Summit News

Analysis: Sluggish medical device sector ripe for mergers

NEW YORK (Reuters) - The stage is set for more dealmaking in the medical device sector, with companies eager to find faster growth amid a stubbornly weak economy and potential targets still attractively valued.

The pace of acquisitions has quickened in recent months, and deals are getting a little heftier in size as companies scour the landscape for opportunities that can offer an immediate revenue boost.

In the coming year, areas such as diagnostics and ophthalmology may be particularly attractive to acquirers. Companies like Johnson & Johnson, Abbott Laboratories, Baxter International and Medtronic Inc may also be among the ones looking to diversify further.

“The large consolidators are increasingly finding it difficult to move the needle with transactions,” said Michael Neuberger, head of the healthcare banking group and managing director at BMO Capital Markets.

“They, like everyone, are seeking to find valuations that more closely mirror the high growth they used to have. They are looking for ways to get back onto a good growth curve,” said Neuberger, speaking at the Reuters Health Summit in New York this week.

The value of deals in the medical device industry in the first half of 2010 already surpassed the total for all of 2009, when the financial crisis and concerns over the impact of a new U.S. healthcare law gripped the market.

According to a recent Ernst & Young report, 89 deals valued at $16.9 billion were struck in the United States and Europe in the first half of 2010, compared with 172 transactions worth $15.7 billion in full-year 2009. The first-half 2010 total excludes Swiss drugmaker Novartis AG’s purchase of a controlling stake in U.S. eyecare company Alcon from Nestle worth more than $28 billion.

Medical device makers have felt the pinch of declining revenue and profits as consumers who lost private insurance coverage or faced skyrocketing deductibles simply stopped visiting the doctor.

Some have sought to diversify beyond maturing markets such as pacemakers and hip replacements where revenue growth has slowed to low single digits.

In recent weeks, orthopedic device maker Stryker Corp announced it would buy a unit of Boston Scientific Corp that makes devices to treat stroke, aneurysm and other vascular conditions for $1.5 billion, and St Jude Medical Inc agreed to pay $1 billion for AGA Medical Holdings, whose devices treat structural heart defects.

Attractive stock valuations could spur more deal-making in the sector, Neuberger said.

“Medical device valuations have gotten beaten up pretty badly. They are starting to come back a little bit, but it might be a long time before valuations get back to pre-2006, 2007 levels,” he said. “So now might be a pretty good time to sell.”

In one of the medical technology sector’s largest deals this year, Covidien Plc in July completed the purchase of fast-growing ev3 Inc, which specializes in treatments for neurovascular and peripheral vascular diseases, for $2.6 billion.

The device and pharmaceuticals maker, spun off from Tyco International Ltd three years ago, is looking for more acquisition candidates in the vascular space, although any future deals will likely be under $1 billion in size, Covidien Chief Executive Richard Meelia said at the summit.


Johnson & Johnson, also active on the acquisitions front, completed the purchase of stroke treatment maker Micrus Endovascular in September for $480 million and recently launched a $2.4 billion bid for Dutch vaccines maker Crucell.

Frederick Frank, vice chairman of investment advisory firm Peter J. Solomon, told the summit he expects to see big healthcare companies such as J&J and Abbott make more moves to broaden their portfolios.

“You are going to see a change in both parts of the business, in pharma and medtech, becoming much more diversified companies, and I think that’s a smart thing to do,” Frank said.

Neuberger, the BMO banker, said he expects merger activity in the diagnostics sector to remain brisk, driven by the march toward personalized medicine and demand for tests to help determine whether a patient is receiving the most effective therapy regime from both a health and cost standpoint.

Reporting by Susan Kelly; Editing by Matthew Lewis