The next medtech megamerger?

The consolidation in the medical device industry this year has been unprecedented in its range and reach, not to mention how long it has lasted. With four multibillion-dollar mergers in the last month alone the pace does not seem to be slackening, and the only question is, who will be next?

Here, EP Vantage attempts to provide an answer – or at least some likely candidates. Medium to large companies that are relatively specialised and growing at a reasonable rate seem to be catnip to acquirers, and several companies fit this bill, as the table below shows.

Specialists

Of the six medtech companies bought for more than $1bn this year for which EvaluateMedTech has segmental sales, all but one obtained most of their medtech revenues from a single therapy area. The exception, Covidien, takes just less than half of its sales from hospital equipment, so it is still fairly specialised.

High growth rates seem to be more of a nice-to-have feature rather than a must-have; ortho firm Tornier, bought by Wright Medical, and the dental specialist Nobel Biocare, bought by Danaher, had forecast annual growth rates of 8% and 5% respectively at the time they were taken out.

Biomet and CareFusion, though, were growing at just 3.8% and 3.4% at when they were bought by Zimmer and Becton Dickinson.

Applying similar parameters to the EvaluateMedtech database allows several interesting candidates. The analysis includes companies with medtech sales of more than $1bn in 2013, and which derive at least 45% of those medtech sales from a single area. They also have an annual growth rate greater than 4% – not vital, but surely a factor that contributes to a company’s desirability.

The next megamerger targets?
Company Area of specialisation Proportion of sales in that area Total 2013 medtech sales ($bn) CAGR 2013-20 Market cap ($bn)
Stryker Orthopaedics 58% 9.02 5% 33.16
Essilor International Ophthalmics 89% 5.98 8% 24.70
St. Jude Medical Cardiology 92% 5.50 5% 18.42
Smith & Nephew Orthopaedics 46% 4.35 6% 6.04
Sonova Ear, nose & throat 100% 2.13 7% 11.01
Edwards Lifesciences Cardiology 98% 2.05 6% 12.81
Sysmex In vitro diagnostics 97% 1.80 11% 9.89
The Cooper Companies Ophthalmics 80% 1.59 10% 7.87
ResMed Anaesthesia & respiratory 100% 1.55 6% 7.22
Sirona Dental Systems Dental 100% 1.10 7% 4.56

Orthopaedics has led the charge towards consolidation this year, so much so that many have wondered whether there is room for more megamergers. The purchase of Tornier last week showed that there are still companies willing to try (Wright targets Tornier despite tax and antitrust risks, October 28, 2014).

Assuming Wright will not be the last company to buy an orthopaedics specialist, Stryker could be a target, but with a market cap in excess of $33bn it could only be bought by the very largest companies. Medtronic has enough on its plate at the moment, and J&J’s recent strategy has involved divestments rather than acquisitions.

No list of potential targets is complete without Smith & Nephew, though perhaps the US’s new anti-inversion rules mean that the UK-based company is not quite as attractive as previously. But the company is the right size to be easily absorbed and has a product portfolio that could mesh well with one of the larger ortho firms. In fact, a merger of the two ortho specialists in the table would not be entirely shocking.

Growth drivers

The French lens maker Essilor is the fastest-growing company in medtech's top 10. It is not a classical medtech group, with a large share of its sales coming from spectacle lenses, and hence is unlikely to be bought by a medtech pure-player.

A group such as Novartis might be a possibility, however; the lenses Essilor makes could be complementary to those developed by Novartis’s Alcon unit. Essilor’s 8% annual growth rate would certainly reinvigorate Alcon, currently forecast to grow at 4% annually to 2020.

Cardiology is well represented in this analysis. It is a mystery why the transcatheter heart valve pioneer Edwards has not been bought already; the company could be a perfect fit for Abbott Laboratories, Boston Scientific or St. Jude Medical, and would be a growth driver for them all.

St. Jude itself, not quite as specialised as Edwards but very much a cardiovascular specialist, could also be taken out. Its close alliance with Abbott – the companies collaborate to sell cardiovascular devices in the US – has led to speculation of a coupling, with St. Jude’s electrophysiology and cardiac surgery strengths meshing nicely with Abbott’s interventional cardiology lines. The resulting company would have the scale to compete better with Boston, though it would still fall short of post-Covidien Medtronic.

Arms race

In vitro diagnostics companies have been notably absent from mergermania 2014. Perhaps this is because, more than any other sector in medtech, they tend to rely on licencing deals, for example collaborating with big pharma to create companion diagnostics. But Sysmex’s enviable double-digit growth rate could make it a tempting prospect for a large but relatively slow-growing company such as Siemens or Thermo Fisher Scientific.

It is of course impossible to forecast which companies will be responsible for the next billion-dollar merger; this analysis is no more than a thought experiment. That said, the target is likely to be one with a reasonably narrow focus, and the buyer already active, perhaps entirely active, in that same sector.

The point is almost approaching where every medtech company with a market cap of more than $1bn must build scale defensively just to remain competitive. The alternative appears to be that they themselves are acquired by their rivals.

To contact the writer of this story email Elizabeth Cairns in London at elizabethc@epvantage.com or follow @LizEPVantage on Twitter

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