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MedTech M&A Deals Abound, Emerging Markets Promising

By Zacks Investment ResearchStock MarketsDec 09, 2014 12:13AM ET
www.investing.com/analysis/medtech-m-a-deals-abound,-emerging-markets-promising-235056
MedTech M&A Deals Abound, Emerging Markets Promising
By Zacks Investment Research   |  Dec 09, 2014 12:13AM ET
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While merger & acquisition (M&A) activities are scaling a seven-year high, the U.S. government’s crackdown on tax-dodging transactions has created a ferment in the medical device equity market worldwide. That said, the industry is looking for some improvement in its prospects in the wake of the midterm elections.

This positive piece of news was followed by the speculation on MedTech major Stryker Corp. (NYSE:SYK) considering a likely bid of $15 billion to buy London-based orthopedic major Smith & Nephew plc (NYSE:SNN). Steris also announced plans to move its corporate headquarters to U.K., reportedly to lower its tax burden. The company has offered to buy U.K.-based outsourced sterilization services provider Synergy Health plc for $1.9 billion in cash and stock.

On the same path, global orthopedic device maker Wright Medical (NASDAQ:WMGI) has entered into a definitive merger agreement with the Netherlands-based medical device company Tornier N.V. (NASDAQ:TRNX) for $3.3 billion.

Last week, the Federal Trade Commission (FTC) has approved the pending $43 billion acquisition of Irish medical device major Covidien (NYSE:COV) by Medtronic (NYSE:MDT), consequently letting the latter enjoy the fruits of a lower tax rate overseas. Countering the series of corporate inversions in 2014, the U.S. Treasury Department has recently come out with a set of anti-inversion rules to make these overseas acquisitions less attractive. Apart from the controversial cross border acquisition activity, other M&A deals continued unabated in the MedTech corner this season.

In October, Becton, Dickinson (NYSE:BDX) and CareFusion (NYSE:CFN) entered into a definitive agreement under which the former would acquire the latter for roughly $12.2 billion. Apart from all other financial gains, this acquisition has the potential to enhance the combined entity’s geographical reach and focus intensively on emerging market growth.
 
Zimmer Holdings (NYSE:ZMH), on the other hand, expects the successful completion of the $13.35 billion Biomet acquisition to help capture the $45 billion musculoskeletal industry. We are impressed with the strong strategic and financial goals set for the expanded company post closure.

Abbott Laboratories (ABT) in an attempt to broaden its medical device business, entered into the fast-growing catheter-based electrophysiology market with the acquisition of Topera, Inc. Johnson & Johnson (NYSE:JNJ) is also pursuing growth through suitable acquisitions, especially to boost its cardiovascular business.

There is this long list of M&As in the MedTech space. After closing the acquisition of Bard EP, the electrophysiology business of C.R. Bard, Inc. (NYSE:BCR), Boston Scientific Corporation (BSX) acquired the Interventional Division of German health care major Bayer AG (BAYRY). The deal, valued at $415 million, is a step toward strengthening the company’s foothold in the global peripheral interventions market.

Divestments

We have also been observing a lot of divestments lately, particularly of non-core business segments. Divestments, specifically to offset the tax, have been announced by many key players. We expect this trend to continue going forward.

In November, Smith & Nephew (NYSE:SNN) announced the sale of certain assets of its Advanced Wound Management division to SWM International (NYSE:SWM). As part of the transaction, SWM will acquire Smith & Nephew's Gilberdyke, UK facility, which will become part of DelStar's operations (a division of SWM International).

Integra LifeSciences Holdings Corp (NASDAQ:IART) has decided to spin off its spine business in order to focus on its core specialty surgical solutions, orthopedics and tissue technologies. On FTC’s conditional approval, a subsidiary of Covidien has entered into an agreement with The Spectranetics Corporation to divest its drug-coated balloon catheter product.

Alere is selling its Health Management business unit to Optum, a division of United Healthcare, for $600 million. According to the company, the continuing divestment of non-core assets will not only boost profitability but will also help Alere focus more on developing its core operations.

