Midyear Medtech Review

It’s only been three months since my last assessment of the medical device manufacturing and outsourcing market, but the flurry of deals, activity, and industry news over the last 90 or so days merits an update.

As we approach the midpoint of 2017, the medtech industry seems to be wrestling with some of the same issues it faced earlier this year: healthcare reform in flux, a medical device tax in limbo, regulatory anxiety, and outlandish political leadership. Some matters are becoming more clear—President Trump’s choice (and the U.S. Senate’s confirmation) of Scott Gottlieb, M.D., as U.S. Food and Drug Administration (FDA) commissioner bodes well for the industry, as the new chief has long been a critic of the agency’s slow and protracted drug and medical device approval processes. Other concerns, however, are no closer to being resolved than they were in the first quarter (Obamacare repeal, the device tax, among others).
Certainly, the only constant for the industry is uncertainty.

M&A Activity
There has been no shortage of deals over the last three months. The most significant on the OEM side was Becton Dickinson and Company’s blockbuster $24 billion acquisition of CR Bard Inc., and Cardinal Health’s $6.1 billion acquisition of Medtronic plc’s legacy medical supplies business (the latter’s Covidien, Kendall, and Sherwood brands). In the contract manufacturing (CM) space, TE Connectivity Ltd. continued its platform-building strategy by adding Microgroup to its recent collection of Creganna Medical Group and AdvancedCath to assemble a major catheter CM player. TE competitor Molex has also grown through acquisition and gained market share in the medical device CM space with last summer’s purchase of Philips-Medisize. Molex and other firms remain active and poised to add additional assets to their medical device CM businesses.

BD is funding its purchase of CR Bard (the largest deal in BD’s 120-year-old existence) with $1.7 billion in cash, $10 billion in new debt, and $4.5 billion in equity and equity-related securities. Bard shareholders will receive $8 billion in BD common stock and will own about 15 percent of the company after the transaction closes. While many industry analysts have viewed the deal favorably, it comes at a steep price for BD: 26.9 P/E ratio, approximately six times sales and at a 25 percent premium to the company’s April 21 closing stock price. There should be no significant regulatory hurdles associated with this deal, as there is minimal market overlap in any one product category. Bard primarily offers products in vascular medicine, urology, oncology, and surgical markets, whereas BD specializes in syringes and infusion devices.

In announcing TE Connectivity’s latest acquisition to customers on May 1, senior vice president and general manager Paraic Curtis noted how the MicroGroup deal is the latest in a string of acquisitions TE has made in recent years to strengthen its medical device design and manufacturing capabilities. While Curtis did not disclose deal terms, it is reportedly almost 12 times the company’s EBITDA earnings.

“TE’s acquisition of MicroGroup broadens our metal tubes and precision metal shafts offering for interventional devices and significantly enhances our capabilities to develop and manufacture metal shafts for devices used in electrosurgery, endoscopy, and analytical and diagnostic instrumentation,” Curtis said in his letter to existing customers. “MicroGroup’s capabilities complement TE’s experience in catheter technologies, guidewires, custom connectors, cable assemblies, sensors, and heatshrink tubing, positioning us to provide the most advanced, vertically integrated solutions to our customers.”

MicroGroup, a provider of precision metal shafts for medical devices, will add a 75,000-square-foot FDA-registered facility in Medway, Mass., to its global manufacturing footprint. The addition of MicroGroup, along with Creganna Medical and AdvancedCath’s P.E.-based platform business, will help TE Connectivity become a significant force in the global catheter market. The company’s recently formed catheter-focused business segment is poised to hit $1 billion in sales in the near future—possibly faster, should the $12 billion Swiss connectors and sensors giant continue its current pace of M&A.   

Valuations and competition for assets continue to be at some of the highest levels seen in the last several years, with no near-term end in sight. Although dollar value has fallen in some cases, the overall number of deals is at the highest level in nearly a decade (2008-2009). Major OEMs, strategic platforms, out-of-market strategics, and private equity (PE) are all competing for assets in the space, making for a good sellers’ market in terms of an “arms” race. The backdrop for this window should continue for the rest of 2017, and it is possible that respite will arrive next year as assets become more scarce and the boost provided by interest rates begins to wane. That said, if President Trump’s proposed (but still vague) tax plan takes shape and is enacted by Congress, the industry’s investment boom could continue as business owners might want to cash in on new tax advantages for a seller.

