04.09.12
Device Manufacturers Countering Flat Sales with Buybacks, Mergers, Dividends
The signs seem vaguely familiar: a rising stock market, miniscule dips in unemployment (and equally diminutive rises in the number of new jobs created), a somewhat stabilized housing market, and a drastic reduction in private debt.
Could the long-suffering U.S. economy finally be healing itself?
Many economists seem to think so. U.S. Treasury Secretary Timothy Geithner, for one, claims the nation’s economy currently is more productive than it was before its critical wounding by the “Great Recession” of 2007-2009. And former high-ranking World Bank economist Uri Dadush (who now is with the Carnegie Endowment for International Peace) expressed his confidence in the recovery, recently telling international public broadcaster Voice of America that innovation and flexibility will drive the economic healing process.
This confidence feels like déjà vu, though. America has traveled this road before—twice before, to be precise.
The labor market seemed poised for recovery in 2010 as gross domestic product growth approached 4 percent, but panic over Europe’s escalating debt crisis kept unemployment from falling significantly for much of the year. Hopes were high last year as auto and retail sales improved and the stock market made a steady climb toward 13,000. Then oil prices shot up, Mother Nature threw a temper tantrum (both in the U.S. and in Japan), political gridlock gripped Washington, D.C., and the bigwigs at Standard & Poor’s downgraded America’s AAA credit rating.
So much for those high hopes.
Nevertheless, there may be good reason to think the third time’s the charm. Actually, there are several good reasons to consider such a thought: The unemployment rate has fallen 0.8 percent in just six months, jobless claims fell 5,000 to a seasonally adjusted 359,000 in the week ending March 24 (the lowest since April 2008, during the depths of the recession), and employers added 227,000 jobs to their payrolls in February, pushing the three-month total to 734,000. Adding to all this economic ecstasy is a two-fold increase in homebuilder confidence, falling inflation and an 11.8 percent jump in the S&P 500 in the first quarter of 2012—the index’s best start to the year since 1998 and its best quarter since the third period of 2009.
Such auspicious data, however, does not guarantee a smooth recovery.
Economists warn that the nation still has some very significant challenges to overcome before it can fully recuperate from its recession-induced injuries. Tightening fiscal policy and rising gas prices could be a drag on the economy in the months ahead, though experts claim oil price hikes currently are being driven more by fear than by fact. And despite some good progress over the last 18-24 months, private debt remains a threat, as does Europe’s ever-evolving debt crisis.
“It’s a much better environment compared to six months ago, but we shouldn’t overstate growth,” Stephen Stanley, chief economist for Stamford, Conn.-based Pierpont Securities LLC, told The Wall Street Journal in February. “The momentum is moving in the right direction.”
It may not be moving fast enough for medical device makers, though. Faced with pricing pressures and weak demand from unemployed consumers, these manufacturers can expect their organic revenue growth rates to remain sluggish for the next 12 to 18 months, according to a report from Moody’s Investors Service. As a result, device firms will be forced to turn to shareholder-friendly initiatives—buybacks, dividends and acquisitions—to jumpstart growth and appease investors, the report states.
“Spurred by slow organic sales growth, U.S. medical products and device companies will continue to engage in shareholder initiatives (share buybacks and dividends) and seek acquisition opportunities over the next 12-18 months,” noted the Dec. 8, 2011, report. “Share buybacks in particular will continue to outpace past levels as companies look to satisfy shareholders by increasing earnings per share.”
Shareholder satisfaction usually is a top priority at most companies, but the pace at which dividends, acquisitions and share repurchase programs are occurring in the industry seems to have accelerated recently. As if on cue, both Stryker Corp. and Zimmer Holdings Inc. announced share repurchase programs in December, shortly after Moody’s released its report. Stryker’s board authorized the repurchase of $500 million in common stock, while Zimmer’s top executives sanctioned the purchase of up to $1.5 billion of stock through Dec. 14, 2014. The Warsaw, Ind.-based orthopedic device behemoth owned 179.2 million shares of common stock as of Oct. 26, 2011.
Since 2005, Zimmer has returned about $4.5 billion of capital to investors through share repurchases. Stryker, on the other hand, has given back roughly half that amount ($2 billion) over the last four years, according to executives.
