengthen its contraceptive portfolio,
) inked a deal to buy contraceptive device-maker
) for approximately $1.1 billion in cash. This impending
acquisition will add the Essure permanent (non-surgical) birth
control system to Bayer's product portfolio. The transaction is
expected to close by mid-2013.
In Mar 2013,
Becton, Dickinson and Company
) acquired AustriA-based Cato Software Solutions, the manufacturer
of "catoA? and chemocatoA?" software, a suite of comprehensive
medication safety solutions for pharmacy intravenous medication
preparation, physician therapy planning and nurse bedside
Low global penetration and demand outstripping supply provide a
positive long-term thesis for investing in the blood processing and
supply chain management industry. With the acquisition of the
transfusion medicine business of
) entered the $1.2 billion whole blood collection market. Moreover,
in May 2013, Haemonetics acquired Hemerus Medical that develops
technologies for the collection of whole blood, and processing and
storage of blood components.
) acquisition of UMass Medical Lab in Jan 2013 is in sync with its
goal to create a planned 'lab of the future.' According to the
company, this will help boost its long-term growth opportunities in
the faster-growing esoteric markets.
Additionally, earlier this month the company announced the
acquisition of the outreach testing operations of Dignity Health in
California and Nevada. Quest Diagnostics expects to complete
additional fold-in acquisitions, consistent with its goal of
generating 1-2% revenue growth per year through accretive
Apart from the abovementioned takeovers and/or acquisitions, at the
end of last year,
) entered into a $4 billion deal to take over Gambro AB, a
Sweden-based privately-owned renal products company. The deal which
is expected to close in the second quarter of 2013, is going to
strengthen the company's role in the hemodialysis market.
Moreover, after the three successive acquisitions of Cameron
Health, Rhythmia Medical and BridgePoint Medical last year, Boston
) recently acquired Vessix Vascular, which has developed the
percutaneous radiofrequency balloon catheter technology for the
treatment of hypertension. The company expects commercial launch of
this platform in Europe and other international markets in 2013.
Other major deals inked in recent times in the MedTech space
include six successive acquisitions by healthcare products maker
(COV) exceeding $1.2 billion. In Jan 2013, the company completed
the acquisition of Fremont, California-based medical device
company, CV Ingenuity. In Mar 2013, leading vendor of cloud-based
services for physician practices
(ATHN) took over Epocrates, a pioneer of mobile health workflows
and POC health apps.
The past year also witnessed significant M&A deals, including
the acquisition of Switzerland-based Synthes Inc. by
Johnson & Johnson
) for a whopping $19.7 billion, and Gen-Probe Inc. by
) for $3.8 billion.
Trends over the recent past reflect focus on the diagnostics space.
A prime example is that of
) entering into the Diagnostics and Genomics space through the $2.2
billion acquisition of cancer diagnostic company Dako. The
acquisition is intended to augment Agilent's portfolio and build a
global market share to better fight its major peers, especially
), Thermo Fisher Scientific and
) in this space.
In order to expand into the large and lucrative market for
) purchased Lutonix Inc. in Dec 2012. The worldwide peripheral
vascular market for drug-coated balloons is forecast to hit roughly
$1 billion annually over the next ten years. Further, the
acquisition of Neomend will allow Bard to expand into another $1
billion market for surgical specialties offerings.
In Nov 2012, the neurovascular division of
) acquired Surpass Medical (for $135 million) to expand its
Complete Stroke Care portfolio. Surpass' mainstay, the CE-Marked
NeuroEndoGraft family of flow diverters is an attractive addition
to the company's product line.
In the light of the discussion above, 2013 is going to be another
big year for M&As in the MedTech space. We expect a significant
pickup in in-licensing activities and collaborations for the
development of pipeline candidates. Several MedTech majors
struggling in their core businesses are looking to explore
potential emerging therapies through collaborations and alliances.
The US still holds the leading position with almost one-third of
the market share. However, emerging economies like Brazil, Russia,
India and China -- collectively known as the BRICs -- are fast
coming up in the medical devices space and are attracting a lot of
These emerging economies are seeing an increasing uptake of medical
devices due largely to growing medical awareness and economic
prosperity. An aging population, increasing wealth, government
focus on healthcare infrastructure and expansion of medical
insurance coverage make these markets a happy hunting ground for
global medical device players. Expansion in emerging markets,
especially those with double-digit annual growth rates, represents
one of the best potential avenues for growth in 2013 and beyond.
The focus on emerging markets is all the more significant given the
saturation and uncertain growth in the developed markets of US,
Europe and Japan. Companies like
), Boston Scientific, Thermo Fisher Scientific, Stryker and
Smith and Nephew
) are all vying to expand their presence in the BRICs and other
emerging markets. These companies are also looking to establish
their manufacturing facilities abroad.
According to a McKinsey & Co. report (Jul 2012), health-care
spending in China has more than doubled from $156 billion in 2006
to $357 billion in 2011. It is expected to grow to $1 trillion by
2020. China is also setting up proper health insurance coverage
that should boost the healthcare sector. It is expected that within
the next decade, China will be the biggest healthcare market in the
world, even outpacing the US.
