The Street likes Medtronic Inc.’s move to spike a group purchasing organization deal with Novation LLC. How will the rest of the medical device industry react?
Medtronic Inc.’s (NYSE:MDT) move last week to cancel $2 billion worth of supply contracts with Novation LLC could save the device maker some $60 million a year. It’s a no-brainer for one of med-tech’s biggest players, but it might signal a wider trend: Will the medical device industry buck group purchasing organizations even as hospitals flock to them?
Irving, Texas-based Novation, which is owned by VHA Inc. and the University HealthSystem Consortium, said last week that the Fridley, Minn.-based devices giant canceled five contracts it had with Novation to supply orthopedic and cardiovascular products.
When Investment Rhymes with Canada
Canada has a proud history of achievement in the areas of science and technology, and the field of biomanufacturing and life sciences is no exception.
Novation, which represents more than 25,000 healthcare providers including hospitals, non-acute care centers and academic medical centers, is one of a handful of big GPOs that work on behalf of hospitals to negotiate terms for lower priced items (typically for lower-cost items). These organizations have become an industry norm in recent years as hospitals look to control costs. Surveys suggest that hospitals will look to expand their use of the purchasing middle-men for big-ticket items such as MRI machines and other capital equipment — a move that isn’t likely to be welcomed by the med tech industry.
For its part, Medtronic isn’t making any bold proclamations. The company said last week’s move was made “with an eye on removing costs from the healthcare system,” according to a prepared statement.
“As the leading medical device company with the broadest reach across the industry, Medtronic, like other health care organizations, realizes the challenges that all participants in the market are facing in light of healthcare reform and economic uncertainty,” according to the release.
But some Wall Street analysts are saying this could be the start of a larger trend.
Health Benefit Consultants, Share Your Expert Insights in Our Survey
MassDevice Staff Website The Massachusetts Medical Devices Journal is the online journal of the medical devices industry in the Commonwealth and New England, providing day-to-day coverage of the devices that save lives, the people behind them, and the burgeoning trends and developments within the industry.
J.P. Morgan Chase & Co. analyst Michael Weinstein told the Wall Street Journal that spiking the Novation deal represented “a watershed moment” that could send ripples through the entire industry, positing that Medtronic will ditch other GPO deals as well.
And “other firms may well want to move in the same direction,” Ben Andrew, an analyst with William Blair, told the broadsheet.
Bernstein Research analyst Derrick Sung wrote in a note to investors that “MDT’s bold move could represent a positive shift in bargaining power away from the hospitals and back to the device manufacturers.”
Not surprisingly, MDT shares have jumped nearly two percent since news of the deal hit The Street last week.
For medical device companies facing pricing pressures, an unstable economy and a looming 2.3 percent annual excise tax for healthcare reform, shaving up to 3 percent in favor of going direct to customers is an approach worth looking at — that is, if they’re big enough to stomach the risk.
The Massachusetts Medical Devices Journal is the online journal of the medical devices industry in the Commonwealth and New England, providing day-to-day coverage of the devices that save lives, the people behind them, and the burgeoning trends and developments within the industry.
