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WINDHOVER INFORMATION INC. • windhover.com • Vol. 23, No. 6
JUNE 2005
Medical Devices/M&A
JUNE 2005
INDUSTRIAL
REVOLUTION:
The New
Medical Device
Acquirers
Industrial Revolution:
The New Medical Device Acquirers
They may not be medical technology experts,
but industrial companies know what they like—
the fat margins and attractive fundamentals
of the medtech sector.
By Pete Lawyer and Rob Alford
This article is the first in a two-part series from The Boston Consulting Group (BCG) exploring
the financial rationale driving the steady trend of M&A activity in the medical technology sector—
as well as the business implications that result. Here, the authors examine the phenomenon of
external players—industrial companies, conglomerates and others—acquiring companies and
entering the medtech sector. In the follow-up article, they will analyze the role of acquisitive growth
within the industry and its impact on large and small medtech companies alike. The series draws
on the valuation techniques, used by BCG’s ValueScience Center, which combine proprietary
discounted cash flow and relative valuation multiple models.
C
ompanies that bend metals, extrude plastics and assemble electronic components may not
know much about medical technology, but they do know what they like: the fat margins and
robust fundamentals offered by the medtech sector. And so, whether they’ve traditionally
played in high-tech or heavy industry, many of the companies churning out single-digit growth
largely by serving the aerospace, energy and manufacturing sectors now have their eye on trading
up. Flush with cash, they’re seeking to buy their way into a new and more promising market,
acquiring medtech companies to bolster their growth and revenues.
Much like GE, 3M and Siemens before them, these outsiders recognize that medtech companies deliver patent-protected revenue streams and that the demand for medical devices and other
equipment is likely only to soar as boomers age. These players also believe that the technical and
© 2005 WINDHOVER
INFORMATION
business expertise that they bring to the table—combined with their rather deep pockets—will
compensate for their relative unfamiliarity with the particular demands of the life science
products industry.
While playing in lower-margin businesses, many of the new entrants have finely honed their
business processes—including product development, R&D and manufacturing—for maximum costefficiency and profits. As payers worldwide intensify pressure on price, such capabilities will no doubt
prove critical in the medtech sector. Furthermore, other industrial newcomers have combined
operational effectiveness with sophisticated quality control of components and materials. This onetwo punch promises to knock out the greatest risks that threaten devices: ineffective products that
fail to clear regulatory hurdles and defective ones that result in major liability.
Indeed, some of the newcomers appear to be faring well in their endeavors. PerkinElmer Inc., for
instance, has transformed itself from a largely subscale and underperforming defense contractor (as
EG&G in its former life) into a leading light in the medtech space. While the billion-dollar acquisitions
turn heads and grab headlines, in many ways the small medtech deals are transforming the landscape
by opening the door for new competitors seeking their first taste of the health care market.
In most cases, industrial acquirers have not immediately pursued companies producing complex medical devices. Instead, they have tested the waters by migrating first into medical
equipment or simple Class I or II devices that draw on some existing capability or skill set. Even
though the operating margins for these initial lower-tech forays typically aren’t as high as those
enjoyed by Class III device manufacturers, they still significantly outpace margins at the companies’ existing businesses.
Still, such trailblazing practically guarantees a bumpy ride—particularly when the new path must
cut through a business as complex and as dependent on R&D as medical technology. Unlike the
larger medtech companies seeking “bolt-on” acquisitions, traditional industrials and conglomerates
may lack first-hand experience and deep understanding of regulatory approval processes and requirements, medical marketing and hiring and retaining talent in the life sciences. For the unlucky or
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INDUSTRIAL
REVOLUTION:
The New
Medical Device
Acquirers
Gross Margin of Medtech and Pharma vs. S&P Midcap 400 (1992-2004)
EXHIBIT 1
Gross Margin as a Percentage of Revenue
90
S&P 500 Pharma
80
70
Devices
60
Diagnostics
Medtech Average
50
40
Equipment
30
20
S&P Midcap 400(1)
10
0
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
(1)
Excludes financials
SOURCE: Compustat data, BCG analysis.
the ill-prepared investor, these pitfalls can add up to certain failure—and a serious case of buyer’s
remorse.
