A Perfect ’10? The Year in Medtech Mergers
Few medical device companies would characterize 2010 as a “perfect” year. Profits slipped, healthcare reform helped dampen financial outlooks throughout the sector, and a feeble (at best) economic recovery turned formerly munificent investors into modern-day Ebenezer Scrooges.
Maturing markets and a dearth of new blockbuster device debuts only added to the misery, eroding annual revenue growth at many firms by several percentage points. Annual revenue growth at multi billion-dollar conglomerates Abbott Laboratories, Boston Scientific Corp., Johnson & Johnson, Medtronic Inc. and St. Jude Medical Inc. have plunged 15 percent over the last six years, going from 15-20 percent between 1995 and 2004 to just 5-6 percent last year, according to industry estimates.
“These companies have had huge successes in the past and now they’re mature businesses, so it’s harder for them to find growth,” Thomas Gunderson, a senior medical technology analyst at global investment bank Piper Jaffray & Co., told The Star-Tribune of Minneapolis, Minn.
Such difficulty in finding new sources of revenue has forced many of the large device firms to re-examine their long-term growth strategies and ultimately, make more deals in recent years. As one analyst noted, “These companies have to do deals; their growth has ground to a halt in virtually every big product category.”
With traditional sources of growth now at a standstill, companies are turning to startups or smaller firms with cutting-edge technology to spur sales.
Some companies have gone a step further, boldly barging into markets that are ruled by their rivals. Stryker Corp., for instance, closed a $525 million deal last January for Ascent Healthcare Solutions Inc., a company that reprocessed and remanufactured U.S. medical devices. The purchase bolstered Stryker’s presence in the $1.8 billion device reprocessing market, an area dominated for years by both Ascent and SterilMed Inc. It also helped cement Stryker’s commitment to environmental stewardship, a move that hasn’t exactly hurt its image in the orthopedic sector.
“A lot of these companies are flush with cash and shareholders are beating on them to do something,” Phil Nabone, an analyst with Los Angeles, Calif.-based Wedbush Securities, told The Star-Tribune. “So they’re going to go out and buy something.”
Medical device firms apparently listened to their shareholders last year and embarked on a full-fledged spending spree, completing more than 17 deals with price tags of more than $150 million, according to a recent Piper Jaffray report. Those deals were worth a collective total of $10 billion.
Amid the blockbuster deals (Stryker’s $1.5 billion purchase of Boston Scientific’s neurovascular division, for example) were smaller mergers worth less than $150 million and many whose terms were not disclosed. Though these smaller deals seem irrelevant compared with the billion-dollar acquisitions conducted by Stryker, Covidien plc and St. Jude Medical Inc., they are equally as significant for the opportunities they provide to the merging partners.
Consequently, the most noteworthy mergers and acquisitions in the orthopedic sector last year not only were the pricey, game-changing moves from the industry’s major players but also the minor purchases from smaller firms that enabled them to reinvest money and enter new markets. Deals that made the (top 10) cut in 2010 include:
10. Allergan Inc. acquires Serica Technologies. In late 2008, the U.S. Food and Drug Administration (FDA) approved Serica’s SeriScaffold, a silk-based surgical mesh that repairs damaged connective tissue and helps prevent surgical scars. About a year later, Serica executives began looking for a way to turn its SeriScaffold into a platform for multiple products. Enter Irvine, Calif.-based Allergan, whose product line includes Botox, Lap-Band gastric banding systems and breast implants. A win for both companies, not to mention plastic surgery patients.
9. Biomet Inc. purchases Cytosol Laboratories Inc. Biomet hit the new product jackpot with the purchase of Cytosol. The Braintree, Mass.-based manufacturer of small volume anticoagulants received new drug application approvals last year from the FDA for TriCitrasol, noClot-50 and Rejuvesol—products that Biomet executives claim work well with the company’s GPS III Platelet Separation System and its BioCue Platelet Concentration system. Cytosol, in return, stands to benefit from what Biomet Biologics President Stuart Kleopfer deemed the “excellent market potential” of the GPS and BioCue Platelet systems.
8. Amedica Corp. acquires US Spine. These two companies seemed destined for each other: Salt Lake City, Utah-based Amedica manufactures and markets silicon nitride ceramic plates and spacers for the neck and lower back; Boca Raton, Fla.-headquartered US Spine makes thoracolumbar fusion products and PEEK (polyetherketone) interbody spacers as well as the Facet Fixation System, a device that quickly locks facet joints. By joining forces, both firms broadened their spinal implant and instrument portfolio, adding PEEK and silicon nitride interbody spacers to their offering. The companies’ combined product lineup is more versatile, too, capable of tackling open, minimally invasive, allograft and deformity correction procedures. The deal’s overall benefits were equally split between the two firms. Amedica gained the opportunity to establish itself as a “complete and full-line spinal implant concern,” as well as the chance to double its distribution network, sales and marketing management, and enhance its international presence, while US Spine gained access to four new patents Amedica received last year—one for ceramic-on-ceramic bearings, another for a hip implant using monoblock silicon nitride technology, a third for silicon nitride knee components and the fourth for its motion-preserving total disc replacement technology.
