Emerging Markets Heat Up for Device Makers

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With the medical device industry struggling for growth, leading companies have had to look elsewhere to power up stagnating sales. That's gone beyond expanding their product lines: Some of the best names in the business have looked across the oceans for future growth, where lucrative and untapped emerging markets become tomorrow's medical device battlefields.

British device maker Smith & Nephew (NYSE: SNN  ) is the latest company to join the emerging markets push. The company announced it agreed to buy Indian trauma device maker Adler Mediequip, which -- along with the buyout of a Brazilian distribution partner -- totaled around $70 million. What does this mean for your investment and the medical device industry's emerging markets momentum?

Smith & Nephew's well-timed move
Smith & Nephew announced the news on the back of a disappointing earnings report on Thursday. The company's sales slid less than 1%, but that fall is a trend that we've seen plenty of during this earnings season. Medical device companies have had a hard time finding revenue traction with pricing pressures in the industry, although orthopedics-centered firms such as Smith & Nephew have generally done better than the competition.

Purchasing Adler Mediequip is a smart move when taking a look at what's working for Smith & Nephew. The cheap price tag of $70 million will hardly upset the company's finances, and making an entry into a high-growth market such as India -- a country where the medical device industry is expected to grow at a double-digit clip to $10 billion by early in the next decade -- is an important step forward. With the European market in free-fall, Smith & Nephew will have to expand geographically in more promising markets in the near future.

Smith & Nephew's trauma business has also done well lately. The segment is only a minor part of the company's portfolio, and generated less than 15% of total revenue last year. Still, the trauma business grew sales by 3% last year, and pushing into emerging markets should keep that growth going.

The industry's way of the future
Emerging market trauma buys isn't a new trend. Smith & Nephew follows in the footsteps of Stryker (NYSE: SYK  ) , its fellow orthopedics player that spent $764 million on purchasing China's largest trauma business, Trauson Holdings, back in January. Zimmer Holdings (UNKNOWN: ZMH.DL  ) also took a step into China's orthopedics market, purchasing Chinese firm Montagne back in 2010 to push its own emerging market expansion.

As advanced markets mature, most big players in the industry will have to expand geographically. Orthopedics is hardly the only business feeling the heat from leading economies. Cardiovascular businesses have also been under fire lately, and Medtronic (NYSE: MDT  ) , the biggest pure player in the medical device industry, has started its own push to expand around the globe. Medtronic hopes to generate 20% of total sales from emerging markets by 2016, and the company's $816 million acquisition of Chinese orthopedics maker Kanghui Holdings last year is a step in the right direction.

Smith & Nephew's purchase of Adler Mediequip is hardly on the scale of Medtronic and Stryker's purchases, but it's a necessary move that investors should love. This is one company that can't afford to sit back and rely on advanced economies for future sales -- not with Europe unable to dig its way out of recessions and the U.S. still on track for slow growth. Emerging markets are the future, and Smith & Nephew took its first step toward building a brighter tomorrow for investors with this smart move.

The right path for investors?
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9/29/2016 4:02 PM
SNN $32.37 Down -0.87 -2.62%
Smith and Nephew CAPS Rating: ****
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SYK $115.70 Down -1.61 -1.37%
Stryker CAPS Rating: *****
ZMH.DL $0.00 Down +0.00 +0.00%
Zimmer Holdings CAPS Rating: ****