Devices & Diagnostics, Hospitals

Medtronic and Covidien merger casts light on medical device purchasing trends

Aside from the tax benefits, I was interested in finding out what some of the […]

Aside from the tax benefits, I was interested in finding out what some of the other driving forces were behind Medtronic’s $42.9 billion deal to acquire Covidien. A phone chat with Charles Whelan, Director of  Consulting for Healthcare and Life Sciences for North America at Frost & Sullivan, highlighted some of the underlying trends in the medical device industry and healthcare reform that are shaping these deals.

For one thing, it diversifies Medtronic’s pure play medical device company more products to sell. An acquisition of this size will help improve Medtronic’s growth rate much more than a small acquisition could, noted Whelan. Medtronic’s devices are mostly for elective surgery. Covidien, on the other hand, has a broader product line that includes energy technologies and big medical equipment. These are some of the differences that make the acquisition attractive for Medtronic. Yet, working out what a merger will look like in a few years is tough to map out. Their respective engineering requirements and manufacturing expertise do not fit together easily, so it won’t happen overnight.

“Medtronic CEO Omar Ishrak has been one of the boldest CEOs and has been willing to take on more strategic risk than most companies are,” Whelan said.

Although it will be hard to seamlessly integrate these two companies, Whelan does see opportunities for the businesses to complement each other. Covidien’s acquisition of Israel-based superDimension to detect lung cancer using endoscopy, for example,  uses imaging technology similar to some of Medtronic’s imaging-guided technology in its spinal division.

The acquisition also better positions Medtronic’s overseas business, which accounts for half of its revenues, so that it has the capacity to fill large-scale purchasing orders that tend to be more common outside the U.S.

The traditional call points for these two companies tend to be different. A Medtronic rep may contact an electrophysiologist regarding its  pacemakers but for Covidien the likely contact would be a medical health services manager. The priorities and needs of an administrator and a physician are different, but the way Whelan sees it, this deal indicates that these differences will mean less over time. That’s because there’s another healthcare trend that’s having an impact on the medical device sector. The consolidation trend means hospitals have more buying power. As physician practices consolidate with hospitals, physicians will have less autonomy to order what they want. Healthcare reform has made hospitals more price conscious.

“As hospitals grow more cost conscious, medical device vendors will become one-stop shops for all medical devices,” Whelan said.

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