Smaller companies swirl in the wake of medtech megamergers

Analysis

Every single large-cap medical device company saw its share price go up in the first half of 2014, and the main reason without doubt is the unprecedented level of M&A activity. But the turbulence seen in the medtech space in the first half has extended further than the companies directly involved in billion-dollar deals.

Small and mid-cap device companies have benefited from their own clinical and regulatory successes as well as their rivals’ failures, but some smaller companies have found it hard to compete with their larger brethren and have fallen in value as a result. Progress in the clinic is not enough if market conditions are unfavourable, and with the big groups getting bigger this environment could become more hostile for smaller, newer companies (see tables below).

While large cap medtech firms saw share price rises across the board, the largest growth in that cohort was outdone easily by the sharpest risers in both mid- and small cap groups. Illumina’s impressive 61% growth was fuelled by success for its Down’s syndrome test, which it obtained through its acquisition of Verinata Health a year earlier (Success for Illumina’s genetic Down’s test could expand the market, February 27, 2014). Proof that the maternal blood test has a lower false-positive rate than standard screening, including ultrasound, has taken the company this far; if the test is adopted as a standard screen Illumina could soar even higher.

Rivals and rumours

Coloplast’s steady progress has a more prosaic explanation: it raised its revenue guidance in January and again in March. Shareholders were predictably delighted; they will have to wait until November to see whether the predicted 9% organic growth rate is achieved. Similarly, valve developer Edwards won a decisive patent victory over arch-rival Medtronic, but the biggest jump in its stock came when it reported that its global transcatheter heart valve sales had grown 10% in the first quarter.

Elsewhere, Smith & Nephew rose 24% on nothing but talk. After Stryker backed out of acquiring it, Medtronic was rumoured to be sizing up the UK firm, and its varied operations might have made it a more appropriate buyer than another pure ortho firm (Why Medtronic is a better fit than Stryker for Smith & Nephew, June 5, 2014). In Irish-domiciled Covidien, however, Medtronic clearly felt it had found a preferable use for its ex-US cash.

The largest mid cap faller, Swedish radiosurgery company Elekta, had a disappointing first quarter with analysts from UBS highlighting broken promises from management regarding cost-cutting and asking why the company’s leadership blames the group’s slowing growth on macroeconomic factors at a time when the global economy appears to have improved. A sharp turnaround will be necessary if Elekta is to avoid a reappearance in the fallers.

Mid cap ($2.5-15bn) medtech companies: top risers and fallers in H1 2014
Share price (local currency) Market capitalisation ($bn)
Top 5 risers YE 2013 H2 2014 Change YE 2013 H2 2014
Illumina $110.59 $178.54 61% 13.98 22.92
Coloplast DKr359 DKr492 37% 12.41 18.43
Edwards Lifesciences $65.76 $85.84 31% 7.19 9.06
Smith & Nephew $71.74 $89.28 24% 12.81 15.94
Sysmex ¥3,105 ¥3,805 23% 6.58 7.72
Top 5 fallers
Elekta SKr98.35 SKr85  (13%) 5.66 4.89
Mindray Medical International $36.36 $31.5  (13%) 3.30 2.86
Terumo ¥2535 ¥2265  (11%) 9.84 8.40
Carl Zeiss Meditec €24.29 €22.439  (8%) 2.69 2.52
William Demant DKr527 DKr494.4  (6%) 5.46 5.19

Myriad Genetics’ place atop the small-cap table is at first glance counterintuitive. Just over a year ago the company had the US breast cancer testing market to itself, but a Supreme Court decision in mid-June 2013 opened the space to competition. Despite this, Myriad is having a stormer of a year, and in February announced that its fiscal second-quarter profit was up 44% (Myriad impresses with sales past and future, February 5, 2014). The company’s 86% share price increase is enough to push it into the midcaps; it will be interesting to see if it will remain in that bracket at the end of 2014 or if competition will start to bite and drive its profits – and stock – down. 

Exact Sciences gained on the news that its colorectal cancer diagnostic had beat the rival offering from EpiGenomics to a recommendation from an FDA advisory panel (Colorectal screening set to become a slightly less inexact science, March 28, 2014). It jumped further when EpiGenomics disclosed that non-approvable letter from the US regulator.

IPO woe

Amid the fallers, insulin pump developer Tandem Diabetes Care has had a particularly tempestuous time since floating in November. The company’s stock rose fast to reach a high of nearly $30 in January, buoyed by the buzz around artificial pancreas projects – Tandem is the only company with sufficiently advanced technology to enable a true multi-hormone closed-loop system (Therapeutic focus – Artificial pancreas projects will deliver over time, October 4, 2013). But the company is competing against the big guns, and has had trouble converting users of Medtronic’s pumps, disappointing early backers.

Shares in Carmat have fallen steadily over the first half, despite the French group’s early-stage artificial heart technology having shown some promise. The firm is some years away from the market, which is wholly the preserve of Arizona company SynCardia, but its device managed to keep a patient alive for 74 days. Though the term was short, this still counts as a success, Carmat says: end-stage heart failure is often fatal in very short order and survival for 30 days post-implant is considered “encouraging”. However, the firm has yet to enrol a second patient in this trial. Its remaining investors are in for a long wait.

Small cap ($250m-2.5bn) medtech companies: top risers and fallers in H1 2014
Share price (local currency) Market capitalisation ($m)
Top 5 risers YE 2013 H2 2014 Change YE 2013 H2 2014
Myriad Genetics $20.98 $38.92 86% 1,568 2,912
Orthofix International $22.82 $36.25 59% 444 668
IBA Group €7.80 €11.52 48% 294 441
EXACT Sciences $11.75 $17.03 45% 973 1,411
SIRTeX Medical AUS$11.73 AUS$16.88 44% 626 861
Top 5 fallers
TearLab $9.34 $4.87  (48%) 309 164
Tandem Diabetes Care $25.77 $16.26  (37%) 551 374
Carmat €116.60 €75.33  (35%) 675 446
GI Dynamics AUS$0.75 AUS$0.58  (23%) 300 258
Meridian BioScience $26.53 $20.64  (22%) 1,102 858

The overall medtech market is improving now that the global recession is past. Nonetheless economic pressures still exist, and form a large part of the rationale for the megamergers convulsing the sector.

These pressures affect smaller companies too, perhaps disproportionately since they do not have the scale to withstand them. It is encouraging that the mid- and small cap risers rose more than the fallers fell, but this is a tricky market and it will only stabilise once the large cap acquirers close their deals and complete the integration of their targets.

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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