Abbott is on track with its all-stock deal with Mylan (NASDAQ:MYL) to divest a portion of its generics pharmaceuticals business for a deal value of $5.3 billion, although with a modification in the terms of the deal. While Abbott expects to gain strategic flexibility with more focus on emerging markets, Mylan is looking to save taxes besides expanding its portfolio.

Emerging Market Opportunities

Although the U.S. still holds the leading position with almost one-third of global market share, a gradual slowdown in the mature markets due to a number of lingering headwinds are forcing MedTech companies to look for opportunities in the developing world. Currently, with a growth rate in the low single digits in the developed markets of the U.S., Europe and Japan, large-cap medical device makers are increasingly looking to invest in the high-growth emerging regions.

Accordingly, emerging economies like Brazil, Russia, India and China (BRICs) as well as Turkey, Mexico, Malaysia, South Africa, South Korea and the Czech Republic are fast coming up in the medical devices space. An aging population, increasing wealth, government focus on health care infrastructure and expansion of medical insurance coverage make these markets a happy hunting ground for global medical device players.

Expansion in emerging markets, especially those with double-digit annual growth rates, represents one of the best potential avenues for growth going into 2015 and beyond.

Abbott continues to lead the trend with about 50% of sales coming in from the emerging market, which were up 13.8% year over year on a reported basis during the third quarter 2014. The company’s growth strategy includes building leadership positions in key emerging geographies across its wide portfolio. For Medtronic, emerging market grew a robust 12% (at CER) in its second quarter of fiscal 2015, representing more than 13% of the company’s total sales mix.

In the face of flattening or declining sales growth in the developed markets, Boston Scientific achieved 19% emerging markets growth in the third quarter of 2014. Boston Scientific is currently targeting emerging market revenue contribution of almost 15% in 2017. Stryker, with strong double-digit sales growth coming from emerging markets in the third quarter of 2014, is expected to grow the market share further in key geographies like China and India.

Strongest Links

In spite of several core market challenges, the big three medical device players -- Medtronic, Boston Scientific and St. Jude Medical, Inc. (NYSE:STJ) -- are striving to gain share in the implantable cardioverter-defibrillator (ICD) market through new product launches. With a gradual stability in the ICD market, these players should be able to revive their top line.

Among the medical product stocks, companies like Boston Scientific, NuVasive, Inc. (NASDAQ:NUVA) and Abaxis, Inc. (NASDAQ:ABAX) look attractive with all three carrying a Zacks Rank #2 (Buy). ICU Medical, Inc. (NASDAQ:ICUI) and OraSure Technologies, Inc. (NASDAQ:OSUR) are also well-positioned with a Zacks Rank #1 (Strong Buy).

In the medical instrument space, we are positive on Edwards Lifesciences Corp. (NYSE:EW), IDEXX Laboratories, Inc. (NASDAQ:IDXX), Volcano Corporation (NASDAQ:VOLC) and Natus Medical Inc. (NASDAQ:BABY) among others. All these are Zacks Rank #2 stocks. Besides, AngioDynamics Inc. (NASDAQ:ANGO) looks impressive with a Zacks Rank #1.

Some other important MedTech stocks worth a look are AmerisourceBergen Corp. (ABC), CR Bard Inc., Cardinal Health, Inc. (NYSE:CAH) and Quest Diagnostics Inc. (NYSE:DGX), all sporting a Zacks Rank #2.

Weaknesses

Coming to the weakest link in the MedTech sector, we advise investors against names that offer little growth/opportunity over the near term. These include companies for which estimate revision trends reflect a bearish sentiment.

 Stocks which do not look inspiring are Accuray Inc. (NASDAQ:ARAY), Baxter International Inc., Thermo Fisher Scientific, Inc. ((NYSE:TMO)), Varian Medical Systems, Inc. (NYSE:VAR) and Thoratec Corp. (NASDAQ:THOR), all carrying the Zacks Rank #4 (Sell).

Original post

MedTech M&A Deals Abound, Emerging Markets Promising
 

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MedTech M&A Deals Abound, Emerging Markets Promising

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