Source丨Original Work by 21st Century Health (Healthnews21)
Author/Wu Yinggang Intern Li Jiaying
EditEdit/Zhang Weixian, Xu Qiulian
Image/21 Image Library
Recently, according to the official website information of BD, BD and Edwards Lifesciences announced that they have reached a definitive agreement, under which BD will acquire Edwards' critical care business for $4.2 billion in cash (equivalent to 30.4 billion yuan).Edwards' critical care business currently has approximately 4,500 employees, most of whom work in Irvine, California. In 2023, the business generated more than $900 million in revenue.To raise funds for the acquisition, BD plans to use approximately $1 billion in cash and $3.2 billion in new debt, equivalent to about 23.2 billion yuan. After the transaction is completed,BD's estimated net debt ratio is approximately 3x, and it aims to reduce its net debt ratio to a long-term target of 2.5x within 12 to 18 months after the completion of the transaction, primarily through debt repayment using free cash flow.An industry insider told the 21st Century Business Herald that Edwards' critical care business is not unprofitable, and the overall quality is good. However, for Edwards, it may be a more important choice to fully focus on the higher-margin valve business. Therefore, they are willing to sell the critical care business. But why is BD willing to take on $3.2 billion in debt to acquire this business? It’s a question worth pondering.
Willing to borrow $3.2 billion for the acquisition
According to BD Medical's official WeChat information, the long-term financial outlook for this critical care business is expected to achieve continuous earnings growth of approximately 6% to 7%. The adjusted gross margin in the first year will be at least 60%, and the adjusted operating profit margin will be at least 25%, with gradual improvements over time. This aligns with BD Medical’s 2025 strategy, where mergers and acquisitions that drive growth and create value remain a key component of BD Medical’s target financial structure.It was reported that as early as December 2023, Edwards had announced plans to spin off its critical care business. The sale is intended to enhance Edwards’ balance sheet flexibility, allowing for disciplined investment in new therapeutic areas such as treatment technologies for patients with aortic, mitral, tricuspid, and pulmonary valve diseases, as well as interventional heart failure therapies. Edwards will use the post-tax cash proceeds to support subsequent strategic growth initiatives.
Edwards Lifesciences CEO Bernard Zovighian also stated that the fundamental reason for divesting the critical care business has always remained unchanged: to focus on implementing a strategy centered on structural heart disease.Similar to Edwards Lifesciences, Becton, Dickinson and Company (BD) is also undergoing a strategic split by divesting certain businesses to sharpen its overall focus — on April 1, 2022, BD completed the spin-off of its former diabetes care business into an independent publicly traded company, and in August 2023, it finalized the sale of its interventional segment's surgical tools platform.The primary reason for BD Medical's debt-driven acquisition may be performance pressure, as its net profit has continuously declined over the past two and a half years.BD's business mainly includes three segments: Medical, Life Sciences, and Intervention. According to the 2023 annual report, during the reporting period, BD achieved revenue of $19.4 billion, a year-on-year increase of 4.5%. By segment: Global revenue from the Intervention segment was $4.736 billion, a year-on-year increase of 8.1%; global revenue from the Medical segment was $9.502 billion, a year-on-year increase of 9.1%; global revenue from the Life Sciences segment was $5.133 billion, achieving organic growth of 2.3%.During this period, BD achieved a net profit of 1.484 billion US dollars, a year-on-year decrease of 16.6%; in 2022, it achieved a net profit of 1.779 billion US dollars, a year-on-year decrease of 14.96%.According to the semi-annual report for the fiscal year 2024, BD (Becton Dickinson) achieved a revenue of $9.751 billion, representing a 3.7% increase compared to $9.407 billion in the first half of 2023. The net profit reached $818 million, reflecting a 15.58% decrease compared to $969 million in the first half of 2023.As profits continue to decline, the interventional segment, including critical care business, seems to be becoming a significant growth driver for BD Medical.According to BD's financial report, the growth rate of the interventional segment is gradually taking the lead. In the second quarter of 2024, BD's medical segment revenue was $2.449 billion, a year-on-year increase of 3.8%; life sciences segment revenue was $1.304 billion, a year-on-year increase of 2.2%; interventional segment revenue was $1.292 billion, a year-on-year increase of 9.0%.Specifically, BD's interventional segment includes surgery, peripheral intervention, and urology and critical care. In the second quarter of 2024, the urology and critical care segment grew by 26.1% year-over-year from $336 million to $424 million. In contrast to the other two sub-segments, the surgical segment decreased by 0.5% year-over-year, while peripheral intervention increased by 4.3%. As a result of these offsetting dynamics, revenue in the interventional segment increased by 9% year-over-year during the reporting period. BD attributed this growth to continued strong demand for PureWick.BD's $4.2 Billion Acquisition of Edwards' Critical Care Business Reflects Expectations for Continued Growth in the Sector, Which Contributed Over $900 Million to Edwards' Revenue in 2023.By contrast, the intensive care business belongs to the slower-growing segment compared to other businesses of Edwards Lifesciences.According to relevant data, Edwards Lifesciences Corporation's total revenue in the fourth quarter of 2023 was $1.53 billion, a year-on-year increase of 14%. In the fourth quarter of 2023, its critical care business generated $250 million in revenue for Edwards, an increase of 11% over the previous year. The growth of the other three major business segments was as follows: TAVR (Transcatheter Aortic Valve) product sales reached $979 million, up 13% year-on-year; TMTT (Mitral and Tricuspid Valve) sales were $56 million, a year-on-year increase of 65%; surgical structural heart sales amounted to $248 million, growing by 11% year-on-year.