The Seduction
The lure of companies that design innovative medical technology is powerful. Their performance
is enviable across several dimensions. The sector boasts gross profit margins 30% higher than the
S&P 400 on average—and the more advanced device makers have attained average gross margins
of 70% over the last five years. (See Exhibit 1.) Furthermore, over the past 10 years, the medical
device sector has created almost twice as much value for shareholders as did the S&P 400 on
© 2005 WINDHOVER
INFORMATION
average. (See Exhibit 2.)
Not only has the device sector significantly outpaced the highly successful biopharmaceutical
industry in value creation, it has also made its rapid ascent with far less volatility. Medtech
companies were largely unaffected by the bubble that waylaid pharmaceutical and biotech players
earlier in this decade. Similarly, they have not seen their expectations for future profits diminish as
these other medical industries have.
The reasons for this buoyancy are myriad, but one important driver is that high-tech devices and
equipment are not easily copied and rely significantly on the essential value added by skilled
surgeons (for implants and instruments) and technical operators (for imaging and other diagnostic
equipment). Some knockoffs do exist, but their inroads in the United States, Japan and the EU have
been slowed by physicians’ preferences for the tried and true—or, failing that, their fear of legal
liability. Furthermore, in sharp contrast to the products of the pharmaceutical industry, there is
little clamoring for the latest medical technology in less-developed countries, which allows prices
to remain reasonably strong worldwide.
All of this is to say that the medtech sector is picking up speed—and interest. Over the past 10
years, for example, the number of billion-dollar companies operating in the sector has grown by
over 50% (from 23 to 37) and the number of billion-dollar device companies has doubled from 9 to
18. (See Exhibit 3.)
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INDUSTRIAL
REVOLUTION:
The New
Medical Device
Acquirers
The Shopping Spree
So who could resist such an alluring offer? Fewer and fewer companies, it appears, since BCG
estimates that over the last three years industrial companies have invested $6 billion to acquire
medtech companies, accounting for 21 of 256 deals and 10% of the $65-billion total invested in the
sector. (If the recent $25-billion J&J/Guidant deal is excluded, the $6 billion spent by industrial
companies actually accounted for 15% of M&A deal value.) (See Exhibit 4.) No doubt, countless other
industrials have considered entering or have actually funded organic efforts to develop the sector.
Cumulative TSR* of Medtech, Pharma and S&P Midcap 400 (1992-2004)
EXHIBIT 2
Cumulative TSR Index (1991= 100)
1000
900
Devices
800
700
Equipment
600
500
S&P 500 Pharma
400
Diagnostics
300
200
S&P Midcap 400(1)
100
0
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
*
Total Shareholder Return; (1)Excludes financials, Note: BCG Medical Technology Sector Indexes
SOURCE: Compustat, BCG ValueSciences.
Tyco International Ltd., one of the leaders of this industrial revolution sparked a decade ago,
assembled a mighty portfolio and achieved a great deal of success in the medtech area before being
felled by other much-publicized troubles. Although the conglomerate faced a severe crisis of confidence in 2001-2002, the company has staged an impressive 250% comeback in its stock price since the
dark days of 2002. The rebound has resulted because the cash flow and profitable growth of many
of Tyco’s underlying businesses have remained consistently sound. And the steadiest beat of all at the
heart of this far-flung industrial giant resonates from Tyco Healthcare Group, a domain of properties
picked up in the mid- to late-1990s that includes such luminaries as the former Kendall Co., US Surgical
© 2005 WINDHOVER
INFORMATION
and Mallinckrodt Medical. The $9-billion portfolio of Tyco Healthcare accounts for nearly one-quarter of
corporate revenues, and it pumped out $2.1 billion in cash flow in 2004 with a 26% operating margin that
was nearly double that of Tyco’s other business segments. Say what you will about Dennis Kozlowski—
this is one bet that he got right.
More recently, Danaher Corp.—a leading provider of equipment and solutions, which serves a
broad set of end-markets, including electronic test, precision motion control, environmental and product
identification in addition to mechanics’ hand tools—has quite publicly jumped at the chance to enter the
medical device sector. The company responsible for equipping mechanics and weekend do-it-yourselfers
with Sears Craftsman tools made its foray into medical technology only last year. During the first three
months of 2004, it acquired three medical device companies and added medical technology as a whole
new platform to its already impressive and extensive list of divisions.
Danaher began the year with a $640-million acquisition of Radiometer AS, a Danish developer,
manufacturer and distributor of systems for analyzing blood gas, electrolytes and metabolites.
The company quickly signaled that it wasn’t merely dabbling in diagnostics when one month later it
purchased Gendex, a US manufacturer of dental imaging products, for more than $100 million.
