Mergers, Takeovers, Healthcare Reform All Affecting Medical Device Market

Medical Device Manufacturers Delaying new Projects and Increasing Layoffs due to Unease Over Multiple Issues
CaduceusThe medical device manufacturers have had a volatile year so far with the impending device excise tax slated for 2.3% of total revenues generated to start 2013. In anticipation of this new tax many companies have delayed product development as well as New Product Introduction (NPI) until after the Presidential election in hopes that there is more clarity in regards to the excise tax.  Jitters within the EU have also contributed an overall uneasiness within the industry.  Major medical device companies like Stryker have already begun workforce reduction to the tune of 1,000 global employees from their workforce in the Orthopedics division with an estimated cost savings of approximately $100 million.  Former Stryker CEO Steve MacMillan in November of 2011, estimated the new tax will add an additional $150 million to their tax liabilities.  On Thursday, June 28, 2012 a spokesperson for Stryker stated that the added tax will eat into approximately one third of their R&D budget. Other companies such as Medtronic announced they will reduce their workforce by 1,000 employees globally across many of their business units, Smith and Nephew, and Covidien have also announced layoffs that began taking effect in 2011 and/or 2012 (see the Wall Street Journal for more)  With the House of Representatives recently  passing legislation (Health Care Cost Reduction Act H.R. 436) and the decision by the Supreme Court  on the Patient Protection and Affordable Care Act signed into law in 2010 by President Obama the excise tax slated for January 1, 2013 is starting to look like a reality. At this point it appears that the big guys are setting themselves up to operate more effectively and efficiently with expectations of continuing to meet market demands, while also trying to maintain the quality standards that are required. Who in your eyes are the best positioned companies as we move forward? Can you really reduce headcount without having a detrimental affect on quality? With yesterday’s ruling I think it is very likely we will see even more layoffs as the industry attempts to reduce staff to offset the additional tax liabilities.

The Upside to the Shifting Medical Device Industry
In addition to the health care reform debate and the recent Supreme Court ruling,  mergers and acquisitions have also played a large roll in making this a volatile year as large medical conglomerates continue to acquire competitors in order to balance and strengthen their portfolios and focus on areas where they currently do not have a strong market share position.  Most notably the acquisition of Synthes by J&J (DePuy) for $21.3 billion, strengthening their brand in the Spinal, Trauma and CMF segments.  The deal which was approved by the FTC on June 11, 2012 with a provision that it divest its wrist fracture system (DVR ) to Biomet. (see FTC article) Without the sale,  the new Synthes/Depuy portfolio for Distal radial fracture devices would have had 70% market share.  Synthes is the market leader for these systems with an estimated 42% market share,  Biomet also previously agreed to acquire Depuy’s trauma unit for an estimated $300 million. (click here to see Johnson & Johnson’s article) I believe we will continue to see market consolidation through the remainder of 2012 and through 2013 with a major focus on Chinese manufacturers being acquired for easier penetration into this emerging market for devices.  Other notable acquisitions: Asahi Kasei acquired Zoll medical ($300 million). Symmetry medical acquired Codman ($300 million) and Stryker acquired Orthovita for ($316 million), Memometal in France ($150 million) and Boston Scientific’s neurovascular unit ($1.45 billion).

Speaking of China…
With yesterday’s ruling by the Supreme Court to uphold the Patient Protection and Affordable Care Act, will we begin to see even more business transition over to China? Will it be India? How about Africa, where many of the MRO Aerospace operations have sprung up. Is this an option for the medical device industry? Will R&D transition over to Asia at a faster pace than was originally planned for these corporations? Not only did the device industry take a hit yesterday, but its been a tough week with the Senate passing the User Fee Act for Medical device manufacturers increasing it from $295 million over the last five years to $595 million over the course of the next five years. What’s $595 million over five years for the device industry? We shall see, it should be an interesting run up to the election and an even more interesting time after the general election.

What will Happen to the Growth we Have Seen?
Although there has been little in the way of growth for most of the last 12 months in the medical device industry,  there are some fairly sizable product developments churning at some of the larger OEM’s. There have also been some key innovators that have popped up over the last 36 months.  Will these new guys set new market trends and turn into a preeminent market leader on a new system or device?  Will the innovators be the ones that help turn around domestic manufacturing or will they be gobbled up by one of the big guys that is looking to acquire some IP to add to its portfolio and then shift the manufacturing offshore? We are in interesting times, how will it all shake out? Stay tuned, we will find out sooner rather than later and as things happen I will do my best to bring the facts to light so everyone can stay informed about changes to this very important industry.

Dave Piperi

Sales and Marketing Manager – East Region
Medical Materials
ThyssenKruppMaterials NA
AIN Plastics Division

 

Here are links to related articles and websites:

The Wall Street Journal – Excise Tax Article

Federal Trade Commission conditions on Johnson and Johnson

Johnson and Johnson article from their website

Synthes website

 

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