Biotech Values

[DewDiligence]

Are Healthcare Companies Waving The White Flag?

[Although nominally about the BEC buyout, this piece applies generally to the medical-device and medical-disposables industries.]

http://blogs.forbes.com/davidwhelan/2011/02/07/danaher-acquires-beckman-coulter-are-health-care-companies-waving-the-white-flag-2

›Feb. 7 2011
By David Whelan

As a vertical market, are medical devices and diagnostics still in growth mode? Or are they just another prosaic industrial category like elevators, air conditioners and light bulbs?

More the latter, is one way to read the deal announced today that Danaher is buying Beckman Coulter for $6.8 billion.

Danaher is a secretive DC-based conglomerate that acts much like a private equity fund. It’s not the prototypical growth investor or strategic acquirer. The conglomerate owns subsidiaries that make water treatment systems, bar coding devices and industrial thermometers, among hundreds of other products.

Beckman Coulter, based in Brea, Calif., makes medical diagnostic instruments like centrifuges for hospital laboratories. The struggling company’s stock hasn’t moved in five years and it’s recently had some quality control problems with its test to detect a heart attack.

The zeitgeist for medical manufacturers is not good.

Device-makers are having a terrible time getting new products that might give them pricing power approved by the FDA. Health reform adds a new 2.3% excise tax on many of the companies (though not lab equipment). And there’s demographic evidence that the number of baby boomers whose creaky knees and bad hearts fueled a decade of explosive growth for many medical manufacturers has peaked. Many of those patients are close to or already becoming cost-controlled Medicare patients.

Health reform points to a world of centralized rationing through Medicare and a return to capitated payments by private payers. This is not the time to be selling fancy new hospital equipment. From a societal standpoint, a slowdown in spending may not be a bad thing.

Investors should take note. Consider what Barclays analyst Anthony Butler wrote about the deal: “[Danaher] is confident of being able to restore the business to its typical 5-7% revenue growth rate in the medium term.” That’s not exactly Google-like growth. To be sure, there are other diagnostics makers like Life Technologies and Illumina, that have been hot growth stocks. But for most health care investors, an outcome like Beckman Coulter’s portends a far less exciting future.‹