Medical Device Companies' Future Remains Bright, Albeit Slow Penetration
According to a report published by reportlinker.com, the medical devices industry is expected to grow by 6.1% CAGR through 2017, reaching approximately $302B. On the other hand, reportsnreports.com predicts that the industry will reach $434B in 2017, with CAGR of 7.1%. These are as the reports suggest a significant growth. However, in a real sense, penetration in the consumer market is still low compared to the opportunity availed by advances in medical technology.
More than three-quarters of the companies in the medical devices industry have 50, or fewer employees, which again suggests a cautious approach to the market. Companies are shy to expand organically without a guaranteed revenue growth. This also explains one of the reasons there have been so many acquisitions in the recent past.
While medical device manufacturers are innovative in new and products, it is a difficult task to get people to believe in them. This has been one of the biggest obstacles with regard to market penetration. The companies are shifting their focus from institutional products, and expanding to consumer products in a bid to widen their addressable market. However, penetration has failed to shake up the market as many consumers still prefer the tried, tested and trusted methods of healthcare.
Despite this growth, some companies may still find it difficult to make profits due to the unpredictable regulatory process on products produced by the companies. According to a report published on Forbes, medical device companies often face a long and tough process, which they must first negotiate before a product is sold in the market. This means that, at times, companies may require making large sales in order to become profitable.
Now, that may not sound like a big issue to industry giants like Medtronics (NYSE: MDT), Johnson & Johnson (NYSE: JNJ), or Abbott Laboratories (NYSE: ABT). However, the net effect is that the process does affect their income levels. This gets worse for smaller companies. Therefore, this explains one of the reasons there have been so many mergers and acquisitions in the industry over the last few years as companies seek to strengthen market share, while at the same time extending their reach to other niche markets.
Consolidations Are Happening Across the Board
Even new players in the industry like Sanomedics International (OTC: SIMH) are already acquiring various startups as they position themselves strategically to get in the game. Sanomedics announced recently that, it intends to acquire a leading provider of professional healthcare services and solutions. The targeted company, which remains undisclosed, reportedly posted $30m in revenues in the year 2013.
The latest player to complete a major acquisition is Stryker (NYSE: SYK), which on March 7 completed the acquisition of Pivot Medical, a privately held company that sells innovative products for hip arthroscopy. Pivot has operating facilities in Sunnyvale, California. Pivot Medical is not the only acquisition that Stryker is making. The company has made a number of acquisitions over the last few years. Between 2011 and June 2012, alone, Stryker made acquisitions totaling $592.4M in value.
Nonetheless, that number was nowhere close to what Johnson & Johnson spent during the same period. The giant drug manufacturer spent $19.7B in medical devices related acquisitions, after acquiring Synthes (a medical device company) in cash and stock. On the other hand, Medtronics and Abbott Laboratories spent $779.7M and $69.8M respectively. Another pure-play medical devices company Boston Scientific spent $310M.
In the recent past, the giants in the medical device industry have also made serious acquisitions. Last year, Medtronic acquired Cardiocom a privately held company, based in Chanhassen for $200M. The company has telecommunication tools for managing chronic diseases, which analysts predicted to be a move to diversify Medtronic’s business. The move gives Medtronic an opportunity to expand operations to data services, as the population health company, Cardiocom provides a perfect avenue.
The company also in January 2014 announced the acquisition of TYRX Inc, a developer of solutions for surgical site infections. This acquisition will help Medtronic expand its medical device product offering in healthcare services and solutions.
Another giant, Abbott laboratories announced last year completed the acquisition of IDEV Technologies, a privately held company focusing on the development of next-generation medical devices for use by interventional radiologists, vascular surgeons and interventional cardiologists. This was a strategic move by the company in an effort to expand its global peripheral technology portfolio.
"Peripheral artery disease is a significant and growing health concern around the world, raising the need for new and effective treatment options," said Chuck Foltz, senior vice president, vascular, Abbott. "Abbott's acquisition of IDEV Technologies strengthens our global product portfolio while providing an additional opportunity to make a positive impact in the lives of patients with peripheral artery disease."
The Future Remains Bright
It is often believed that rapid acquisition of startups by veteran players in an industry kills innovation. Now, when we look at what has happened in the medical device industry over the last few years, it is clear that an industry whose backbone is innovation may be staring at a similar fate.
However, from a different point of view, it could be argued that the long, draconian negotiation process that stands between product development and making a sale plays an enormous role in these acquisitions. The recently introduced excise tax rate of 2.3% on sales that came with the ObamaCare administration does not ease the situation.
While the acquisitions may sound like holdup on innovation, some of the small players may consider this as a massive opportunity to reward their loyal investors. The small players are strong candidates for acquisition, especially if their operations focus on a certain market segment. For instance, Sanomedics develops its products with a view of building a bridge between the high-technology medical world and home healthcare.
As noted earlier, home healthcare seems to be the ultimate target for medical device companies. This widens the addressable market by targeting every living being, rather than just hospitals, schools and research centers, among others.
With time, people will continue to embrace the use of medical technology. Devices such as heartbeat monitoring, blood sugar and blood pressure devices will continue to gain traction. The ageing population in North America, which is the largest market for medical device companies, should boost the opportunity. More people will begin to see the need to use these devices in monitoring their health while children between the ages of 0-5 years also provide an added opportunity.
The medical device industry may not be the most attractive for investors as demonstrated by Warren Buffet, who has no ownership in any pure-play medical device company. However, with advances in technology, and the growing adoption of wearable devices, the medical device industry’s future remains bright.
Recent projections also suggest that the industry is growing at admirable rates annually despite the low penetration. This means that if penetration peaks in the coming years, then even the researchers could be set for a good surprise. This means that there is a brilliant opportunity even for the small players, which could be ideal for investors looking for affordable stocks.
The bottom line is that, the industry is faced with massive challenges, which perhaps may have partially contributed to the recent mergers and acquisitions. However, with a growing market, there is a compelling reason to stay in the business because the opportunity is there for the taking.
The following article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.