Monday, August 06, 2007

Medtronic/Kyphon: Averting a Shake-Up in Spine...For Now

If Johnson & Johnson’s DePuy Spine and Abbott Spine weren’t overjoyed by Medtronic Sofamor Danek’s recent $3.9 billion acquisition of Kyphon, those two members of the spine market’s Big 3 at least heaved a big sigh of relief knowing that the market leader had eliminated the company that was emerging as a potentially significant competitor to the trio’s domination of this product sector. Indeed, Kyphon had already begun to flex its newfound muscle when it out-bid MSD and Abbott to acquire St. Francis Medical Technologies for $725 million last year—a deal that shocked the spine market as much for whom the acquirer was as for its huge sticker price.

Kyphon’s rapid recent growth and willingness to pay a premium price to acquire new technology marked perhaps the largest shock waves threatening to disrupt the status quo in the spinal market, where small companies have had little choice other than the Big 3 when looking for potential acquirers. Recently, however, that sector has been undergoing a bit of a shake-up with the major companies losing market share; MSD, in particular, has seen its market-leading position drop from 48% to 40%. These losses have largely come at the hands of the many burgeoning spine start-ups. Analysts now estimate there are as many as 150 spinal device companies, compared with one-third that number just a few years ago.

The start-up company growth and recent deal activity in this sector appear to belie the concerns that interest in the spine market peaked. A panel of investors and entrepreneurs at Windhover’s In Spine and Orthopedics conference last December (excerpted in IN VIVO) was quite bullish about the spine sector. Indeed, rather than entering a period of slower growth and retrenchment or consolidation, this group of spine industry veterans predicted that a number of product, market, and clinical forces are coming together to drive significant future growth, with one panelist suggesting that the current $4 billion spine market will more than triple in the next few years.

The factors contributing to this perfect storm in spine include innovations in diagnostics, particularly new imaging technologies, along with new implant designs, and a patient population growing not just from overall aging but from younger patients looking to take advantage of new treatment options. Clinically, the spine market is characterized by variety of conditions that can be treated by numerous therapeutic approaches; doctors are not wedded to any single therapy and continue to explore different options, resulting in a fertile environment for companies with innovative technology.

Indeed, with a clinical community receptive to new therapeutic options and a growing patient population, huge deals like Kyphon and St. Francis are likely to spur increased entrepreneurial and investor interest in spine, creating an opportunity for the growth of new mid-cap companies who themselves will be positioned to be potential acquirers, leaving the IN VIVO Blog to ask: Who will be the next Kyphon?

1 comment:

David Hamilton said...

Interesting analysis. I've certainly been seeing a lot of activity in the spinal-device area over at VB Life Sciences, but hadn't yet put together what it all means. The only quibble I'd raise is that if market share at the Big Three is shrinking while innovation proceeds apace among startups, doesn't that suggest that M&A activity will increase again, just as it has among biotechs? It's awfully hard for smaller companies to compete against big, cash-rich incumbents, especially ones who can make a buyout offer the startup can't refuse.