Weak Economy Fuels Medical Device MA Activity8232

­­Weak Economy Fuels Medical Device M&A Activity


The sluggish economy (or economic “recovery” as the pundits like to point out) may not be so bad for business after all. A seesawing stock market, inconsistent growth and fears of a double-dip recession have hammered the medical device industry in the past year, resulting in significantly lower profits and earnings among the major players. And while companies in the sector have been quick to cut jobs and implement sweeping “realignments” to help reduce costs, they have not scaled back their shopping sprees. Merger and acquisition spending, in fact, has intensified since 2009 as a feeble economy depressed company valuations and curtailed demand for initial public offerings. As a result, companies such as Medtronic Inc., St. Jude Medical Inc., 3M and Covidien plc have fielded some attractive deals from investors eager to unload struggling firms.

“It’s a time for Medtronic to be opportunistic,” Chad Cornell, vice president of corporate development who oversees the company’s acquisition/investment portfolio, told MedCity News. “There are a lot of economic factors weighing on valuations. We’re in the fortunate position of having a strong balance sheet.”

Medtronic’s strong balance sheet has enabled the Minneapolis, Minn.-based firm to buy eight companies in the past year or so, including Ablation Frontiers, CoreValve Inc., Ventor Technologies Ltd., Invatech, Fogazzi, and Krauth Cardio-Vascular GmbH. The device conglomerate spent a total of $2.1 billion on the acquisitions, though the final price tag could be higher because some of the deals require Medtronic pay its conquests (CoreValve and Invatech in particular) additional money if certain milestones are met.

Executives deemed the acquisitions part of Medtronic’s overall long-term growth strategy to diversify its product base and expand its footprint in various medical sectors. Part of that growth strategy, however, included the layoffs of up to 1,800 workers in the wake of a 69 percent drop in profit in the final quarter of its 2009 fiscal year. Medtronic attributed the decline to lower sales and the $27 million it spent on restructuring to streamline operations.

“We intend to extend our market leadership by increasing our focus on innovation,” Medtronic Chairman and CEO Bill Hawkins told investors during a conference call last year to discuss the company’s fourth-quarter and fiscal 2009 earnings. “We will also continue our efforts on relentless execution. We intend to extend our market leadership by strategically investing in faster growing markets like endovascular, diabetes, atrial fibrillation, transcatheter valves, neuromodulation and spine. And we expect to extend our leadership by leveraging our global footprint.”

Hawkins certainly was true to his word. In fiscal 2010, Medtronic boosted its portfolio of cardiovascular and spinal products through acquisition. In April, for example, the firm shelled out $370 million or $4 per share, to acquire heart valve manufacturer ATS Medical Inc., whose share price had remained below $4 for five years. In August, Medtronic agreed to pay $123 million, or $6.50 per share, to buy Osteotech Inc., a developer of biologic products for regenerative healing. Before the deal, Osteotech’s shares lost 20 percent of their value since 2009.

Cornell told MedCity News that Medtronic’s acquisitions can be categorized as either “tuck-in” deals—those that immediately add revenue to existing businesses—or technology-driven purchases that provide the company with expertise is does not currently have. The deals for CoreValve and Ventor Technologies, for example, could be considered a technology-driven purchases because they represented advanced technologies in development that had not received regulatory approval in the United States, Cornell noted.

By contrast, ATS Medical and Osteotech already were generating sales in markets in which Medtronic already competes. In addition to acquiring larger, more well-known companies, Medtronic also looks for promising startup firms, particularly those struggling to raise capital.

Medtronic, however, is not the only bargain shopper in the market. Since May 2009, Covidien plc has spent $3.5 billion purchasing five companies that in one way or another offer differentiated solutions to customers or expand its presence in certain markets. Its most extravagant purchase came in June, when it spent $2.6 billion in cash, or $22.50 per share, to bring ev3 Inc. under its wing. The deal represented a nearly 19 percent premium for ev3, whose shares already had jumped more than 40 percent up to that point.

Though they touted the “growth benefits” of the merger at the time of the purchase, Covidien executives admitted that significant growth is not expected to occur before 2012. Charles J. Dockendorff, executive vice president and chief financial officer, said the acquisition will most likely reduce non-GAAP earnings in fiscal 2010 by 5 cents to 8 cents per share and in fiscal 2011 by about 10 cents to 15 cents.

Such losses, however, pale by comparison to the anticipated growth in the vascular device market. Covidien executives 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.

“We believe ev3 brings sustainable long-term opportunities in developed regions as well as advanced treatment opportunities in emerging markets such as Brazil, Russia, India and China,” said Joe Woody, president of Covidien’s vascular therapies unit. “Ev3 has the broadest product portfolio in the industry. 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.”

Other unique opportunities for Covidien over the last 17 months included deals for VNUS Medical Technologies Inc. ($440 million), Power Medical Interventions Inc. ($64 million), Aspect Medical Systems Inc. ($210 million) and Somanetics Corporation ($250 million).

Abbott Laboratories has been just as willing to spend money on acquisitions, shelling out a total of $3.6 billion on four companies since January 2009. The most expensive deal was the $2.8 billion purchase of Advanced Medical Optics, a Santa Ana, Calif.-based firm that described itself as a leader in ophthalmic care and divided its products into three segments: cataract surgery, laser vision correction (LASIK), and eye care products. Executives said they expected the merger to help the Abbott Park, Ill.-based healthcare conglomerate immediately become a “global leader in vision.”

Perhaps to ensure its place in the top spot, Abbott snapped up Visiogen Inc. last fall for $400 million in cash. A privately held company based in Irvine, Calif., with European operations in Karlsruhe, Germany, Visiogen provided Abbott with a next-generation accommodating intraocular lens technology to address presbyopia for cataract patients.

After arming its vision care product stockpile, Abbott moved on to conquer the cardiac valve repair market with the $320 million acquisition of Evalve Inc., a Menlo Park, Calif.-based developer of devices that repair cardiac mitral valves.

Late last year, Abbott strengthened its position in the global diagnostics market with the $123 million cash purchase of STARLIMS Technologies Ltd., a company that develops laboratory information management systems.

St. Jude Medical has been shopping around for bargains as well. In May, the St. Paul, Minn.-based firm bought LightLab Imaging Inc. of Westford, Mass., for $90 million. LightLab developed a technology called Optical Coherence Tomography (OCT), a high resolution diagnostic coronary imaging technique that helps doctors treat cardiovascular disease.

Executives with St. Jude Medical said the acquisition would help expand the company’s cardiovascular growth platform by providing a product offering that will allow the firm to compete in, and potentially expand, the intravascular imaging market.

St. Jude Medical executives expect the OCT platform to contribute an additional $20 million in revenue to its cardiovascular business in the second half of this year. The OCT market is expected to grow at a double-digit compounded annual rate over the next five years and is expected to capture intravascular imaging market share as well as expand the market for coronary imaging. The intravascular imaging market is estimated to be worth $500 million this year and grow 10 percent to 15 percent annually. OCT coronary imaging is expected to grow at an even faster rate within this market.

Last month, St. Jude Medical decided to make a $60 million equity investment in CardioMEMS, a medical device company that has developed a wireless sensing and communication technology to assess cardiac performance. The agreement provides St. Jude Medical an immediate 19 percent ownership in CardioMEMS and the exclusive option to acquire the company for an additional payment of $375 million during the period that extends through the completion of certain commercialization milestones.

CardioMEMS’ wireless technology can be placed directly in the pulmonary artery to assess cardiac performance via measurement of pulmonary artery pressure.