[caption id="attachment_3087" align="alignleft" width="225"] This guy loves consolidation[/caption]
While orthopedic implant maker Stryker (Kalamazoo, Michigan) said today that it did not intend to make an offer for Smith & Nephew (S&N; London) after a report in the Financial Timesforced its hand, it seems likely that such a union for S&N with Stryker or another willing partner is inevitable.
Stryker responded at the request of the UK Takeover Panel and confirmed that the company does not intend to make an offer for S&N. Post this announcement, UK takeover rules now prohibit Stryker from making a bid for S&N for six months, unless recommended by S&N’s board, in which case it can make an offer in three months.
The Financial Times report said that Stryker had hired banks and was working on assembling financing for the bid, but said no bid was coming after the report came out.
Part of the logic for the possible acquisition certainly stems from a desire to lower the company's tax obligations via an inversion, under which Stryker would use its takeover of S&N to relocate its headquarters to London, thus sheltering overseas revenues from U.S. taxation.
To qualify for the inversion, at least 20% of the shares in the combined company would need to be held outside the U.S., meaning Stryker would need to fund a large proportion of any bid with its own stock.
The UK has a corporate tax rate of 21%, which is dropping to 20% next year, compared with a 35% rate in the U.S. In addition, the UK only taxes profits that companies say are earned within its borders, while the U.S. taxes all earnings once the money is brought into the country.
The other logical reason for acquiring S&N is to keep up with competitors as the orthopedic market continues its march towards ever larger economies of scale.
Rival Zimmer agreed to acquire Biomet (both Warsaw, Indiana) for $13.4 billion last month to leapfrog Stryker as the second-largest company in the $45 billion market. Both Johnson & Johnson (New Brunswick, New Jersey), and Medtronic (Minneapolis) have said they plan to bundle their products and appeal to hospitals by providing a broader range of services.
Larry Biegelsen of Wells Fargo wrote in a research note that the acquisition of S&N by Stryker would make strategic sense, given the recently announced Zimmer/Biomet transaction and the speculation of further consolidation in the orthopedic industry. “The combined Stryker and S&N would have over 30% market share of the hip and knee markets, second only to the combined Zimmer/Biomet, assuming the acquisition is completed,” Biegelsen wrote. Given that Stryker was only at an early stage of evaluating a takeover of S&N, He said it would not be surprising to see Stryker eventually bid on S&N.
“We continue to think that Smith & Nephew remains a viable target for Johnson & Johnson or Stryker as the orthopedic industry enters a new phase of consolidation.” added Lisa Bedell Clive, an analyst at Sanford C. Bernstein & Co. in a research note.
Stryker would also benefit from an increased proportion of sales outside of the U.S. (OUS). Currently, Stryker generates 34% of its revenue OUS which is relatively low compared to its peers, while S&N generates 57% of its revenue OUS. Additionally, S&N generates 13% of its sales from emerging markets, compared to 8% for Stryker. Stryker is committed to increasing its emerging market sales to 10% of total sales over the next 2-3 years and moving towards 15-20% longer term.
Biegelsen pointed out one more thing that depending on one's point of view is either a positive or a negative. A Stryker acquisition of S&N "would further help alleviate pricing pressure in hips and knees given that the market would then move from five major players to three."
Great for the companies and investors in the orthopedic sector, probably not so much for patients.
Three years ago, med-tech companies were bracing for a massive shakeup on the healthcare landscape.
The medical device tax, the implementation of the Affordable Care Act and vanishing venture capital funding, were all topics that caused a great deal of anxiety for many in the space.
Forget thriving in the space. Many just wanted to survive. Yet earlier this month, thriving in the medical device industry was the focus of the Southeastern Medical Device Association's annual conference held in Atlanta. In fact, the title of the conference was "Thriving During Healthcare Reform."
With the landscape more clearly defined, medical device firms seemed ready to move onto the next phase. Even venture capitalists flirted with the idea of getting more involved with med-tech. But entrepreneurs have to be more savvy. Just take it from one investor that spoke at the conference.
