Medical device mergers & acquisition activity is as scarce in 2012 as during the global financial meltdown in 2009, perhaps because of a concurrent flurry of CEO turnovers.
medtech companies have announced $20 billion worth of deals so far for 2012, less than half of the $53.32 billion worth posted in 2011, according to a Thomson Reuters report.
Medical device titans Johnson & Johnson (NYSE:JNJ), Medtronic (NYSE:MDT), Stryker (NYSE:SYK), Boston Scientific (NYSE:BSX), Covidien (NYSE:COV) and Teleflex (NYSE:TFX) have all swapped out their chief executives in the past 2 years, along with a slate of their smaller peers.
"It’s unprecedented to see this many CEO changes in the device space," investment banker John Soden told Reuters. Soden said he expects M&A activity to pick up as the new chiefs get settled in.
Medtronic, which became the world’s largest pure-play medical device company in part with buyouts, has been markedly absent from the M&A scene in recent months. Medtronic’s most recent acquisitions were announced July 7, 2011, about 3 weeks after new CEO Omar Ishrak replaced William Hawkins.
By contrast, Covidien (which handed its reins to Joe Almeida when Richard Meelia retired in March 2011), has announced 5 acquisitions worth a collective $504 million under Almeida’s watch.
Johnson & Johnson’s medical device operation has closed 2 deals since Alex Gorsky took over as CEO in April, most notably a $19.7 billion merger with Swiss orthopedics giant Synthes. Gorsky got the nod after former CEO William Weldon announced his retirement.
Another large medical device player, Boston Scientific, announced in September 2011 that a retiring Ray Elliott would be replaced in the corner office by J&J veteran Michael Mahoney in November of this year, with insider Hank Kucheman serving as interim CEO until then. Boston Scientific put 1 acquisition under its belt, a $1.35 billion buyout of Cameron Health, since the announcement was made.
Rounding out the C-suite shuffle is Stryker, which has yet to name a new CEO after the shocking departure of Stephen MacMillan, who resigned earlier this year after a romantic relationship with a former employee came to light. Stryker has not reported any mergers or acquisitions under interim CEO and CFO Curt Hartman since MacMillan announced his departure.
The exception that proves the rule might be Teleflex (NYSE:TFX) CEO Benson Smith, who took over in January 2011 after the abrupt departure of Jeffrey Black. Under Smith’s watch Teleflex has spent a collective $371 million on a trio of device companies and has narrowed its portfolio by divesting its aerospace and orthopedics divisions.
Benson is executing to a plan first hatched in 2007, when Teleflex decided to ditch its non-medtech units and become a pure-play medical device company. At least 1 consultant believes that such M&A decisions will be a crucial tool for growth in a time of straitened circumstances.
"As the medtech industry reshapes itself, mergers & acquisitions will likely be an important tool, because savvy deal-making enables companies to adapt to a changing competitive environment more quickly thank making organic moves," according to Colm Foley of the Boston Consulting Group. "The right deals will allow medtech companies to leverage customer and market access through consolidation, to strategically expand their product portfolios, to bolster R&D pipelines and to secure strategic footholds in emerging markets."
Finding and closing the right deals may not be easy, especially for smaller companies with less experience in competing with other device makers, private equity firms, pharmaceutical companies and other players, Foley noted in a report, "M&A in Medtech: Restarting the Engine." But with several industry titans embroiled in C-suite change and medtech valuations at attractive lows, it’s still prime-time for deal-making, before heightened interest in the industry drives prices back up.
"Current conditions in the financial and capital markets pose only limited obstacles for M&A in the medtech industry," according to the report. "Heightened interest by private-equity, pharmaceutical and electronics companies, however, could again drive up prices of attractive targets, especially medtech companies that are large enough to achieve significant scale but small enough to make acquisition easy."
Other industry analysts are also predicting a pick-up in medtech M&A, as pricing pressures push companies toward consolidation and the impending medical device tax weighs down smaller firms, squeezing valuations and making for some attractive buyout targets, according to Reuters.
If the trend holds, industry players don’t have much time to make their moves before medtech’s newly appointed CEOs begin making their mark.
"Typically it takes somewhere between 3 to 6 months to really formulate a new strategy and then up to another 12 months to execute on that strategy," Soden told the news agency. "So one would hope that 2013 would see the benefit of these leadership changes."