Among the other BRIC members, Brazil is currently the largest
health-care market in Latin America, covering almost one-fourth of
the population. Though India has one of the largest and fastest
growing health-care markets in the world, it is considered to have
the least developed health-care infrastructure and spends
relatively little on health care. In order to reverse the trend,
during the 12th Plan (2012-2017), the Indian government planned to
spend 2.5% of its GDP (up from 1.2% earlier) on healthcare and
raise it to at least 3% by 2022.
Given the huge potential in these emerging regions, in Mar 2013,
Stryker acquired China-based Trauson Holdings for $685 million.
Trauson was a competitor in the Spine segment and a producer of
Trauma products. The company sold as many as 120 offerings and
maintained a decent pipeline.
Smith & Nephew, on the other hand, entered into two definitive
agreements to expand in the BRIC regions. In Apr 2013, it
contracted to purchase its Brazilian distributor, Pró Cirurgia
Especializada (PCE). PCE has been associated with the company for
the last 30 years and has distributed its sports medicine,
orthopedic reconstruction and trauma offerings in Brazil.
In May 2013, the company announced another agreement, to take over
Adler Mediequip Private Limited and with it the brands and assets
of Sushrut Surgicals Private Limited, a leader in mid-tier,
orthopedic trauma products for the Indian market.
Johnson & Johnson has already set up manufacturing and R&D
centers in Brazil, China and India. While it has been doing
business in China for more than 25 years, it established a new
innovation center in the country in 2011. The Guangzhou Bioseal
Biotech deal marked the company's first MedTech acquisition in
China. The company is expected to expand further in China on the
back of the Synthes acquisition.
Medtronic is targeting 20% of its revenues from emerging markets by
fiscal 2015−16. After setting up its Innovation Center in Shanghai,
the first outside the US and Europe, last October the company
acquired China Kanghui Holdings and formed a strategic alliance
with China-based LifeTech Scientific Corporation (both in Oct
2012). The acquisition is expected to strengthen its orthopedic
franchise in the country.
Boston Scientific is aiming to increase its below-average market
share in the $700 million combined drug-eluting stent market in
China and India, which is growing sharply at 20%. The company plans
to invest $150 million in China over the next five years to build a
local manufacturing operation.
Thermo Fisher is also expanding its presence in emerging markets.
It expects to garner 25% of total revenues from the high-growth
Asia-Pacific region and emerging markets by 2016, up from 19% in
2011 and 10% in 2006.
Another trend that we have been observing of late is the divestment
of non-core business segments. For example, in an effort to focus
on its high-margin surgical product portfolio, healthcare products
maker Covidien is spinning off its pharmaceuticals business
Mallinckrodt plc, which is expected to take place by Jun 2013.
In early January,
) separated its research-based pharmaceuticals business by creating
a new company,
), to allow the two separate entities to focus more on their
Quest Diagnostics has also been focusing on areas with high
potential such as gene-based esoteric testing for cancer,
cardiovascular disease, infectious disease and neurological
disorders. As a part of this strategy, in Apr 2013, the company
completed the divestiture of the HemoCue diagnostics products
Last December, the company divested its OralDNA Labs
salivary-diagnostics business in order to redirect its resources to
core diagnostic information services. Johnson & Johnson, too,
is currently looking for opportunities to sell or spin off its
Ortho Clinical Diagnostics business.
In November last year, Becton, Dickinson and Company divested its
Discovery Labware sub-segment (excluding Advanced Bioprocessing
) for $730 million. In May 2012, Smith & Nephew, through an
agreement with Essex Woodlands, completed the disposal of its
Clinical Therapies business, to the newly formed Bioventus LLC, in
which it will retain a 49% investment.
Challenging economic conditions, a competitive environment,
pressure on core segments and a larger-than-expected currency
headwind continue to remain as major causes of concern for medical
device majors like Boston Scientific and
St. Jude Medical
). Both these companies barley managed to stay in line with the
Zacks Consensus Estimate for earnings in the first quarter.
The still choppy U.S. defibrillator and global drug-eluting stents
("DES") markets remain an overhang on these two stalwarts, and we
expect the same to affect the performance of their peer Medtronic,
which is slated to release its first quarter result on May 20,
While we are to some extent relieved with the signs of stability in
Medtronic's core spine markets, challenges remain in the Pacing and
Spine business, which are expected to remain sluggish, in turn
affecting the company's overall performance. With the earnings
Expected Surprise Prediction or ESP (Read: Zacks Earnings ESP: A
of 0.0% and a Zacks Rank #3 (Hold) for the company, we are
uncertain about a likely earnings beat in the first quarter.
Other major earnings reports by industry players include the first
quarter earnings beat of Stryker Corporation. The austerity
measures in Europe notwithstanding, which dampened sales growth at
some of its segments, the recent stability in the company's
domestic recon market is encouraging.
