I didn’t write about Medtronics’ $3.9 billion acquisition of Kyphon when it was announced almost two weeks ago, largely because it seemed to be a pretty straightforward merger of two big public companies with relatively few implications for the venture medical-device business.
The good folks at the In Vivo Blog beg to differ, and weighed in earlier this week with a sharp analysis of the deal. To summarize, Kyphon was seen as an upstart in the spinal-device market — a venture firm that grew up, went public, and appeared on the verge of threatening the hegemony of the Big Three device makers by snapping up promising little companies before they could. (In Vivo doesn’t name the Big Three, but they have to be Medtronic, J&J and Boston Scientific.) Yet Medtronics’ decision to take out Kyphon may do little to stem a new wave of competition from spinal-device startups.
As In Vivo tells it:
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…. 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….
[R]ather 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.
We’ve certainly seen no shortage of spinal-device companies getting funded here at VentureBeat Life Sciences over the past few months — a group that includes Active Implants, Amedica, Gentis, Interventional Spine, Orthopedic Development and Pegasus Biologics, among others. (I’m sure I missed a few.) There’s certainly no shortage of innovation in the space, even though it’s far from certain that most — or even many — of these innovative techniques will end up being safe and effective. (There are also plenty of spine-related device horror stories out there as well, with the tale of J&J’s Charite spinal-disc replacement perhaps chief among them.)
In any case, there’s no question that hegemony is boring, and the idea that one or more of these startups could hit it big and keep shaking things up is certainly appealing. On the other hand, if market share at the Big Three is shrinking while innovation proceeds apace among startups, that may just cause the big companies to step up their M&A activity while they can — perhaps reaching even further down to earlier-stage companies, the same way Big Pharma has done recently in biotech. As it turns out, it’s awfully hard for smaller companies to compete against big, cash-rich incumbents, especially ones who can make a buyout offer the startups can’t refuse. As Kyphon itself ultimately realized, I guess.
