Cardiovascular Giants Announce Layoffs in Select Divisions, Amid Growth or Expansion in Others
While companies such as Boston Scientific Corp., Johnson & Johnson (J&J) and Medtronic Inc. compete head to head in some markets, they do share some common frustrations, such as dealing with the challenging market conditions for products such as implantable defibrillators and heart stents.
The roughly $200 billion U.S. medical device sector has felt an impact as economic turmoil slowed patient traffic in hospitals, tougher hospital bargaining squeezes product prices, and older legacy products are no longer bringing in the margins they once were. The race is on for growth in sales and market share through new product development—usually as a result of strategic acquisitions.
Boston Scientific recently has been discussing layoffs. Medronic announced last month that it is planning to cut up to 2,000 jobs in its current fiscal quarter in a cost-cutting move, and Johnson & Johnson’s stent-making Cordis unit recently confirmed it is reducing the size of its U.S. sales force.
Here’s a look at how these three companies have planned to resize and reshape to stay competitive.
Medtronic
Fiscal third-quarter earnings climbed 11 percent (in part thanks to lower taxes, company executives said), but officials at Minneapolis, Minn.-based Medtronic Inc. said they plan to reduce the company’s workforce by 4-5 percent in the current quarter—roughly 1,500 to 2,000 jobs—due to slower growth in some of the devicemarkets the company serves.
“It could have an impact in terms of not needing as many employees in certain areas,” CEO Bill Hawkins said in an interview with The Wall Street Journal.
The cuts will be company-wide, with a primary focus on administrative, back-office costs. Executives provided limited details about expected costs, benefits or targeted areas, but aim to “balance operations” so that they are “in line with market conditions.”
In the recent quarter, Medtronic’s business for heart-rhythm devices shrank slightly, while growth in spinal devices improved, though it remains just below the overall company growth rate. Heart rhythm and orthopedics account for the bulk of Medtronic’s sales. Company officials claim there are several new products in the pipeline to help the firm combat market-share challenges and pressure on product prices as a result of tougher bargaining from hospitals. But growth rates for top markets where Medtronic operates remain sluggish and continue to challenge the whole industry.
Hawkins announced plans to retire at the end of the fiscal year in late April. Industry analysts and even some company insiders believe his departure could bring a more competitive shakeup of the company’s product portfolio. Some expect more cost-cutting from a new chief executive.
Medtronic has added to its product pipeline through smaller-scale acquisitions, such as last year’s acquisition of heart valve maker ATS Medical for $370 million. In addition, Medtronic has been planning to divest its Physio-Control external defibrillator business for four years. The sale was postponed due to quality issues, but Hawkins recently confirmed that plans for the sale are on again.
Medtronic reported earnings for the quarter ended Jan. 28 of $924 million, or 86 cents a share, up from $831 million, or 75 cents a share, a year ago. Sales of $3.96 billion were up 2.9 percent, compared withanalysts’ forecast for $3.97 billion.
Heart-rhythm sales declined 2 percent to $1.2 billion, reflecting lower sales of both pacemakers and defibrillators. The overall market for those devices remains soft, but Medtronic is expecting a benefit from pacemakers the U.S. Food and Drug Administration (FDA) recently cleared that are designed to be safe in MRI scans. The company continues to wait for a key, new defibrillator product, but it remains held back by a warning letter the FDA issued the company in late 2009 due to quality-systems issues. Hawkins told the WSJ that he remains optimistic the letter would get resolved “sooner rather than later.”
Sales for the Medtronic’s spinal and biologics unit rose 2.3 percent to $861 million, marking an improvement after declines in recent quarters. Medtronic is also rolling out new products in that business, although the overall market has been pressured by price declines and insurers pushing back against certain procedures.
Johnson & Johnson
Johnson & Johnson executives are calling it a “total-account approach” to purchasing decisions. But industry analysts believe the sales force shakeup within J&J’s Cordis division is really an attempt by the healthcare giant to reverse sliding sales and regain market share.
The New Brunswick, N.J.-based company announced layoffs last month to an unspecified number of salespeople and said it is merging two separate sales forces within the Cordis division, which perhaps is best known for its cardiology products (the Cypher heart stent is one of its most prominent devices). The unit also sells diagnostic devices as well as a variety of endovascular products used in minimally invasive surgery, such as catheters, guidewires and related accessories.
“The change resulted in the elimination of some positions in our U.S. field sales organization, but we are continuing to call on all current accounts,” J&J spokeswoman Sandra Pound told Reuters. She declined to disclose the precise number of layoffs.
