Bloomberg Business News
February 2, 2016
Phyllis McCready, VP & Chief Procurement Officer, Northwell Health
Medical-device companies, under pressure from hospitals and health insurers to keep expenses down, are capitalizing on strong cash flows and the stumbling stock market to beef up cost-controlling technologies that may be critical to maintaining growth.
Three of the biggest makers of medical technology, Medtronic Plc, Abbott Laboratories and Stryker Corp., announced acquisitions Monday that target improved health-care efficiency and quality. Each of the deals bolsters the acquirers’ offerings in ways that address the needs of doctors and hospitals to control spending while reducing errors and waste.
“There is no coincidence that big players are looking to do deals like this,” said Dan Shoenholz, managing director and co-head of the health-care practice at EY’s Parthenon unit. “The short-term financial environment makes this an attractive point in time, but the fundamental strategic rational is an ongoing and inexorably evolving trend.”
As the focus on costs intensifies, health-care providers are looking for ways to get fast, accurate information to guide services and reduce spending, said Abbott Chief Executive Officer Miles White in announcing the $5.8 billion purchase of test-maker Alere Inc. Expanding in diagnostics will help the company get in front of those decisions and boost the system’s efficiency, he said.
“It takes our testing capability or our diagnostic capability out into segments where we could have a much bigger presence,” including doctor’s offices, pharmacies, homes and workplaces, White said. “As testing and information management changes, we’re in the front seat. And I think that’s pretty valuable.”
Stryker, a maker of artificial hip and knees, spent $2.78 billion to buy Sage Products LLC, which makes products that reduce the chance of serious surgical mistakes and infections. Medtronic bought Bellco, which makes treatments for organ failure and blood infections. Those companies didn’t announce terms.
Companies are recognizing that they need to change the way they do business to help confront the skyrocketing cost of care, rather than selling individual products that contribute to the expense, Shoenholz said. The trend is increasingly evident among people with costly conditions, such as diabetes and end-stage kidney disease, he said.
“Virtually any company that’s in medical products has to think about where this is going,” he said. “They need to be evolving their own business model to influence the value of health care.”
As government health programs have moved away from paying for individual services, institutions must manage patients’ health on a set budget. Most hospitals buy through group purchasing organizations that negotiate prices on all kinds of supplies. The field of large group purchasers underwent consolidation itself last year, said Sheryl Skolnick, an analyst with Mizuho Securities USA.
“Buying power is getting increasingly centralized in fewer hands,” said Skolnick, who follows the for-profit hospital industry. “I don’t care whether you’re buying a complex medical device like a hip joint or something as simple as syringe; when purchasing power consolidates, pricing tends to drop.”
Northwell Health, known until recently as the North Shore-Long Island Jewish Health System, has been consolidating its buying internally, said Phyllis McCready, chief procurement officer for the chain of 21 hospitals. The system spent about $2.5 billion last year on supplies, and the bill was reduced by about $48 million through negotiations with suppliers, she said.
While consolidation among suppliers presents challenges, it can also create opportunities for Northwell in its search for top-quality products, McCready said. For example, Medtronic’s purchase of Covidien last year combined a company that makes implantable devices with another that makes materials for closing surgical wounds. Northwell is now discussing potential agreements under which suppliers like Medtronic would share the hospital’s risk when patients who receive those products are readmitted because of complications, McCready said.
“We’re in the process of looking at how it could work,” she said.
Medtronic, Stryker and Boston Scientific Corp., all recently brought cash back to the U.S. that had been earned and stockpiled abroad, said Jason McGorman, an analyst at Bloomberg Intelligence. For acquirers, the combination of additional cash and lower costs is proving irresistible to the industry, McGorman said.
“Valuations are obviously a lot cheaper this year than they were last year,” McGorman said. “Companies have said if they were interested before, valuations were holding them off. Now it makes sense.”