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Is Medtech Still Hot for M&A?

Medtech was definitely hot for M&A last year, but will that trend will continue in 2019? Here's what the biggest players in the industry said about M&A during recent earnings calls.

  • Medtech was definitely hot for M&A last year, but will that trend will continue in 2019? Here's what the biggest players in the industry said about M&A during recent earnings calls.

  • Abbott Is Not Hot for M&A

    Abbott certainly has the capacity for M&A, CEO Miles White said during the company's fourth-quarter earnings call, as transcribed by Seeking Alpha. But right now it's just not a high priority for the company.

    "First of all, you earn your highest return on organic growth, not on M&A," White said.

    A lot of deals struggle to provide a good return to shareholders, White said. Granted, Abbott has had an excellent track record with M&A and has managed its acquired products and companies well, he added.

    Right now the growth from all of Abbott's businesses, including St. Jude, is the source of the company's highest returns and biggest growth opportunities, White said. The CEO also said he just doesn't see gaps right now that have to be filled with M&A.

    "So we’re able to return a pretty good sales and profit growth rate across the business," White said. "We’ve also been careful over time. There are times to be in the M&A markets and there are times not to be. And when multiples are really high, bad time to buy."

    That's certainly not to say Abbott hasn't been presented with plenty of potential acquisition opportunities.

    "All of the various investment banking houses that you can imagine have put many things in front of us as opportunities ... so it’s not like we’re not aware of what opportunities may be out there," White said. "It’s just they wouldn’t meet our criteria. I don’t see something compelling. I don’t see something that we need. And right now, we’re in a fortunate position where we’ve got very strong products and pipelines and strategies across all of our businesses."

    With two major acquisitions in the rear view (St. Jude and Alere), White said it was important to him that Abbott pay down debt and maintain capital allocation flexibility.

    "And I think we’re in that position," he said. "So I just don’t see M&A right now as a high priority."

  • Baxter Is Still Hot for M&A

    Baxter CEO José Almeida said the company is "very aggressively looking for opportunities," and size doesn't matter as much to Baxter as adjacencies. But don't mistake the company's aggressiveness in looking for targets with a lack of discipline, Almeida said during the company's fourth-quarter earnings call, as transcribed by Seeking Alpha.

    "We continue very aggressively looking for opportunities, and I want you guys to think about not on the size base, but more so on adjacencies and things that’ll make sense for our company, for Baxter," he said.

    Areas of interest currently included molecules to augment Baxter's pharmaceuticals business, Almeida said. The company is also interested in critical care and "many other areas" that are adjacent to its business.

    "Size is not the priority, but the ability to augment that," he said. "... Some may be a little larger than others, but we’re working intensively. But I want our investors to understand ... we would not do a deal that is in the fringes or negatively impact our return to our shareholders."

  • Boston Scientific's M&A Pace Will Cool Off in 2019

    Boston Scientific CEO Mike Mahoney said the company still has the capacity for about $1 billion or more in M&A this year, but we won't see the volume of deal activity in 2019 as we saw from the company in 2018.

    With its proposed BTG acquisition Boston Scientific has ample capacity to pay down acquisition-related debt and continue to purse business development activities, Mahoney said.

    "And even with the debt pay down because of our strong cash flow generation profile, we believe that gives us the capability of about $1 billion or more in terms of M&A to continue to evolve our category of leadership strategy and do other tuck-in acquisitions, such as the recently closed Millipede acquisition," he said.

    Mahoney said that going forward, Boston Scientific is on track as it works to integrate multiple acquisitions.

    "So this year we have three or four deals that will drive contribution this year with Augmenix, Claret, and NxThera," he said. "And I'm pleased to say that all those are going as planned. The operations team is doing a great job of ramping up supply. We're driving the appropriate synergies."

    Then there are a couple of recent acquisitions that are a bit farther out in the pipeline, he noted, but they too are on track. Specifically, those deals include Cryo and Apama, and Mahoney said the company anticipates fourth-quarter regulatory approvals for both those platforms. Meanwhile, he added, the nVision and Millipede platforms are still in the early stages of R&D.

    In other words, the deals that Boston Scientific made in 2018 are sequenced in terms of maturity and they are distributed across the company's various businesses, he said, noting that the company has the infrastructure in place in its operations supply chain, IT, and quality control to manage those acquisitions very effectively.

    "We will see the pace of M&A slow for us in ’19. As we stated before, we do have the capacity to do some tuck-in acquisitions," he said. "But you won't see the volume of activity in ‘19 that we had in ‘18."

  • Edwards Is Mostly Hot for Organic Growth

    Edwards Lifesciences has set itself apart in medtech by focusing mostly on organic growth. The company does acquire new technologies from time to time, but most of its portfolio has been developed internally.

