At the recent Symposium on Advanced Wound Care (SAWC Spring 2019), there were several interesting developments and companies to watch (scroll down for a video interview we did with one of them). But without a doubt, the major advanced wound care (AWC) industry theme in the first half of 2019 has been consolidation. Given the increasing size and frequency of recent deals in the sector, it also may be time to discuss if, when, and how executives and investors might potentially begin to look at companies’ handling of post-M&A integrations as a core competency–and perhaps even an opportunity to develop new competitive advantages?
Recent corporate activity
To be clear, M&A activity in this space has been ramping up for years. To recap just a few:
2017:
- Integra Life (IART) Science’s acquisition of Derma Sciences
- Organogenesis’ (ORGO) acquisition of NuTech Medical
- Essity (ESSYY)’s acquisition of BSN Medical
2018:
- Acelity’s acquisition of Crawford Healthcare
- Mölnlycke Health Care’s acquisition of SastoMed
- Urgo Medical’s acquisition of SteadMed Medical
Yet both the quantity and scale of activity in just the fist half of 2019 alone is essentially unprecedented. At least six deals, three of them mid-to-large (by AWC industry standards, not necessarily when compared to medtech or pharma overall), and all of them strategic, occurred:
1H 2019:
- 3M Company’s (MMM) acquisition of Acelity (KCI + Systagenix) for $6.7 billion including assumption of $2.4 billion in debt (expected to go through later this year)
- Smith & Nephew’s (SNN) acquisitions of Osiris Therapeutics for $660 million and Leaf Healthcare for an undisclosed amount
- Misonix’s (MSON) acquisition of Solsys Medical for $97 million in stock, plus assumption of $20 million in debt
- Mölnlycke Health Care’s acquisition of M&J Airlaid
- Urgo Medical’s acquisition of Realm Therapeutics (Vashe)
Perspective and significance
The 3M-Acelity and S&N-Osisis deals are both considered very large relative to historical activity in the AWC sector. In particular, 3M and Acelity were both “Top 6” AWC players before the acquisition, and the combined entity will command a very significant scale, particularly in the US (about half of the global AWC market), but also in the rest of the world, where Acelity traditionally lagged but had impressive growth leading up to the acquisition, and 3M already has a solid presence.
The S&N-Osiris deal pulls a top regenerative medicine company (with a particular AWC focus) into the portfolio of a “Top 6” AWC firm. Before the acquisition, S&N already had what we might casually be referred to as “tissue growth acceleration” products like Oasis and Regranex, in addition to active healing assets such as PICO (single-use NPWT) and Santyl (collagenase ointment for enzymatic debridement). While clinically different, those products shared similar sales call points, reimbursement support infrastructure, and other considerations to the Osiris portfolio.
The Leaf acquisition, while certainly much smaller in size, is in line with strategic trends in the AWC space overall: Pressure ulcer prevention and offloading is among the skin and AWC product segments with the most focus in recent years. Moreover, it put S&N particularly head-to-head with Mölnlycke (who acquired patient turning, positioning, and offloading device firm Sundance Systems in 2016), with both companies claiming their respective foams, adhesives and turning/offloading systems as a three-pronged approach to pressure injury prevention and care. Pressure ulcer prevention and treatment has become such a key battleground in the AWC sector that it was the subject of a lawsuit filed by Mölnlycke in 2017, claiming misleading and unsubstantiated advertising. As of May 2019, both firms continue to assert their respective skin and pressure injury portfolios, even as multiple new entrants have launched solutions for prevention, early detection, and treatment.
Prior to this new round of major acquisitions, if there were such as title as “most comprehensive and sophisticated AWC portfolio,” Acelity and S&N would likely have been the top contenders. After all, both companies boasted solutions for most key categories of AWC therapies, and each had several assets with significant market share in their respective categories (debridement, traditional NPWT, disposable NPWT, etc.). The timing of the above acquisitions couldn’t have been more exciting, as each firm bolted on multiple asset classes which too enjoyed significant account penetration and market share (single-use compression, film dressings, CTPs, etc.). The developments were almost like watching two racers neck-and-neck, when both simultaneously increase their pace. At the same time, the “rules” of the sport are evolving in real time, with reimbursement and pricing pressures, continuum of care, digital health and wearables, prevention, diagnostics, and the global markets shaping the terrain ahead.
