The medical device industry is adjusting to some tectonic shifts as the broader healthcare world moves to a value-based system.
Even so, the industry has had a remarkable transformation over the past 12 months, going from about flat or 1% growth in revenue globally to an increase of 5% to 6%, said medtech expert John Babitt, partner of Lifesciences, Transactions Advisory Services at Ernst & Young. The industry will be managing headwinds for some time, and Babitt will be presenting a keynote on this changing landscape at the annual MedTech 2014 conference in Albany, New York on Monday.
|John Babitt, Partner, Ernst & Young|
In an interview, Babitt discussed the three major trends he is observing that will be characteristic of this evolving marketplace.
More Megadeals to Come
He believes that the industry will see two additional mega deals worth at least $3 billion in the short term. That's because scale and critical mass have become very important attributes in this new world of value-based healthcare.
"One of the things we are seeing in an increasingly bundled world, is that scale and critical mass in any particular therapeutic area or discipline is really required to be successful in the new paradigm," he said.
That is driving the mega-deals that have already been announced - for instance, Medtronic buying Covidien and Zimmer buying orthopedics rival Biomet.
Babitt declined to speculate on which firms would engage in the $3 billion deals he is predicting, but the possibility of a Stryker and Smith & Nephew merger has been widely reported in the past few months.
While achieving scale through large combinations is one goal of these transactions, geographic expansion is another motivation, he said. The benefits of tax inversions - where moving U.S. headquarters to some overseas locations may allow a lower tax rate and the ability to access foreign cash without paying hefty U.S. taxes on them - is also another reason driving large deals.
Firms Will Look to Divest Businesses
Over the past year or so, large companies have been looking through their portfolios to see which businesses make sense to keep.
For instance, Johnson & Johnson completed the sale its Ortho-Clinical Diagnostics business to private equity firm Carlyle Group for $4 billion in June. Earlier this month, Boston Scientific completed its acquisition of Bayer Interventional, a unit of Bayer AG, for $415 million.
"We've seen companies pruning their portfolios," Babitt said. "I am very confident that we will see that trend continue. As more of these large companies combine, it offers them a fresh opportunity to look at where they want to be and potentially jettison some of the underinvested assets particularly the spaces where they just [don't have] a critical mass and [are not a] formidable player."
More Unconventional M&As Will Occur
It used to be that if a startup invented a new type of medical device that provided a new bell and whistle for the physician, medtech firms would be interested in acquiring them. That dynamic is shifting.
"I think the type of startups that medtechs are going to be interested in is fundamentally going to change," Babitt said. "Medtech is going to look for service offerings, so they are going to look for technology offerings. They are not going to look for a femoral closure device to round out their suite of interventional cardiology and cath lab products."
This change is occurring largely because the medical device customer profile is changing from comprising exclusively physicians, to including others like hospital adminisitrators, payors and in some cases even consumers. The new healthcare marketplace rewards companies that are able to work with hospitals to help them cut costs, become efficient and improve outcomes.
To take advantage of that, medtechs will scour for startups that give them the ability to partner with hospitals and help them not just sell to the hospital's cath lab but to help improve the cath lab's operational efficiency.
Yet another set of startups should also start looking promising to medtechs - those that target consumers and extend the medtech firm's reach outside the walls of the hospital.
"The companies that are able to bring technologies to consumers such as wearables and other types of medical technology - those types of entrants are very interesting and those companies are going to get funded," Babitt said. "If they look at the landscape beyond the hospital, that really represents very fertile ground for the medtech sector."
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