In Orthopedics, Consolidation's Aftershocks

Following significant consolidation in 1998, orthopedic industry executives are bracing for more deal-making. A handful of deals in 1999 suggest continued consolidation, but the modesty of the deals also implies that consolidation is unlikely at such an aggressive pace.

Even after the tremendous consolidation of 1998, many orthopedic industry executives are betting on more. The big deals will likely involve Bristol-Myers Squibb Co. subsidiary Zimmer Inc., widely rumored to be on the block, and either Smith & Nephew PLC or Sulzer Medica Ltd. , two companies in the middle of the market-share pack who have made clear their intentions to grow their orthopedic businesses, particularly in total joints. Another possible consolidation player: spinal company Surgical Dynamics Inc. , now a Tyco International Ltd. business after that company's acquisition last year of United States Surgical Corp. [See Deal]. Tyco officials have hinted that they will either have to significantly increase their presence in orthopedics or get out altogether, because holding on with a single orthopedic business isn't viable.

Until those bigger deals take place, however, what deal-making occurs in orthopedics is likely to be small, such as Encore Medical Corp. 's acquisition of Biodynamic Technologies Inc. [See Deal]. All three deals suggest that companies are beginning to position themselves for the kinds of product-line breadth and critical mass plays implicit in further consolidation.

But by their very nature, these deals also underscore the fact that significant consolidation in orthopedics—on the scale that we saw last year—is unlikely, if only because there aren't that many candidates to consolidate. A sale of Zimmer Inc. aside, there doesn't seem to be many other big plays on the horizon. Smaller deals help individual companies, but hardly create ripples throughout the rest of the industry.

The Stratec-Synthes deal is a case in point. It was important, particularly in the trauma and spine segments of the market, and industry executives widely note that the two companies fit nicely together. Indeed, the merger represents a kind of homecoming for the two. Many years ago, Synthes and Stratec were part of the same organization before it split into three parts. (The other leg of the stool: Switzerland-based Mathys Medical Ltd. ) This deal brings back together two of the three and, importantly, the two biggest and most successful companies.

In fact, the Stratec-Synthes deal seems almost to guarantee further consolidation: some industry executives wonder whether it's simply a matter of time before some company—perhaps even the newly merged Stratec-Synthes—takes on Mathys.

But in and of itself, the deal will have little impact on the total joint market and not much more on the spinal market, particularly following the frantic deal-making of 1998. Last year all four of the top four spinal companies changed ownership, acquired either by another orthopedics company—as in Sulzer's acquisition of Spine-Tech Inc.[See Deal].

Moreover, the Stratec-Synthes deal can hardly be seen as a response to last year's consolidation wave, if only because the two companies had reportedly been talking for years. In fact, a contrarian view is emerging in some circles of the industry, holding that consolidation is neither inevitable or even necessary, and that if it comes, it's likely to be much less dramatic than last year's deals have led some to believe (See "Biomet's Contrarian Conservatism," p. 48).

PULSE 5