De­vice­maker con­sol­i­da­tion likely to con­tinue

Modern Healthcare - - NEWS - By Jaimy Lee

Ex­pect to hear about a con­tin­u­ing wave of med­i­cal de­vice man­u­fac­turer deals and flat or slight in­creases in sales amid on­go­ing price pres­sure from health­care providers as de­vice­mak­ers re­lease quar­terly earn­ings in com­ing weeks.

Like the de­vice sec­tor, the phar­ma­ceu­ti­cal in­dus­try is un­der­go­ing a num­ber of deals, with patent ex­pi­ra­tions, pric­ing pres­sure and slow drug launches driv­ing many of the merg­ers and ac­qui­si­tions ac­tiv­ity, Moody’s In­vestors Ser­vice an­a­lysts said in a July 7 re­port. Two sig­nif­i­cant deals re­main un­re­solved: Ab­bVie’s bid for Shire and Valeant Phar­ma­ceu­ti­cal In­ter­na­tional’s takeover of Al­ler­gan.

The med­i­cal de­vice and sup­plies sec­tor has been rapidly con­sol­i­dat­ing as com­pa­nies seek to off­set the grow­ing in­flu­ence of large and still grow­ing hospi­tal sys­tems.

“If you think about the fu­ture of health­care, there’s a power strug­gle, and ev­ery­one is vy­ing for more power as a sup­plier and as a buyer,” said Matt Tay­lor, re­search an­a­lyst for Bar­clays Cap­i­tal.

Sec­tor sales in the U.S. have gen­er­ally re­mained flat or with sin­gle-digit per­cent­age in­creases in re­cent quar­ters as pa­tients re-eval­u­ate when to un­dergo surgery, and providers and pay­ers en­cour­age fewer high-cost pro­ce­dures.

While pa­tient vol­ume is ex­pected to in­crease in­cre­men­tally and mil­lions of pa­tients are now newly en­rolled in health plans, many an­a­lysts say such fac­tors are not enough to ma­te­ri­ally im­pact earn­ings now or even later this year.

In­deed, War­saw, Ind.-based Zim­mer Hold­ings is pur­su­ing a $13.35 bil­lion ac­qui­si­tion of com­pet­ing or­tho­pe­dic man­u­fac­turer Biomet. Medtronic an­nounced last month plans to buy sur­gi­cal sup­plier Co­vi­dien for $42.9 bil­lion.

Minneapolis-based Medtronic has made a num­ber of deals be­yond Co­vi­dien that aim to re­po­si­tion the com­pany. In 2013, it bought Car­dio­com, a dis­ease-man­age­ment and pa­tient­mon­i­tor­ing firm. Ear­lier this year it bought Tyrx, which makes an­tibac­te­rial en­velopes used to re­duce sur­gi­cal­site in­fec­tions.

In a June 30 note, Tay­lor wrote that he would not rule out a big­ger deal for Bec­ton, Dickinson and Co., a Franklin Lakes, N.J.-based sup­plier of med­i­cal sup­plies and di­ag­nos­tics, which has made seven tuck-in ac­qui­si­tions in three years. Bec­ton Dickinson is ex­pected to re­port slower growth in the sec­ond half.

Biomet, based in War­saw, Ind., was one of the first de­vice­mak­ers to re­lease earn­ings, reporting July 9 that net sales in the U.S. rose 5.8% to $1.97 bil­lion in fis­cal 2014, com­pared with $1.86 bil­lion in 2013. An­nual U.S. sales of knee im­plants rose 5.9% while sales of hip prod­ucts edged up 2.8%.

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