MASSDEVICE ON CALL — The pending marriage of Medtronic (NYSE:MDT) and Covidien (NYSE:COV) has generated a lot of buzz and has been hailed as a strong move for the companies, but venture capitalists say it’s a downer for startups.
Both Medtronic and Covidien are big buyers of medtech startups, but aren’t likely to be making many acquisitions as they spend a few years integrating their businesses.
"Prior to this merger, Covidien was very acquisitive of startup companies, and Medtronic was also quite active," medtech accelerator InCube Labs chairman Mir Imran told the Wall Street Journal. "But post-merger, the new Medtronic will be focused on integrating the 2 businesses … so, for the next 2 or 3 years, [they] will be less focused on investing in and acquiring young companies. For the world of med-tech startups, this is not good news."
The union of Medtronic and Covidien, expected to close late this year or early in 2015, would create the world’s largest pure-play medical device company with enough scale to rival Johnson & Johnson‘s (NYSE:JNJ) medtech operation. Aside from its effects on Medtronic and Covidien, already 2 of the largest companies in the space, the deal radically reshapes the medical device landscape and could augur a sea change for small- and mid-cap medtech players.
The deal also reflects a new economic reality for large strategic medical device companies. In the 5 years leading up to the recession of 2008, top-line growth in the medical device industry was a robust 12%; in the 5 years after the recession, growth slowed to just 3%, according to Piper Jaffray’s Jon Salveson, vice chairman of investment banking. Former Medtronic CEO Bill Hawkins told MassDevice.com last week that he expects the merger to drive other large companies to unite.
"This will very likely trigger further consolidation within the industry, as others seek to compete in size and scale. You now have 2 companies, Johnson & Johnson and Medtronic, that make up almost 15% of the medtech industry," he explained.
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