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The Consolidation Climate: What Trends Prevail?

By Carolyn LaWell

Through the first half of 2015, the number of merger and acquisition transactions closed has kept pace with the amount of deals that took place during the same time periods in the previous two years. Specifically, 37 transactions closed in 2014; through July 15, 2015, 24 closed or are expected to close this year.

Notably, Zimmer Biomet is official. Smith & Nephew continues its path of growth by acquisition of implants, distributors and software. Supply-side M&A expands geographic reach through cross-border transactions.

Strategics and industry executives who spoke at OMTEC® 2015 agreed that all of healthcare—insurers, hospitals, device companies, suppliers—will continue to consolidate in reaction to their own customers’ alignment and demands to scale size in order to increase services while simultaneously decreasing costs.

What is fueling deals, at least between large public device companies, is that this activity is positively received by investors.

When a company seeks to be acquired, its stock price goes up—but sometimes, the acquirer isn’t as fortunate,” said Don Urbanowicz of Urbanowicz Consulting. “What’s happened more recently is, the stock prices of both companies seem to be increasing.”

Urbanowicz moderated an OMTEC panel discussion among Joseph Kuranda, Director, Business Development, DePuy Synthes; Robert Lynch, Vice President of R&D and Marketing, Tecomet and Robert Kinsella, President and Founder, Kinsella Group. The conversation highlighted types of companies and technologies that might attract buyers in the future. 

High Growth Segments
Less mature, high revenue growth segments within the industry—like extremities and biologics—have strong valuations, which drive their attractiveness as acquisition candidates.

“Our argument to the OEM is, you have established distribution; you can add this (extremities) company to that, and see a very nice return,” Kinsella said. “That often supports a multiple of revenues. In extremities, we’ve seen multiples between 3 and 5 percent TTM revenue.”

Additive Manufacturing
Consensus amongst the panelists is that additive manufacturing or 3D printing remains an emerging technology in orthopaedics. OEMs and suppliers continue to work in-house, with each other and with printer manufacturers to determine just how best to use the technology.

Additive manufacturing companies like 3D Systems, Arcam and Materialise have participated in M&A activity in the past 18 months, with purchases of orthopaedic-focused contract manufacturers and software companies. These acquisitions afforded them a certain technological and supply chain sophistication, which in turn secured investment from or partnerships with orthopaedic device companies of all sizes. Their increased penetration of the market is expected to give the technology more direction within the industry. 

Based on his perspective from working with manufacturers that are experimenting with it, Kinsella observed that additive manufacturing won’t be fully realized until companies get past viewing it as simply a tool and implement it for actual production of parts. Once that takes place, the technology or the human expertise associated with it will be ripe for more M&A activity at device and supplier company levels.

“Everyone wants to talk about how hot (additive manufacturing) is, and certainly, it’s very hot. But in terms of its impact on revenues and profits for anybody in this industry yet, I would have to be educated, because I don’t see much,” Kinsella said. “Certainly I’m a believer that this technology, over time, will have a big impact—but I think that for it to do so, you have to have a change in mindset.”

Small and Smart Companies
The need to scale, whether that’s with products, capabilities or capacities, remains the ultimate driver of M&A activity today. This leaves small players (with revenue of $15 million and less) as attractive targets for several reasons.

First, on the OEM side, innovation comes from smaller, more nimble companies that can be leveraged by larger players. Second, no matter where a company falls within the supply chain, only so much growth can be obtained organically, and smaller players find it more difficult to get over the revenue hump that will allow them to scale-up and scale-out to meet customers’ demands or will allow them to handle increased regulatory burdens that take significant resources. The latter is more relevant on the supplier side, which harbors a “buy-or-be-bought” mentality as industry moves to a simpler supply chain.

“Those companies are good companies,” Lynch said, speaking specifically of the industry’s smaller suppliers. “They have good capabilities and equipment, and very intelligent people. But they do lack the financial backing to take it to the next level, or they just don’t have the horsepower to manage all of the flow-down of new regulatory requirements. They are good acquisition candidates, especially if the management teams that run the companies want to stick around.”

Companies of all sizes are targets, whether from competitors within the orthopaedic industry or companies seeking to enter it. Just seven companies maintain 71 percent of the orthopaedic industry’s worldwide market share, according to the most recent ORTHOPAEDIC INDUSTRY ANNUAL REPORT®.

Urbanowicz cited BMO Capital Markets, which compared the top 50 standalone medical device companies in 2004 and 2014. The firm found that by 2014, 27 (54 percent) of the top 50 companies from 2004 had been acquired. BMO’s conclusion was that if you’re a medical device company with $10 billion or less in revenue, you are vulnerable to acquisition. Though not orthopaedic-specific data, the evidence thus far has proven to be true.

 

What activity has taken place this year? The following tables provide perspective on each of the 24 closed or expected to close acquisitions, classifying them in categories of OEMs acquiring OEMs, OEMs acquiring partners and suppliers acquiring suppliers.