Completed 20 M&A in 3 years
Behind the decline in profits is the multi-faceted pressure faced by BD, with the centralized procurement in the Chinese market being one of the pressures it currently faces.
In the quarterly report released on May 3, 2024,BD stated frankly that, as expected, China's centralized procurement system had an adverse impact on its operating performance. While BD embraces the major trend of centralized procurement in the Chinese market, it also faces challenges from local companies.
For example, the provincial alliance for the centralized procurement of indwelling needles led by Jilin Province achieved an average product price reduction of 57.57%, with the highest reduction reaching 92.8%. Taking a commonly used closed intravenous indwelling needle as an example, the price before the procurement was 52 yuan, which dropped to 6.5 yuan after the procurement. In this procurement round, the winning bid prices for BD's indwelling needles included 4.8 yuan, 4.2 yuan, and 13.99 yuan.Xu Xiaoliang, Vice President of the Guangdong Medical Device Industry Association, told the 21st Century Business Herald that China is currently actively promoting an import substitution strategy. Faced with such a vast market in China, foreign companies may find it difficult to maintain large market shares as they did in the past. At the same time, Chinese companies are also actively "going global," striving to enter the international market with products that are more competitive in terms of price and quality. This has enabled Chinese companies to gain a certain level of competitiveness in the international market, giving them the ability to compete for market share abroad.Facing performance and centralized procurement pressures, BD is advancing its "2025 Strategic Plan," with acquisitions being a key component. In its latest earnings report, BD stated that it will continue to invest in R&D, strategic acquisitions, geographic expansion, and new product initiatives.According to incomplete statistics, apart from this acquisition exceeding 30 billion yuan, BD had completed 20 acquisitions within three years. These include CUBEX LLC, GSL Solutions, Velano Vascular, and Tepha acquired during the 2021 fiscal year; Scanwell, the developer of smartphone-based COVID tests, GSL Solutions, a smart medication management developer, and Tissuemed, a UK-based surgical technology manufacturer, acquired in the 2022 fiscal year.Not only BD, but also many multinational medical device companies have recently launched acquisitions.For example, on January 28, Mindray Medical announced that it planned to use 66.5 billion yuan of its own funds to acquire control of Huitai Medical, a medical device company listed on the STAR Market. If the entire acquisition plan is successfully implemented, Mindray will become the largest shareholder and controlling shareholder of Huitai Medical.On April 5, Johnson & Johnson and Shockwave Medical announced a definitive agreement under which Johnson & Johnson will acquire all outstanding shares of Shockwave Medical for $335 per share in cash, with a total transaction value of approximately $13.1 billion. On May 31, Johnson & Johnson announced the completion of this acquisition.Regarding this phenomenon, Xu Xiaoliang analyzed to the 21st Century Business Herald that the development of China's medical industry is currently facing multi-faceted challenges. International issues have led to many uncertain factors in foreign markets, and the economic environment is also not very optimistic. At this time, a group of enterprises may face survival crises, with lower acquisition prices. Moreover, projects that were previously highly valued will also significantly reduce their prices. For enterprises with strong resource integration capabilities and financial strength, the recent period may be a good opportunity for acquisitions and expanding tracks.This is also closely related to the development characteristics of the medical device industry. According to an analysis by Zheshang Securities, unlike pharmaceutical R&D, the medical device sector involves numerous subfields and product types with significant differences between them. This results in varying core elements for the R&D of different medical device products, making iterative innovation a distinctive feature of this sector.Under the iterative innovation development path,The maturity of a medical device product, whether in terms of product quality or doctors' operational habits, requires long-term customer validation and cultivation. The moat effect of first-mover advantage becomes more pronounced, which means that if a device company wants to expand into new business segments, starting from scratch with self-research, self-production, and self-sales would involve enormous investment in terms of both capital and time. Therefore, mergers and acquisitions have become a more optimal choice for device companies."Mergers and acquisitions in the medical device industry are an inevitable move and also an inevitable process. Since the market space for each category of medical devices is relatively limited, companies must expand into new product lines, build new teams, and develop new business areas through mergers and acquisitions to achieve continuous growth. After years of mature and stable development, the industry will see a 'big fish eating small fish' phenomenon, where high-quality companies acquire less competitive ones to integrate and optimize resources, which is a very common occurrence," Xu Xiaoliang pointed out to the 21st Century Business Herald.