“With the additional share repurchase authorization, we are demonstrating our commitment to maximizing shareholder value by leveraging our strong balance sheet and consistent cash flow generation,” former chairman, president and CEO of Stryker Stephen P. MacMillan said.
“Although the macro environment remains challenging, we have continued to make sizable investments in R&D while further diversifying our revenue base through targeted acquisitions. Combined, these actions position us well to continue ourhistory of delivering innovation and driving long-term sales and earnings growth.”
Both Stryker and Zimmer were among half a dozen companies cited in the Moody’s report for their vulnerability to weak market demand. The number of orthopedic procedures has fallen in tandem with the nation’s economic fortunes over the last several years, as debt-strapped consumers—particularly the uninsured and those on fixed incomes—postpone elective surgeries.
The manufacturers of implantable cardioverter defibrillators (ICDs) have encountered a similar fate, though different factors have helped curb demand for those devices, including safety concerns, recalls and a Journal of the American Medical Association story that questioned the need for ICDs. The story cited a study that showed 22.5 percent of patients typically fall short of the medical guidelines necessary to receive the $25,000 devices. The findings did not determine a reason for such a high rate of non-compliance with the guidelines, but author Sana M. Al-Khatib, M.D., offered an explanation to The New York Times, blaming the failure on physicians’ lack of knowledge and awareness of Medicare’s National Coverage Determination criteria. Such ignorance—as startling as it is sobering—certainly contributed to weak demand for ICDs in 2011, but other factors in place long before the JAMA article was published very well could have softened demand for the devices. One such factor was an investigation by the U.S. Justice Department into hospitals’ ICD billing to Medicare; another was the government’s prosecution of St. Jude Medical Inc. for allegedly paying kickbacks to entice doctors to implant the company’s pacemakers and defibrillators (the St. Paul, Minn.-based firm agreed last January to pay the government $16 million to resolve the allegations).
Companies such as St. Jude Medical, Boston Scientific Corp., Medtronic Inc., Stryker and others that depend on products susceptible to consumer demand are more likely to pursue acquisitions to drive growth or engage in shareholder initiatives to please investors, the report contends.
Over the last four months, the crowd-pleasing efforts have been limited mostly to acquisitions and dividends. Stryker, for instance, declared quarterly dividends of $0.2125 per share in early December and early February, while Medtronic executives approved a cash stipend of $0.2425 per share payable on April 27. Shareholders of Becton Dickinson and Company, Covidien plc and Danaher Corporation stock received bonuses as well—Becton Dickinson investors collected a quarterly dividend of 45 cents per share on March 30; Covidien shareholders will get $0.225 per ordinary share on May 7; and Danaher stockholders picked up two quarterly dividends of $0.025 per share on Dec. 30 and March 30.
St. Jude followed suit by increasing its quarterly dividend in late February by 10 percent to 23 cents per common share, boosting the annual bonus by 8 cents to 92 cents per share. “This increase in our cash dividend demonstrates our commitment to maintaining a meaningful dividend payout over time without sacrificing our ability to invest in our portfolio of product development initiatives designed to accelerate our revenue growth,” Chairman, President and CEO Daniel J. Starks said.
Zimmer executives touted a similar commitment in announcing the company’s quarterly cash dividend of 18 cents per share shortly before Christmas. “This year marked our 10th anniversary as a publicly traded company. Given the substantial increase in revenues since the spin-off from our former parent, our position in our core reconstructive product categories and the considerable strength of our balance sheet coupled with our capacity to generate cash, now is an appropriate time to solidify our commitment to return value to our stockholders…”
Zimmer and other companies returned value to stockholders through targeted acquisitions as well. Zimmer completed three deals last year, buying Chinese orthopedic implant maker Beijing Montagne Medical Device Co. Ltd., Sodem Diffusion S.A., a Swiss maker of orthopedic surgical power tools, and Memphis, Tenn.-based startup Extra Ortho Inc. The Beijing Montagne purchase, according to the company, helps Zimmer increase its presence in the emerging (and lucrative) Chinese orthopedic market, while the Sodem procurement broadens the company’s portfolio of surgical power tools and strengthens its position in the global surgical power tool market, estimated to be worth more than $1 billion.
