Devices & Diagnostics

Will Medtronic finally pull the ‘Big One?’

On Wall Street, you’re only as good as your next acquisition. Try telling that to Medtronic Inc. (NYSE:MDT). Over the past two years, the Fridley, Minnesota, medical device maker purchased nine companies: $700 million for CoreValve Inc., $370 million for ATS Medical Inc., $123 million for Osteotech Inc. — all small, “tuck-in” deals. The time is ripe for a big acquisition.

On Wall Street, you’re only as good as your next acquisition.

Try telling that to Medtronic Inc. (NYSE:MDT). Over the past two years, the company based in Fridley, Minnesota, has purchased nine companies: $700 million for CoreValve Inc., $370 million for ATS Medical Inc., $123 million for Osteotech Inc., to name a few.

Yet the company has had little to show for its acquisitions. Since January, Medtronic shares have fallen nearly 25 percent to $34.

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First-quarter sales rose just 2 percent, prompting the company to reduce its sales and profit forecasts for 2011. And some analysts suspect Medtronic will further lower that guidance when the company reports second-quarter earnings next week.

What gives? CEO Bill Hawkins says the global healthcare market is slowing down. The company is earning less profit as prices fall amid greater competition and falling demand.

“Medtronic is seeing price declines accelerating by 100-200 basis points into the mid-single digits as hospitals focus more on cost controls and competition on price increases,” according to a report by Morgan Stanley.

The problem is not limited to Medtronic. In the third quarter, medical technology stocks rose just 4.6 percent, the second-worst performance of 10 sectors tracked by Morgan Stanley.

Analysts say medical device makers must continue to make acquisitions to goose sales. And with plenty of cash, Medtronic is poised to do that.

The problem is, the type of smaller “tuck in” acquisitions that Medtronic prefers to make doesn’t seem to impress Wall Street. Nor have those deals significantly boosted Medtronic’s revenue engine — at least not yet.

Knowing this, Hawkins has told several media outlets that Medtronic is hungry for deals. But the CEO has been far more cautious when it comes to a big one — the mega deal that consolidates industries.

Hawkins’ caution is understandable. Big deals can go awry and set back companies for years. Just look at Boston Scientific Corp.’s ill-fated $26 billion purchase of Guidant Corp.

But Hawkins may have no choice but to pull the trigger soon. Here’s why:

  1. Global demand for medical devices is waning, a long-term trend that’s not likely to reverse course anytime soon.
  2. With billions of dollars in cash, Medtronic certainly can afford it.
  3. The timing is ripe for consolidation. A weak economic recovery has depressed valuations, meaning Medtronic can avoid overpaying.
  4. A sizable acquisition can meaningfully increase sales and take out a competitor or two. With fewer rivals to compete for customers, Medtronic can boost profitability by charging higher prices for its products.

Medtronic never has ruled out a big acquisition, but it says such a deal invites more scrutiny from top brass.

“Size is obviously a factor, but it’s not what we start with,” Chad Cornell, vice president of corporate development who oversees the company’s acquisition/investment portfolio, recently told MedCity News.

The driving force behind any deal is “how can we add value?” he said. “That’s the key lens.”

At this point, though, Medtronic may need a longer lens.