Medical-technology giants like Medtronic (MDT), Stryker (SYK) and Boston Scientific (BSX) are in the mood for mergers — simply because they're getting easier.
XOver the past 10 months, the three have announced deals worth a total of nearly $5 billion amid a "hot" streak in heart valves, robotic surgery and diabetic instruments.
Innovation helps. But so does cash. Just before Christmas Day 2017, President Donald Trump signed into law a sweeping overhaul of the U.S. tax code, slashing the corporate tax rate to 21% from 35%. The changes also made it temporarily easier for companies to repatriate cash from overseas. After medtech companies kicked a few tires, they decided to use their cash to add growth, Needham analyst Mike Matson said.
"Strong companies with good growth and good gross margins are likely to get acquired," Matson said.
The biggest acquisitions include Medtronic's $1.35 billion upfront bid on Mazor Robotics (MZOR) and Stryker's plans to buy K2M Group Holdings (KTWO) for $1.4 billion. In total, the three biggest medtech firms announced 14 bids north of $4.7 billion.
PNC Capital Advisors analyst Luyi Guo says there have been more tuck-in deals this year. Boston has been the most acquisitive, with Stryker's activity in line, she said.
"Some companies, such as Boston, have been very active this year, but not all have been as active, so we would expect M&A activities to continue to be robust because of the need to enter growth areas and access innovative and disruptive technologies," Guo told IBD via email.
Medtech-Technology Stocks Fly
Meanwhile, medical-technology stocks are nearing record highs.
IBD's 118-company Medical-Products industry group rocketed nearly 29% over the first nine months of 2018. Since then, shares have pulled back almost 6%. But that's done little to wipe out the group's gains. It's now ranked fifth out of 197 groups IBD tracks.
At the same time, the medical research and medical systems groups climbed a respective 32% and 39% through the end of September. Both have pulled back thus far in October, but are still ranked No. 9 and No. 11, respectively.
Jeremie Capron, director of research and managing partner for Robo Global, says a number of factors are lining up nicely for medtech. Robo Global is an index and advisory form specializing in robotic and artificial intelligence investments.
Robotic surgery benefits from a widespread belief that it's "the next technological revolution," he told IBD. So many companies will try to "acquire their way into it." There have been more than 40 deals announced by 87 members of the Robo Index thus far in 2018, Capron said.
Broadly, medical technology benefits from a recently streamlined Food and Drug Administration approval process, and a now twice-delayed 2.3% tax on device sales, said Scott Whitaker, chief executive of the Advanced Medical Technology Association, or AdvaMed, a trade group.
"The regulatory environment in the U.S. is just much better than it was a few years ago," he told IBD. "And the predictability that comes with that around your planning-and-review cycle makes a huge difference."
Whitaker says medtech is entering a "golden era" in which medical devices and technology are aligning. That's resulted in innovations like continuous monitoring insulin pumps for diabetics, he said. The biggest hurdle remains government coverage and reimbursement of devices.
Innovation 'Strong,' 'Breathtaking'
Medical-technology innovation has been "very strong and almost breathtaking" of late, Edward Jones analyst John Boylan told IBD. He doesn't see a sudden spike in medtech acquisitions, but rather says it's an ongoing trend for the segment.
The research and development cycles tend to turn over faster in medtech, he said. So companies either have to innovate or acquire. He lists transcatheter aortic heart valves — from the likes of Medtronic, Boston and Edwards Lifesciences (EW) — as among recent innovations. The devices can replace faulty heart valves via catheter without surgery.
Further, diabetes products coming out now are seemingly "better than what we've seen in the market in years," he said. Abbott Laboratories (ABT) is among the leaders in diabetes products. He calls for the "growth and innovation to continue in the foreseeable future."
Other medtech companies will look for the holes in their portfolios, he said. Medical-technology players that find themselves lacking in certain areas can make takeovers to support their existing businesses or add new ones, he said.
"When companies look at themselves strategically, it does come back to whether there's a tech hole they need to fill or adjacent areas they need to leverage," he said. "The more fruit you have in the cart to sell is a good thing. The fact there are tax cuts and repatriation, that's just icing."
Could J&J Be Hungry?
Among the most notorious potential acquirers out there is Dow Jones component Johnson & Johnson (JNJ). In fact, tuck-in acquisitions — smaller and easier to meld into existing business — is a part of the stated strategy for J&J and Stryker, PNC's Guo said.
But chatter this year has suggested J&J could go after at least one of two major medical-technology players: Boston or Edwards. J&J hasn't commented on those rumors, and Boston and Edwards both declined to comment to IBD.
Wells Fargo analyst Lawrence Biegelsen says J&J has been pruning its medtech portfolio over the past six years to better focus on pharmaceuticals. But now the fundamentals look better in medical technology. Even J&J Chief Executive Alex Gorsky has acknowledged medtech strength.
During the Wells Fargo Healthcare Conference in September, Gorsky noted regulators seem to have eased up on devices in recent years, Biegelsen said in a recent report. Later in the month, Gorsky said "science and technology is becoming more encouraging" in medical technology, Biegelsen reported.
"We believe these two statements regarding a more favorable regulatory environment combined with more encouraging science and technology will lead J&J to pursue more inorganic opportunities in devices than they have in recent years," Biegelsen said.
But Boston and Edwards could be pricey. Attaching a 30% premium to closing prices on Sept. 14, Boston could cost $73 billion and Edwards could run up to $42 billion, Biegelsen said. He sees the former as the better strategic fit for J&J.
Needham's Matson, too, says Boston could be a "one-stop shop" for J&J in the cardiovascular space.
Challenges For Medtech Boom?
Matson notes a correction could derail medtech buying.
"You have to be in this sweet spot where the acquirers don't think the targets are overvalued and the targets don't think they're being undervalued either," he said. "If the buyer thinks everything is too expensive, or the value is too cheap, (a company) won't be willing to sell."
Right now, medtech is seemingly in that sweet spot. He lists Medtronic, Stryker, J&J and Abbott among potential buyers. Larger potential takeouts include Abiomed (ABMD), Masimo (MASI) and Wright Medical Group (WMGI).
Robo Global's Capron, too, expects acquisitions to continue on robotic surgery side of medtech. He notes the biggest obstacle now appears to be interest rates, which have been on the rise.
"It means capital is going to become more expensive," he said. "So we're seeing that already playing out in the residential construction housing market that gets hurt first. Other sectors get hurt one after another. That's something we need to watch that could stop this boom."
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The post Merger Fervor In 2018 Nears $5 Billion For Just 3 Top Medtech Players appeared first on Investor's Business Daily.
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