Although overshadowed by the massiveness of the 3M and Smith & Nephew deals, Misonix’s purchase Solsys Medical was also significant. Why? Because traditionally, most of the major cellular and tissue product (CTP) / biologics / allograft / “skin sub” product firms’ portfolios are pure plays in that space (they might have different formulations or sizes). Likewise, debridement is a crucial wound care need, with relatively few options on the market considering how important proper wound bed preparation is for wound healing. Almost none of the other advanced products–CTPs, NPWT, dressings, ointments, rinses, and even diagnostics, are effective if they cannot come into contact with viable tissue (and if the “chronic” wound is not turned into an “acute” wound). At the same time, selling debridement products, especially those involving a capital equipment component like Misonix, can be complex. In this sense, at least on its surface, the combination is a good fit that significantly expands the reach and offerings of two companies that each benefit from the others’ portfolio and team. Although a smaller deal than the 3M and S&N ones above, care must of course be given to the actual integration efforts as well.
The last two deals listed (Mölnlycke-M&J Airlaid and Urgo-Realm Therapeutics) are smaller and appear to be driven by control of sourcing, protection of intellectual property (IP), and other vertical integration considerations: Important roll-ups, but likely not to be viewed as game-changers. However, they also come just months after other important M&A activity by both Mölnlycke and Urgo alike–and are significant in terms of the increased activity those firms have demonstrated over the past few years.
Although the 3M-Acelity and S&N-Osiris deals were both significant, they were also so fresh that understandably, there was not much discussed or flaunted openly: Separate exhibition booths, separate sponsored symposia, etc. Had there not been press releases in the days and weeks before the conference, most attendees would not even have been aware they took place, which is totally fine. In the second half of the year and into 2020 is when the merged organizations will become more visible. It is also quite likely that activity in this sector is not yet finished.
Looking ahead: Might M&A integration planning and execution become a competitive advantage in AWC?
The synergies in terms of portfolio and reach notwithstanding, the biggest hurdles for both the 3M-Acelity and S&N-Osiris acquisitions–and perhaps for some of the smaller ones, too–will be execution of the integrations themselves: both in terms of business operations and corporate cultures. Management will need to determine the appropriate balance between driving cost-savings and other operational synergies (which both organizations pointed to as an opportunity in investor communications following the deals), vs. the risk of losing key talent and other competencies in the months and years following the deal. Many large firms in the medical sector have actually made their handling of post-M&A integrations into a core competency, and it might even be argued a competitive advantage, in some cases. Johnson & Johnson and Stryker are two such examples that come to mind. The question we must ask then becomes: If M&A activity in the AWC sector continues to grow in both frequency and scale, might executives and investors begin placing a higher emphasis on post-M&A planning and execution competency at the same levels as they currently see R&D pipeline, product portfolio, and sales/marketing reach?
To share an anecdotal yet illuminating interaction at this recent SAWC Spring which touches on this point:
At conferences, Smith & Nephew’s sales and marketing staff are known for wearing bright orange (brand color) ties (for men) and neck handkerchiefs (for women). At this recent SAWC Spring, the Osiris employees still had their regular-branded green-and-white booth (next to Smith & Nephew’s), but the employees were wearing the S&N orange ties, which they said were received “just in time” for the conference. When I casually wished a couple of the Osiris executives (whom I have known for years) congratulations on the acquisition and complimented them on the new look, they had a moment of hesitation and responded, “Yeah…we don’t really wear ties…” While we must be careful to not read too much into it, for sure the integration teams for both the 3M and S&N post-merger teams will need to strike a sensitive balance of how to blend the strengths and cultures of both organizations without alienating some of the most valuable assets. We saw a lot of that playing out following the Smith & Nephew-Healthpoint acquisition. Perhaps even more so than promotion of their respective, impressive, portfolios themselves, Smith & Nephew-Osiris and 3M-Acelity will need to compete on their ability to execute on thoughtfully crafted and smoothly implemented integrations in the short to mid term.
