A Perfect ’10? The Year in Medtech Mergers
Few medical device companies would characterize 2010 as a “perfect” year. Profits slipped, healthcare reform helped dampen financial outlooks throughout the sector, and a feeble (at best) economic recovery turned formerly munificent investors into modern-day Ebenezer Scrooges.
Maturing markets and a dearth of new blockbuster device debuts only added to the misery, eroding annual revenue growth at many firms by several percentage points. Annual revenue growth at multi billion-dollar conglomerates Abbott Laboratories, Boston Scientific Corp., Johnson & Johnson, Medtronic Inc. and St. Jude Medical Inc. have plunged 15 percent over the last six years, going from 15-20 percent between 1995 and 2004 to just 5-6 percent last year, according to industry estimates.
“These companies have had huge successes in the past and now they’re mature businesses, so it’s harder for them to find growth,” Thomas Gunderson, a senior medical technology analyst at global investment bank Piper Jaffray & Co., told The Star-Tribune of Minneapolis, Minn.
Such difficulty in finding new sources of revenue has forced many of the large device firms to re-examine their long-term growth strategies and ultimately, make more deals in recent years. As one analyst noted: “These companies have to do deals; their growth has ground to a halt in virtually every big product category.”
With traditional sources of growth now at a standstill, companies are turning to startups or smaller firms with cutting-edge technology to spur sales. Boston Scientific, for example, spent $194 million last fall to purchase Asthmatx Inc., a Sunnyvale, Calif., startup that has developed a catheter-based procedure to treat severe asthma, a largely untapped market in medtech. Under terms of the deal, Boston Scientific could make additional payments of up to $250 million through 2019 based on the achievement of revenue-based milestones, giving the deal a potential worth of $444 million.
Some companies have gone a step further, boldly barging into markets that are ruled by their rivals. Take Stryker Corp., for instance. The Kalamazoo, Mich.-based orthopedic manufacturer closed a $525 million deal last January for Ascent HealthcareSolutions Inc., a company that reprocessed and remanufactured U.S. medical devices. The purchase bolstered Stryker’s presence in the $1.8 billion device reprocessing market, an area dominated for years by both Ascent and SterilMed Inc. It also helped cement Stryker’s commitment to environmental stewardship, a move that hasn’t exactly hurt its image in the orthopedic sector.
“A lot of these companies are flush with cash and shareholders are beating on them to do something,” Phil Nabone, an analyst with Los Angeles, Calif.-based Wedbush Securities, told the Star-Tribune. “So they’re going to go out and buy something.”
Medical device firms apparently listened to their shareholders last year and embarked on a full-fledged spending spree, completing more than 17 deals with price tags of more than $150 million, according to a recent Piper Jaffray report. Those deals were worth a collective total of $10 billion.
Amid the blockbuster deals (Stryker’s $1.5 billion purchase of Boston Scientific’s neurovascular division, for example) were smaller mergers worth less than $500 million and many whose terms were not disclosed. Though these smaller deals seem irrelevant compared with the billion-dollar acquisitions conducted by Stryker, Covidien plc and St. Jude Medical Inc., they are equally as significant for the opportunities they provide to the merging partners.
Consequently, the most noteworthy mergers and acquisitions in the medical device sector last year not only were the pricey, game-changing moves from the industry’s major players but also the less expensive purchases that enabled some companies to reinvest money and enter new markets. Deals that made the (top10) cut in 2010 include:
10. C.R. Bard acquires SenoRx Inc. With breast cancer rates showing no signs of abating, the need for new, improved screening technologies has assumed a sense of urgency. The aging baby boomer population and the increased use of digital breast tomosynthesis is expected to drive growth in the digital mammography market in the next four years, pushing the sector’s total worth to more than $679 million. C.R. Bard stands to benefit from that market growth, thanks to its $213 million acquisition of SenoRx Inc., an Irvine, Calif.-based developer of breast cancer diagnostic and treatment devices. The deal expands Bard’s product portfolio beyond its existing product range of ultrasound imaging devices. The devices Murray Hill, N.J.-based Bard acquired in the deal—including the EnCor stereotactic-guided and MRI-guided breast biopsy systems as well as the Contura brand balloon catheter (used to treat breast cancer) can be used across various forms of imaging procedures.
9. CareFusion Corporation acquires Medegen Inc. CareFusion’s first major deal since its 2009 emancipation from drug-distribution giant Cardinal Health was a significant one. The $225 million purchase of Ontario-based Medegen continues a long-standing company strategy of growth through acquisitions in the hospital products arena, a practice that has served the San Diego, Calif.-based company well in the past (evidenced by its takeover of former San Diego companies Alaris Medical Systems Inc. and Pyxis, manufacturers of automated drug dispensing and patient identification systems, respectively). Analysts predicted the deal would enable CareFusion to boost sales of Medegen products and benefit both companies’ research efforts. In addition to Medegen’s needleless access valves and administration sets that reportedly can reduce catheter-related bloodstream infections, CareFusion inherits units that provide contract manufacturing to medical device and drug companies, as well as intravenous therapy components for other firms.