Next, Danaher punctuated its message with an exclamation point when a mere four weeks later it
announced its acquisition of yet another medtech company: Kaltenbach & Voigt GMBH, aka
KaVo. KaVo is a German designer, manufacturer and distributor of dental devices such as headpieces and diagnostic and treatment systems. By combining Gendex and KaVo and building on
their synergies, the company bought itself instant global reach in the dental device sector.
On the heels of Danaher’s recent acquisitions, the company logged record financial results for the
year, with 2004 sales of $5.3 billion, up more than 15% from $4.6 billion in 2002. Earnings were up as
well. Most importantly, Danaher investors appear to have given the strategic move two thumbs up. With
growth prospects bolstered by a hot new market, the company’s forward P/E ratio—a key indicator of
confidence in future earnings—stands at 19x, a 15% premium over comparables. Another clear indication of investor satisfaction is the short-interest ratio, with yearly averages down from 7.4 in 2004 to 5.2
thus far in 2005, according to Bloomberg data. Shareholders are settling in for what they hope to be a
long and skyward joy ride.
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INDUSTRIAL
REVOLUTION:
The New
Medical Device
Acquirers
Number of Major Medtech Players in the Past 10 Years
Number of Companies with Net Revenue > $1B
EXHIBIT 3
40
35
30
17
16
25
14
20
15
15
15
19
14
OTHER MEDTECH
14
13
14
10
5
19
9
11
12
12
15
17
18
19
18
18
14
DEVICE COMPANIES
0
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
SOURCE: Compustat, BCG ValueSciences
Magnetic Attraction
Intermagnetics General Corp. engaged in a similar buying binge last year. It scooped up two
medtech companies and then divested cryogenic refrigeration company Polycold, the last vestige
of its instrumentation business, to help pay for the deals.
Intermagnetics develops, manufactures and markets superconducting materials and high-field
magnets that serve the energy and MRI markets, among others. The company formulated a
focused strategy to strengthen its presence in the high-growth medtech sector. Integral to its plan
was its nearly $150-million purchase in January 2004 of Invivo MDE, a patient monitoring and care
© 2005 WINDHOVER
INFORMATION
device company, and its $100-million purchase in July 2004 of MRI Devices Corp., a manufacturer
of radiofrequency coils for MRI imaging, particularly for cardiovascular, neurovascular and specialty
purposes. The companies augmented Intermagnetics’ existing Medical Advances unit, which designs and manufactures radiofrequency coils used primarily to image patients’ extremities.
In announcing the Polycold divestiture in January of this year, Intermagnetics CEO Glenn Epstein
explained that since the company decided in 2002 to shift its focus to the “growing and increasingly
profitable medical devices market,” Intermagnetics had “more than doubled … revenue and earnings
on an annualized basis.”
And the future is looking rosier still, according to the company. Contributions from the acquisitions, Epstein announced in July 2004, were projected to increase fiscal 2005 revenues to nearly $300
million with an anticipated operating EPS of $1.55 to $1.65, an 80% increase over the prior year.
Of the acquisitions, Epstein said, “[W]e have created an enhanced and unique platform for growth
through internal initiatives and further acquisition opportunities.” He also noted an added benefit of
the acquisitions: the diversification of Intermagnetics’ overall customer base. Thanks to the acquisitions and the resulting addition of new customers in the MRI market, he explained, the company’s
largest customer, which had once accounted for 80% of annual revenue, now accounts for only 50%.
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INDUSTRIAL
REVOLUTION:
The New
Medical Device
Acquirers
An Industrial Invasion?
Similar plays have recently been made at other industrial firms, including Teleflex, OSI and Smiths
Group. Teleflex Inc. held true to its word after announcing that it would be divesting non-strategic
product lines and adding complementary ones in an effort to increase profitability and to stay
competitive. The company acquired Hudson Respiratory Care Inc. for $460 million in May 2004.
It sold off the National Strand galvanized and stainless steel strand product line; Techsonic Industries,
Industrial Segment of Medical Technology Acquisitions
EXHIBIT 4
Acquirers Represent Nearly 10% of the Value
Industrials bought 21 of the
256 companies acquired in
Medtech since 2002...