On Feb. 10, the company merged separate cardiology and endovascular sales teams into a single Cordis Vascular sales force, Pound said. The news sales force, she added, would be better equipped to offer a wide range of products to doctors, hospitals, purchasing managers and administrators of catheter labs that implant stents in patients suffering from heart disease. “This reflects the changing nature of the marketplace…to a total-account approach,” Pound told Reuters, noting that such a move enables the company to approach various parties involved in purchasing decisions.
However, Gabelli & Co. analyst Jeff Jonas said he believes the sales force merger is little more than an attempt by J&J to boost sales and regain market share lost in recent years to Abbott Laboratories Inc. as that firm’s newer Xience heart stent became more popular with doctors and patients. Cordis sales fell nearly 10 percent in the fourth quarter of 2010 to $629 million, according to the company’s latest financial results. The unit was J&J’s worst-performing division in the quarter, with international sales plummeting 16.2 percent to $383 million.
J&J has developed a new heart stent, called NEVO, but the device has had numerous setbacks and may not get to the market for another two to three years. “By then,” Jonas said, “it will be difficult for J&J to break back in (to the stent market).”
Boston Scientific
Boston Scientific Corp. is conducting what company officials are calling “focused workforce reductions” as the firm continues ongoing restructuring and cost-cutting efforts and deals with sluggish market conditions.
The Natick, Mass., company declined to offer specifics on the job cuts and was unable to immediately say whether they add to, or are part of, reductions announced last year. Boston Scientific launched a sweeping restructuring program a year ago that the company said would include eliminating up to 1,300 non-manufacturing jobs, equaling about 8-10 percent of that specific workforce, plus combining the combining the company’s various heart-device businesses into a single unit.
“To achieve its strategic objectives, the company will be conducting focused workforce reductions,” Boston Scientific said in an emailed statement. “While difficult, these reductions are in the best interest of the company and essential to meeting long-term goals. Although the company does not disclose details regarding affected personnel, all impacted employees will be treated fairly and provided with transitional support.”
On a recent earnings call, Elliott said ongoing pricing pressure was the company’s “greatest challenge” and said continued weakness in elective procedures wasanother top challenge.
To expand its new-product offering Boston Scientific Corp. recently completed its buyout of Atritech Inc., a Minnesota-based device company. The acquisition, first announced in January, called for Boston Scientific to pay $100 million for the all outstanding shares of Atritech stock, and up to $275 million more based on Atritech revenue and regulatory achievements through 2015. Atritech makes a device called the Watchman, which is meant to take the place of anticoagulant drugs to treat patients with atrial fibrillation who are prone to developing blood clots in an area of the heart known as the left atrial appendage. The device has CE mark approval in the European Union but has not yet gained approval by the U.S. Food and Drug Administration, which likely is one of the milestones of the deal. A news release from Boston Scientific indicated that the Watchman was found to bring a 38 percent risk reduction of stroke, cardiovascular death and systemic embolism, compared to anticoagulants.
In January, Boston Scientific bought Intelect Medical Inc., a Boston, Mass.-based company developing technologies for deep brain stimulation, for $60 million in cash.
Venture Capital Firms Swap Sterigenics Ownership
Buyout firm Silverfleet Capital is selling selling Sterigenics International to GTCR, a U.S. private-equity firm, for $675 million.
Sterigenics, based in Oak Brook, Ill., is one of the world’s largest providers of outsourced sterilization services for medical equipment. The deal is expected to close by the second quarter. Healthcare merger deals have continued throughout the downturn, as companies consolidate to capture market share.
Silverfleet and PPM America Capital Partners, together with the management team of Sterigenics, acquired the company in 2004 for $311.5 million from Belgium’s Ion Beam Applications. Since then, the company has built two new facilities in Shanghai, China, a new facility in Wiesbaden, Germany, and expanded eight other facilities at a cost of more than $100 million.
Silverfleet Managing Partner Neil MacDougall, who also is a director at Sterigenics, said the firm had “grown substantially during the six-year period that we have been investors.”
MacDougall said the growth was a result of new service centers in China and Germany, and adding processing capacity to existing locations in the United States, France, Belgium and the United Kingdom.
Chicago-based GTCR is a 30-year-old firm that focuses on financial services and technology, healthcare, and information services and technology. It has invested more than $8 billion in more than 200 firms.
TechDevice Purchased by Private Equity Firm
Inverness Graham Investments, a private equity firm based in suburban Philadelphia, Pa., purchased TechDevice in Watertown, Mass.
TechDevice is an outsource partner developing and manufacturing sophisticated catheters and components, including balloons, coils, ground cores, and finished guidewires across a broad range of endosurgical and interventional applications.