Boston Scientific is refusing to back off the ICD market despite its vulnerability to demand. In early March, the Natick, Mass.-based firm announced the acquisition of Cameron Health Inc., developer of the world’s first and only commercially available subcutaneous implantable cardioverter defibrillator—the S-ICD System. Unlike conventional ICDs that require thin, insulated wires (leads) to pass through the venous system and into the heart, the S-ICD device sits just below the skin, leaving the heart and blood vessels untouched. The system has been commercially available in several European countries since 2009, but has not yet been approved by the U.S. Food and Drug Administration (FDA).
Though the deal was announced without much fanfare, it has the potential to become a blockbuster for Boston Scientific. The company has agreed to an initial $150 million payment for San Clemente, Calif.-based Cameron Health and another $150 million installment upon FDA approval of the S-ICD System (which is expected in the first half of next year). In addition, the deal calls for Boston Scientific to make up to $1.05 billion in additional payments based on specific revenue milestones over a six-year period following FDA approval of the S-ICD technology.
“We expect the S-ICD System, combined with recent ICD and CRT-D launches, upcoming pacemaker launches and the recently acquired Watchman left atrial appendage closure device will create a highly differentiated portfolio of arrhythmia management products,” Boston Scientific CEO Hank Kucheman said.
Other companies attempting to boost revenue through acquisitions include Franklin Lakes, N.J.-based Becton Dickinson, which bought Kiestra Lab Automation BV, a Netherlands firm that designs, develops, manufactures and sells lab automation solutions for the microbiology laboratory; Varian Medical Systems Inc., which is spending $15 million for privately owned InfiMed Inc., a Liverpool, N.Y.-based supplier of X-ray image processing workstations; and Covidien, which purchased two companies last month—Herzliya, Israel-based SuperDimension Ltd. and Newport Medical Instruments Inc. of Costa Mesa, Calif. The deal for SuperDimension, a private developer of minimally invasive interventional pulmonary devices, is worth $300 million, while the Newport Medical acquisition is valued at $108 million. Newport Medical designs and manufacturer of ventilators.
The signs seem vaguely familiar: a rising stock market, miniscule dips in unemployment (and equally diminutive rises in the number of new jobs created), a somewhat stabilized housing market, and a drastic reduction in private debt.
Could the long-suffering U.S. economy finally be healing itself?
Many economists seem to think so. U.S. Treasury Secretary Timothy Geithner, for one, claims the nation’s economy currently is more productive than it was before its critical wounding by the “Great Recession” of 2007-2009. And former high-ranking World Bank economist Uri Dadush (who now is with the Carnegie Endowment for International Peace) expressed his confidence in the recovery, recently telling international public broadcaster Voice of America that innovation and flexibility will drive the economic healing process.
This confidence feels like déjà vu, though. America has traveled this road before—twice before, to be precise.
The labor market seemed poised for recovery in 2010 as gross domestic product growth approached 4 percent, but panic over Europe’s escalating debt crisis kept unemployment from falling significantly for much of the year. Hopes were high last year as auto and retail sales improved and the stock market made a steady climb toward 13,000. Then oil prices shot up, Mother Nature threw a temper tantrum (both in the U.S. and in Japan), political gridlock gripped Washington, D.C., and the bigwigs at Standard & Poor’s downgraded America’s AAA credit rating.
So much for those high hopes.
Nevertheless, there may be good reason to think the third time’s the charm. Actually, there are several good reasons to consider such a thought: The unemployment rate has fallen 0.8 percent in just six months, jobless claims fell 5,000 to a seasonally adjusted 359,000 in the week ending March 24 (the lowest since April 2008, during the depths of the recession), and employers added 227,000 jobs to their payrolls in February, pushing the three-month total to 734,000. Adding to all this economic ecstasy is a two-fold increase in homebuilder confidence, falling inflation and an 11.8 percent jump in the S&P 500 in the first quarter of 2012—the index’s best start to the year since 1998 and its best quarter since the third period of 2009.
Such auspicious data, however, does not guarantee a smooth recovery.