Zimmer completed its acquisition of Biomet nearly 14 months after it announced it would buy its cross-town rival. The final cash equity transaction was valued at $14 billion.

Management updated the net annual synergies during the acquisition closing announcement, stating that Zimmer Biomet expects synergies of approximately $350 million by the end of its third year, with approximately $135 million in synergies anticipated in the first 12 months.

The exhibit below notes the assets that Zimmer and Biomet divested in the U.S. and in Europe to satisfy regulators, as well as announcements that have taken place between OEMs in 2015.
 

OEMs Acquire OEMs
Acquired Acquired by Transaction Details
Baxano Surgical implants Amendia Purchased iO-Flex and iO-Tome assets
SpineSelect Amendia Includes company’s minimally invasive transforaminal lumbar interbody fusion system and 20 patents
Baxano Surgical implant ChoiceSpine Purchased VEO Lateral Access/IBF system
Olive Medical DePuy Synthes Purchased visualization systems for minimally invasive surgery to augment Mitek arthroscopy line
BioSurface Engineering Technologies (BioSET) Ferring Pharmaceuticals Acquired AMPLEX® and PREFIX®, both Phase
III-ready orthobiologic candidates
MetaSurg foot/ankle portfolio Integra LifeSciences Purchase includes distribution of BioFix®
amniotic-based regenerative biologic line
SeaSpine Integra LifeSciences spinout Shed its spine business to focus on orthopaedic and tissue repair products
Covidien Medtronic Cash and stock deal closed at $42.9 billion value
S2 Interactive Smith & Nephew/Syncera Acquired Virtual Backtable® and TrayTouch® surgical software applications related to instrument-use data collection
Wright Medical (merging with) Tornier Deal expected to close in 2H15 in a stock-for-stock transaction valued at $3.3 billion
Biomet Zimmer Acquisition closed at a value of $14 billion
Zimmer and Biomet implants Lima Corporate Acquired assets of Zimmer’s Uni High Flex Knee, Biomet Discovery Elbow within the European Economic Area and Switzerland and the Biomet Vanguard Complete Knee for Denmark and Sweden
Biomet implants DJO Global Acquired U.S. rights to Discovery Total Elbow, Cobalt Bone Cement, Optivac Cement Mixing System
Zimmer implant Smith & Nephew Acquired U.S. rights to Uni Knee



A quarter of the M&A activity in 2015 has focused on deals between OEMs and their current partners. Notably, Smith & Nephew acquired two of its distributors, following similar transactions the company has made in emerging markets.

Also, Globus Medical purchased its decade-long partner, Branch Medical. Globus management owned 49 percent of Branch prior to the acquisition, and 94 percent of Branch’s sales came from Globus in 2014, according to Globus.
 

OEMs Acquire Partners
Acquired Acquired by Transaction Details
BlueOrtho Exactech BlueOrtho developed Exactech’s Guided Personalized Surgery system prior to its acquisition for $11.6 million
Branch Medical  Globus Medical Globus paid $68 million in cash for Branch Medical, which manufactured a quarter of the spine company’s products prior to the acquisition 
DS Manufacturing McGinley Orthopaedic Acquired supplier partner to leverage manufacturing in-house 
Wuhan Dragonbio Surgical Implant Mindray Medical Transaction valued at $72.6 million; Mindray acquired a majority stake in Dragonbio in 2012
DeOst trauma and ortho business Smith & Nephew DeOst has distributed Smith & Nephew products in Russia since 2009; transaction includes distribution and manufacturing
EuroCiencia Colombia Smith & Nephew EuroCiencia has been Smith & Nephew’s sole distributor in Colombia since 2006



A handful of executives offered perspective on the increase in consolidation at the supplier level in the March 2015 issue of ORTHOKNOW. Of note since then is the number of cross-border transactions that have occurred.

Three of the four deals closed between suppliers this year involved U.S. and European companies. Attraction lies in the ability to scale capabilities and operations, as well as geographic reach.

Also, Precision Engineered Products acquired Holmed in 2014 and has grown again with its purchase of Trigon.
 

Suppliers and Service Providers Acquire Suppliers 
Acquired Acquired by Transaction Details
Onyx Medical Elos Sweden-based Elos acquired U.S.-based Onyx to focus entirely on med device and strengthen its position in trauma, spine and extremities
Turner Medical In’Tech Medical France-headquartered In’Tech purchased Turner Medical to expand its U.S. presence and reportedly become the largest provider of spinal instruments; transaction is expected to close in 3Q15
Michael Bubolz  Paragon Medical Acquired the European company's medical device business to further Paragon’s global reach
Trigon Precision Engineered Products Acquired to enhance design, engineering, manufacturing and assembly services for orthopaedic products; PEP Trigon will operate as a wholly-owned subsidiary



Carolyn LaWell is ORTHOWORLD’s Content Manager. She can be reached here.