As this competitive market heats up, there is evidence that larger OEMs and CMs (more than $500 million in sales) will push further down the market to acquire smaller niche assets as the more established, larger, actionable assets are gobbled up. Key drivers of this trend include OEM consolidation as well as the need to acquire new capabilities, global capacity, or simply, additional scale. Against a backdrop of economic stability and global growth, historically low interest rates, and large amounts of unused cash on PE and corporate balance sheets, this trend will likely continue at least through early next year.

A Familiar Face at the FDA
Confirmed in a 57-42 vote, Gottlieb is considered a moderate choice of President Trump’s compared with other potential candidates. His nomination and confirmation by the Senate mark a return to the agency, as the 44-year-old cancer survivor held various jobs at the FDA under President George W. Bush, including deputy commissioner. A physician, long time healthcare investor, and pharmaceutical industry consultant, Gottlieb was a frequent advocate for quicker drug approvals and looser off-label marketing regulations, writing many opinions and speaking at various conferences. The industry generally regards him as an advocate for more flexible approaches to evaluating new drugs and clinical trials.

Due to his consultant work and investment choices, some Democrats—like U.S. Sen. Patty Murray (D-Wash.), the ranking Democrat on the Senate Health Committee—opposed  Gottleib’ s nomination over his “unprecedented industry ties” and “inability to withstand industry pressure.” Gottlieb will have the difficult job of balancing Trump’s pledge to ease FDA regulations to ensure drugs reach the market more quickly with safeguarding the public against dangerous pharmaceuticals that have not been properly vetted. A recently released Journal of the American Medical Association study published by Yale University researchers claimed that one-third of all U.S. drugs approved for sale over a 10-year period were subject to post-approval “safety events,” including new warnings on labels and safety advisories to doctors and the public. The FDA has not commented on this specific study but Gottlieb has pledged to uphold the FDA’s reputation as the world’s “gold standard” for drug approval. During his confirmation hearings in April, he vowed to recuse himself from any decisions on more than 20 companies in which he may have conflicts of interest. I consider Gottlieb an advocate for the medtech industry and believe he will do his best to get newer therapies and products to market in the United States as quickly as possible while remaining vigilant on the FDA’s core mission of safety, efficacy, and patient outcomes. 



Healthcare 2.0
The Republicans’ plan to replace Obamacare was approved by the U.S. House of Representatives in early May after an initial bill failed to acquire enough votes in March. At first glance, it is hard to imagine this bill (as it is currently written) to become law, as there are still some key provisions and items in the legislation that will trigger debate in the Senate. The fate of the medical device tax, which is currently in the second year of a two-year “suspension,” will largely depend on whether the new healthcare legislation can actually be enacted into law. If the Republican plan passed by the House does indeed become law, the 2.3 percent medical device tax is history. If, however, the legislation stalls or does not become law, anything is possible. With all the turmoil generated by the Trump White House, it’s become virtually impossible to predict Washington’s moves at the moment. I would like to believe that with the enormous cost-benefit medical devices have on patient outcomes and the abilities of caregivers to provide the best care to patients, the U.S. legislature would look elsewhere for these funds. Let’s not forget that medical devices make up less than 5 percent of U.S. healthcare spending. Perhaps something else should be taxed, no?

In the meantime, keep an eye on the news, as I’m sure we’ll hear about another blockbuster deal, or political/regulatory event affecting the medtech industry. These remain exciting and rapidly changing times for the industry as well as the global healthcare landscape as a whole. 

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Mark Bonifacio is founder and president of Bonifacio Consulting Services LLC, a global consulting and advisory firm to medical device OEMs, contract manufacturers, private equity, and other investors in the medtech manufacturing sector. Bonifacio has a B.S. in plastics engineering from the University of Lowell (now UMASS-Lowell), and more than 25 years of experience in medical device manufacturing across many therapeutic disciplines and market segments. After working for major medical device OEMs, Bonifacio co-founded APEC, a Baldwin Park, Calif.-based contract manufacturer, and sold it to Helix Medical (now Freudenberg Medical) in 2007. He founded Bonifacio Consulting Services in 2008. BCS is headquartered in Boston, Mass., and has offices in California, Florida, and China.