Companies in the orthopedics space have had a rough go of it in the last few years. The federal government launched multiple investigations regarding the sales practices of these companies and prosecutors have managed to nail several skins to the wall. At the same time, hospitals and insurers have fought back on pricing and the growth rate for the sector has suffered. Making matters worse, the recession set in and many would-be patients decided to wait to undergo procedures.
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Buyouts have added some energy to this space of late. Medtronic (NYSE:MDT) absorbed Osteotech late in 2010; Johnson & Johnson (NYSE:JNJ) announced its intention to acquire Swiss spine and trauma specialist Synthes in April of this year; and just the other day Stryker (NYSE:SYK) announced that it would acquire Orthovita (Nasdaq:VITA) in an all-cash deal. Given the benefits of scale, though, there may yet be more deals to come in this sector. (For background reading, check out Investing In Medical Equipment Companies.)
Orthopedics Companies Merge
Right now, there are several major players in orthopedics. JNJ, Stryker, Zimmer (NYSE:ZMH), Smith & Nephew (NYSE:SNN) and Biomet are the dominant names in reconstruction (which is largely comprised of hip and knee implants), while Medtronic is a major name in spinal care.
At present, JNJ, Stryker and Zimmer are the leaders in hips and knees with nearly three-quarters of the market. Medtronic is far and away the leader in spinal care, with more than one-third of market share; even the combination of JNJ and Synthes will not change this, as the new company will still only have about one-quarter of market share.
Beyond the major markets of hip, knee and spine are additional smaller markets. Some of the more significant ancillary markets include trauma, extremities soft tissue repair, sports medicine and orthobiologics (which is often used to facilitate trauma procedures as well as procedures in the spine and extremities).
With so much of the market held by relatively few companies, it stands to reason that there could be a wave of M&A in the sector as companies look to build scale, add key product categories, and bulk up their offerings to stand against the largest players. Keeping that in mind, there are several smaller orthopedics companies that could find themselves in line for an acquisition bid.
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NuVasive (Nasdaq:NUVA) is the largest spine care company outside of the majors. Although companies are launching products targeted to compete with NuVasive's less-invasive approach, NuVasive seems to be on the road to restoring some of its momentum. Stryker, Biomet and Zimmer could all potentially be interested parties.
Exactech (Nasdaq:EXAC) and Wright Medical (Nasdaq:WMGI) are similar in many respects. Both have hip, knee and extremity platforms and both have found themselves on the wrong side of DOJ investigations. Wright Medical arguably stands out for its niche leadership in areas like foot/ankle and wrist procedures, but the company is also facing some severe challenges from findings of serious wrongdoing and resulting management changes.
Orthofix (Nasdaq:OFIX) and Alphatec (Nasdaq:ATEC) both offer opportunities to build exposure to spinal care. Orthofix has over half the market for bone growth stimulation and is a player in spinal fusion and fixation. Orthofix also has a sports medicine business and an interesting new orthobiologic based on adult stem cells. Alphatec is looking to roll out a new stem-cell-based orthobiologic, as well as a new fusion system, and new cage, spacer, and screw products.
ArthroCare (Nasdaq:ARTC) has a relationship with Smith & Nephew, but could offer appeal to companies that want to expand further into sports medicine and soft tissue repair. ArthroCare's ablation technology is also applicable in the ENT space and companies like Stryker and JNJ (who have meaningful non-orthopedic businesses) could find the ENT devices to be a attractive and leverageable.
Investors may also want to consider China Kanghui Holdings (NYSE:KH). One of the three largest orthopedic companies in China, Kanghui would not add much of anything in terms of FDA-approved devices, but it would give an acquirer a foothold in a rapidly growing market with good distribution at the mid-tier hospital level. This company is already richly valued, though, so investors should tread lightly.
The Bottom Line
Predicting M&A is hardly exact or precise. Nevertheless, it is clear that major med-tech players have picked up where they left off before the recession and credit crisis. With significant benefits to scale and the likelihood of further consolidation in orthopedics, investors may want to look for some of the bargains and growth opportunities among the smaller ortho players and regard potential M&A as a kicker to the upside.
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