What drives orthopedic, spine device company M&A today and what to watch for through 2020

Written by Laura Dyrda | April 01, 2019 | Print  |

Over the past year, the orthopedic and spine device industry has experienced significant consolidation, including 11 acquisitions so far in 2019.

The key transactions include large companies, such as Medtronic and Stryker, acquiring small and mid-sized companies to realize strategic growth. For example, Medtronic finalized a $1.7 billion acquisition of Mazor Robotics in the past six months while Smith & Nephew also made an acquisition in the robotics field last month, purchasing Brainlab's orthopedic joint reconstruction business.

There are several factors driving these moves, including the increased emphases on value-based care, move to outpatient procedures and development in anesthesia and pain management techniques. Here, six thought leaders discuss orthopedic and spine device company M&A and what to expect in the future.

James Caillouette, MD. The Joan and Andy Fimiano Endowed Chair in Orthopedic Surgery and Chief Strategy Officer of Hoag Orthopedic Institute (Irvine, Calif.): The orthopedic and spine device focus appears to be on increasing the opportunity for moving surgery to the ASC setting. Thus we are seeing a push in robotics and other computer assisted technologies that theoretically will allow for more accurate, less invasive surgical procedures. Nontraditional players are starting to move into this space as well such as Verb Surgical, a joint venture between Alphabet (Google) and Johnson and Johnson.

Gradually you will see increasing efforts to minimize the trauma of surgery via new anesthesia techniques and drugs as well as new surgical techniques using AI, robots, etc. As this happens, surgery will increasingly move to an ambulatory setting.

J.C. Lupis. Managing Director of Research for GHA (Miami): The current deals show us that M&A remains a key strategy for medical device companies to deploy their cash to stimulate growth, combat pricing pressure, jostle for market share and acquire both innovative and complementary technologies that can provide them access to adjacent markets and new categories. Innovative players with strong patent portfolios and those that have de-risked their technology and can demonstrate patient adoption and traction with surgeons remain attractive targets. Large companies are targets too, with DJO Global bought last year and Smith & Nephew reportedly in talks to acquire NuVasive.

Broadly speaking, demographic trends (an aging and active population coupled with longer life expectancy) and continued obesity rates suggest that there will be sustained demand for orthopedic procedures. Of note is that this recent activity is taking place alongside an uptick of interest in orthopedic practices, particularly on the part of private equity. Separately, it will be interesting to see what impact on the market there might be from recent developments including the FDA’s modernized 510(k) pathway and cybersecurity guidance, as well as increased scrutiny of medical device safety and product liability litigation.

The market for robotics in orthopedics is growing quickly in the U.S., and we've seen recent acquisitions targeting that space, such as Corin's acquisition of OMNI and J&J's investment in Auris Health. We should expect this to be a growth area over the longer-term, as only 5 percent to 10 percent of general surgeries in the U.S. include robotic technology. 3D implants, cementless and minimally invasive technologies look to be among other growth areas. In the shorter-term, we should continue to see transaction activity and tuck-in acquisitions through the remainder of the year.

Glenn Barenbaum. Diligence Director, Advisory Services at Grant Thornton (Chicago): Innovation continues to advance the spine medical device sector. For example, companies are using 3D printing techniques and robotics to create more intricate implant designs. Companies can choose to spend their own research and development dollars to design new technology, or in some cases, they simply choose to buy the innovative tools. Two recent transactions that highlight this trend include Globus's acquisitions of Nemaris in September 2018 to leverage their proprietary software (SurgiMap), allowing the company to marry its robotic and navigation system with a more robust data analytics platform.

Medtronic acquired Mazor Robotics, allowing Medtronic to take advantage of the firm's robotic guidance tools. We expect M&A in the medical device sector to be strong for the remainder of 2019; however, the possibility of the reinstitution of the medical device tax in 2020 (2.3 percent tax) may curb some enthusiasm.

Lance Beder. Partner, Transaction Services, Healthcare Leader at Grant Thornton (Chicago): Continued orthopedic practice and ASC consolidation has resulted in centralization of purchasing from preferred medical device manufacturers. In addition, progress towards bundled payment reimbursement is another factor that will exert pricing pressure on medical device companies in the near term.

Rick Tresnak. CEO of Innovative Rescue Solutions (Waterloo, Iowa): The spine and orthopedic device space has been flooded by MLM companies in the past. We have seen a decrease in their involvement in the past six months as they industry is finding out that people that sell the devices are not well educated and in many cases lack any medical training.

One new industry twist is that Amazon has been pursuing the medical device market and it is my personal belief that soon we will see them offering medical insurance options.

Shane Hubbell. Founder and Managing Director of Alkali Partner (San Francisco): I think it's extremely likely that we'll see the device manufacturers start to acquire software to better position their products with orthopedists, lower their sales and marketing costs, shorten the loop on feedback cycle and create a more vertically integrated offering. Especially as the cost to acquire and maintain recommending doctors continues to rise as more and more vendors spend a higher percent of revenue on sales and marketing. You've already seen it many other specialties (dentistry, ophthalmology, etc.), so I'd predict it's likely to happen in orthopedics.

Editor's note: This article was updated April 2 at 1:40 p.m.

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