With all the turmoil in the US healthcare market, a port in the storm is not easy to find. A port that can accommodate an outsized tanker ship like Medtronic is even harder to locate. With two back-to-back acquisitions last month of Peak Surgicaland Salient Surgical, the S.S. Medtronic took refuge in Surgery Harbor, committing nearly $600 million (net of previous ownership stakes) in a single day to nestle in with the hulking barges of Covidien and J&J.
So why is Medtronic bulking up its surgery business? Looking inward at Medtronic’s recent business performance and PR troubles, several obvious explanations can be found. The cardiac rhythm management segment, making up a third of Medtronic’s revenues, has been flat to declining. The Infuse debacle and overall perceived sketchiness of the spinal fusion market have put Medtronic’s Spinal business, representing over 20% of company sales, at risk.
On the other hand, Medtronic’s Surgical Technologies business is growing handily in the high single digits, while sadly accounting for less than 10% of sales in FY 2011. There is definitely room for additional products in the Medtronic OR sales bag. On the M&A front, Medtronic’s ammunition has been spent almost exclusively in cardiac and spine technologies over the past three years, crying out for a little diversification. The new CEO, Omar Ishrak, who grew up in the conservative cultures of GE and Philips, also seems unlikely to replicate his predecessors’ big, risky acquisitions of innovative companies like Ardian, CoreValve and Ablation Frontiers. Whereas the management mantras may have once been “focus on your core” and “invest in disruptive technologies,” it may now be “hedge your bets.”
Looking outward to the markets, a.k.a. the people and institutions that actually buy med tech stuff (easy to lose site of these important folk), one can find plenty of reasons to invest in surgical technologies:
Hospital economics: In general, surgical procedures have been steady and profitable revenue generators for hospitals, and thus a source of competition among hospitals for both patients and top surgeons. With these market dynamics, surgeons have clout and influence in hospital purchase decisions. And surgeons use a lot of devices, particularly single use devices given the invasiveness and messiness of most surgery. While other services, such as diagnostic radiology and interventional cardiology, have come under media and payor scrutiny of late, surgical procedures appear less vulnerable to such swings in sentiment.
Healthcare Reform: A key component of U.S. healthcare reform is coverage of the 40 million or so uninsured population. The over-65 crowd have long been insured by Medicare, so the additional coverage won’t have much impact on this demographic. So what are the 40 million uninsured likely to need and have been putting off for lack of insurance? Surgery, especially of the general, gynecologic, orthopedic and ENT varieties. No coincidence that these are fields addressed by Medtronic’s latest surgical acquisitions. In addition, a large component of the surgery market involves necessary therapeutic procedures that are unlikely to be denied by insurers under any reform scenario – trauma, cancer, exploding appendices and other organs, and the like.
Global Opportunity: As developing countries build their middle classes and demand more healthcare, surgical procedures will be on the rise. An investment in surgical devices has global expansion potential, more so than interventional devices for which the market tends to be more U.S.-centric (driven by the dysfunctional quirkiness of our healthcare system). Ex-US, and particularly developing country, revenues have become increasingly important to the large medical device companies. For example Boston Scientific recently announced that it plans to invest $150 million to expand its commercial presence in China and Medtronic publicized plans to double its Chinese workforce over the next four years. For more of our thoughts on the globalization of the new med-tech market opportunity, read our recent blog post First Stop, Third World.
Surgeons – the New Interventionalists: The latest generation of surgeons are training in interventional and open procedures. As interventional procedures become more adventuresome and used in riskier patient populations, surgeons will have a major advantage vs. interventionalists and/or will be a necessary part of the procedure team, for example in hybrid transcatheter aortic valve procedures. Developing surgical sales channel is a potentially powerful foot in the interventional marketplace.
So stay tuned for more deals in the surgical space!