Over $17.5 billion is spent annually in the U.S. on major cardiovascular device implant procedures, which include coronary stents, heart pacemakers, and Implantable Cardioverter Defibrillators (ICDs).
Boston Scientific (BSX) leads in coronary stents with a close to 50% market share in 2010. Its recalls of some unimplanted stents due to failure to deploy have provided an opportunity for its rival Abbott Laboratories (ABT), whose worldwide sales of stent products increased by 18.6% to $3.2 billion between 2009 and 2010.
Johnson & Johnson (JNJ), which used to be one of the three major stent manufacturers, has withdrawn from the market. However, it has been considering an expansion of its medical device portfolio through the acquisition of a maker of heart valves or pumps.
The U.S. market for pacemakers is dominated by Medtronic (MDT), which sold $1 billion worth of pacing systems in fiscal 2011. St. Jude Medical (STJ) and Boston Scientific also have a presence in this segment. For ICDs, which are implanted less frequently than the other heart devices, the market share ranking is the same as for pacemakers.
The aging of the U.S. population should keep up demand for cardiovascular implants, but the industry has been impacted by the recent downturn in healthcare utilization. Due to increasing unemployment and steeper insurance deductibles, patients continue to delay treatment. The current administration’s focus on health care cost reduction could also contribute to cutbacks in the use of heart implant procedures which are costly, both due to the price of the device and the associated hospital fees.
Another source of pressure has been the U.S. Department of Justice, which has been investigating the cardiovascular device industry due to the widespread practice of implanting devices too soon after a major cardiac event.
Medical implant makers generally are facing stronger pricing pressures from hospitals, which purchase the bulk of medical devices sold in the U.S. Any government reimbursement cuts or adverse changes to healthcare payment models that hospitals will have to put up with will be partially passed on to implant manufacturers.
Industry consolidation is one response to the utilization and pricing pressures. It provides a way for medical device companies to cut their cost structures. By gaining a greater scale and breadth of product offering, it can also help them to increase their leverage with the hospitals. Most of the major firms in the field have strong enough balance sheets and sufficient cash available for purchases.
There have already been a number of cardiovascular medical device acquisitions this year. Physio-Control, a Medtronic subsidiary which makes defibrillators, bought privately-held Jolife, maker of the Lucas chest compression system. A few months later, Medtronic sold Physio-Control to private equity company Bain Capital.
Boston Scientific acquired Atritech, which develops nonvascular atrial fibrillation technologies for the structural heart market at a price of $100 million, plus milestones of up to $275 million. Boston Scientific’s second acquisition in the cardiovascular device space was that of S.I. Therapies, a start-up offering an advanced reentry cardiac catheter technology, for $5 million plus milestones. If the milestones are achieved, the total price would go up to $24 million.
These deals indicate that would-be buyers are looking for innovative companies that make leading-edge technologies with high potential for growth and proven health improvements in patients. By these standards, the following companies are likely takeover candidates in the cardiovascular medical device segment:
Abiomed Inc. (ABMD): Abiomed makes a range of implants that provide circulatory support to acute heart failure patients across the continuum of care in heart recovery. It claims the world’s first total replacement heart but also produces catheter-based devices. Its market cap is $795.66 million and its year-on-year quarterly revenue growth is 26.10%. ABMD could be an acquisition target for Abbott Laboratories, Johnson & Johnson or Medtronic.
Edwards Lifesciences (EW): Like ABMD, Edwards Lifesciences is an often-rumored takeover target. It is about ten times the size of ABMD with a market cap of $7.36 billion, while its y-o-y quarterly revenue growth is slightly lower at 18.30%. EW’s main products are heart valves that are implanted percutaneously through a patient's vasculature. EW also makes machines for critical care monitoring, a procedure for measuring cardiovascular performance during surgical procedures and in intensive care. EW could be of interest to the large cardiovascular medical device companies, as well JNJ.
Heartware International (HTWR): Heartware International develops and manufactures small implantable heart pumps - or left ventricular assist devices - for the treatment of advanced heart failure. Its equity value is $882.19 million and its quarterly revenue has grown by an outstanding 54.40% on a y-o-y basis. Like the heart valves produced by EW, heart pumps are a promising opportunity in medical technology, and potentially attractive to JNJ or the large heart implant companies.
Volcano (VOLC): Volcano makes intravascular ultrasound and flow fraction reserve products for imaging during percutaneous coronary intervention (PCI) procedures. It has a market cap of $1.16 billion and year-on-year quarterly revenue growth of 17.70%. VOLC could provide a growth boost for cardio companies with stent franchises such as Abbott Laboratories, Boston Scientific and Medtronic, but also companies like Siemens (SI) or General Electric (GE) that are active in diagnostic imaging.
Thoratec (THOR): Like its direct competitor Heartware, Thoratec produces implantable devices that provide circulatory support for patients with advanced heart failure. Its HeartMate pumps are intended for patients who are waiting for a heart transplant or for those who are too sick for this type of surgery. THOR has a market cap of $1.86 billion and y-o-y quarterly revenue growth of 12.70%. THOR investor Oracle Investment Management recently proposed that it sell itself. According to that shareholder, Johnson & Johnson or another large medical technology company could improve the sale of THOR products because such companies have access to larger budgets, a bigger sales force, more efficient manufacturing, and faster product development.