"We're looking for those medical device entrepreneurs that understand all of the implications that their device would have in the ecosystem," said Tom Hawes, MD, managing director, Bluecross BlueShield Venture Fund/Sandbox industries during an investor panel at the conference.
In my estimation it's good to see medical device firms thinking positive and making the best out of a tough situation.
[caption id="attachment_3056" align="alignleft" width="250"]A tasty treat or a scalding serving of bad news?[/caption]
The general public might think of FDA and CMS as ingredients in the government’s alphabet soup, but there are times when things seem to move too slowly for a mere broth to be the medium. Here are two stories that are taking a lot of time to achieve the required viscosity.
First, let’s tackle some of the blowback attached to FDA’s latest attempt to finesse the First Amendment on the point of off-label use. Off-label device use has been the bane of FDA for years, and worse yet in the agency’s view is when device makers talk about off-label use. This latest attempt at a guidance on how device makers should (not) exercise freedom of speech raised the hackles at the Washington Legal Foundation (WLF), an outfit FDA knows all too well.
The reader might remember the 1999 case in which WLF persuaded a judge to enjoin some of the agency’s restrictions per the Food and Drug Administration Modernization Act of 1997. WLF’s response to the latest draft claims that the draft “appears to violate the terms of [the] permanent injunction” the association obtained in WLF v. Henney. WLF argued further in a recent statement that the draft’s limitation of appropriate materials to those that address “adequate and well-controlled clinical investigations” constitutes a standard “that would virtually eliminate dissemination.”
Richard Samp is the chief counsel at WLF, and if you ever met him, you’d think there’s no more mild-mannered denizen of DC. On the other hand, he works for WLF, and I have to assume he likes a good scrum as much as the next JD.
In other words, this is far from over.
CMS says “CED” to the MitraClip
The Centers for Medicare & Medicaid Services recently proposed to pay for the MitraClip via the coverage with evidence development (CED) mechanism, but it was interesting to see how the agency arrived at CED with this device. Abbott Vascular had requested a new technology add-on payment last year, which CMS declined, and then the company asked the agency earlier this year to shift the procedure between diagnostic-related groups because the default DRGs were too miserly.
So why CED?
CMS declined last year to cover the MitraClip because FDA had not at the time approved the device, but CMS never staked out a position in the FY 2014 proposal for the inpatient prospective payment system (IPPS) as to whether the MitraClip met the cost criterion for a new technology add-on. So it’s tough to say just where the agency stands on this score.
The IPPS proposal for 2015 tackled the question of the device’s DRG classification, but here again, CMS declined, this time based on what the agency saw as a problem with the company’s claims regarding resource utilization. Still, physician societies backed Abbott on the resource question, leading one to wonder whether CMS wasn’t intent on a CED approach from the outset.
We can speculate endlessly about whether CMS has issues with the device, but it might be more informative to speculate about the approach to these novel and expensive cardiology devices generally. After all, TAVR devices got the same treatment, but when was the last time anyone saw a national CED determination for an orthopedic device? I can’t recall any of recent vintage off the top of my head (but that could change as all those bum-kneed Baby Boomers hit retirement).
Sponsors of left atrial appendage (LAA) closure devices might want to take note on two scores. One is that CED is a pretty sure bet for their devices, and the second is that a registry requirement is almost certainly in the offing. Sponsors of the TAVR registry had already carved out a spot for mitral valve repair devices, but where might an LAA closure registry find a home?
ICYMI: Uncle Sugar is poised to plow another $200 million into the Healthcare.gov website, which will bring the grand total to more than a billion bucks. And some people wonder why some taxpayers dislike big government. If you don’t get it by now, forget it. You never will.
