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2. Medical Device Company Merger Frenzy Could Continue

The same factors that sparked huge deals in 2015 remain, experts say.

Chris Newmarker

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Last year saw huge consolidation at multiple levels in the medical device industry. Medtronic acquired Covidien for about $50 billion, Zimmer and Biomet became Zimmer Biomet through a $14 billion deal, and BD bought CareFusion for $12 billion. Major mergers took place on the supplier level, too, such as Greatbatch's $1.73 billion acquisition of Lake Region Medical.

As we enter 2016, the environment encouraging such deals remains, experts say.

"I think there are only so many Medtronic-Covidien-like deals out there to be done. But I think you will continue to see as aggressive of an exploration of those opportunities as you've seen in the last year or two," says Shaye Mandle, president and CEO of the Minnesota-based Medical Alley Association.

The U.S. government through Medicare is incentivizing health providers to be more concerned about how efficiently and effectively they manage patient populations--versus the former fee-for-service model's focus in which they counted how many devices, procedures, and services they are able to sell. Both health providers and private insurers are merging in response. That means the pressure remains for medical device makers to consolidate to offer better economies of scale, as well as create a whole cafeteria of products and services to offer up around each device.

"As long as you see consolidation on the side of the providers and consolidation on the side of the insurers, you're going to see consolidation on the side of medtech," says Debbie Wang, a Morningstar analyst following the medical device industry.

Doctors are also increasingly merging with hospitals--removing themselves as a potential sales avenue for medtech companies. It is but another factor increasing pressure on device companies to consolidate, Wang says.

Wang thinks companies such as Smith & Nephew (frequently rumored to be an acquisition target) and NuVasive "seem to be ripe for a larger firm to roll them up."

Also look out for pharmaceutical companies looking to swoop in and bolster their portfolios and drug pipelines, with "beyond-the-pill" products, PwC points out in its recent report on top 2016 health industry issues.

The OEMs' need for more efficient operations also means that contract manufacturers are being asked to do more. Contract manufacturing is quickly turning into contract development, which ranges from early product design to the manufacture of finished products. And so M&A deals and partnerships are taking place among the suppliers in order to help them meet the new demands and become proverbial one-stop shops.

"It all sort of has this cascade effect," Wang says.

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