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Opinion: James Knott
A cut above
The global advanced wound care market is dominated by a handful of major global players, with Smith & Nephew (S&N), Kinetic Concepts, ConvaTec and Molnlycke commanding over 60% of the total market. This market was estimated to be worth £4.4 billion in 2011, and is expected to grow by 4% per annum over the next five years. These impressive growth prospects have focused the strategies of the aforementioned wound care majors and also attracted the attention of some other significant players in the healthcare space.
Advanced wound care products are used to treat complex and hard to heal wounds such as diabetic, venous and pressure ulcers. Obesity, ageing populations and an increased prevalence of type 2 diabetes are the main drivers behind the growth in this market. Various treatments are currently available, including:
- moist wound care products, mainly dressings;
- biologics such as growth factors, skin substitutes and tissue engineered products; and
- devices that provide therapies such as negative pressure wound therapy (NPWT), oxygen, electrical stimulation and ultra sound.
The $52 billion turnover German pharmaceutical giant Bayer, which doesn’t have a dedicated wound care division, has recently announced it is keen to invest in the area, attracted by its significant growth prospects. UK-based Shire Pharmaceutical acquired Advanced BioHealing in 2011 for a whopping £450 million (33 x EBITDA!), its first foray into the advanced wound care space. This gives Shire a platform to acquire further regenerative medicine assets and potentially other complimentary wound care related assets.
More recent acquisitions have followed similar strategies with money being spent to gain market share (such as S&N’s acquisition of Kalypto Medical for its NPWT kit and its strong market position), or access new territories (ConvaTec’s acquisition of Boston Medical to penetrate LATAM for example). There remains a lack of clinical evidence as to the efficacy and cost-effectiveness of existing treatment alternatives which is becoming a bigger headache for healthcare authorities across the globe especially with recent austerity measures. This means the major players will continue to invest heavily in R&D to try and develop a new more effective treatment and meet the market needs, but alongside this there will be a significant amount of M&A in this area with the large corporates snapping up smaller, niche, businesses for their technology and to maintain market share.
Thinking outside The [Patent] Box
The mid-noughties saw a string of UK headquartered multinationals exit the UK in search of more profit friendly territories. This shift, which included a number of medical devices companies, did not go unnoticed by the UK Government, not least because large chunks of corporation tax went with them. In 2009, in a bid to stem the tide, the Government announced they would introduce an effective corporation tax rate of 10% from 1 April 2013, the Patent Box.
The Patent Box is applicable to any company liable to pay Corporation Tax with profits from exploiting patented inventions. The aim being to make the UK a more attractive location for the development and retention of IP, especially in the high tech arena. Add to this the existing R&D reliefs available to UK based corporates, and the UK Government appears to be achieving its aim of creating the most competitive tax system in the G20.
But what does this mean from an M&A perspective? I believe the Patent Box will further encourage investment from overseas corporates, who will once again see the UK as an attractive proposition. The last 18 months has seen a number of rumoured foreign takeovers of UK based devices companies, Stryker Corps bid for Corin plc and Biomet Inc’s reported interest Smith & Nephew plc, fall short. This new legislation could, and should, help push such transactions through in the future.
We are aware of a number of major corporates in the UK devices space who are interested in acquiring in the UK in the short term. Given M&A post 1 April 2013 will muddy the Patent Box water somewhat, I expect to see a flurry of activity in the first quarter of 2013.
Blade runner - the investors cut
I, like many others, have spent the past two weeks gripped by Olympic fever, revelling in the success of Team GB and witnessing some historic moments. One such moment was watching Oscar Pistorius, the double-amputee sprinter, competing alongside able bodied athletes in the 400m (in which he qualified for the semi-finals) and 4x400 metre relay.
Oscar runs on prosthetic legs called Flex-Foot Cheetah’s, named so as the J design is based on a cheetahs hind legs. These custom built, high performance carbon fibre blades are designed and manufactured by Icelandic based Ossur Hf, who produce a range of prosthetic devices, bracing and supports and compression therapy products. Also in the Ossur’s product range is the Flex-Run with Nike sole, which is designed to appeal to the wider audience for jogging and competition. This got me thinking, with Oscar now one of in the top 10 earning Olympic athletes there is much greater awareness of disabled athletes and their abilities, are we now likely to see more investment from large corporates, such as Nike, into prosthetics?
