A new report from Kalorama Information examines the $300 billion-plus global medical device market, finding acquisitions driving growth in the future.
Device companies are consolidating to grow market share and boost revenue, as well as take advantage of distribution synergies, according to the report. "Combining is the rule as government spending is being curtailed in the United States and Europe, and the emerging nations can't replace the revenue fast enough," said Kalorama Information Publisher Bruce Carson. "The way to growth is to acquire, partner and merge."
The orthopedic and spine device market is no stranger to merger and acquisition activity; in fact, it's one of the largest perpetrators today. Medtronic's $42.9 billion acquisition of Covidien last month is one of the biggest transactions to date, and will make the emerging Medtronic plc among the world's largest medical device makers, if the transaction is approved.
Kalorama estimates the deal will be "just short" of creating the largest device company in the world, based on 2013 revenues.
Other striking examples include Zimmer's $13.35 billion acquisition of Biomet, both orthopedics-focused device companies, solidifying Zimmer as the second largest orthopedic device company in the world. Other leading contenders are consolidating smaller companies through mergers and acquisitions instead of going for the jugular with one big move. Case in point: Stryker, which has acquired MAKO Surgical, Small Bone Innovations, Patient Safety Technologies and Berchtold Holdings in less than a year.
There are several factors driving these acquisitions beyond just revenue growth. Rising taxes in the United States has motivated device companies to move overseas, and one of the most effective ways to this tax inversion strategy is acquiring a company overseas and then moving headquarters there. That's exactly what Medtronic plans if their acquisition of Ireland-based Covidien goes through. London-based Smith & Nephew has been the target of several acquisition talks as well by American companies, including Stryker, but Smith & Nephew CEO Olivier Bohuon says the company plans to forge ahead alone, for now.
Previous analysts estimated the most sought-after companies for the next wave of acquisitions will be small bone companies. Extremities sales are up significantly while large joints — such as knees and hips — are noticeably flat. New companies are also emerging in the hip and knee industry to produce generic implants for commoditized procedures and selling directly to the surgeon without a representative, undercutting the large device company prices. Reimbursement pinches and increased insurance company denials are also placing a damper on spine systems, implants and materials sales whereas the extremities market is experiencing no such roadblocks.
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