Devicemaker consolidation likely to continue

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%.