50
20
50
92
90
80
70
Deal Value ($B)
Number of Deals
100
...representing $6B
of the $65B invested
in the sector
75
66
60
50
40
30
87
65
15
10.8
10
62
5.8
23
20
5
OtherMedtech
21
10
0
4
2002
43.5 (1)
41.3
5
2003
10
2004
2
Industrial
0
2005YTD
9.9
5.1
3.8
2.0
2002
4.1
0.9
2003
2.2
2004
1.0
2005YTD
(1) Other Medtech includes the $25.3 billion proposed acquisition of Guidant by Johnson & Johnson.
Note: Total value based on completed deals whose values were announced,
categorized by the acquisition announcement date. 2005 YTD as of May 15, 2005.
SOURCE: Windhover’s Strategic Intelligence Databases, BCG analysis
a sonar device manufacturer; and its ownership in the Teleflex-NHK Automotive joint venture, among
other businesses. The acquisition of Hudson, a manufacturer of anesthesia and respiratory products,
doubled Teleflex’s presence in the North American health care products market.
Founded some 60 years ago as an aerospace and automotive company, Teleflex first entered medical
technology about 20 years ago. The company has been focused on adding what the company calls
“small attack units” in health care. (See “Teleflex: Hospital Supply’s Best Kept Secret,” IN VIVO, October
2001.) They’ve amassed an entire battalion over the years. They started in urology and anesthesia by
acquiring Rusch in 1989. Then they added surgical instruments through Pilling Surgical in 1991, closure
devices through Edward Weck in 1993, specialty orthopedic instruments through KMedic in 1999,
© 2005 WINDHOVER
INFORMATION
intermittent catheters through Medical Marketing Group in 2000 and cardiothoracic devices by acquirwindhover.com
ing substantially all of the assets of that segment of Genzyme Corp.’s business in July 2003.
OSI Systems Inc.—a diversified company operating in security systems, optoelectronic components and medical monitoring —acquired Spacelabs Medical Inc., a developer of patient monitoring
devices, for the bargain-basement price of $57 million—less than half of the $141 million InstrumenPosted with
tarium Corp. paid for it in mid-2002. Regulators required that GE divest the Spacelabs business as a
permission from
condition of the conglomerate’s purchase of Instrumentarium.
OSI has been building its play in medical technology over the past several years, most recently, in
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March of this year, acquiring Blease Medical Holdings Ltd., a privately owned manufacturer of
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anesthesia systems, vaporizers and ventilators. It had acquired Osteometer in 1998 and picked up
majority control of THT Medical a year later. These properties—an osteoporosis scanner business
and pulse oximetry franchise, respectively—gave OSI broader reach and branded presence in highergrowth and higher-margin medical markets.
JUNE 2005
Also in March of this year, Smiths Group PLC, a UK industrial engineering company whose
products include security detection for chemicals and explosives as well as aerospace and specialty
engineering equipment, purchased US medical device company Medex Inc., a manufacturer of
INDUSTRIAL
intravenous and safety catheters, for $925 million. Noting that the purchase placed the company
REVOLUTION:
in the “big leagues” of safety and disposable anesthesia devices, Keith Butler-Wheelhouse, chief
executive of Smiths Group, said, “This purchase once again underlines our intent to pursue a
The New
strategy of profitable growth through the acquisition of high-growth businesses that complement
Medical
Device
or expand our product portfolio and through investment in research and development.”
The Medex deal builds on earlier Smiths Group acquisitions of medical device companies, including
Acquirers
DHD Healthcare, a US respiratory care device company purchased for $55 million in July 2004, and
Bivona Medical Technologies Inc., a US supplier of
silicone tracheostomy tubes, purchased for $35.6 million
in November 2001. Of the company’s four divisions, its
medical group reported the highest net margins for the
first half of 2005—17% vs. 14%, 12% and 8% for the detection, specialty engineering and aerospace businesses, respectively.
In their eagerness to exploit opportunities in the
medtech sector, companies that operate beyond the pale
In Good Company
in medical technology can find themselves frustrated by
the lack of control that licensing arrangements afford and
Today’s newcomers seek to join a who’s who of industrithe complications that joint ventures can create. These
als that have learned how to grow and profit from unique
players can be quick to turn to acquisitions, expecting that
and valuable opportunities. Companies such as General
they will be able to exploit core capabilities from their base
Electric Co., 3M and W.L. Gore weren’t born into medical
businesses for higher growth and profit in medtech.
technology, but they have since parlayed core capabilities
But avoiding a nasty case of buyer’s remorse demands
into highly profitable device and equipment plays.
