Med Device Sector Ripe for Deal-Making

CHICAGO (Reuters) – Large medical device makers armed with cash hoards and seeking ways to grow are stepping up acquisitions of young companies with promising technology pipelines but scarce capital.

The past few weeks have seen a burst of deals, most recently Monday’s announcement by Medtronic Inc that it plans to buy two privately held, replacement heart valve developers for more than $1 billion.

And analysts expect more deals this year amid the urgency on the part of maturing medical device makers to find new engines for long-term growth.

‘There are opportunities out there, and we’re going to see this continue throughout 2009,’ said BMO Capital Markets analyst Joanne Wuensch, who expects Medtronic, with $1.75 billion in cash and short-term investments on its balance sheet, to continue shopping.

‘Medtech stocks have outperformed, so these companies still have a currency,’ Wuensch said. ‘A lot are in hunker-down mode, but they are not in crisis mode.’

Meanwhile, small development-stage companies are running up against the challenge of raising capital at a time when credit markets have seized up.

‘You’ve got receptive buyers and receptive sellers, and deals are getting done,’ said Thomas Weisel Partners analyst Raj Denhoy. ‘Technological innovation and clinical advancement haven’t stopped just because the capital markets aren’t acknowledging it.’

But a start-up medical device maker can no longer count on plans to pay back its private investors with capital raised through an initial public offering, Denhoy said, noting that this market hasn’t launched a medtech IPO since early 2008.

‘Everybody’s asking themselves how do we shore up our finances, how do we get to profitability?’ said Leerink Swann analyst Rick Wise. ‘This has to be a key topic of discussion in every small and private company boardroom and executive suite.’

Besides cash flow, the big diversified healthcare companies have the regulatory and legal muscle and huge global infrastructures needed to bring new medical devices to market, and the patience to await a return on their investment.

‘The small guy is just the opposite — they have the idea but need the capital,’ said Wise, who expects Johnson & Johnson , St. Jude Medical Inc, Abbott Laboratories and Stryker Corp to be active acquirers.

Last month, J&J completed the acquisition of breast implant maker Mentor Corp for $1.07 billion. Abbott is in the process of buying Advanced Medical Optics, the leader in Lasik laser vision correction, for almost $1.4 billion, plus another $1.4 billion in debt.

Analysts say there are not a lot of distressed assets in the medical technology sector. Still, stock prices are somewhat depressed, making valuations attractive to device makers that are looking for ways to supplement their growth.

‘The device companies don’t have the pressure the drug companies have (to expand their product pipelines), but they have seen their growth slow,’ said JPMorgan analyst Michael Weinstein.

Most analysts aren’t expecting blockbuster deals along the lines of Boston Scientific Corp’s $27 billion acquisition of Guidant in 2006.

‘The larger companies generating strong cash flows and good balance sheets are going to use that to be opportunistic in the current environment and acquire early-stage companies that might otherwise have a tough time getting financing,’ said Weinstein, who expects Covidien Ltd, Baxter International Inc and Stryker to be buyers.

Wuensch named ArthroCare Corp, AtriCure Inc , Cooper Cos Inc, Masimo Corp, NuVasive Inc, ResMed Inc, Staar Surgical Co and even St. Jude Medical among device makers that could be takeout targets.

Despite the merger-readiness of small and large companies, deals in the sector have their own inherent challenges.

The device sector actually consists of many subsectors, each with its own target customers and insurance reimbursement practices.

‘It makes deals challenging,’ said a healthcare investment banker who requested anonymity, ‘but the cost benefits outweigh those risks.’

By Susan Kelly
(Additional reporting by Jessica Hall in Philadelphia; Editing by Lisa Von Ahn)