8. Medtronic Inc. buys ATS Medical Inc. In 2009, Medtronic considered abandoning the $1.5 billion global mechanical heart valve market because it did not have the bi-leaflet valve technology of its rival, ATS Medical. Now it does. Medtronic’s $370 million purchase of its former adversary further bolsters its cardiovascular division, which added CoreValve Inc. and Ventor Technologies Ltd. in February 2009 (both companies were developing new, minimally invasive technologies to replace malfunctioning heart valves when they were acquired) and Invatech Inc. last winter (Medtronic paid $350 million to access Invatech’s expertise and its new treatment methods for coronary artery and peripheral vascular disease). Besides the prized bi-leaflet heart valve technology, Minneapolis, Minn.-based Medtronic inherits ATS Medical’s extensive line of CryoMaze ablation products and its Simulus annuloplasty devices. What makes this deal most valuable, though, is the level of respect Medtronic stands to gain from selling ATS products (ATS devices are well-accepted and highly respected within the industry). That kind of reverence is priceless.
7. Johnson & Johnson purchases Micrus Endovascular Corp. The neurovascular device sector experienced a flurry of M&A activity last year, as three of the industry’s major players supplemented their stroke treatment portfolios in an effort to gain market share. Johnson & Johnson set its sights on Micrus Endovascular, paying $480 million for the San Jose, Calif.-based developer and manufacturer of implantable and disposable medical devices that treat cerebral vascular disease. J&J merged Micrus Endovascular into its existing neurovascular device business (under the Codman & Shurtleff Inc. division), a move analysts claim will give the New Brunswick, N.J.-based firm a strong suite of solutions for hemorrhagic stroke and eventually, various products for ischemic stroke. With the neurointerventional market as its focus, Micrus Endovascular’s product lineup is expected to help Codman’s overall business reach the next level. Micrus also can help J&J siphon market share from rival Boston Scientific Corp., which competes (along with ev3 Inc.) in the $500 million global market for coils that are threaded into the brain through a catheter to prevent an aneurysm from causing a stroke. Let the games begin.
6. Stryker Corp. acquires AscentHealthcare Solutions. Besides increasing its market share, this $525 million deal gives Stryker the opportunity to profit from a trend among hospitals to use reprocessed and remanufactured medical devices. Experts predict this trend will grow rapidly over the next few years due to more stringent federal oversight of the industry, an increased awareness of the safety and efficacy of reprocessing, and the ability (of reprocessing) to help cut costs and leverage the supply chain for maximum savings. “Reprocessing and remanufacturing is one of the most impactful programs in use at hospitals, allowing for significant cost savings to the healthcare system,” Stephen P. MacMillan, Stryker’s CEO, said. Stryker is wise to jump on the reprocessing bandwagon now—as lawmakers and the industry look for ways to cut skyrocketing healthcare costs, markets such as remanufactured medical devices are bound to heat up.
5. Medtronic Inc. acquires Ardian Inc. This deal epitomizes the power of innovation. Barely one week after unveiling some promising clinical trial results about its novel treatment for high blood pressure, Ardian Inc. had an $800 million offer in hand from Medtronic Inc. The Minneapolis-based device manufacturer was so impressed with Ardian’s technology that it agreed to make commercial milestone payments through 2015 to acquire the Mountain View, Calif., firm. Medtronic has good reason to be excited, too: Clinical trials showed that Ardian’s technology significantly could reduce blood pressure in patients whose levels remained stubbornly high despite treatment with an average of five different drugs.
Ardian reduced patients’ blood pressure by using a catheter to deliver radio-frequency waves to shut down overactive nerves near the kidneys, a condition that causes “resistant hypertension.” Though it still has to win U.S. Food and Drug Administration approval before it can start selling Ardian’s treatment method (called the Symplicity Catheter System), Medtronic is more than eager to begin the regulatory journey. With hypertension expected to affect one in three people worldwide by 2025 (that’s 1.56 billion patients), expect the Symplicity Catheter System to be one of Medtronic’s top priorities over the next few years.
4. 3M Co. acquires Arizant Healthcare Inc. Eden Prairie, Minn.-based Arizant was one of three companies 3M purchased over the course of 10 days late last summer. The mini spending spree, while not unusual for the healthcare conglomerate (it has spent more than $1 billion annually on acquisitions since 2006), demonstrated 3M’s commitment to foster long-term growth through acquisitions. Under the guidance of 3M Chairman and CEO George Buckley, the St. Paul, Minn., company has focused primarily on kick-starting internal growth through product development, improving manufacturing efficiency and expanding its presence in emerging markets. The $810 million Arizant acquisition certainly will expand 3M’s presence in the patient warming market, which has been growing by about 10 percent annually (Arizant makes products to help prevent hypothermia and infections in surgical patients). The deal also will help expand the profit margins at both 3M and Arizant; executives estimate that Arizant’s profits—before taxes and interest payments—will amount to 35 percent during the first year under the merger. Such a windfall would be a significant improvement over the current performance of 3M’s healthcare business, which has recorded sales and pretax margins ranging from 5 percent to 9 percent. The division’s sales accounted for 17 percent of the firm’s $23.1 billion in total revenue in 2009. “When you’re acquiring companies that are faster-growing than 3M’s averages, you’ll boost those averages,” Ajay Kejriwal, an analyst with brokerage firm FBR Capital Markets, told The Wall Street Journal. “This deal is exactly what [3M’s] been saying: ‘We want to expand our healthcare platform.’ It will fit right into their existing distribution network.”
