In an era when medical device companies face tough competition and pricing pressure in developed markets like the U.S. and Europe, emerging markets are a hot topic. Industry leaders Stryker (NYSE:SYK) and Medtronic (NYSE:MDT) have made big news in the past two years by scoring huge acquisitions in China, but rivals are quickly catching up.
Covidien's (UNKNOWN:COV.DL) the latest big name in medical devices to make a move in the emerging markets, as the company announced two acquisitions earlier this week -- one in Brazil and one in China. Covidien's stock has soared lately, up 31% over the past year, but can the company's latest moves in emerging and innovative markets pave the way for an even brighter future for investors?
Covidien looks to the future
Covidien's been on the acquisitions train lately even before this week's events. The company's purchase of innovative endoscopic device maker Given Imaging (UNKNOWN:UNKNOWN) in December for $860 million marked an aggressive foray into a new alternative to endoscopy. Given's product, the PillCam, is already available in more than 75 countries and has performed well in its young product life, giving Covidien some much-needed international optimism -- and it doubled down on its global market expansion this week.
Covidien's latest purchase came with an eye toward manufacturing. The company purchased Brazilian electrosurgical manufacturer WEM Equipamentos Eletrônicos, and launched a joint venture with Chinese stapler product manufacturer Changzhou Kangdi Medical Stapler Co. This isn't a huge deal of the type that will give Covidien an immediate boost to its 2014 earnings. However, it's a big move towards increasing the company's footprint in two of the world's highest-potential health care markets.
The firm's been gaining ground in emerging markets lately even as its performance has slowed in the U.S. While Covidien's sales in the U.S., its largest market by far, fell flat during the 2013 fiscal year, Asia-Pacific sales jumped by an operational growth of 15%. Operational growth in the Americas outside of the U.S. surged by 12% last year, and while these two geographical areas still are small pieces of Covidien's global profile, the company's increasing foothold in them bodes well for a future in which health care needs are poised to explode in places like China and other developing economies.
The huge opportunities abroad
Just what kind of potential are we talking about? The U.S. Commerce Department already estimates that China is the world's second-largest medical equipment market, with average medical device market growth of between 15% and 20% in recent years. Considering that domestic Chinese health care companies have yet to take off on a wide scale in the country, Covidien and other device leaders have an unparalleled opportunity to stake out a dominant claim in this growing market. China's aging population, urban growth, and expanding middle class should only help its health care market explode over the next few decades, so the time is now for Covidien to cement its footprint here.
Stryker and Medtronic certainly have already. Medtronic's deal to buy Chinese orthopedics device maker Kanghui Holdings back in 2012 for more than $800 million gave the company a solid route into the market. Medtronic's goal is to generate 20% of its total sales from emerging markets by 2016, and considering how American and European markets have been under pressure lately, it's a solid long-term plan for both the company and shareholders. Stryker's own $764 million acquisition of Trauson Holdings keeps it in contention for medical device leadership in China. Covidien's buy of Changzhou Kangdi should help it expand its full portfolio of products into the country just as similar acquisitions helped its larger competitors, while giving the company a chance to get familiar with Beijing's tightening health care rules and regulations.
Brazil's still getting its feet wet in the medical device market in comparison to China's colossal opportunity, but make no mistake: Latin America's largest market is no less brimming with potential for Covidien and other firms. While the Brazilian government hasn't hid its preference for locally made medical products over foreign-made ones, this still is a medical device market that research firm HIS expects to grow by 65% between 2012 and 2020 to more than $13 billion. That's more than enough opportunity to go around for the top firms in the industry, and for Covidien, getting in as growth continues to march higher is the right move to boosting revenue in the Americas outside the U.S.
Emerging markets for the long-term investors
Covidien's two low-key emerging market moves might not be the same flashy acquisitions that its Given Imaging buy was, but they're the exact steps that this company and smart investors need to capitalize on the emerging markets boom. Even though Brazil and China recently backed off of the astronomical growth rates projected in earlier years, these are still two of the strongest developing economies in the world -- and huge health care opportunities for forward-thinking investors. Firms like Covidien, Stryker, and Medtronic cementing their foothold in emerging markets today will reap the benefits down the line, and long-term investors patient enough to wait for these moves to pan out won't be disappointed.