Lack Of Takeovers Sees Medtech Hiring Staff Again

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by: EP Vantage

The dearth of large mergers in medtech in 2016 brings the organic growth in the sector to the fore. In contrast to 2015, almost all the companies in the top 15 by market cap built up their workforce organically, most notably Intuitive Surgical, which expanded by a massive 17%.

Intuitive is also the most efficient in this group in terms of sales generated per employee (see analysis below). True, the fastest-growing among the 15 largest companies by market cap is Stryker (NYSE:SYK), whose 22% workforce expansion can be attributed to the eight M&A deals it closed in 2016, but this is an exception.

Standard hiring practices by the other 12 groups in the big-cap cohort allowed these to grow naturally in 2016. In this, 2016 is an outlier: mergers are almost always the means by which big changes in staff levels come about in the medtech industry.

Indeed, Medtronic (NYSE:MDT), Zimmer Biomet (NYSE:ZBH) and Becton Dickinson (NYSE:BDX) closed major mergers the year before, and likely trimmed some jobs in 2016 as they digested their purchases.

And the trend towards organic growth will be reversed next year. Already one company in the top 15 has closed a multi-billion dollar merger in 2017, and three more ought to close before this year is out.


Employee numbers of the top 15 medtech companies by market cap
No of employees at year end
Company Market cap YE 2016 ($bn) 2011 2012 2013 2014 2015 2016 % change 2011-16 % change 2015-16
Stryker 44.9 21,241 22,010 25,000 26,000 27,000 33,000 55% 22%
Intuitive Surgical 24.6 1,924 2,362 2,792 2,978 3,211 3,755 95% 17%
Edwards Lifesciences 19.8 7,800 8,200 8,600 9,100 9,800 11,100 42% 13%
C. R. Bard 15.8 12,100 12,200 13,000 13,900 14,900 16,300 35% 9%
Boston Scientific 29.5 24,000 24,000 23,000 24,000 25,000 27,000 13% 8%
Coloplast 14.3 7,372 7,875 8,563 9,250 9,706 10,275 39% 6%
Zimmer Biomet 20.7 8,700 9,300 9,500 10,000 17,500 18,500 113% 6%
Essilor International 24.5 48,700 50,688 55,129 58,032 60,883 63,676 31% 5%
Hoya 16.9 32,363 35,130 36,605 34,635 34,362 35,752 10% 4%
Medtronic 116.8 45,000 46,000 49,000 92,000 88,000 91,000 102% 3%
Becton Dickinson 35.9 29,369 29,555 29,979 30,619 49,517 50,928 73% 3%
Philips 28.2 121,888 118,087 116,082 113,678 112,959 114,731 (6%) 2%
Abbott Laboratories 56.6 91,000 91,000 69,000 77,000 74,000 75,000 (18%) 1%
Baxter International 23.9 48,500 51,000 61,000 66,000 50,000 48,000 (1%) (4%)
Danaher 54.1 59,000 63,000 66,000 71,000 81,000 62,000 5% (23%)
Source: EvaluateMedTech.

One company is missing entirely from the top 15 table - St. Jude (JUDE). It did not file a Form 10-K last year as its $25bn takeout by Abbott (NYSE:ABT), which closed in February, was pending. The group had 18,000 employees at the end of 2015; if this total were to be added to Abbott's 75,000 it would represent a 26% year-on-year growth rate for the Illinois company.

The company that saw its workforce shrink by the greatest amount also has a strategic move to thank. Danaher (NYSE:DHR) spun off some of its non-medtech segments into a new company, Fortive (NYSE:FTV), shedding 19,000 workers in the process.

Efficiency

Analyzing this group of big-cap companies by the sales they recorded last year also brings Intuitive out on top - hardly surprising given that it is mid-table in terms of its valuation but has the fewest workers.

The surgical robotics group made $582,530 per employee in 2016, putting it way ahead of the rest of the pack. Its closest rival, Zimmer Biomet, made $415,346 per staff member - still a tidy sum, but some way behind. This doubtless partly reflects the high price of Intuitive's machines - even a basic model can cost upwards of $1m - as well as the fact that its customers are locked in to paying for a constant stream of single-use surgical accessories.

The two last-placed companies on this metric are both lens makers. Essilor (OTCPK:ESLOY), based in France, and the Japanese group Hoya (OTCPK:HOCPY) principally make lenses for eyeglasses.

In terms of percentage growth in staff numbers, the winner for 2016 is Viveve (NASDAQ:VIVE), which doubled its headcount to 42. This group skates the boundary between medical and aesthetic devices, offering a therapy for "vaginal laxity".

Aesthetics is without doubt a fast-growing, money-spinning sector, and over the past five years Viveve has obtained $23m in venture funding from investors including Wexford Capital and 5AM Ventures.


Top 10 headcount increases of the last year
By percentage of staff added By number of staff added
Name % added 2016 headcount Name Number added 2016 headcount
Viveve Medical 100% 42 Stryker 6,000 33,000
Accelerate Diagnostics 71% 193 Dentsply Sirona 4,300 15,700
CareDx 69% 161 Sonova 3,195 14,089
Omnicell 68% 2,444 Medtronic 3,000 91,000
Nevro 68% 518 Essilor International 2,793 63,676
Venaxis 60% 8 B. Braun Melsungen 2,318 58,037
Dexcom 57% 1,900 Boston Scientific 2,000 27,000
Oxford Immunotec 55% 432 Philips 1,772 114,731
Novacyt 45% 97 Align Technology 1,685 6,060
Align Technology 39% 6,060 William Demant* 1,536 12,339
*Numbers are averages for the year.

As for those whose workforce shrank over the past year, the biggest percentage reduction was in Alphatec's (NASDAQ:ATEC) staff. This was the result of a divestment: the spinal implant company sold its international operations and distribution channels to a musculoskeletal specialist, Globus Medical (NYSE:GMED), for $80m in cash.

Then there is the long, slow atrophying of GI Dynamics following the abandonment of its only product two years ago (GI Dynamics has nothing up its sleeve, July 31, 2015). In 2015, the company dropped from 69 employees to 36; in 2016 the percentage fall was even more precipitous, leaving the company with a staff of just 15.


Top 10 headcount reductions of last year
By percentage of staff cut By number of staff cut
Name % cut 2016 headcount Name Number cut 2016 headcount
Alphatec Holdings (62%) 162 Danaher (19,000) 62,000
GI Dynamics (58%) 15 Steris (2,000) 12,000
Lombard Medical Technologies (40%) 113 Baxter International (2,000) 48,000
Vermillion (39%) 33 Gerresheimer (780) 9,904
Tearlab (36%) 75 Drägerwerk (700) 13,236
Cancer Genetics (36%) 142 Masimo (650) 3,050
LED Medical Diagnostics (30%) 28 ConvaTec (556) 8,500
Nexstim (28%) 23 DJO Global (280) 4,980
CHF Solutions (24%) 29 Alphatec Holdings (268) 162
Danaher (23%) 62,000 Nxstage Medical (200) 3,400

The changes in headcount - both increases and decreases - seen over the past year are relatively modest; in 2015 small-cap companies swung as much as 612%, and even among the big-cap group the biggest increase was 62%, far larger than this year's 22%. This is partly attributable to the much quieter merger scene last year.

Next year ought to see greater changes. Several big deals will make themselves felt, including Abbott-St. Jude, and Becton Dickinson's purchase of Bard for $24bn. Philips (NYSE:PHG) is divesting its last lighting units but buying Spectranetics, perhaps meaning that its staff numbers will not change greatly though its focus will be entirely different.

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