OEMs Looking Outside the Box for Growth

It was the classic “bad news sandwich.”

Though it was subtle, Michael F. Mahoney used the savvy ploy several months ago while discussing his company’s fourth-quarter and full-year 2013 earnings results. He began, of course, with good news: Boston Scientific Corp.’s MedSurg business grew faster than the market last year, driven by impressive gains in neuromodulation, endoscopy, urology and women’s health.

Next came the bad news: Softness in the drug-eluting stent market prevented the company’s interventional cardiology business from turning a profit in Q4 2013. Most of Boston Scientific’s cardiovascular-related products, in fact, performed poorly last year due to a continued slump in the worldwide cardiac rhythm management (CRM) market.

Then mercifully, more good news: The Peripheral Interventions division delivered above-market growth for the eighth consecutive quarter (sales rose 7 percent in Q4 and 6 percent for the entire year). Also, the company’s balloons, stents and interventional oncology franchises performed well in the United States, Latin America and Canada.

“Overall we are really pleased with the fourth quarter, our full-year results and the momentum we are building as a company,” Mahoney, Boston Scientific’s president and CEO, told analysts. “We have numerous growth opportunities in front of us and there is significant room for improved execution and performance across many of the businesses and regions. Our aim in 2014 is to grow our core business faster than the market and to grow our operating income faster than sales. In this year we plan to continue to devote our R&D and commercial investments and deliver meaningful innovation in new products, new solutions and new commercial models.”

Some of those new solutions and models may require a hefty investment in non-core competency technologies. The stagnant CRM and large-joint markets are forcing companies like Boston Scientific, Stryker Corp., Zimmer Holdings Inc. and others to rethink their growth strategies. In many cases, these new approaches involve the infiltration of markets that traditionally have been off-limits to product- or practice-specific OEMs.

Boston Scientific and Stryker, for example, have turned to neuromodulation to offset sluggish CRM and hip and knee replacement revenue. The technology—which works by altering or moderating nerve activity through electrical stimulation or drugs—was a boon to Boston Scientific’s bottom line in 2013, boosting sales 33 percent in the fourth quarter and 24 percent for the year. It was, by far, the company’s best-performing division.

It also was a top-performing division at Stryker, which ironically, purchased Boston Scientific’s neurovascular unit in 2010 for $1.5 billion. Though it was quite a leap of faith on Stryker’s part, the procurement was a risk worth taking: Over the last three years, the company’s Neurotechnology division has outperformed all other business segments, growing sales 22 percent, according to the manufacturer’s 2013 annual report. The gain easily bypassed the 19.8 percent increase posted by trauma and extremities during the same period, and handily transcended the 3.6 percent and 4.1 percent respective spikes in hip and knee sales.

Medtronic Inc.’s neuromodulation division—one of the industry’s largest—has thrived as well, growing 17.4 percent in fiscal 2013 (ended April 26) and 11.7 percent thus far in fiscal 2014 (through Jan. 24). Total neuromodulation revenue rose 7 percent in the fiscal third quarter, driven by double-digit growth in pain stimulation products and the launch of the company’s SureScan MRI spinal cord stimulation system, a device with percutaneous leads that help determine whether patients’ implantable systems are safe for magnetic resonance imaging.

Prospects are high for a similar stellar performance in Q4, given the early April release of a study that found Medtronic’s spinal cord stimulators, in combination with physical therapy, helped three paraplegic patients move their limbs voluntarily—years after their initial paralyzing injuries.
“The implications of this study for the entire field are quite profound,” noted Susan Howley, executive vice president for research at the Christopher & Dana Reeve Foundation in Short Hills, N.J. “We can now envision a day where epidural stimulation might be part of a cocktail of therapies used to treat paralysis.”

Indeed, neuromodulation has become a viable growth alternative for medtech OEMs dependent on saturated markets for profits. But it’s not the only option available.

Smith & Nephew plc has offset flaccid hip and knee joint revenue with sizable gains in advanced wound management (AWM) and sports medicine. Last year, the United Kingdom-based orthopedic behemoth grew its sports medicine revenue by 7 percent (11 percent in the fourth quarter alone) and its AWM proceeds by 11 percent on an underlying basis. The AWM gain was driven mostly by robust sales in the United States and emerging/international markets (up 22 percent and 20 percent, respectively) and a confounding 47 percent hike in advanced wound bioactive sales.

“Sports medicine [experienced] the best quarter we have ever made,” CEO Olivier Bohuon told analysts during an early February conference call. “It’s a huge growth. There are tremendous dynamics driven by products and an organization focused on what matters. The portfolio is the best we’ve ever had in sports medicine. Thanks to the investment that we have done, we start to see the biocomposite materials like the new Healicoil product that we have launched.”

Smith and Nephew’s joint revenue, meanwhile, maintained its slump. Knee implant sales were flat and hip revenue fell 1 percent.