3. St. Jude Medical Inc. buys AGA Medical Holdings Inc. St. Jude Medical truly set itself apart from the competition with this deal. The $1.08 billion purchase of Plymouth, Minn.-based AGA Medical Holdings makes St. Jude the only cardiovascular device firm with programs across all major product categories—structural heart defects, left atrial appendage occlusion, transcatheter aortic valve implantation and percutaneous mitral valve repair. This distinction, however, was not foremost on the minds of executives when they decided to add AGA Medical to the company’s cardiovascular unit. More important to bigwigs was the opportunity for long-term growth, and there is plenty of that embedded in the acquisition. Besides boosting its presence in the structural heart repair market (which includes devices that fix faulty valves and treat atrial fibrillation), the acquisition gives St. Paul, Minn.-headquartered St. Jude the rights to AGA Medical’s Amplatzer device platform, which has a strong brand-name recognition and is currently marketed and sold in 112 countries. Perhaps most importantly though, AGA Medical is likely to add hundreds of millions of dollars to St. Jude’s coffers—the company reported $200 million in sales in 2009. Fitch Ratings gave the deal a thumbs-up, as did most analysts. “[The deal] represents a clearly positive strategic and financial fit,” Rick Wise, a Leerink Swann & Co. analyst, wrote in a note to investors, adding the deal will “propel St. Jude in a more significant way into one of the fastest-growing areas of medical technology.”
2. Stryker Corp. buys Boston Scientific Corp.’s neurovascular division. This deal landed in the No. 2 spot for numerous reasons: It was savvy; it was unexpected; it was courageous (on Stryker’s part). It represents a tremendous long-term growth opportunity for the implant manufacturer. Boston Scientific’s neurovascular division complements Stryker’s neurosurgery products lineup and allows the company to diversify into a fast-growing therapy market as it adjusts to an ailing orthopedic sector caught up in price and procedure volume headwinds. Analysts claim the $1.5 billion acquisition will position Stryker as the leading player in the neurovascular market, thanks to a strong products portfolio and the pending launch of a bevy of next generation devices. Boston Scientific stands to benefit as well—the Natick, Mass.-based company now can focus its growth strategies on other divisions and reduce its debt. In addition, the sale will give Boston Scientific additional funds to make more “targeted” growth acquisitions.
1. Covidien plc acquires ev3 Inc. This deal landed in the top spot not only for its price tag, but also for the opportunity it provides to Covidien. The Dublin, Ireland, firm has steadily been beefing up its vascular business in an effort to become a leader in the vascular market, snapping up Bacchus Vascular Inc. and VNUS Medical Technologies Inc. in the spring of 2009. But the $2.6 billion purchase of Plymouth, Minn.-based ev3 last June truly is a coup for Covidien, as it gives the global healthcare firm the “broadest product portfolio in the industry,” according to company executives, and will enable it to enter two potentially very lucrative markets—peripheral vascular and neurovascular. Covidien executives have forecast growth of 6 percent to 8 percent over the next five years for the $3.1 billion peripheral vascular market, and 10 percent to 12 percent growth during that time for the $1.3 billion neurovascular market. One of the other selling points of the ev3 deal was the one-stop shopping nature of the transaction—with just the stroke of a pen, Covidien picked up a comprehensive portfolio of treatment options, including the primary interventional technologies used today: peripheral angioplasty balloons, stents, plaque excision systems, embolic protection devices, liquid embolics, embolization coils, flow diversion, thrombectomy catheters and occlusion balloons. As Joe Woody, president of Covidien’s vascular therapies unit, told reporters during a conference call, “The opportunity to acquire a strong endovascular lineup in one step was a key reason why we believe ev3 was such a unique opportunity for us.” Unique indeed.
This transaction accelerates Covidien’s strategy of building a world-class vascular platform addressing high-growth markets and positions Covidien to become a leading endovascular player, with strong positions in both the peripheral vascular and neurovascular markets. The acquisition offers a comprehensive portfolio of treatment options, including the primary interventional technologies used today: peripheral angioplasty balloons, stents, plaque excision systems, embolic protection devices, liquid embolics, embolization coils, flow diversion, thrombectomy catheters and occlusion balloons.
“The acquisition of ev3 will enableCovidien to significantly expand itspresence in the vascular market and is in line with our strategy of becoming a leading partner with vascular surgeons, neurosurgeons, interventional cardiologists and interventional radiologists,” said Richard J. Meelia, Chairman, president and CEO. “With its broad product portfolio, clinical expertise and call-point synergies with our existing vascular franchise, ev3 will be an important addition to our innovative vascular intervention products.”