Analysts say it could spark further consolidation in the med-tech industry.
By acquiring Covidien PLC, Medtronic Inc. will transform from a $17 billion to a $27 billion company, a jump of such magnitude it could spur other medical device makers to follow suit.
While much of the discussion Monday centered on the $42.9 billion deal’s controversial tax implications — Medtronic will be based in Ireland to avoid U.S. taxes — Wall Street analysts focused on its implications for other medical-device makers and the hospitals they serve.
“I think there will be more consolidation. This is probably the tipping point,” said Venkat Rajan, principal analyst with Frost & Sullivan, a California research firm. “It’s pretty seismic.”
In a conference call with analysts Monday, Medtronic CEO Omar Ishrak said “consolidation of some sort is inevitable. It’s just a matter of time.”
Medtronic, founded 65 years ago in a northeast Minneapolis garage, will emerge from the deal as the world’s second-largest medical-device company behind Johnson & Johnson, which has device revenue of $28.5 billion. Covidien’s CEO Jose Almeida said the combined firm will be a “powerhouse.”
From a product perspective, the two companies have little overlap. Medtronic is strong in cardiovascular, spine, diabetes and surgical technologies, while Covidien’s prowess lies in surgical supplies, soft-tissue repair, vascular devices and monitoring equipment, said Larry Biegelsen, a senior analyst with Wells Fargo Securities.
The financial might and product breadth will give Medtronic a certain heft to lord over its competitors when it vies for business from hospitals and health care payers increasingly obsessed with value, especially in the wake of the Affordable Care Act.
“The changes taking place in health care around the world will force medical device companies to get bigger because they would need scale to negotiate with payers and providers on an equal footing,” Biegelsen wrote in a note to investors Monday.
But not all observers see size as a slam-dunk for success. “It’s a debate that is ongoing in med-tech. There are companies that believe greater scale will provide more benefits, and a fuller suite of services to hospitals,” said Brooks West, an analyst with Piper Jaffray & Co. “There are other companies that believe if you have the best products, that will drive growth and opportunity. The answer is still not clear.”
Payers wield more power
Other companies in the med-tech space will watch the Medtronic-Covidien deal closely, perhaps with an eye toward crafting their own alliances. “The power structure of medicine is shifting from the device manufacturers to the health care providers and payers as hospitals merge and payers increasingly wield more power in health care decisions,” Biegelsen said.
Some consolidation has already occurred. Johnson & Johnson purchased orthopedic device maker Synthes Inc. two years ago for $21.3 billion. And Zimmer Holdings Inc. agreed in April to buy Biomet for $13.4 million.
It’s unclear whether two other major med-tech companies in Minnesota, Boston Scientific and St. Jude Medical, will be engaging in such talks. From time to time over the past decade, Little Canada-based St. Jude has been a rumored takeover candidate, yet it still remains independent.
The acquisition also highlights the maturation of the U.S. med-tech industry, particularly in cardiac and orthopedic fields. Medtronic, in particular, has increasingly sought growth in emerging markets worldwide, including China and India.
Said Ishrak, “We will now have a $3.7 billion emerging-markets business that we are confident can sustain double-digit growth over an extended period of time.”
The two chief executives also said the deal will help speed along new and innovative products. To that end, Medtronic said it will commit $10 billion in U.S. technology investments over the next decade in areas such as venture capital investments, acquisitions and research and development.
Shaye Mandle, president and CEO of the St. Louis Park-based industry group LifeScience Alley, expects the “lion’s share” of that money to land in Minnesota.
“In terms of [med-tech] companies and job growth in the U.S., Minnesota is one of two or three places in a country where there’s a ton of innovation in that space,” he said.