that they test the waters before diving into medical techGE Healthcare Technologies Inc., for instance, acnology, evaluating each “opportunity” (as well as the opcounted for about 10% of General Electric’s revenue in
tions of their competitors) by carefully considering:
2004. With an overall revenue growth target of 10%, Jack
• Is the buyer’s core capability/technology truly differWelch’s successor, Jeff Immelt, faces the daunting task of
entiated?
finding some $15 billion in incremental revenues each
•
Is the capability transferable to the device business?
year. For some perspective on just how herculean the
•
Are
the regulatory requirements well understood?
task, consider that a $15-billion company would fall squarely
•
Does
the company have the institutional fortitude
in the middle of the Fortune 500 list of the largest industrineeded to see a product through approval?
als in the United States. As Immelt articulated to a group of
• Is there a credible plan to market and sell the product?
students at a business leader forum at Marquette Univer• Will shareholders accept the business risk and potensity in March 2004, health care spending continues to
tial liability?
capture an increasing share of the nation’s gross domestic
product, “an unstoppable trend.”
As former head of GE Medical Systems, Immelt is investing with confidence and, so far, his picks are paying off. GE Healthcare Technologies produced $11
billion in revenue from its imaging and monitoring devices in 2004. Another $3 billion was generated by
GE Healthcare Bio-Sciences Inc., the former Amersham PLC. GE acquired the developer of
contrast-imaging agents and genetic analysis systems for $9 billion in April 2004, in the hopes of
advancing its molecular imaging and bioscience capabilities.
Other major players in this vein include 3M Company, the company renowned for sandpaper, Scotch
Tape and Post-It Notes, which launched a medical products business in 1961 that now represents its
largest business segment with 21% of company revenue. In the company’s first-quarter 2005 earnings
report, 3M CEO W. James McNerney, Jr. singled out the strong contribution of the health care portfolio
and called for increasing reliance on the sector for growth and profitability.
Similarly, WL Gore & Associates Inc., the industrial materials manufacturer born in Bob Gore’s
basement in the 1950s and best known for Gore-Tex, entered the medical market in the 1970s with a
© 2005 WINDHOVER
vascular graft. Today Gore’s medical division delivers various medical implants ranging from biodegradINFORMATION
Exploiting the Opportunity
While Ignoring the Siren Song
able hernia plugs to patches for heart and chest defects as well as MRI and ultrasound devices. In April
of this year, the company made its most recent medical acquisition—Tetrad Corp., a manufacturer of
specialized probes and systems for ultrasound, laparoscopy and open surgery.
An Extreme Makeover
Clearly, as these expansion approaches demonstrate, playing in the medical device sector can indeed
help the big get bigger. But for some of the industrial newcomers, the medtech sector offers more than
an opportunity to add another division or another market. It offers these players a way to refocus and
refashion entire businesses. One company that has taken the extreme-makeover approach is
PerkinElmer, aka EG&G.
EG&G began its life serving the military industrial complex, designing timing and firing systems for
the government’s nuclear testing program in the 1940s. Over the years, the company grew fat—and
ultimately bloated—as a government contractor, providing services to NASA, the Departments of
Energy, Defense and others. At one point, the company is rumored to have served as the primary
contractor in the now-fabled Area 51.
In 1998, when Greg Summe assumed the reins of EG&G, the company had more than 30 disparate
business units. Although many of these areas touched on the technology realm, most lacked growth
prospects, the CEO explained to the Harvard Business Review and Wall Street Reporter magazine.
Summe thus set the company on an aggressive course of divestiture and acquisition.
In 1999, when the company acquired the analytical instruments division of Perkin-Elmer from PE
Corp. (now Applera Corp.), there was an opportunity to position the company in a promising new
market with an equally promising new identity as a high-tech player. After the acquisition and the name
change, the new PerkinElmer saw its instrument sales grow 280% to $200.5 million in the third quarter
of 1999 (over third quarter 1998). To complete its reinvention, PerkinElmer then acquired NEN Life
Science Products, a reagent supplier to drug discovery markets, in 2000 and Packard BioScience, a
liquid-handling and sample preparation company, in 2001. In total, all the acquired and existing
capabilities positioned PerkinElmer as a leader in drug discovery and genetic disease screening.
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Acquirers
Flushing Cash Down the Toilet
Expanding into medical technology, however, doesn’t always work out as expected. Companies and shareholders unaccustomed to the sector’s long product- development cycles, high
levels of investment and complex regulatory environment can quickly lose their way or lose their
appetite for their new adventure.