“TechDevice is the initial acquisition within Inverness Graham’s Medical Device ‘Outsourced Manufacturing’ platform-build initiative. Our intention is to combine TechDevice’s established manufacturing and engineering expertise with the differentiated capabilities of select companies to create a leading outsource provider of catheter-centric medical devices and components,” said Scott Kehoe, managing principal of Inverness Graham.
TechDevice’s vice president of Operations, Michael Brown, said TechDevice is benefiting from an aging population, the explosive growth of minimally invasive surgical techniques and the expanding outsourcing of medical devices by medical device OEMs, which has created a “perfect storm” to drive demand.
“We will leverage our comprehensive manufacturing and engineering capabilities, scalable quality management systems, and experienced team to build an industry leader focused on the design and manufacture of complex medical devices and components,” Brown said.
Inverness Graham is bringing in industry veteran Ross Magladry (former chief operating officer of Venusa and vice president of Business Development at Medegen) to be CEO of TechDevice.
“I observed firsthand Inverness’s ability to execute a medical-platform build strategy with their highly successful investment in ExtruMed, a market-leading provider of precision tubing solutions to the medical device industry,” Graham said.
Terms of the deal were not disclosed.
SMC Opens its Own Facilityin Costa Rica
SMC Ltd., has joined a growing number of medical device manufacturers to open a facility in Costa Rica. The Somerset, Wisc.-based firm has been part of a joint venture in the country for about 10 years, but is set to open the doors of its own facility.
The company broke ground on the building in August, according to Bob Stoesser, vice president and general manager of Western and Central America. The first phase of the facility will be up and running in April and will be 20,000 square feet. Company officials aren’t stopping for too long before tackling the next steps. SMC already is planning on expansion. Two additional phases, 20,000 and 50,000 square feet, respectively, are planned “in the near future.”
“We looked all over the country for the best location,” Stoesser told Medical Product Outsourcing. They chose the Coyol free trade zone located in San Jose. “It’s proximity to the airport and other key logistics made it the best spot.”
The facility—which goes beyond component and subassembly manufacturing (which currently is what SMC does in Costa Rica)—will offer custom molding, assembly, packaging and full supply chain management onsite.
“We’re now able to offer our customers a state-of-the-art facility for clean room device assembly and testing in Costa Rica,” Stoesser added, noting that the new location gives the company flexibility to support the needs of its U.S.-based customers with facilities in Central America as well as provide a low-cost country option for higher labor projects serving the U.S. market.”
In addition to Wisconsin, SMC Ltd. has locations in California, Massachusetts, Ohio and India—more than 500,000 square feet of medical manufacturing. The company is a contract manufacturer offering design and molding services and finished devices for the medical and pharmaceutical industries.
Thermo Fisher Divests Units for Nearly $1 Billion
Thermo Fisher Scientific Inc. has inked deals to sell its Athena Diagnostics and Lancaster Laboratories businesses for a combined $940 million.
The move comes as the Waltham, Mass.-based laboratory-supply company is in the middle of a $2.1 billion buyout of laboratory-equipment maker Dionex Corp. Thermo Fisher sells products ranging from analytical instruments to lab equipment and services to labs and research operations.
Thermo agreed to sell Athena to Quest Diagnostics Inc. in Madison, N.J., for$740 million.
Quest’s CEO Surya N. Mohapatra said the deal would establish his firm as “the clear leader” in esoteric and genetic testing for neurology. The deal is expected to add to Quest earnings starting next year.
“We expect to further accelerate Athena’s growth by supplementing its specialty sales organization with Quest Diagnostics’ extensive sales force, to sell into our broader customer base,” said Mohapatra. “Strategically, we believe Athena will be the principal beneficiary of the accelerated demand for diagnostic testing as new and earlier therapies are developed for neurological conditions such as Alzheimer’s disease.”
Thermo sold Lancaster Laboratories to Brussels-based Eurofins Scientific SE for $200 million. Lancaster and Eurofins are contract-testing laboratories that serve drugmakers and environmental-sciences technology companies.
Thermo Fisher’s President and CEO Marc N. Casper said the deals, which are expected to close in the second quarter, will “generate significant proceeds that we can redeploy to create shareholder value.”
Thermo’s 2011 guidance didn’t include expected impacts from the deals. The company said that assuming the Dionex acquisition also closes in the second quarter, the two divestitures, Dionex and the stock buyback, could add five cents a share to Thermo’s 2011 results. The company’s board also approved a $750 millionstock buyback.
“Athena and Lancaster have performed very well within our company and we believe that these strategic buyers will offer them even greater opportunities for growth in the long term,” said Casper. ”The transactions position both businesses in companies that are closely aligned with the unique contract laboratory services they provide and, at the same, will generate significant proceeds that we can redeploy to create shareholder value.”