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Mergers and acquisitions, other deals, are consolidating orthopedic device markets
With maturing markets, surgeons may see fewer opportunities to collaborate with manufacturers.
The past year brought news of many mergers and acquisitions among orthopedic device makers. Matt Miksic, an orthopedic and spine device analyst with Morgan Stanley, answers questions from Orthopedics Today about what the trend means for surgeons and the industry.
Orthopedics Today: Why the flurry of mergers and acquisitions in orthopedics? What lies ahead?
Matt Miksic: The trends in mergers and acquisitions (M&A) have gone through many fluctuations over the past couple of years. A year ago, we saw strategic buyers like Smith & Nephew competing with private consortia for assets like Biomet. Today, a tightening credit environment has made it incrementally more difficult for the leveraged buyout (LBO) model, which has probably leveled the playing field for strategic buyers.
In orthopedics, we view the acquisition of Plus Orthopaedics by Smith & Nephew as one example of the types of consolidating transactions we can expect going forward. In addition to horizontal transactions in hips and knees, established players may also seek to round out their orthopedic offerings with spine, trauma, sports medicine and extremities.
In spine, we’ve seen a couple of different types of transactions. One involves existing players seeking to acquire innovative technology or differentiated products, primarily as a means to drive growth and gain market share. A good example is the acquisition of St. Francis Medical Technologies by Kyphon, which added a fast-growing new product (X-Stop) to Kyphon’s portfolio, drawing additional surgeon interest and leveraging the company’s large U.S. spine sales force.
Another type of transaction we see involves the acquisition of an entire spine business as a means to enter the spine market, to enter a new segment of the market, or to strengthen a flagging spine franchise. An example of this is Orthofix’s acquisition of Blackstone Medical last year. Orthofix had a well-established position in the market for spinal stimulation products, which facilitates bone healing. With the Blackstone acquisition, Orthofix entered the core fusion business, competing with the likes of Medtronic, Stryker, DePuy and others.
Given the rapid innovation still pervasive in spine, we have not yet seen more traditional horizontal consolidation in the market.
OT: How are the objectives of M&A different for orthopedics in general compared with spine alone?
Miksic: For large joint orthopedics (ie, hips and knees), you have a set of relatively mature core technologies, devices and procedures that have become very successful and reproducible over time.
As much as we continue to see innovation in terms of new materials and designs, we are now in the flattening part of the innovation curve for total hips and knees – or I should say “a flattening part of the curve.” By this I mean that outcomes are very good for patients, and improvements in current hip and knee systems as they exist today are likely to become more and more incremental in nature. That said, I believe that there are new technologies coming around the bend that could significantly change the way many patients are treated, and therefore innovations can still be disruptive and significant. But for now, the innovation curve is flattening, suggesting that there could be further horizontal consolidation.
Veterans of the orthopedic industry would say that today’s spine market looks a lot like the orthopedic market of 20 years ago, with more companies vying for market share driven by rapid innovation. In spine, there remain many opportunities to expand the continuum of care for patients, adding new therapies to fill the gaps between ameliorative care and spinal fusion. These new therapies open doors to new surgeons for smaller innovative companies.
We find spinal surgeons to be marginally more willing to try new devices and technologies, assuming that they have been proven safe and effective. Other surgeons, by contrast, evaluate orthopedic implantable devices on the basis of decades of wear and longevity, making it inherently harder for new startups to get any traction with new whiz-bang devices for total joints.
In the spine market, however, there are many new devices and technologies under development, and clinical evaluation targeting these “gaps” in the currently available therapies. As new therapies and technologies become clinically and commercially viable, they inevitably emerge on the radar screens of larger manufacturers.
Perhaps more importantly, new technologies and devices proven safe and effective — and which offer benefits for patients relative to previously available therapies — generate interest and demand among patients and surgeons, in turn making them attractive for established spine manufacturers. To the extent that larger more established providers are not developing these devices themselves, they need to acquire them from smaller innovators who are.
OT: So, what does all of this mean to orthopedic surgeons?
Miksic: It is sort of good news and bad news, both for orthopedics generally and for spine in particular. In orthopedics generally, further consolidation among device manufacturers should enable these large players to provide products and services more efficiently. This is probably a positive for hospitals; it should help control the costs of implants and services. But, for surgeons, it will mean fewer choices, and if there is less competition, there may also be decreased incentives to provide truly exceptional service and innovative products. So, this could all mean more reliability and potentially improved efficiencies in service and manufacturing, although some of these benefits could come at the expense of innovation.
For spine, we think the expansion and maturation of the spinal surgery armamentarium will be a positive for surgeons and patients. However, as the spine market matures, it may begin to more closely resemble the orthopedic market of today in other areas (vs. the market of 20 years ago).
One side effect of a more mature market, however, is that surgeons are also likely to see fewer and fewer opportunities to collaborate with manufacturers, and to see their ideas transformed into products. Smaller, more innovative spine startups today are generally more inclined to work with surgeons to bring their ideas to life, while larger manufacturers are less able to satisfy the entrepreneurial urges of its many surgeon customers. So, like many things, the mature spine market of the future will have its advantages and disadvantages.
For more information:
- Matt Miksic is an orthopedic and spine device analyst. He can be reached at Morgan Stanley, 1585 Broadway, New York, NY 10036; 212 761-6261; e-mail: Matt.Miksic@morganstanley.com.