Abbott Laboratories’ acquisition of St. Jude Medical for $25 billion in a bid to create a cardiovascular giant made sense to some, but others questioned the wisdom of the deal.
Buying another company with a slower sales growth rate for $25 billion doesn’t sound like a recipe to please shareholders. Neither does financing the deal by issuing additional stock, significantly reducing shareholder repurchases and moderating growth of the dividend.
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In defense of the deal, the companies’ pipelines are highly complementary. Abbott doesn’t sell (low growth) cardiac rhythm management devices like pacemakers, neuromodulation devices, left ventricular assist devices or transcatheter aortic valve replacements, all markets in which St. Jude is active.
Still, Bank of America Research Analyst Bob Hopkins concluded that the proposed transaction signals that Abbott has few options to turn around its “low growth” vascular business, and that the company’s “view on the growth outlook for its entire business is now lower — more mid-single digits than mid-to-high single digits.”
“In the last two years, eight of the largest device companies have merged or are merging into four new, larger companies,” he pointed out. “The common theme with these deals is that the move away from fee-for-service payment models has these eight CEOs convinced that category leadership, product breadth and size/scale will matter much more in the future. It seems highly likely that we will see more large scale mergers in medtech.”
So what will those deals look like and who will be at the center of them? Here are are a few deals I’d like to see in the medical device sector.
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A Stryker acquisition of fellow orthopedics player Smith & Nephew is not one of them (it’s been discussed enough already), though Abbott’s move shows that repeated denials of a rumored deal do not mean a transaction isn’t around the corner.
Edwards Lifesciences buys HeartWare
HeartWare is an obvious acquisition target following the acquisition of Thoratec, the only other left ventricular assist device maker. St. Jude paid a hefty premium when it purchased that company for $3.4 billion.
The LVAD business boasts strong growth and a wide moat, for the cost of entry is high due to the device’s complexity and high regulatory hurdles.
Activist investors earlier this year scuppered a controversial tie-up between HeartWare and Israel’s Valtech Cardio to prepare the company for a takeover by an industry bigwig. The activists know the resulting investor payday is far more likely if HeartWare remains focused solely on the attractive LVAD market, and avoids entering risky and speculative in markets like mitral heart valves—an arena where several potential buyers like Edwards have already placed their bets.
Edwards is a logical purchaser of HeartWare because it too focuses on late-stage heart failure patients, so its heart valves would be a good “call point” with physicians, and serve as a platform to further drive LVAD sales among patients who need a heart transplant.
Edwards has said it’s mainly interested in the heart valve business, but has a large cash pile due to the runaway success of its Sapien TAVR. Moreover the company could use a second-prong to its attack, and needs to prepare for the day when TAVRs become so widely used that they are no longer a growth market.
IBM’s Watson Health buys MedyMatch Technology
MedyMatch is little-known at the moment, but would be a tremendous fit for IBM’s Watson Health unit, assuming its unapproved Big Data technology works as intended. Former Philips Imaging CEO Gene Saragnese believes his company’s image analysis software can quickly and accurately determine the occurrence and type of stroke.
Watson Health demonstrated a clear interest in machine learning and medical image analysis via its billion-dollar acquisition of Merge Healthcare. Adding the ability to diagnose stroke would move Watson closer to the front-line of clinical decision making. That would mean navigating FDA regulations.
But limiting the supercomputer to use as a research tool and source of partnerships hasn’t resulted in much revenue for IBM despite several recent acquisitions worth $4 billion. Is it time to use Watson’s intelligence in a more traditional manner, and one that device bigwigs have proven to be quite profitable?
Plus, stroke is a hot market for med tech thanks to the advent of stent retrieval devices that have proven themselves capable of treating the condition in acute situations, as long as they are used within an appropriate treatment paradigm that provides quick diagnosis, the very thing MedyMatch is supposed to provide.
(more about MedyMatch)
Stryker buys Halyard Health
Stryker seeks to add more disposable devices to its portfolio in a bid to receive steady, recurring revenue, which balances out its traditional emphasis on expensive capital equipment, whose sales can be cyclical and unpredictable. This desire was evidenced in the company’s February statement that it is purchasing Sage Products for $2.8 billion.
Kimberly Clark spinoff Halyard Health offers Stryker a great way to further its goal of expanding in the disposables arena.
Halyard Health’s offerings would bulk Stryker up in some key arenas like hospital-acquired infection prevention. Some of Halyard’s disposables would neatly complement Stryker’s capital equipment, while others would expose Stryker to entirely new markets like pain management, making the company an indispensable supplier to hospitals.
Stryker hospital beds and Halyard Health protective apparel, it just sounds like a good combination.
Medtronic buys Nuvasive
Medtronic’s spine business has been underperforming of late, especially in the U.S., where more focused competitors are gaining market share. Medtronic CEO Omar Ishrak has said the underperformance is unacceptable, adding “we’ve got to get this thing fixed.”
That was in response to equity analyst asking how long the CEO was willing to let the business underperform. In other words, the clock is ticking. If the unit’s performance doesn’t improve Medtronic’s options include annoying Wall Street by standing pat, spinning it off (like Integra LifeSciences did, creating SeaSpine Holdings), selling it, or looking for outside help.
Nuvasive makes sense in the latter case, because the fast-growing company is strong in minimally invasive spinal surgery implants, which is the most desirable subsegment these days. Of course it would be an expensive buy, and diversified Medtronic’s priority may very well not be its spinal implants.
But Nuvasive recently acquired its Brazilian distributor to strengthen sluggish international sales. Medtronic’s broad international reach would certainly make it an attractive buyer from Nuvasive’s perspective.
Photo: Flickr user Toni Blay