American Standard Companies Inc. serves as a particularly notable example—albeit one from
a few years back. The company sought to expand beyond its product lines in air conditioners,
anti-lock braking systems and well-known plumbing products. Its approach was to apply the laser
technology it used in ceramics manufacturing to develop an easy-to-use benchtop optical analyzer for in vitro diagnostics designed for use in physicians’ offices and small hospitals.
In the early 1990s, the company devoted itself to developing the technology, and, in 1997, giddy
from some initial developmental success, it invested $212 million in the diagnostics division of
Sorin Biomedica SPA—a price considered extraordinarily high at the time. With the investment,
American Standard hoped to gain access to additional assays, a marketing organization and diagnostic industry expertise.
The move into diagnostics was part of the company’s strategy to increase its overall growth
rate. Benson Stein, the VP and general auditor of the company, told Windhover in 1997 that
American Standard was looking for opportunities in fields that were growing faster than its
mature core businesses. It also wanted to offset the cyclical nature of its businesses with a
commercial line less subject to economic fluctuations.
“Although its expertise is not in health care,” Windhover noted at the time, “American Standard
believes that its experience operating in highly competitive environments and in efficient application of low-cost, short cycle manufacturing can be applied beneficially to diagnostics.”
But consolidating its acquisition with its existing diagnostic resources resulted in dire consequences. Critical product-development staff ran for the exits, and the American Standard veterans who were left managing the division lacked diagnostics experience.
Product troubles with the benchtop analyzer and the failure of the legacy Sorin businesses to
generate sufficient cash to fund ongoing development raised questions about the diversification
strategy. American Standard’s shareholders, who had recently supported the company’s decision to rebuff a $4-billion takeover offer by Tyco, were focused on consistent quarterly earnings
and dividend growth. They soured on the strategy after Medical Systems posted two years of
losses totaling $28 million.
By the end of 1999, forced to admit that it had erred, American Standard announced that it
would pursue the sale of the businesses—and took a $126 million loss. The company exited the
business completely after a year-long sales process, selling it back to a syndicate of Italian
investors and Sorin management for substantially less than the original purchase price.
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A White Elephant in Cash Cow’s Clothing?
The tale of American Standard demonstrates how industrials or conglomerates seeking out medtech
opportunities can saddle themselves with a “great deal” in the sector if they lack the capabilities to fully
exploit inherent opportunities or can’t afford to properly grow and develop the product pipeline. When
considering an investment, problems can arise when industrials fail to:
• Adjust investors’ expectations for their new strategic direction—Investors in typical industrial firms
largely value companies’ consistent dividends and slow-but-steady earnings, cash flow and growth.
Transitioning to a greater focus on medical technology requires that industrials recalibrate the expectations of their investors, since delivering on long-term growth demands additional investment in the
short-term. Shifting mindsets in such a way will likely require targeting the sales message to a different
group of investors who have a higher tolerance for risk and longer-term investment horizons.
• Evaluate acquisitions based on criteria beyond their short-term earnings potential—Unlike a typical
industrial firm, a prospective acquisition in medical technology cannot be valued based entirely on the
cash flows projected for the next few years. Believing that expected future total shareholder return
warrants current valuation, the market places a high premium on the long-term value of a medtech
company’s technology—even if that value is not fully demonstrated. Therefore, companies in unrelated
industries are simply not ready to move definitively into the sector unless they are willing to accept a
year or more of EPS dilution following an important medtech acquisition.
Once acquisitions have been made, problems arise in managing the new medtech businesses
when:
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• New entrants attempt to integrate businesses that have little overlap with core businesses and
capabilities. The highly entrepreneurial and scientific nature of device companies in particular means
that they aren’t necessarily well-served by the same governance structure, metrics and policies that
work well in manufacturing or industrial divisions. American Standard serves as an industry poster child
for this error. In contrast, GE has borrowed liberally from its highly structured and highly successful
planning processes in running its health care division, but it has allowed the group to retain its autonomy
rather than fully integrating it. A senior health care executive, for example, serves on GE’s executive
committee. Teleflex, in a related strategy, has pursued a decentralized approach of largely disparate
brands with much success.