The imminent Paralympics provide the ultimate stage for manufacturers of prosthetic devices to showcase innovative new technologies and attract new customers. Having tried (and failed) to get hold of tickets myself, there is no doubt that the Paralympics will attract a huge live audience, on top of those that will watch on TV.
The companies that manufacture devices for the successful Paralympians will no doubt see a post-games sales spike (no pun intended) - perhaps this might be the catalyst for further investment in the sector?
Investment opportunities within the medical devices market
I have previously written about the exciting growth prospects of the medical devices industry as a whole, since within this broad sector there are a number of categories growing at a rapid rate of Knotts (excuse the pun).
Minimally invasive surgery (MIS), a procedure (surgical or otherwise) that is less invasive than open surgery used for the same purpose, is one such category. MIS devices are high on the agenda for a raft of the world's largest healthcare companies, who are investing heavily in developing and acquiring new technologies. US based CR Bard Inc’s 2011 acquisition of ClearStream Technologies Group plc, a developer and manufacturer of MIS devices, at almost 2.5x revenue, demonstrates an appetite to pay premium multiples for the right asset for example.
Typically patients who receive MIS procedures require shorter hospital stays, which reduces hospital costs and frees up precious bed space. Technological advancements mean that procedure quality is improved with MIS rather than sacrificed, and hence patients are also more commonly favouring MIS. It is this continued technological advancement and market demand that is driving the growth forecast to continue for the next 5 years, at least.
Surgical Innovations Group plc, the designer and manufacturer of surgeon led solutions for MIS, is at the forefront of the industry in the UK. Surgical Innovations started out in keyhole surgery, principally related to the abdominal cavity, however it is expanding its product base, transferring its innovative protected technologies to other clinical disciplines.
Definitely a market I think worth following for investors interested in the healthcare space.
Medical devices market remains buoyant
Western Europe has three of the world's five largest medical device markets; Germany, France and UK. All of these are forecast to demonstrate healthy growth over the next few years, with the UK growing quickest.
The UK market, worth an estimated £5.6 billion, is forecast to grow by around 3.5% p.a. for the next 5 years. This growth will be driven by our ageing and growing population, as well patients and clinicians demands for the latest equipment/services. However, much of this growth is driven by imports, with UK based manufacturers perceived as being unable to adjust to rapid changes in demand.
Currently the majority of imports are from the US where there is an abundance of companies producing innovative and high quality devices. However there are some growing niche providers of product in the UK such as Surgi-C (independent distributor of spinal implants which recently received an investment from ISIS) and Promedics Orthopaedic (manufacturer and distributor of specialist orthopaedic products), both having growing reputations in the domestic market and overseas.
I believe the medical device market will be an attractive space for ambitious UK businesses. There is funding appetite, growth markets, both in the UK and overseas, and the opportunity to grow and sell good businesses to large cross border players.
Veterinary market ripe for consolidation
Worth an estimated £2.6 billion and forecast to grow to over £3 billion by 2017, the UK veterinary market is a sector that I think is ripe for consolidation, particularly with no company yet holding more than 5% market share.
The overall market is growing strongly, driven by increasing numbers of pet owners (pets like property appear a national obsession) and “pet humanisation”, as owners treat pets like a member of the family.
Other markets with similar dynamics have seen significant consolidation over the last few years - these include the funerals, dentistry and a range of health and social care markets. Signs are too that the vet market is following suit. CVS (Corporate Veterinary Practice) Group plc is a well established player in the South of England, Vets 4 Pets is growing rapidly (driven by a number of ex Vision Express executives) and recently August Private Equity (who specialise in buy and build platforms) invested into a South West based business, Independent Petcare.
With further growth forecast and independent surgery owners looking to crystallise some of the value in their business before retirement, the veterinary market looks set for significant M&A activity.