As another relevant case study along the same consideration, when several key Derma Sciences executives departed Integra LifeSciences in the post-acquisition aftermath, some of that institutional knowledge loss slowed certain commercial initiatives and cost resources to reinvent and rebuild. Of course, in mid and large M&A deals, losing some talent is unavoidable–and often an important part of realizing certain cost savings. On the other hand, when Urgo acquired SteadMed, they largely left the core management team in place, while augmenting it with executives who had gained experience at the corporate office in France. Although each situation is unique, ideally, the acquiring firm will integrate processes which can benefit from economies of scale, while still maintaining a certain amount of influence over the timing of reorganizations and specific roles so that the appropriate knowledge and process redundancies can be established–or even leave the target as a quasi-independent organization, depending on the key objectives of the deal.
A survey by “Big 3” strategy consultancy Bain & Company found that when problems arise such as expected synergies that fail to materialize, challenges associated with combining the two corporate cultures “was the No. 1 reason for a deal’s failure to achieve the promised value.”
In the midst of a recent wave of uncharacteristically active corporate deal flow in the AWC world, we would be remiss to not ask: Do the players in this space have the competencies in integrating (or ensuring independence of) companies and cultures at these levels? This question is not only relevant to the AWC sector: A survey by “Big 3” strategy consultancy Bain & Company found that when problems arise such as expected synergies that fail to materialize, challenges associated with combining the two corporate cultures “was the No. 1 reason for a deal’s failure to achieve the promised value [across sectors].”
Again, this is not a criticism of the AWC sector, and certainly not on individual firms or executives. In fact, in an often cited article in The Harvard Business Review, researchers summarized that, “study after study puts the failure rate of mergers and acquisitions somewhere between 70% and 90% [across industries].” Cultural mismatches and difficulties reconciling them are a well documented–but often ignored–culprit when M&A does not deliver on its expectations, as laid out in another HBR piece.
The point is simply that as the need for advanced wound care products and services continues to skyrocket, M&A activity levels are likely to continue and perhaps even accelerate. Should this play out, might more firms in this space (or new entrants) begin to invest more deeply in post-M&A integration planning–perhaps even developing it as a core competency alongside R&D, manufacturing and quality control, sales and marketing, reimbursement and regulatory affairs, international expansion, and of course business development and deal flow (among others)?
As highlighted above, the leaders in certain other areas of medtech have determined the answer to be, “Yes.” As the AWC industry becomes increasingly recognized as more of a sector than a (series of) sub-sector(s), might we increasingly see AWC leadership employ elements of corporate strategy and execution from the Johnson & Johnsons and Strykers of the world?
Emerging business models
Despite much of the conversation at SAWC Spring 2019 being on consolidation by the large players, there were some interesting smaller companies. Most are not brand new to the space, but their potential importance has been heightened as the market and competitive forces outlined above increasingly impact how complex wounds are cared for. Just as the SAWC Spring exhibition was (literally) wrapping up, we had a chance to speak with Corstrata, a really interesting digital health company with a unique business model and approach (they are currently in fundraising mode as of May 2019):
Continue the discussion at The European Wound Management Association Conference (EWMA)
Finally, if you have a stake in wound care industry developments like M&A, portfolio strategy, digital health, and others discussed above, then you’ll definitely want to join us at The European Wound Care Management Association ( #EWMA2019 ) coming up in Gothenburg, Sweden. I’ll be personally moderating a panel discussion with some leading executives and investors, and of course the above topics will be on the agenda:
EWMA Executive Industry Forum: Unlocking The Commercial Potential of the US and APAC: A Panel Discussion with Top Wound Care Executives (by invitation only)
SESSION ROOM A5 (English)
06 June 2019 14:30 – 17:00 CEST (GMT +2)
Which of the above topics caught your interest? M&A activity in the advanced wound care industry? The concept of post-M&A planning and execution as a potential competitive advantage in this space? Emerging healthcare services and digital health business models such as Corstrata and others? Will you be attending EWMA 2019 and looking to join our Executive Industry Forum to hear how key leadership interprets the field and path forward? Contact us to learn more.