Change is what the American public was promised (or some might say threatened with) during the 2008 presidential election and for better or worse, the healthcare industry worldwide has been served an extra large helping of that change over the past six years. While the medical device industry’s palate has reacted to most of that change the way a five-year-old reacts to Brussels sprouts, this year’s menu does appear to be more appetizing. In March, two competing companies filed IPO papers on the same day. TriVascular Technologies and Lombard Medical Technologies both sell devices to treat abdominal aortic aneurysms. TriVascular initially expected to raise up to $100 million in its IPO but instead the company raised $78 million in its debut on the Nasdaq Global Select Market. Lombard priced its IPO of 5 million shares at $11 a share. One expert in the medical device space and a regular contributor to Medical Device Daily, Larry Haimovitch, called this recent up-tick of device IPOs “very encouraging” and said he expects the industry to see more companies filing IPOs this year. “Finally the IPO window has opened up,” Haimovitch said. To put it into perspective, last year 30 device startups were acquired by larger companies while only four went public, according to industry tracker VentureSource. One company that nixed its IPO plans last November, citing poor market conditions, has regained its appetite for the public market. CardioDx is revisiting its plans for an IPO. The diagnostic company previously intended to offer 5 million shares at a range of $14 to $16 a piece. The industry has also been treated to a number of flavorful mergers this year. In April, Zimmer and Biomet cooked up a rather spicy deal in orthopedics. Zimmer has agreed to pay $13.35 billion in cash and stock for Biomet. The combined company stands to gain a much larger slice of the orthopedic pie. Zimmer-Biomet has been the largest M&A entrée in the orthopedic sector this year, but certainly not the first. Smith & Nephew said in February it would buy ArthroCare for $1.7 billion and there could easily be more multi-billion dollar transactions in the orthopedic space this year. Paul Teitelbaum, managing director and medical device/healthcare IT M&A expert at Mesirow Financial’s Investment Banking Group, said it would not be a surprise if Zimmer continued to add a few more acquisitions to its plate. “This isn’t the beginning of hot M&A activity in medical devices but it’s certainly not the end of it,” Teitelbaum said in reference to the Zimmer-Biomet deal. Before the year is over, the healthcare industry will likely have to choke down more change that we’ll all want to turn our nose up at. But if these recent M&As and IPOs are any indication, the sweetest dish for med-tech is yet to come. Bring on the dessert!
[caption id="attachment_3028" align="alignleft" width="230"]More Medicare ICD coverage equals less of this, docs say.[/caption]
The 2014 scientific sessions hosted by the Heart Rhythm Society are over, and there was a lot of news coming out of San Francisco. One of the items that caught my eye was a consensus statement by HRS and a couple of other physician societies about appropriate use of implantable cardioverter defibrillators for populations not well represented in clinical trials. The first question that occurs to the casual observer is; how seriously will government take this consensus standard?
The background for this is in part the push by the Department of Justice to go after physicians and clinics that implanted ICDs outside of Medicare coverage policy, a move that ended in what seemed on the surface like a stalemate, but which was probably a win for electrophysiologists (EPs). At the 2013 HRS meeting, a group of EPs announced they were in pursuit of legislation that would exonerate cardiologists who implant ICDs outside of guidelines established by the Centers for Medicare & Medicaid Services. We might bear in mind that the House GOP alone has at least 19 members who are doctors, and they typically don’t take kindly to some efforts to restrict senior access to Medicare.
The consensus statement addresses a number of scenarios for implant outside coverage guidelines, but the natural question to ask is which of these are must-haves and which are nice-to-haves. One item we can safely assume is a must-have is the nagging question of implant within the first 40 days post-infarct.
This particular coverage question has rankled EPs for several years, but the consensus statement seems to offer more specificity about which patients in this group should receive this device within that 40-day window than perhaps was previously available. Will the specificity of the consensus document’s discussion on this and other recommendations mollify CMS and DoJ?