7. Teleflex Inc. sells its surgical services division. Not all business units perform equally; some are more profitable than others. But when a unit’s revenue growth and profit margins fall below the corporate average, it’s time to reconsider its value to the company. Teleflex conducted such a revaluation late last winter of one of its units, SSI Surgical Services Inc., and determined it was “not a strategic fit.” The Limerick, Pa.-based manufacturer sold the unit for $25 million, a move that analysts claim would help the company generate higher returns on its investment.
6. Zimmer Holdings buys Beijing Montagne Medical Device Co. Ltd. and Sodem Diffusion S.A. These acquisitions flew under the radar due to their proximity to the holidays, but Zimmer’s purchase of both firms demonstrates just how far the world’s largest seller of orthopedic implants will go to jumpstart sales. With sagging profits at home and two plants in China—one in Beijing and the other in Xianning, Hubei—the Warsaw, Ind.-based company turned to Beijing Montagne to boost its presence in the Asia Pacific region and increase sales. Executives are confident that Beijing Montagne can help the company create products that “address the unique needs of the Chinese market.” The same basic principles applied to the Sodem Diffusion purchase: The Swiss firm’s large and small bone product lines will enable Zimmer to expand its presence in the surgical power tool market, currently worth about $1 billion.
5. Small Bone Innovations Inc. sells shoulder technology to Fx Solutions. This deal was inevitable. With a growing product portfolio covering the thumb, fingers, hand, wrist, elbow, foot and ankle, Small Bone Innovations (SBi) was in danger of spreading itself and its resources too thin. Determining which body part to abandon was a relatively easy one: the company’s shoulder joint technology is nowhere near as popular or profitable as its signature product, the S.T.A.R. (Skandinavian Total Ankle Replacement) system, a three-piece mobile bearing uncemented and non-constrained total ankle replacement. By unloading its shoulder-related assets, SBi now can concentrate on what it does best—manufacturing and marketing its S.T.A.R. ankle. The sale also will allow the Morrisville, Pa.-based company to focus more attention on its other small joint products and potentially gain market share in the fingers, hand, wrist and elbow sectors. SBi found an eager and apposite buyer in Fx Solutions—the French firm plans to use its newly-acquired technology to develop devices that treat shoulder fractures and trauma, a move executives hope will help the company better compete in the shoulder replacement (and trauma) market.
4. Stryker Corp. sells bone growth product franchise to Olympus Corp. Stryker did its best to mask the true reasons for this $60 million sale, claiming in a news release that the move would enable the firm to redirect part of its R&D spending on other “internal projects” with more shareholder value. But the more likely reason for jettisoning its OP-1 product franchise was the $1.35 million the Kalamazoo, Mich.-based orthopedic behemoth paid to settle allegations that it marketed the product for uses that had not been approved by the federal government. Stryker’s loss, though, is Olympus Corp.’s gain: The Japanese company has been developing and selling bone void fillers and artificial dermises through its subsidiary, Olympus Terumo Biomaterials Corp. The purchase of Stryker’s OP-1 portfolio accelerates the company’s efforts to make regenerative medicine a new pillar of its medical business.
3. Stryker Corp. purchases Gaymar Industries Inc. It was only a matter of time before Gaymar Industries officially became a member of the Stryker corporate family—Stryker has been selling Gaymar’s support surface and pressure ulcer management products for 10 years. The $150 million acquisition adds complementary temperature management technologies to Stryker’s product lineup and enables the manufacturing giant best known for its orthopedic implants to dapple in the $1.8 billion support surface and pressure ulcer management market.
2. Stryker Corp. acquires Ascent Healthcare Solutions Inc. Besides increasing its market share, this $525 million deal gives Stryker the opportunity to profit from a trend among hospitals to use reprocessed and remanufactured medical devices. Experts predict this trend will grow rapidly over the next few years due to more stringent federal oversight of the industry, an increased awareness of the safety and efficacy of reprocessing, and the ability (of reprocessing) to help cut costs and leverage the supply chain for maximum savings.Stryker is wise to jump on the reprocessing bandwagon now—as lawmakers and the industry look for ways to cut skyrocketing healthcare costs, markets such as remanufactured medical devices are bound to heat up.
1. Stryker Corp. buys Boston Scientific Corp.’s neurovascular division. This deal landed in the top spot for numerous reasons: It was savvy, it was unexpected, it was courageous (on Stryker’s part) and it represented a tremendous long-term growth opportunity for the implant manufacturer. Boston Scientific’s neurovascular division complements Stryker’s neurosurgery products lineup and allows the company to diversify into a fast-growing therapy market as it adjusts to an ailing orthopedic sector caught up in price and procedure volume headwinds. Analysts claim the $1.5 billion acquisition will position Stryker as the leading player in the neurovascular market, thanks to a strong products portfolio and the pending launch of a bevy of next generation devices. Boston Scientific stands to benefit as well—the Natick, Mass.-based firm now can focus its growth strategies on other divisions and reduce its debt. In addition, the sale will give Boston Scientific additional funds to make more “targeted” growth acquisitions.