Economists warn that the nation still has some very significant challenges to overcome before it can fully recuperate from its recession-induced injuries. Tightening fiscal policy and rising gas prices could be a drag on the economy in the months ahead, though experts claim oil price hikes currently are being driven more by fear than by fact. And despite some good progress over the last 18-24 months, private debt remains a threat, as does Europe’s ever-evolving debt crisis.
“It’s a much better environment compared to six months ago, but we shouldn’t overstate growth,” Stephen Stanley, chief economist for Stamford, Conn.-based Pierpont Securities LLC, told The Wall Street Journal in February. “The momentum is moving in the right direction.”
It may not be moving fast enough for medical device makers, though. Faced with pricing pressures and weak demand from unemployed consumers, these manufacturers can expect their organic revenue growth rates to remain sluggish for the next 12 to 18 months, according to a report from Moody’s Investors Service. As a result, device firms will be forced to turn to shareholder-friendly initiatives—buybacks, dividends and acquisitions—to jumpstart growth and appease investors, the report states.
“Spurred by slow organic sales growth, U.S. medical products and device companies will continue to engage in shareholder initiatives (share buybacks and dividends) and seek acquisition opportunities over the next 12-18 months,” noted the Dec. 8, 2011, report. “Share buybacks in particular will continue to outpace past levels as companies look to satisfy shareholders by increasing earnings per share.”
Shareholder satisfaction usually is a top priority at most companies, but the pace at which dividends, acquisitions and share repurchase programs are occurring in the industry seems to have accelerated recently. As if on cue, both Stryker Corp. and Zimmer Holdings Inc. announced share repurchase programs in December, shortly after Moody’s released its report. Stryker’s board authorized the repurchase of $500 million in common stock, while Zimmer’s top executives sanctioned the purchase of up to $1.5 billion of stock through Dec. 14, 2014. The Warsaw, Ind.-based orthopedic device behemoth owned 179.2 million shares of common stock as of Oct. 26, 2011.
Since 2005, Zimmer has returned about $4.5 billion of capital to investors through share repurchases. Stryker, on the other hand, has given back roughly half that amount ($2 billion) over the last four years, according to executives.
“With the additional share repurchase authorization, we are demonstrating our commitment to maximizing shareholder value by leveraging our strong balance sheet and consistent cash flow generation,” former chairman, president and CEO of Stryker Stephen P. MacMillan said.
“Although the macro environment remains challenging, we have continued to make sizable investments in R&D while further diversifying our revenue base through targeted acquisitions. Combined, these actions position us well to continue ourhistory of delivering innovation and driving long-term sales and earnings growth.”
Both Stryker and Zimmer were among half a dozen companies cited in the Moody’s report for their vulnerability to weak market demand. The number of orthopedic procedures has fallen in tandem with the nation’s economic fortunes over the last several years, as debt-strapped consumers—particularly the uninsured and those on fixed incomes—postpone elective surgeries.
The manufacturers of implantable cardioverter defibrillators (ICDs) have encountered a similar fate, though different factors have helped curb demand for those devices, including safety concerns, recalls and a Journal of the American Medical Association story that questioned the need for ICDs. The story cited a study that showed 22.5 percent of patients typically fall short of the medical guidelines necessary to receive the $25,000 devices. The findings did not determine a reason for such a high rate of non-compliance with the guidelines, but author Sana M. Al-Khatib, M.D., offered an explanation to The New York Times, blaming the failure on physicians’ lack of knowledge and awareness of Medicare’s National Coverage Determination criteria. Such ignorance—as startling as it is sobering—certainly contributed to weak demand for ICDs in 2011, but other factors in place long before the JAMA article was published very well could have softened demand for the devices. One such factor was an investigation by the U.S. Justice Department into hospitals’ ICD billing to Medicare; another was the government’s prosecution of St. Jude Medical Inc. for allegedly paying kickbacks to entice doctors to implant the company’s pacemakers and defibrillators (the St. Paul, Minn.-based firm agreed last January to pay the government $16 million to resolve the allegations).
Companies such as St. Jude Medical, Boston Scientific Corp., Medtronic Inc., Stryker and others that depend on products susceptible to consumer demand are more likely to pursue acquisitions to drive growth or engage in shareholder initiatives to please investors, the report contends.
