Zacks Industry Outlook Highlights: Stryker, Smith & Nephew, Wright Medical, Tornier and Medtronic

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Dec 09, 2014, 09:30 ET

CHICAGO, Dec. 9, 2014 /PRNewswire/ -- Today, Zacks Equity Research discusses the Medical Tech (part 2), including Stryker Corp. (NYSE:SYK-Free Report), Smith & Nephew plc (NYSE:SNN-Free Report), Wright Medical (Nasdaq:WMGI-Free Report), Tornier N.V. (Nasdaq:TRNX-Free Report) and Medtronic (NYSE:MDT-Free Report).

Industry: Medical Tech (part 2)

Link: http://www.zacks.com/commentary/35877/medtech-ma-deals-abound-emerging-markets-promising

While merger & acquisition (M&A) activities are scaling a seven-year high, the U.S. government's crackdown on tax-dodging transactions has created a ferment in the medical device equity market worldwide. That said, the industry is looking for some improvement in its prospects in the wake of the midterm elections.

This positive piece of news was followed by the speculation on MedTech major Stryker Corp. (NYSE:SYK-Free Report) considering a likely bid of $15 billion to buy London-based orthopedic major Smith & Nephew plc (NYSE:SNN-Free Report). Steris also announced plans to move its corporate headquarters to U.K., reportedly to lower its tax burden. The company has offered to buy U.K.-based outsourced sterilization services provider Synergy Health plc for $1.9 billion in cash and stock.

On the same path, global orthopedic device maker Wright Medical (Nasdaq:WMGI-Free Report) has entered into a definitive merger agreement with the Netherlands-based medical device company Tornier N.V. (Nasdaq:TRNX-Free Report) for $3.3 billion.

Last week, the Federal Trade Commission (FTC) has approved the pending $43 billion acquisition of Irish medical device major Covidien by Medtronic (NYSE:MDT-Free Report), consequently letting the latter enjoy the fruits of a lower tax rate overseas. Countering the series of corporate inversions in 2014, the U.S. Treasury Department has recently come out with a set of anti-inversion rules to make these overseas acquisitions less attractive. Apart from the controversial cross border acquisition activity, other M&A deals continued unabated in the MedTech corner this season.

Emerging Market Opportunities

Although the U.S. still holds the leading position with almost one-third of global market share, a gradual slowdown in the mature markets due to a number of lingering headwinds are forcing MedTech companies to look for opportunities in the developing world. Currently, with a growth rate in the low single digits in the developed markets of the U.S., Europe and Japan, large-cap medical device makers are increasingly looking to invest in the high-growth emerging regions.

Accordingly, emerging economies like Brazil, Russia, India and China (BRICs) as well as Turkey, Mexico, Malaysia, South Africa, South Korea and the Czech Republic are fast coming up in the medical devices space. An aging population, increasing wealth, government focus on health care infrastructure and expansion of medical insurance coverage make these markets a happy hunting ground for global medical device players.

Expansion in emerging markets, especially those with double-digit annual growth rates, represents one of the best potential avenues for growth going into 2015 and beyond.

Abbott continues to lead the trend with about 50% of sales coming in from the emerging market, which were up 13.8% year over year on a reported basis during the third quarter 2014. The company's growth strategy includes building leadership positions in key emerging geographies across its wide portfolio. For Medtronic, emerging market grew a robust 12% (at CER) in its second quarter of fiscal 2015, representing more than 13% of the company's total sales mix.

In the face of flattening or declining sales growth in the developed markets, Boston Scientific achieved 19% emerging markets growth in the third quarter of 2014. Boston Scientific is currently targeting emerging market revenue contribution of almost 15% in 2017. Stryker, with strong double-digit sales growth coming from emerging markets in the third quarter of 2014, is expected to grow the market share further in key geographies like China and India.

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