However, there was a negative earnings surprise from Quest
Diagnostics and its arch rival Laboratory Corporation of America (
). We believe that the overall soft industry trends leading to
challenging volume environment for testing laboratories and
utilization weaknesses are looming headwinds. Moreover, their poor
fiscal 2013 revenue guidance reflected the fact that the industry
trend will not improve in the near future.
Notable in this regard, the implementation of the Medical Device
Excise Tax (implemented in Jan 2013) will have an
incrementally negative impact on earnings per share of most
of the medical device majors. This is also reflected in the
conservative guidance posted by these companies.
We continue to have a Neutral outlook on large-cap medical device
stocks. While the companies will keep facing challenges like
pricing pressures, declines in procedural volume from economic
uncertainties and sluggish growth in the Cardiac Rhythm Management
(CRM) business, increased M&A activities, focus on emerging
markets and product approvals in latent areas could help reduce the
impact. Better pipeline visibility and appropriate utilization of
cash should increase confidence in the medical device sector.
With the announcement of its proposed acquisition by Bayer, shares
of Conceptus reached a new high, leading to a Zacks Rank #1 (Strong
Buy) for the stock. The Zacks Rank #2 (Buy) stocks in the MedTech
sector include Becton, Dickinson and Company and
The Cooper Companies Inc.
) among others.
In our universe, we see growth potential in companies dealing with
promising technologies. In this respect, both these companies
represent a value proposition. We are positive on Cooper based on
factors such as margin expansion, acquisitions, product line
expansion and geographical reach as well as share buybacks.
In spite of several core market challenges, the big three medical
device players -- Medtronic, Boston Scientific and St. Jude Medical
-- are striving to gain share in the implantable
cardioverter-defibrillator (ICD) market through several new product
launches. The big three are also exploring new avenues of growth
beyond the mature pacemaker and ICD markets. With gradual stability
in the ICD market, they should be able to revive their top line.
Beyond the MedTech majors, we are optimistic about the Zacks #3
Ranked orthopedic devices player
Zimmer Holdings Inc.
). The percentage of population over age 65 in the US, Europe,
Japan and other regions is expected to nearly double by the year
2030. In the US, the oldest baby boomers are now approaching
retirement age. We believe the orthopedic giants will stand to
benefit from this aging demography.
Among the scientific instrument makers, Thermo Fisher Scientific
has been successfully expanding operating margins over the past few
quarters on the back of operational efficiency. Given Life
Technologies' expansive line of consumables for genomic, and
molecular and cell biology, the proposed buyout will complement
Thermo Fisher's market-leading portfolio of analytical technologies
and specialty diagnostic.
CHALLENGES AND WEAKNESSES
On the flip side, the MedTech industry is currently hampered by
several issues including the 2.3% medical device excise tax. Many
of the nation's medical devices players are currently bracing
themselves for the impact of this tax.
The companies are either trying to relocate outside the US or
reduce operations in order to weather the 2.3% tax burden. They are
undertaking various restructuring initiatives to counter costs
associated with the implementation of the new tax.
Other issues include pricing concerns, hospital admission and
procedural volume pressures, Medicare reimbursement issues and
regulatory overhang. While the debt crisis in Europe remains
unresolved, economies throughout the world are trying to come to
terms with myriad challenges. Consequently, procedural volumes in
the US have been hit by a high unemployment rate, which has
resulted in the expiry of health insurance as well as a decline in
enrollment in private health plans.
Governments across several European countries have taken up
measures to curb spending on devices, which is taking a toll on
utilization. Volume headwind is likely to linger as unemployment
continues to influence procedure deferrals.
Last but not least, the highly regulated US medical device industry
is encumbered by stringent and complex procedures leading to
approval delays. This sometimes demotivates companies, deterring
them from investing in product development.
According to a report based on a survey of over 200 medical
technology companies (FDA Impact on U.S. Medical Technology
Innovation), the US FDA takes a significantly high time to review
compared to its European counterpart.
Coming to the weakest link in the MedTech sector, we advise against
names that offer little growth/opportunity over the near term.
These include companies for which estimate revision trends for 2013
and 2014 reflect a bearish sentiment. Covidien currently retains a
Zacks Rank #5 as doubts linger around its proposed divestiture of
its pharmaceuticals business Mallinckrodt plc.
Another Zacks Rank #5 (Strong Sell) stock is
Health Management Associates Inc.
Edwards Lifescience Corp
Orthofix International N.V.
Vascular Solutions Inc.
Symmetry Medical, Inc.
) do not look inspiring and carry a Zacks Rank #4 (Sell).
Further, pricing compressions on hips, knees and spine products,
which impaired the performances of several orthopedic companies,
remain a key concern, at the macro level. We remain skeptical about
Wright Medical Group
) although the stock currently carries a Zacks Rank #3 (Hold).
AGILENT TECH (A): Free Stock Analysis Report
BRADY CORP CL A (BRC): Free Stock Analysis
DANAHER CORP (DHR): Free Stock Analysis Report
LIFE TECHNOLOGS (LIFE): Free Stock Analysis
MEDTRONIC (MDT): Free Stock Analysis Report
THERMO FISHER (TMO): Free Stock Analysis Report
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