EUR 850.00 For Business Accounts Only

Morningstar | Acquisitions Continue to Fuel Growth at Merit Medical

In our opinion, Merit Medical has done an admirable job navigating the uncertain waters of the U.S. healthcare system over the years. However, we think the firm has struggled to keep up with the breakneck pace of change the industry has undergone in the years following the passage of healthcare reform in 2010. The consolidation among med-tech competitors and hospital providers has left subscale players, such as Merit, out in the cold. Historically, the firm had focused on accelerating its investment in research and development to produce new products and sustain its impressive growth rate. This strategy shifted, in our opinion, in the wake of a changing healthcare landscape in the post-recession era. Merit has turned to leaning more heavily on acquisitions to accentuate its growth profile, while attempting to aggregate scale in the face of competitors and customers that have substantially increased their respective bargaining power over the last decade. This flurry of deal-making has depressed returns on capital as integrations have been hit or miss, making effective transaction multiples more onerous than they might initially look. Sizable transactions such as the $167 million purchase of Thomas Medical in 2012 or the more recent $98 million purchase of DFINE in 2016 have been less then stellar, as revenue performance failed to live up to expectations in the quarters and years following their respective integrations.Examples such as these make us hesitant to forecast consolidated returns on capital in excess of the firm's cost of capital for a sustained period, as we anticipate most new investment will likely flow into inorganic opportunities over the coming years. While some of these potential deals look exceedingly favorable to Merit at the margin, such as the announced acquisition of product lines from C.R. Bard and Becton Dickinson, we are concerned that capital allocation in aggregate will fail to meaningfully exceed our estimate of the firm’s cost of capital. These concerns are core to our no-moat and high uncertainty ratings for the firm, as the need to acquire increases the uncertainty surrounding our cash flow and ROIC forecasts.