MedTech Industry Update: Restructuring, Mergers And Market Expansion

We are on the verge of the Q4 earnings season and it is once again time to review the players in the worldwide medical devices market. For the U.S. medical device industry, spending cuts and higher taxes have been a big issue lately. The industry faced sequestration related spending cuts to the U.S. federal budget and the 2.3% medical device excise tax.

Unfortunately, this is not the end of the story. This year, more spending cuts are scheduled to take place which will last through 2021. The sequestration which resulted in a 5.5% cut in the National Institutes of Health’s (NIH) fiscal 2013 budget resulted in 640 fewer grants in 2013.  

The NIH was not the sole victim of federal budget austerities. In 2013, under the sequester, there was a 5% cut in the Centers for Disease Control and Prevention's budget, another 5% cut to the U.S. Food and Drug Administration's fund and a 2% cut in Medicare funding that included cut in payments to hospitals, physicians, other medical providers, Medicare Advantage insurance companies and Part D prescription drug plans.

Unless repealed or replaced, NIH apprehends sequestration to take a worse shape in 2014 leading to serious consequences like delaying progress in medical breakthroughs, deterioration in job creation and tempering of economic growth. An NBC news article recently noted that many new researchers, who were trained with the U.S. taxpayer’s money, may have to move to Europe and Asia where government funding for medical research is on the rise.

On top of these, the Obamacare’s medical device excise tax is taking a heavy toll on the MedTech sector, hurting pricing decisions of companies and subjecting them to tremendous margin pressure. The small and the medium-sized players in the sector (comprising about 80% of the industry) are the worst hit by this public policy. The devastating 2.3% excise tax (effective Jan 2013), which is imposed on the sale price instead of net profit, amounts to a stupendous sum, wiping out almost a quarter of the profit at the med instrument owners.

Conversely, the big players are trying every means to change their business model and cost structure to accommodate the excise tax. They are undertaking various restructuring initiatives to counter costs incurred from the implementation of the new tax. Restructuring especially to offset the effect of the excise tax has already been adopted by key players, such as, Boston Scientific Corporation (BSX), Medtronic Inc. (MDT), St. Jude Medical, Inc. (STJ), Stryker Corporation (SYK), Zimmer Holdings (ZMH) and Quest Diagnostics (DGX). The companies are also trying to focus on strategic mergers and acquisitions (M&A), emerging market expansion or are reducing operations in order to weather the tax burden.
 
M&A Activities

Get The News You Want

Read market moving news with a personalized feed of stocks you care about.

Get The App

As mentioned above, MedTech M&A is expected to continue unabated in 2014. Wary of an uncertain economy, MedTech giants have resorted to the acquisition route to harness their strength and diversify offerings.

The most noteworthy move in recent times was the Irish medical device maker Covidien plc.’s (COV) $860 million deal in December to acquire Israel-based diagnostic products maker Given Imaging (GIVN) in order to get a share of the $3 billion gastrointestinal (GI) market. The acquisition is expected to be completed by Mar 31, 2014.

Stryker Corporation was also in the headlines last month with its $1.65 billion acquisition of robotic assisted surgery developer MAKO Surgical Corp. Stryker is excited about inheriting MAKO’s robotic technology as the company believes it has long-term potential for human joint reconstruction.
Last month, HeartWare International (HTWR) acquired CircuLite, Inc. -- developer of the SYNERGY Circulatory Support System for a cash-and-stock deal amounting to $350 million. This accentuates the company’s focus on advanced heart failure treatment.
 
In November, Wright Medical Group, Inc. (WMGI) succeeded in its efforts to expand its direct sales and international distribution network in France by completing the acquisition of French orthopedic extremities company Biotech International. The acquisition has added Biotech’s extremity product portfolio that will boost WMGI’s global Extremities business growth.

In continuity of its strategic investment plans, Henry Schein, Inc. (HSIC) acquired a 60% stake in BioHorizons, a U.S.-based manufacturer of advanced dental implants with sales of $115 million. The acquisition of BioHorizons marks Henry Schein’s foray into the global implant market, which is estimated to touch $4.2 billion by 2016. Combined together, the U.S and Canadian markets alone have a potential of $1.5 billion in 2016, up from $1 billion in 2012.

CareFusion Corp. (CFN) announced in November that it has signed a $500 million agreement to acquire Vital Signs, a division of GE Healthcare, for $500 million. The acquisition will not only expand its Specialty Disposables business under the Procedural Solutions segment internationally but establish it as a leader in the $3 billion market for respiratory and anesthesia consumables.

There have been many more M&As in the MedTech space. Boston Scientific Corporation recently closed the acquisition of Bard EP, the electrophysiology business of C.R. Bard, Inc. (BCR). The deal, valued at $275 million, is a step forward to strengthening the company’s foothold in the $2.5 billion global electrophysiology market.

In October, St. Jude Medical acquired world’s first and only leadless pacemaker manufacturer Nanostim, Inc. for $123.5 million. St. Jude utilized an exclusive option, obtained on May 3, 2011, when it had entered into a partnership agreement with the then privately-held company.

In September, Kinetic Concepts formed a trinity with LifeCell Corp. and Systagenix to develop a diversified wound care, biologics and regenerative medicine company with more than $2 billion in sales.

At the end of September, Baxter International (Original post

Written By: Zacks Investment Research