One answer to that question was provided by Fred Kusumoto, MD, of the Mayo Clinic (Jacksonville, Florida) during a press briefing at HRS 2014. Kusumoto said the physician societies had alerted CMS and DoJ to the work on the consensus statement, and that officials at CMS were at least open to the discussion. FDA, too, is apparently aware of these developments, and we might reasonably assume none of these federal agencies will simply ignore the document.
The next step is for someone to file a formal request for a re-opening of the current coverage policy. One might wonder if CMS and DoJ are wary of such an analysis with an interim director at the helm of the coverage and evidence group at CMS. Louis Jacques recently left the job to Tamara Syrek Jensen, who has been at CMS for some time and is probably quite capable of steering this kind of request appropriately. Still, given how charged the politics of this has been, some in government might push for a bigger name at the CAG than an “acting director,” a job Jensen has held before.
In any event, the current coverage policy is based on an analysis put into force in 2005, and everyone at CMS might be on board with the proposition that it’s time for another look. It may be too early to break out the champagne, but patients, doctors and device makers can probably expect at least some loosening of coverage conditions over the next year or so. That is unless CMS and DoJ want Congress breathing down their necks.
[caption id="attachment_3004" align="alignleft" width="274"]MDD Perspectives blog: Out of the ashes or for the birds? You decide.[/caption]
The Medical Device Daily Perspectives blog is finally back, and we’d like to thank everyone on the IT team at ThomsonReuters for restoring the blog. I’ve always had the feeling that anyone in the IT business probably feels like salt-water taffy at a toddler’s birthday party: They’re constantly getting pulled in a dozen different directions, and we MDDers would like to thank them for standing us back up.
But now we’re back and our first target after the layoff is, of course, FDA. The agency published a very intriguing item in the March 25 Federal Register, which might not have attracted as much attention as it merits. Following are two passages I thought were interesting.
FDA’s stakeholders have suggested that premarket and postmarket controls typically associated with class III devices, such as requiring clinical trials to provide an independent assessment of the safety and effectiveness of a device, can be established as special controls.In other instances, FDA’s stakeholders have suggested that all high risk devices should be classified in class III, even if those risks are well understood and may be able to be controlled through premarket studies showing equivalence to a marketed device, labeling, and other general or special controls.
Note that the agency remarks that “stakeholders have suggested.” That has the ring of “the Devil made me do it,” but is it really just so much saber rattling?
Maybe, maybe not. I’m of the view that federal agencies don’t go around adding comments like that to an FR notice strictly for the purpose of draining a barrel of virtual ink. Beyond all that, I’d also point out that those who rattle sabers have sabers, and it’s best not to pretend they’re unarmed.
Another passage of interest states that FDA has often had a tough time scheduling an inspection of a facility within the 90 days allotted for a 510(k) review “on the rare occasions that FDA has required a manufacturing inspection.”
The agency then states that should it find that an inspection of the manufacturing facility “is necessary to provide RASE [a reasonable assurance of safety and effectiveness] for a potentially high-risk device, general and special controls are inadequate to provide RASE and thus the device meets the statutory definition of” a class III device.
The notice does not come out and say “if we want to inspect your place before clearing your device and you don’t make it happen, you need a PMA rather than a 510(k).” That certainly seems the implication, though. This passage addresses devices deemed “potentially high risk devices,” a piece of language some may find remarkably elastic.
There’s much more in there, but I have only one thing more to say. It sure is good to be back in the blogosphere!
Did you miss us?
We certainly missed sharing our thoughts with you via the Medical Daily Perspectives blog. Due to some seriously migraine-inducing computer hardware compatibility issues between the servers at Thomson Reuters and our old ownership, we have been on a forced blogging holiday since this past December.
Now we are back, and dedicated to providing you with the most informative, topical and seriously fun blog that we can muster.
We hope that you will continue to visit this site on a regular basis, and we pledge to update it frequently. We also encourage you to register and comment often on MDD Perspectives.
Again, sorry for the long radio silence, we hope to hear from you very soon. It feels good to be back in the saddle again.