State of the Medtech Industry: ACA Pushback and More Consolidation

As we embark on the final quarter of 2016 and begin the countdown to Election Day, I thought it might be useful to reflect back on the past year (to date), and peek ahead to 2017 to find out what the future might hold for medical device contract manufacturers (CMs) and OEMs.

Let me begin with a disclaimer: Do not hold anything I say against me regarding the outcome of the presidential race. This year’s decision could certainly turn out to be more of a wildcard than usual due to its particularly interesting dynamics (I’ll leave it at that for now).

While there is never a shortage of medtech discussion topics, four issues seemed to have regularly grabbed headlines so far in 2016: payers/insurers leaving some state Obamacare marketplaces, drug pricing, U.S. Food and Drug Administration (FDA) reviews and new technologies, and merger/acquisition activity. Since these topics are trending, I’m assuming there is a lot of interest in them.

Let’s start with the Patient Protection and Affordable Care Act (PPACA, a.k.a., Obamacare) marketplaces.

As we get deeper into the PPACA rollout, we are starting to see some trends and initial data. One of these trends can be regarded in a “good news-bad news” kind of way: While the law has had many positive effects on the number of insured and healthcare in general, there are nevertheless still some areas of growing concern that must be addressed if the legislation and its lofty goals and expectations are to be met. The road to success will not be a straight line, though; there most definitely will be some bumps and turns along the way. Debate on the issue will almost certainly continue, as the new president (and potentially a new U.S. Congress) wrangle with the law’s implementation. Regardless of the party in power, however, some structural and fundamental changes must occur to ensure a good outcome for Obamacare, Americans, and the U.S. healthcare system. Next year could be a new beginning of sorts, once the new administration is in place. 

ACA Flight
The headlines in recent months have focused on payers either not signing up or offering plans on the federal healthcare state marketplaces. In July, Humana announced that it would leave “substantially all” ACA markets next year, participating in “no more” than 11 state marketplaces (down from 19 states in 2016). Although details are still emerging, a spokesman indicated that Humana was pulling out of states where it had very limited presence. Humana claimed losses of nearly $1 billion in 2015-2016.

These types of announcements along with other payers—Aetna, UnitedHealth, etc.—following suit will effectively leave a one-carrier option in many states. There already are four states that have only one carrier—Blue Cross Blue Shield. Rural states and markets with small populations are typically the areas hit hardest by these decisions, as insurers can find more customers and better economics in highly populated states.

This payer exodus will have to be dealt with at some point, and I’m not sure a split White House and U.S. Senate will have the political will to sort this out quickly and in the best manner. This most likely will be hotly debated at some point. But for now, I don’t believe this will have a direct impact on medical device companies or contract manufacturers. It remains to be seen exactly how this will play out in the new administration.

Pharmaceutical Pricing
While some might think this is more of a pharma-related topic, I believe it is worthy of some discussion due to the growth of combination products. I spend a lot of time working with CMs, investors, and OEMs in the drug delivery space. At the center of the latest “controversy” is the EpiPen by Mylan Inc. As many in the industry are already aware, the EpiPen is not new technology, but rather an effective way to deliver a lifesaving dose of epinephrine for those having a seizure. Mylan has built a monopoly on this market (a discussion for another day). I predict this will be a hotly debated item in the upcoming elections, and like it or not, the Mylan case will become the poster child for many things that are wrong with drug pricing and government spending.

The good news for most folks on the medtech side of this equation is I do not see this affecting the manufacturing, overall demand, or pricing of the underlying devices that deliver some of these controversially priced drugs. In most cases, the device makes up a very small portion of the total price to the consumer, so there is likely to be few, if any, ramifications for those involved in product design and manufacturing.

Improved Review Times
What would a year in review article be without a mention of the FDA? While there are many topics I could discuss, I have chosen to focus on review times and dealing with new technologies. According to a recent infographic report by the California Life Sciences Association, FDA approval times have decreased nearly 50 percent since 2009. This data was developed in conjunction with Boston Consulting Group, which showed an average review time of 21 months in 2009, dropping to 10 months in 2015. While the data shows an overall reduction, there are still wide ranges that exist among therapeutic areas. The report partly attributes the agency’s improved review and approval times to the Breakthrough Therapy Designation (BTD), a product of the Food and Drug Administration Safety and Innovation Act of 2012. The BTD is designed to expedite the development times of drugs for serious conditions, with certain submission review times shortened to 60 days.

More Merger Mania
Consolidation and industry M+A is my personal favorite topic. Like other issues, this subject merits a full discussion all its own, but I will attempt to focus on some macro trends and data from this year. Overall, there has still been significant activity by OEMs and CMs, but total deal value has fallen to $400 million, well below the $2.1 billion accrued in the first half of 2015 (actually, $835 million excluding the Medtronic-Covidien purchase). This drop in total deal value appears to signify that the industry is returning to smaller and mid-size deals (the Abbott/St. Jude announcement aside). Some of the more noteworthy transactions of this size in the first six months of 2016 include: Abbott’s $5.8 billion acquisition of Alere Inc. [Editor’s note: Read Medtech Musings on page 90 for an interesting and insightful analysis of this deal], Canon’s $6 billion purchase of Toshiba’s medtech unit, APAX Partners’ 50.1 percent investment in BD’s Respiratory Solutions business  (disclaimer: Bonifacio Consulting Services acted as due diligence advisors to APAX on this transaction), Stryker Corp.’s back-to-back purchase of Sage Products LLC and Physio-Control International (external defibrillators) for $4 billion over the winter, and the “merger of equals” that created Dentsply Sirona, reportedly now the world’s largest developer of dental devices and technologies.

There were also some rather large CM deals this year. TE Connectivity Ltd. made a huge splash in the CM pool with its acquisitions of AdvancedCath ($190 million) (the Inverness Graham rollup) and Creganna Medical Group ($895 million), developer of minimally invasive delivery and access devices. A recent (and not surprising) deal involved TE competitor Molex LLC purchasing Phillips-Medisize Corporation from San Francisco, Calif.-based Golden Gate Capital, a private equity investment firm with approximately $15 billion of capital under management.

In the near term, I expect the CM consolidations to continue, albeit with some smaller deals as well. The medtech M+A landscape is very unpredictable, but in this election, I think it is particularly difficult to forecast. But let me make a final prediction—if the macro economic backdrop does not change drastically from the current environment of low interest rates, low unemployment, private equity and strategic investors competing for assets, and undeployed capital, the medtech industry should continue to further consolidate at both the OEM and CM levels. The sector may also begin to experience some divestiture of non strategic assets from all of the OEM level consolidation.

Here’s the bottom line: 2017 should be another active deal year, at least for the first half. I’m sure some surprises are in store for the industry as well. Stay tuned. 

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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 solid 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.