Acquisitions Heating up in Bracing
BY JOHN MCCORMICK, AUGUST 11, 2005
The traditionally steady-as-she-goes bracing sector has been heating up with some M&A activity lately. Two weeks ago, Ossur annouced it was buying Royce Medical and, in the last five days, we have two new events to consider: (i) dj Orthopedics has announced that it is buying Encore's soft good business and (ii) Omni Life Sciences is buying Apex Surgical.
What is going on here? An armchair observer to the bracing industry would tell you that this is a relatively low growth sector and so the big guys need to buy growth in order to justify their lofty stock valuations.
True that, but there are some more subtle things going on that need to be considered. The key shift in the industry is that the bracing sector is consolidating. Traditionally the area has been fragmented with "mom & pop" manufacturers abounding due to low barriers to entry (ever heard of a recent brace patent that created a monopoly?) and a lack of economies of scale. We think the economies of scale dynamics are shifting with the industry's big players relying more offshore manufacturing to deal with the lousy pricing environment in bracing. Since revenues are slow to grow, there is still plenty of room to improve the bottom line with cost cutting. dj Orthopedics is a perfect example having achieved great strides in its gross profit margin thanks to offshoring and state-of-the-art cellular manufacturing techniques. This spells doom, or at least thinner margins, for the smaller players who insist on keeping manufacturing onshore while the big boys go offshore and are better able to compete on - yes - price where reimbursement is slow and the low cost producer can better deal with bulk purchasing from sports medicine centers and even group purchasing organizations.
Remember, there is not a lot of product differentiation here like there was in the 1980's when jocks were cutting up neoprene westuits and going into business and we think more and more cost competitiveness has become the name of the game. That also means that functions such as R&D and sales and marketing are targets for rationalization as well, unless of course some real breakthroughs can occur in the product development area.
That is not to say we are negative on the bracing sector. In our recently published 2005 Sports Medicine Market Forecast, we think the market is growing at a solid 6% per annum and there are lots of ways we could be proven to be conservative particuarly as we hear anecdotal tidbits about sports med docs seeking creative non-operative and conservative care pathways to a cure.