• Industrials aren’t prepared to invest the significant level of R&D spend required to fuel technology
development. Most industrial companies consider spending anywhere from 2-3% in annual revenue on
R&D a serious commitment of resources. A company that wants to enter the medtech sector must alter
its expectations drastically. Breaking into a new market requires a product that is more than just a “me
too” offering, and heavy investment is often required to justify the clinical claims that will capture the
attention in the marketplace. And market entry is just the first step. Maintaining leadership in the sector
requires a sustained commitment to R&D: Medtech companies spend between three and five times
more on R&D than S&P 400 companies do on average.
• Acquirers take an old-school approach to intellectual property. Device and other medtech companies
can’t afford to be squeamish about patenting aggressively and spending lavishly to defend those
patents—or to attack the patent positions of others. But this mindset can seem foreign to companies
used to competing in traditional industries where intellectual property is less dynamic and less critical to
success and whose legal departments have long sought to avoid risk at all costs. Corporations need to
assess the IP—both patents and know-how—at their newly or soon-to-be acquired medtech companies
if they can hope to exploit those opportunities. If they don’t possess the requisite skills to do so and
don’t know what they’re looking at, they’ll need to make another “acquisition”—bringing on a leadership team expert in the medtech sector.
• Players misunderstand the realities and critical nature of marketing and selling in medical
technology. Industrials might expect that the value of the best technology will be apparent and market
adoption therefore automatic, underestimating the need for demonstrated clinical evidence and an
army of relationship-building and case-making sales reps. But even the most innovative devices won’t
necessarily get a warm welcome among surgeons, technicians and hospitals. These risk-averse players
are reluctant to add new equipment or procedures to their repertoire—or to replace proven ones. And
customers will often rebuff outright products that have a negative impact on their practice economics.
Thus, not only must industrials invest in clinical investigation to demonstrate superior outcomes, but
they also need a firm grasp of the complex role that reimbursement plays in a product’s success.
Further, they also must scale, deploy and compensate a sales force in a manner befitting an industry that
reaps average margins at least 30% higher than the S&P average.
Knowing what not to do is the first factor critical to success; understanding what steps to take is the
second. A list of valuable questions that industrials and conglomerates should ask appears in the
sidebar, “Exploiting the Opportunity While Ignoring the Siren Song.”
© 2005 WINDHOVER
INFORMATION
When Outsiders Move In
windhover.com
With industrial and conglomerate players moving into the more attractive neighborhood of medical
technology, there are implications for the established medtech companies that already reside there—
large as well as small. Now that medtech industry giants are no longer the only acquirers, smaller
companies gain more options and a larger audience for strategic partnerships. Outsiders willing to pay
cash for a presence in medical technology may well bid up the prices paid for acquisitions both by
players within and beyond the industry.
Still, the giants likely aren’t in any serious danger of being forced out. In any fight for an acquisition,
the Strykers, Boston Scientifics and Medtronics enjoy some clear advantages, including their established sales and marketing networks and their experience with protecting and defending intellectual
property positions. But the brute force of their financial power is their most compelling attribute.
The equity markets have rewarded the leaders within the medtech industry with high valuations and
P/E ratios—positioning their stock as extremely attractive currency for acquisitions. When they accept
shares instead of cash, acquired companies and their shareholders recognize the potential for substantial upside in the future. They are familiar with the industry’s historical TSR performance—nearly
double that of the S&P 400 since 1990—and expect the trend to continue.
In recognition of these realities, most industrial firms that have recently entered the sector appear
therefore to be focusing on a targeted portion of the market (Smiths Group homing in on disposable
anesthesia products, for example) rather than developing broad-based offerings. They also aren’t yet
going after the highest-tech acquisitions, presumably because the technology and regulatory barriers
are a bridge too far.
Nevertheless, the role of industrial giants is far from trivial. These major players are infusing vital
scale, cost-cutting efficiencies, business process excellence, and cash into the medtech sector. In the
process, they are revolutionizing the business of medical technology and catapulting the industry into
its next, mature phase.
Posted with
permission from
Windhover
Information Inc.
JUNE 2005
INDUSTRIAL
REVOLUTION:
The New
Medical Device
Acquirers
Examining the dynamics of intra-sector acquisition and its importance to growth and value
creation—particularly in the high-performing and high-technology device area—is the focus of the
second article of our series examining acquisition trends in the medical technology sector.
Since 1989 Windhover Information Inc. has been dedicated
to providing superior analysis and commentary on
health care market trends, company strategy, emerging
technologies dealmaking, and key industry events.
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© 2005 WINDHOVER
INFORMATION