With the suspension of the controversial 2.3% medical device tax for another two years, the medical device industry is currently riding high on optimism. AdvaMed, the medical device industry’s lobbying group, which strongly advocated for this relief, noted that the tax repeal will provide a huge impetus to the companies to channelize their turnovers into strategic consolidations, research and developments and also help in creating new job opportunities.
According to an article published in Daily News, the tax before going into effect from January 2020 will save the device companies as much as $3.7 billion during the two-year suspension.
The U.S. medical device market is undergoing substantial transformation. An aging population, longer expectancy for life, growing healthcare awareness in emerging economies combined with powerful long-term tailwinds, including mergers & acquisitions (M&As) and product innovation, have been contributing to growth of the sector.
M&A Boom Continues
It is yet to be seen how far the benefits of the tax repeal have been redirected to M&As till now. Meanwhile, according to Mark Bonifacio, President of Bonifacio Consulting Services, private equity and strategic OEM (Original equipment manufacturer) buyers are competing for assets in all sectors of medical contract manufacturing and broadening their portfolios or investing in new technologies.
He strongly stated that although the start of 2018 was sluggish with respect to M&As, it was due to uncertainties over changes in the global healthcare market and the fate of Obamacare’s medical device tax. Now that the doubts are gradually getting cleared, the industry is once again heading toward another year of significant M&A activity.
This year’s biggest M&A deal seems to be in the cards with the Wall Street Journal’s latest rumored news related to two mammoths of MedTech space, Boston Scientific BSX and Stryker Corporation (SYK - Free Report) . The report says that both the rivals may consider a bid for consolidation.
The analysts seem to be optimistic about the rumored deal and believe that after the colossal mergers of Medtronic (MDT - Free Report) -Covidien and Abbott (ABT)-St. Jude Medical in the last couple of years, Boston Scientific also needs to make a mammoth move to maintain its foothold in the highly competitive medical-technology space.
Following the company’s $25 billion consolidation with St. Jude Medical in January, Abbott ABT recently closed the $5.3-billion acquisition of Alere. With the successful wrap up of this transaction, the combined company is anticipated to emerge as a leading player in the $7 billion point-of-care diagnostic space.
Another mega consolidation in the recent times was that of medical device major, Becton, Dickinson and Co. and medical, surgical, diagnostic, and patient care devices provider C. R. Bard, for $24 billion. After the completion of the deal in January, Becton, Dickinson is on its way to expand to new areas like vascular access segments – PICCs (peripherally inserted central catheters), midlines and drug delivery ports.
Baxter International BAX purchased RECOTHROM Thrombin topical and PREVELEAK Surgical Sealant from specialty pharmaceutical company Mallinckrodt plc (MNK - Free Report) .
Varian Medical (VAR - Free Report) also inked a major M&A deal. The company recently signed an agreement to acquire Australia-based global life sciences company, Sirtex Medical Limited for a total deal value of $1.28 billion. The investment will strengthen the company’s position in interventional oncology therapies. This apart, in its effort to gain foothold in the emerging economy, the company recently acquired Cooperative CL Enterprises, a leading distributor of radiotherapy equipment in Taiwan.
Johnson & Johnson’s (JNJ - Free Report) subsidiary DePuy Synthes inked a deal to acquire Medical Enterprises Distribution in May.
This apart, in 2018, Boston Scientific announced several strategic acquisitions including NxThera and nVision in Urology and Pelvic Health, EmCision in Endoscopy, Securus in EP and Millipede in Structural Heart. This inorganic expansion plan bodes well for the stocks’ operational growth.
Medical device majors continue to offload their non-core business lines and assets that are similar to the ones acquired through mergers to focus on the main segments. These divestures have been mandated by the U.S. Federal Trade Commission (FTC) and other international anti-trust regulators. This restricts chances of monopoly in the market.
Earlier this month, Johnson & Johnson got a $2.7 billion offer from Fortive Corporation to sell its subsidiary, Ethicon, Inc.’s Advanced Sterilization Products business units to Fortive. If JNJ accepts the proposal, it will be a step toward streamlining of its business per its strategic roadmap for better resource utilization and higher shareholders’ return.
