What is Covidien’s CEO's Take on Broader Implication of Zimmer-Biomet Deal?

Orthopedics company Zimmer Holdings took Wall Street and the medtech world by surprise when it announced last week that it is buying rival orthopedics firm Biomet for $13.35 billion.

Zimmer was responding to market realities of implant pricing pressure, wrote one analyst in response to the announcement. Another opined that the deal creates a “formidable player” in the muskuloskeletal space.

But what does this mean for medtech companies in other market segments?

That was the question put to Covidien CEO Jose Almeida in an earnings conference call on Friday. Bob Hopkins, an analyst with Bank of America, asked whether such a consolidation was a sign of the times where “critical mass” is important.

Here’s a portion of how Almeida , who is now the chairman of the medtech industry organization AdvaMed, answered.

“Well, scale is of great importance going forward. And we think that in most products that Covidien participates today, we are number one and number two so we have that scale.
...I do think size matters. And as we continue to move forward, the company continue to look at opportunities of all sizes in this arena.”

Truer words were never spoken especially when you take into consideration how medtech innovation, thus far, has mostly involved creating similar products with no major differentiation.

The model worked in the past because doctors with comfortable relationships with medtech sales people from different vendors had the most say in purchasing decisions at hospitals. If Dr. Smith was closer to Medtronic, he would most likely use Medtronic’s pacemaker for his surgeries. Meanwhile Dr. Ramalingam at the same hospital had a better connection with Boston Scientific’s rep and ended up choosing its pacemakers.

Now, that system is rightly being undermined by accountable care organizations, which are tasked with making sure that device purchases are cost effective and bear good clinical outcomes. Dr. Ramalingam and Dr. Smith have become hospital employees and their preferences hold less influence than in the past.

Given this set-up, until medtech can come up with truly differentiated products, and equally as important these days, services, there will likely be more M&As where the focus will be on lowering costs through achieving economies of scale.

The charge of creating “me-too” products is possibly more true in the orthopedics world compared with other medetch segments, and perhaps this is also why the space has seen such big deals.

In reviewing the Biomet-Zimmer consolidation, JPMorgan Chase analyst Michael Weinstein wrote in a research note Friday that there is precedent for such large deals in the past 20 years in the ortho market. He reviewed the most notable M&As the space has seen:[Data about deals is from press releases and older news articles]

  • Johnson & Johnson bought Synthes for $19.7 billion 2012
  • Zimmer bought Centerpulse for $3.2 billion in 2003
  • Johnson & Johnson bought DePuy for $3.5 billion in 1998
  • Stryker bought Pfizer’s Howmedical for $1.9 billion in 1998
  • Biomet bought Kirschner for $$38.9 million in 1994

Assuming the Federal Trade Commission does not take issue with the transaction, the Zimmer-Biomet deal will create the no. 1 player in hips, knees and shoulders, Weinstein wrote in a Friday research note.

That goes to echo Almeida’s point: Size does matter going forward. But it would be nice to see a new world order emerge as far as medtech innovation goes as well. 

[Photo Credit: AdvaMed]

-- By Arundhati Parmar, Senior Editor, MD+DI
arundhati.parmar@ubm.com

 

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