Over the last four months, the crowd-pleasing efforts have been limited mostly to acquisitions and dividends. Stryker, for instance, declared quarterly dividends of $0.2125 per share in early December and early February, while Medtronic executives approved a cash stipend of $0.2425 per share payable on April 27. Shareholders of Becton Dickinson and Company, Covidien plc and Danaher Corporation stock received bonuses as well—Becton Dickinson investors collected a quarterly dividend of 45 cents per share on March 30; Covidien shareholders will get $0.225 per ordinary share on May 7; and Danaher stockholders picked up two quarterly dividends of $0.025 per share on Dec. 30 and March 30.
St. Jude followed suit by increasing its quarterly dividend in late February by 10 percent to 23 cents per common share, boosting the annual bonus by 8 cents to 92 cents per share. “This increase in our cash dividend demonstrates our commitment to maintaining a meaningful dividend payout over time without sacrificing our ability to invest in our portfolio of product development initiatives designed to accelerate our revenue growth,” Chairman, President and CEO Daniel J. Starks said.
Zimmer executives touted a similar commitment in announcing the company’s quarterly cash dividend of 18 cents per share shortly before Christmas. “This year marked our 10th anniversary as a publicly traded company. Given the substantial increase in revenues since the spin-off from our former parent, our position in our core reconstructive product categories and the considerable strength of our balance sheet coupled with our capacity to generate cash, now is an appropriate time to solidify our commitment to return value to our stockholders…”
Zimmer and other companies returned value to stockholders through targeted acquisitions as well. Zimmer completed three deals last year, buying Chinese orthopedic implant maker Beijing Montagne Medical Device Co. Ltd., Sodem Diffusion S.A., a Swiss maker of orthopedic surgical power tools, and Memphis, Tenn.-based startup Extra Ortho Inc. The Beijing Montagne purchase, according to the company, helps Zimmer increase its presence in the emerging (and lucrative) Chinese orthopedic market, while the Sodem procurement broadens the company’s portfolio of surgical power tools and strengthens its position in the global surgical power tool market, estimated to be worth more than $1 billion.
Boston Scientific is refusing to back off the ICD market despite its vulnerability to demand. In early March, the Natick, Mass.-based firm announced the acquisition of Cameron Health Inc., developer of the world’s first and only commercially available subcutaneous implantable cardioverter defibrillator—the S-ICD System. Unlike conventional ICDs that require thin, insulated wires (leads) to pass through the venous system and into the heart, the S-ICD device sits just below the skin, leaving the heart and blood vessels untouched. The system has been commercially available in several European countries since 2009, but has not yet been approved by the U.S. Food and Drug Administration (FDA).
Though the deal was announced without much fanfare, it has the potential to become a blockbuster for Boston Scientific. The company has agreed to an initial $150 million payment for San Clemente, Calif.-based Cameron Health and another $150 million installment upon FDA approval of the S-ICD System (which is expected in the first half of next year). In addition, the deal calls for Boston Scientific to make up to $1.05 billion in additional payments based on specific revenue milestones over a six-year period following FDA approval of the S-ICD technology.
“We expect the S-ICD System, combined with recent ICD and CRT-D launches, upcoming pacemaker launches and the recently acquired Watchman left atrial appendage closure device will create a highly differentiated portfolio of arrhythmia management products,” Boston Scientific CEO Hank Kucheman said.
Other companies attempting to boost revenue through acquisitions include Franklin Lakes, N.J.-based Becton Dickinson, which bought Kiestra Lab Automation BV, a Netherlands firm that designs, develops, manufactures and sells lab automation solutions for the microbiology laboratory; Varian Medical Systems Inc., which is spending $15 million for privately owned InfiMed Inc., a Liverpool, N.Y.-based supplier of X-ray image processing workstations; and Covidien, which purchased two companies last month—Herzliya, Israel-based SuperDimension Ltd. and Newport Medical Instruments Inc. of Costa Mesa, Calif. The deal for SuperDimension, a private developer of minimally invasive interventional pulmonary devices, is worth $300 million, while the Newport Medical acquisition is valued at $108 million. Newport Medical designs and manufacturer of ventilators.