This apart, according to a MASSDEVICE report, Medtronic recently divested its stake in LifeTech Scientific to China Everbright Ltd. and another unnamed investor. BD also divested its soft tissue core needle biopsy line and Aspira product line to Merit Medical for $100 million. The divestment is related to its acquisition of C.R. Bard.
In April, Henry Schein HSIC announced its decision to spin off the company’s major segment global Animal Health business. We believe this initiative remains part of Henry Schein's 2018-2020 Strategic Plans to focus more on dental and medical businesses. According to the company, this transaction will enable it to make the most of the opportunities in the dental space in order to deliver quality clinical care and advanced wellness and prevention.
Apprehending that China’s drug distribution reform may slow down the company’s growth in the region (according to a Reuters report), Cardinal Health sold off its China business to Shanghai Pharmaceuticals Holding for $1.2 billion.
Following the announcement of its two major buyouts, Abbott divested its eye care business Abbott Medical Optics (AMO) to Johnson & Johnson for about $4.33 billion to streamline its newly added business lines.
A marketer of aesthetic treatment systems, Cynosure, sold itself to Hologic. Notably, Hologic acquired all outstanding Cynosure shares for approximately $1.65 billion.
Emerging Market Healthcare Scenario Bright
A survey report by Gallup Analytics last July revealed that U.S. adults cited healthcare as the second major problem faced by the country under the new presidential administration. Following the new healthcare reform announcement in December 2017, a Gallup poll revealed that the past decade marked the biggest increase in the uninsured rate.
Meanwhile, with exploding population, rising middle class and increasing governmental awareness of health issues, emerging geographies are facing huge demand for modern but cheaper healthcare options. Going by a report in The Guardian, International Finance Corp’s (IFJ) data shows that developing countries account for 80% of global deaths from chronic diseases indicating enormous market opportunity.
Per a recent BCG report, the share of emerging markets, which is currently less than a quarter of global MedTech revenues, is likely to increase to nearly one-third of revenues by 2022. The MedTech market in China, currently the second largest in the world, is projected to grow about 13% annually from 2015 through 2022. India, the fifth largest MedTech market in the world, currently records 17% annual growth. At this pace, India may emerge as a strong competitor to Japan and Germany by 2022.
Given the huge potential in these regions, long back, Johnson & Johnson had set up manufacturing and R&D centers in Brazil, China and India. The company’s emerging markets medical device segment continues to grow three to four times faster than the developed markets.
Abbott continues to lead the emerging market investment trend with about 50% of sales from this region. In the recent quarters, sales in key emerging markets were up in double digits, driven by strength in BRIC as well as strong growth in several countries throughout Latin America, including Colombia, Mexico, Peru and Argentina.
At Medtronic (MDT - Free Report) , in the fourth quarter of fiscal 2018, businesses in Latin America, the Middle East and Africa, Eastern Europe and China showed sustained strength, growing in double digits. Overall, Medtronic’s long-term outlook on emerging markets is encouraging.
Boston Scientific’s emerging markets’ business registered 17% growth in first-quarter 2018, reflecting a significant increase from 8% growth in 2013. Business in China was once again remarkable (up 23% year over year).
Key Picks from the Space
In the medical instrument space, we are positive on ABIOMED, Inc. ABMD and Intuitive Surgical, Inc. (ISRG - Free Report) , both carrying a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Among the medical product stocks, Baxter International, Surmodics, Inc. (SRDX - Free Report) , Boston Scientific and OraSure Technologies, Inc. (OSUR - Free Report) are also well poised with a Zacks Rank #2 (Buy).
The Weak Links
We advise investors to stay away from companies that offer little growth opportunity for the near term. These include companies for which estimate revision trends reflect a bearish sentiment.
Stocks that do not look inspiring at the moment are Smith & Nephew plc (SNN), TG Therapeutics, Inc. (TGTX - Free Report) , Nxstage Medical, Inc. (NXTM - Free Report) and INSYS Therapeutics, Inc. (INSY - Free Report) , each carrying a Zacks Rank #4 (Sell). Orthofix International N.V. (OFIX - Free Report) and Eagle Pharmaceuticals, Inc. EGRX hold a Zacks Rank #5 (Strong Sell).
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