How a small Minnesota medtech company found itself in the FTC’s crosshairs

Surmodics, a Twin Cities medtech firm with fewer than 400 employees, is a bite-sized operation compared with companies recently scrutinized by federal antitrust authorities like Meta and Google.

Yet the Eden Prairie maker of medical device coatings used in minimally invasive procedures has suddenly found itself in the crosshairs of the United States’ top antitrust regulators in a high-stakes battle, representing the Federal Trade Commission’s first merger challenge since President Donald Trump’s inauguration.

After Chicago-based private equity firm GTCR in May 2024 proposed acquiring Surmodics in a $627 million deal at the time, lawyers with the Federal Trade Commission sued to block the merger they allege will stifle competition. GTCR already owns another device-coating maker called Biocoat.

Illinois and Minnesota attorneys general have since joined the lawsuit.

A spokesperson for Minnesota Attorney General Keith Ellison said elimination of the two coating companies’ competition would “remove a key driver of quality, competitive pricing and innovation to the detriment of business customers and patients that rely on interventional medical devices.”

“This would impact Minnesota’s large medical device industry as well as Minnesotans and health care providers who rely upon safe, effective, and affordable interventional medical devices,” the spokesperson said in an email.

Lawyers for GTCR counter in a court document, “Acquiring Surmodics is a procompetitive addition to Biocoat that will combine complementary capabilities that support the manufacture of medical devices by, among other things, enhancing research and development and improving operations and supply-chain resiliency, ultimately benefitting customers, clinicians, and patients.”

The merger challenge comes with a massive price tag at a time when Surmodics faces growing fiscal stress after betting big on a new business model.

“I think that their strategy wasn’t really working well,” said Needham & Co. analyst Mike Matson. “So, I think when they had this offer to sell the company, it was a good price.”

GTCR declined to comment for this story. Surmodics did not respond to several requests for comment. The FTC declined to comment, directing a reporter to the legal complaint.

Surmodics, founded under a different name in 1979, turned profitable after former Medtronic Chair Dale Olseth took it over in the late 1980s and listed it as a public company. For decades, it has sold chemical components for medical tests and coatings allowing medical devices like surgical catheters to more easily pass through the body.

Olseth, the late executive, in 2003 compared the coatings to “the high-tech equivalent of an oil field” in the Minnesota Star Tribune. Large medtech companies such as Fridley-run Medtronic have been Surmodics’ largest customers.

If Surmodics had continued just making coatings and diagnostics, Matson said, company leaders thought “they were never gonna be a high-growth company,” despite consistent profits.

The company entered what it calls “whole product solutions” business, which is developing completed medical devices to sell to other companies to then distribute, Matson said.

The strategic shift came with more research and development expenses, Matson said. Sales and marketing initiatives were costly.

But the company struck a promising deal with Abbott Laboratories in 2018 to commercialize the SurVeil drug-coated balloon to help the large firm treat peripheral artery disease. Surmodics received $25 million up front with the chance to make an additional $67 million by meeting certain milestones. The agreement also allowed the company to make more money based on the product’s financial performance.

But the product encountered a slowdown. Surmodics announced plans to lay off 13% of its employees in February 2023 after the U.S. Food and Drug Administration asked for additional information from the company about SurVeil, slowing the device’s approval process.

Now, Surmodics expects SurVeil’s financial performance to weaken. In an annual report for the fiscal year ending Sept. 30, 2024, the company said its shipments of the product may fall by more than two-thirds in its 2025 fiscal year.

The cause, the company said, was “low production volume, associated under-absorption and production inefficiencies, and the expiration of raw material inventory, have resulted in an unfavorable impact on the product gross profit margins of our medical device segment.”

Surmodics lost more than $11.5 million in 2024, compared with more than $1.5 million in 2023. The company’s stock price has dropped more than 20% in the past five years to less than $30 per share, and it has not turned a profit since fiscal year 2021.

Barrington Research analyst Michael Petusky said in an email, “Surmodics leadership has believed that its stock has generally been undervalued in the public markets and $43 per share from GTCR would allow the business to be monetized at a valuation that might seem like a modest win — at least to a portion of its investor base.”

The merger just has one hurdle: Trump’s FTC.

The proposed acquisition, the regulators allege in their complaint, would create a company controlling more than 50% of the market for outsourced “hydrophilic” coatings. These coatings are “critical inputs” allowing “lifesaving medical devices” to snake through narrow confines such as the blood vessels in the brain with less friction, the regulators said.

“The proposed acquisition may therefore lead to a substantial lessening of competition in an already concentrated market, as well as a loss of head-to-head competition, resulting in lower quality and service levels, diminished innovation, and higher prices for hydrophilic coatings sold to U.S. medical device customers,” the regulators said.

Surmodics argued in a court document that the merger will instead lead to enhanced innovation, better operations, “and a redundant supply chain” that benefits medical device makers, clinicians and patients.

“In seeking to block the proposed transaction, the FTC relies on a flawed relevant market analysis which is both too broad and too narrow to accurately capture commercial realities,” the company said in a court document. Surmodics alleged the FTC’s argument is too broad as it ignores the differences between the offerings of Surmodics and Biocoat, and too narrow as it excludes competitive coatings from other suppliers.

Under Biden, the FTC treated mergers involving private equity with more scrutiny, lawyers said.

“While medtech companies do not provide direct care, they are a key player in ensuring accessible high quality and lifesaving health care to Minnesotans,” Ellison’s spokesperson said. “There are many cautionary tales across the country demonstrating the catastrophic results of some private equity ownership in health care.”

Former FTC lawyer Joshua Goodman, a partner at Morgan, Lewis & Bockius, said there’s an increasing trend of state attorney general antitrust enforcement, especially when it comes to mergers.

As the Surmodics challenge is the FTC’s first antitrust case during Trump’s second administration, Goodman said “it demonstrates that the U.S. antitrust agencies are continuing to pay close attention to the potential antitrust impacts of deals in the health care sector in particular.”

The parties are currently arguing whether a court order should continue to temporarily block the merger. They agreed to discuss a preliminary injunction stopping the merger in late August.

University of Minnesota Law School professor Thomas Cotter said both sides may hire economists and outside experts. Michael Lindsay, a partner at Dorsey & Whitney, said large teams of lawyers participate in hearings and the rest of the process. The docket lists dozens of attorneys.