The business world was greeted with news of two mega-mergers at the beginning of the year.
None of these were in medical technology. But all the ingredients are there to brew such a concoction in the device world next year or 2015.
Historically, slower growth is one of the key drivers of consolidation in any industry. And that is exactly what the device industry finds itself cursed with these days.
“If you think about the industry - end markets are not growing anymore,” says Glenn Novarro, senior analyst at RBC Capital Markets, in a recent interview. “When I started doing this 14, 15 years ago, ICD, spine, stents, these were all double-digit growth markets and pricing would go up every year. Now pricing goes down every year and units are flat to low single digits and if you add it all up, these markets are flat to down.”
Given this scenario, how have companies increased their earnings? By cutting and cutting some more. But as Novarro pointed out, you can’t cut endlessly, at least on your own, to deal with slower growth.
“And so usually when companies run out of cost cutting, they can engineer more cost cutting by doing acquisitions - not niche but big,” Novarro declares. “I don't think you will see any big deals this year, but it wouldn't surprise me if in 2014, 2015 we wake up one day and I don't know like Stryker and St. Jude Medical are getting together or Medtronic and Zimmer.”
If Medtronic indeed goes down the path of a mega merger, it will be a departure from the sentiment that CEO Omar Ishrak had voiced for at least a year when he took over reins at the Minnesota device maker. Ishrak has repeatedly said that he will do know deals that are dilutive to the shareholder.
“It’s going to be a big hurdle to get any kind of dilution from us.” Ishrak told attendees at the J.P. Morgan healthcare conference in 2012.
But that was last year. In discussing third fiscal quarter results, two weeks ago, Ishrak seemed to be softening his tough stance on acquisitions when asked a question about overall acquisition strategy.
“… we have got to cover dilution within the company and by covering dilution what I mean is that our goal of delivering this mid single-digit growth with 200 to 400 basis points of leverage and EPS is something we want to protect despite an acquisition,” he said, according to a transcript of the call.
Medtronic is now looking to acquire to fill gaps in its Ortho Spine, Urology and in its Diabetes segment, Ishrak said.
So Medtronic is likely to be a player potential transactions. But who else is interested in dealmaking, big or small?
Novarro pointed to Abbott and Johnson & Johnson.
"Abbott is not going to sit by,: Novarro says. “With Abbott you have probably the most prolific dealmaker and best dealmaker in pharma and medtech in the last 10 years. Their device business is very nichy and needs to expand. JNJ, once they digest Synthes, they will get back in the game.”
By Arundhati Parmar, Senior Editor, MD+DI