The medical device industry’s mammoths have been on an acquisition run in recent weeks. And some industry watchers believe Orange County,home to scores of biomedical companies,could be ripe for the picking.
“Orange County is a farm team for big players,” said Edward Doyle, a South County industry consultant who formerly worked for device kingpin Medtronic Inc.
Specifically, Doyle says there are two types of medical device companies that larger players are looking to grab,those that specialize in “nanotechnology,” or micro-miniature devices, and those that make products designed to ease the workloads of physicians, nurses and other caregivers.
“There always has been and there will be consolidation into the next decade,” said David Anast, publisher of the Biomedical Market Newsletter in Costa Mesa. “It’s corporate pressure to continue to grow size and revenue.”
Orange County’s biomed landscape includes numerous smaller medical device players that larger companies may take a shine to. The area is also home to bigger names, such as Fullerton-based Beckman Coulter Inc. and Irvine-based heart valve maker Edwards Lifesciences Corp., which could be buyers as well as targets, observers say.
The industry’s consolidation has heated up in recent weeks, and the talk continued last week. Shares of Beckman, a biomedical testing company, jumped around 10% on speculation that it was one of several companies being targeted by Germany’s Bayer AG. Fueling the speculation was Beckman’s canceling of a previously announced public debt offering, although the company said it made the move because market conditions weren’t right.
Last month, Johnson & Johnson, Medtronic and Tyco International Ltd. each unveiled multibillion-dollar acquisition bids. Minneapolis-based Medtronic, the largest device maker, agreed to buy MiniMed Inc. of Sylmar for $3.3 billion in cash. MiniMed makes insulin pumps used by people with diabetes. Additionally, Medtronic, which employs 400 workers in Santa Ana, is paying $420 million in cash and stock for Medical Research Group Inc., a private company in Sylmar that’s closely tied to MiniMed.
Bermuda-based manufacturing and service conglomerate Tyco plans to buy C.R. Bard Inc. of Murray Hill, N.J., for about $3.3 billion. Bard makes various healthcare products, including vascular, urological and oncological diagnostic and intervention offerings.
Bard is Tyco’s second hefty buy in recent months. Last year, Tyco agreed to buy Mallinckrodt Inc. of St. Louis for $3.1 billion. Mallinckrodt, which has 330 workers in Irvine, makes, among other things, respiratory devices and radiopharmaceuticals.
The Medtronic and Tyco deals followed Johnson & Johnson’s pickup of the diabetes monitoring unit of Waltham, Mass.-based Inverness Medical Technology Inc. J & J;, whose Advanced Sterilization Products unit employs around 200 in Irvine, is paying $1.3 billion in stock for the Inverness unit.
In OC, Edwards, the county’s largest device maker, could be looking to get bigger through acquisitions, according to Michael Mussallem, chief executive of the heart valve maker.
“I wouldn’t be surprised to see Edwards announcing technology acquisitions over the coming months,” Mussallem said. “We are more focused than ever on pursuing the addition of new technology.”
Edwards, as part of a restructuring completed this year, added “discovery resources” to allow the company to analyze and assess new technologies, unmet clinical needs and market size and opportunities, according to Mussallem.
“We’re convinced, because cardiovascular is so large,it’s the No. 1 killer and No. 1 expense item,there are a lot of unmet clinical needs out there,” he said. “So it’s very ripe to be able to apply technology to those unmet needs.”
Industry observer Anast said the strong performance of Edwards’ shares on Wall Street could give the company the wherewithal to acquire other companies.
“They have a wonderful ability to launch a stock offering,” Anast said. “That’s a highly admirable (quality); they can build up a war chest to make acquisitions.”
Industry consolidation brings medical device makers in line with what health maintenance organizations and hospitals,their customers,are doing, said Michael LeConey, a healthcare analyst with Gilford Securities Inc. in New York.
“What’s driving it is really simple,I call it economics 101,” LeConey said. “The provider customers have been consolidating. The next step is suppliers consolidating.”
As for what acquirers are seeking, “any high-tech medical device company would logically be a target,” LeConey said, pointing to Medtronic’s deal for MiniMed as an example.
According to Michael Gioffredi, vice president of sales and marketing for Irvine-based Cardiac Science Inc., buying or selling of medical technology companies is likely to happen in five geographic areas: Southern California, Northern California, Minneapolis, Boston and New Jersey.
Still, not everyone sees the floodgates opening.
“The acquisitions that have hit over the past couple of weeks are just a coincidence,” said Joanne Wuensch, a medical technology and supplies analyst with ABN Amro in New York.
MiniMed and Bard were longtime acquisition targets that fit in with the strategies of Medtronic and Tyco for building wider product lines, Wuensch said.
“When you’re calling on the hospital, you can have a broader bundle of products,” she said, noting that Tyco’s healthcare products include Bard, Mallinckrodt, Kendall and U.S. Surgical.
The scale theory, according to LeConey of Gilford Securities, is leading device makers to lump various subcategories of products into large classes.
“In the heart valve area, any therapeutic device used for cardiovascular becomes a category. Now, companies want to develop an entire spectrum of products,” LeConey said.
Beckman, meanwhile, took its major jump in the acquisition pool a few years ago, when it acquired Miami-based Coulter Corp. Besides the Bayer talk, Beckman saw its stock jump last September when rumors surfaced about Abbott Laboratories Inc. of Abbott Park, Ill., eyeing it.
“Logically, Beckman Coulter would be an industry survivor. It is so big and dominant,” LeConey said. “Scale is the key word here. Medtronic has got the scale in implantable devices. Beckman Coulter’s got the scale in high-tech instruments.” n
