* More deals seen in 2013 after lull
* Weak markets, new tax, shrinking reimbursements seen driving deals
* Big turnover at CEO level also seen supporting M&A in 2013
By Debra Sherman and Soyoung Kim
CHICAGO/NEW YORK, Sept 5 (Reuters) – Medical device mergers look poised to take off in 2013 as the industry compensates for shrinking reimbursements, a new U.S. tax and executive shake-ups at its biggest companies.
Merger and acquisition activity in the sector has fallen near the lows reached in 2009, during the global financial crisis, but industry executives and bankers say the situation is changing.
Heart device maker St. Jude Medical Inc sees greater acquisition opportunities stemming from a new U.S. tax on companies in the sector. The tax, which takes effect next year, is meant to help fund the country’s healthcare reform.
“That will be an immediate cash drain on some of the smaller companies,” St. Jude Chief Financial Officer John Heinmiller told Reuters. “Some of that will impact valuations, and as those come down, it may make for more attractive takeout targets.”
For their part, St. Jude and other large companies are likely to seek out innovative new products through acquisitions as financially strapped governments pressure manufacturers to lower their prices and the weak economy curbs demand from patients.
Medtronic Inc, the world’s largest medical device maker, has been viewed as a likely buyer, but Chief Executive Officer Omar Ishrak has said the company will be careful not to acquire anything that will hurt profits.
Medtronic, Johnson & Johnson, Stryker Corp and Covidien PLC have all replaced their CEOs in the past 18 months, and former J&J executive Michael Mahoney will become Boston Scientific Corp’s CEO in November. These changes have slowed the dealmaking process.
“It’s unprecedented to see this many CEO changes in the device space,” said John Soden, a healthcare banker at investment bank Houlihan Lokey.
“Typically it takes somewhere between three to six months to really formulate a new strategy and then up to another 12 months to execute on that strategy,” Soden said. “So one would hope that 2013 would see the benefit of these leadership changes.”
At the same time, Abbott Laboratories is preparing to spin off its pharmaceutical business, while keeping its medical device business under current CEO Miles White.
Soden said he expected more deals in the device and life science tool sectors.
In the orthopedic market, analysts say public companies at the center of takeover speculation include Nuvasive Inc , Wright Medical Group Inc and Tornier Inc .
In the heart sector, they include Edwards Life Sciences Corp , HeartWare International Inc, Thoratec Corp and Volcano Corp.
DexCom Inc, a maker of continuous glucose meters for diabetics, and Endologix Inc, which makes products used to treat abdominal aortic aneurysms, are also seen as possible targets.
All of those companies declined to comment, except for Volcano, which did not return phone calls.
Analysts also said foreign companies might be attractive because such acquisitions could mean favorable tax treatment for a U.S. buyer.
DEALMAKING AT 3-YEAR LOWS
So far in 2012, dealmaking in the medical technology sector has hit a three-year low, according to Thomson Reuters data as of Aug. 28.
The value of announced deals totaled $20 billion. That is down from a year-earlier $53.32 billion, including J&J’s $21 billion agreement to buy surgical tool maker Synthes, which closed in June.
“Over the long term, we’ll see the industry consolidating more as pressures intensify,” said Morningstar analyst Alex Morozov. He expects buyouts of companies with products at earlier stages of development, as device companies bet they can fend off pricing pressures with more innovative wares.
A decade ago, device makers were growing at double-digit rates, with large and small companies rolling out a steady lineup of new treatments for chronic diseases. Between 2005 and 2007, sector employment increased 20.4 percent, or by 73,000 jobs, according to U.S. government data.
Now, public companies with slow to moderate growth are trading at low multiples to earnings, Soden said. Finding ways to accelerate that growth has become more difficult due to the economy.
Also, medical researchers have recently questioned the need for widespread use of devices such as heart stents, implantable heart defibrillators and spinal implants. U.S. employers have been limiting the benefits they offer, shifting more healthcare costs to an increasingly cautious consumer.
“It’s hard to believe this was such a growth industry just a few years ago, and now there’s such an anemic outlook,” said Nuveen Asset Management analyst Tim Nelson. “It’s harder for small companies to raise money. It’s harder for larger companies to move the needle, so they need to acquire to grow.”
He expects M&A to heat up soon after U.S. elections in early November if President Barack Obama wins. It may take a bit longer if Republican challenger Mitt Romney takes the White House, he said, since Romney has pledged to repeal Obama’s 2010 healthcare law, and companies would probably wait to see what would replace it.
Physician groups and hospitals are also consolidating, giving them even stronger buying power at a time when all segments of the healthcare market are under pressure to cut costs.