    One recent exception is the company's pending $100 million acquisition of Cas Medical Systems. Branford, CT-based Cas Medical specializes in the non-invasive monitoring of tissue oxygenation in the brain. Edwards said it has a pending 510(k) clearance in the U.S. for a smart cable and software module, which enables compatibility between Cas Medical’s FORE-SIGHT sensor and the HemoSphere advanced hemodynamic monitoring platform. This technology, which was developed as a result of a collaboration between Edwards and Cas, has a CE mark.

    But for the most part, we don't expect Edwards to stray too far from its cash allocation priorities. According to CFO Scott Ullem (speaking to analysts during an earnings call last July) that means continuing to invest in internal growth programs and programs with higher returns expected over the long haul and then supplementing those internal programs with external investments, whether its minority investments or small acquisitions.

  • If the Deal Fits, Johnson & Johnson Wants It

    Johnson & Johnson promised investors improved performance in 2018 and the company clearly made significant progress to deliver on that promise through divestitures, acquisitions, and strategic partnerships. But CEO Alex Gorsky reminded investors during the company's fourth-quarter earnings call that J&J's work in the medical devices segment is far from over.

    "We know we still have more work to do, and we are committed to continuing to build upon this momentum and return to above-market growth in 2020," Gorsky said.

    In 2019, J&J expects to make more strategic partnerships like its collaboration with Apple, Gorsky said. The company also plans to launch between 20 and 25 new products this year across the orthopedics, surgery, interventional, and vision portfolios.

    "We will do this while progressing our efforts in digital surgery including robotics, which is a critical element to our future success, not just in the near term, but as we look to the next decade and beyond," Gorsky said.

  • Medtronic Is Hot for Reinvestment Opportunities

    Medtronic CEO Omar Ishrak recently told investors that there are opportunities both internally and externally that the company expects to take on in a measured way in 2019. That means if an opportunity comes along that Medtronic can deliver on and it makes sense within the strategic alignment of the company, Medtronic is likely to go after it. But that means reinvesting in the company through R&D spending too.

    "​​​​​​This company is about technology, it's about R&D, but we're not going to be stupid about it, we'll have to be responsible," Ishrak said.

    Medtronic CFO Karen Parkhill also talked about reinvestment as a focus.

    "Where we see good reinvestment opportunities we are focused on driving that because it does drive the long-term value of our company," she said. "We balance that with share repurchase because we do not intend to hoard cash on our balance sheet. We've had very good reinvestment opportunities, not just in our R&D but also in acquisitions, we've just announced the acquisition of Mazor, and so we're focused on balancing both."

  • Stryker Is Hot for a Good Deal

    Larry Biegelsen, a medtech analyst at Wells Fargo Securities, said he can't remember a year that Stryker didn't do at least a few acquisitions. So he asked the company's executives during a recent earnings call how much flexibility they would have on operating margin improvement in 2019 and if they would be willing to sacrifice that for M&A.

    "Well, as you know the nature of M&A is inherently unpredictable," CEO Kevin Lobo told the analyst, adding that M&A will continue to be Stryker's primary planned use of cash.

    "As it relates to dilution, once we see an asset that we think will be really value-creating for Stryker, we're going to want to do that deal," Lobo said. "And then we'll look at the related dilution and figure out whether we can offset it or not. As you've seen we are very committed to operating margin expansion. We've been able to offset Novadaq, Entellus, K2M deal after deal that are high-growth deals that have dilution, we've been able to offset."

    So if Stryker saw an opportunity to acquire a fantastic asset but it caused the company to be lower in that range, Lobo said, the deal wouldn't necessarily be off the table. But that doesn't take away from the company's efforts to continue to drive margin in its core underlying business, he said.

  • Smith & Nephew Is Hot for M&A

    One of Smith & Nephew's key priorities this year is to expand in high-growth segments through both internal product development and M&A, CEO Namal Nawana said during the company's fourth-quarter earnings call, as transcribed by Seeking Alpha.

    The value-creation potential from bolt-on deals like Rotation Medical and Ceterix is very clear, he said, and Smith & Nephew wants to continue finding similar acquisitions.

    "We're also looking at deals to get access to adjacent markets where there's a good strategic fit for Smith & Nephew," he said. "And that's been a very big part of the exercise of my team, mapping out the full universe of our possibilities."

    That said, there have been more rumored deals in recent years than actual deals for the London-based firm. Most recently, Wall Street has speculated about a possible $3 billion tie-up between Smith & Nephew and NuVasive. Neither company has officially commented on the rumored deal, but financial analysts have already offered their take on the idea.

  • Zimmer Biomet Is Fairly Cool on the M&A Front

    M&A isn't exactly high on Zimmer Biomet's priority list these days, as the company focuses on remediation efforts. During the third-quarter earnings call last year, CEO Bryan Hanson said the company has to reduce the size of its portfolio in order to simplify the supply chain and improve customer service.

    At the same time, Hanson said during the company's most recent earnings call, if there are attractive targets that make financial and strategic sense to the organization with the probability of providing good shareholder returns, "we would certainly look at those targets today."

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