Year Draws to a Close in Acquisition Mode

Year Draws to a Close in Acquisition Mode

The year may be winding down, but merger-and-acquisition activity in the medical device industry surely doesn’t seem to be.

A few notable and interesting deals to follow include:

Endologix and Nellix

Endologix Inc. purchased a California stent manufacturer in a move that executives claimwould boost the company’s aortic aneurysm treatment platform.

The deal for privately held Nellix Endovascular Inc. of Palo Alto, Calif., includes $15 million in stock and up to $39 million in milestone payments. The agreement includes a $15 million equity investment from Essex Woodlands Health Ventures, a majority shareholder of Nellix. The healthcare investment firm has offices in Palo Alto, Calif.; New York, N.Y.; Houston, Texas; and London, England. Endologix expects the deal to close in the last quarter of the year.

Endologix manufactures stents used to reinforce a ruptured or ballooning section of an artery. The Irvine, Calif.-based firm’s primary product, the Powerlink, treats abdominal aortic aneurysms, or a weakening of the wall in the aorta, the body’s largest artery. Powerlink is delivered through a catheter.

Nellix also makes devices that treat abdominal aortic aneurysms. The technology it has developed, according to a news release from Endologix, completely seals and fills an aortic aneurysm sac, preventing device migration. The product treats a wide range of abdominal aortic aneurysm (AAA) anatomies, including those that cannot be treated with existing endovascular aortic repair products. These hard-to-treat anatomies include patients with aortic neck lengths of 5 millimeters or less, widths as wide as 34 millimeters, and patients with iliac aneurysm diameters greater than 23 millimeters.

Endologix plans to use the $15 million equity investment to develop Nellix’s device for a European launch in 2012. It also will use the funds to develop a European sales force and start a U.S. clinical trial of the product.

According to John McDermott, Endologix president and CEO, Nellix has developed a new technology that will allow more physicians to treat a greater number of patients than existing technology options—which potentially could expand the global market for endovascular aneurysm repair (EVAR).

“We believe Nellix is the most revolutionary EVAR technology in the world and will help position Endologix as the innovation leader in aortic aneurysm treatment,”

McDermott said.

He also noted that the device has “exceptional clinical results” and that feedback from physicians has been positive, particularly as it relates to ease of use, effectiveness and versatility to treat both simple and complex aortic anatomies.

Nellix President and CEO Bob Mitchell said the acquisition will help maximize his company’s potential and broaden the company’s customer base.

“Endologix is the ideal partner to maximize Nellix’s potential and drive adoption of this device,” he said in a news release. “The Nellix technology has been developed in collaboration with physicians around the world and is the only AAA device that completely seals the aneurysm sac. Early clinical data suggest that the Nellix implant has the potential to dramatically reduce endoleaks, secondary interventions and long-term patient follow-up costs.”

Mitchell noted that the companies will be working in the short term to quickly build a sales force in the United States and Europe, in addition to looking for product-line expansion opportunities.

Essex Woodlands officials predicted the merger would create a “strong contender” for global leadership in the abdominal aortic aneurysm market.

“The combination of Endologix and Nellix creates a company that is poised for great success,” said Guido Neels, managing director of Essex Woodlands Health Ventures. “Nellix’s technology and Endologix’s track record make the company a strong contender for global leadership in the AAA field. The combined company has a strong management team and [our] funding puts them in an excellent position to achieve their clinical and commercial objectives and execute their growth strategy.”

“Bye” and “Buy” to Boston Sci’s Neurovascular Division

Boston Scientific has said goodbye to its neurovascular business. The Natick, Mass.-based medical device company will sell the business to Kalamazoo, Mich.-based Stryker Corp. for $1.5 billion in cash. The deal is expected to close before the end of the year, according to the companies.

Boston Scientific said it plans to use about half of the $1.2 billion in after-tax proceeds of the sale for acquisitions and the remainder for retiring debt. Stryker has agreed to pay Boston Scientific $1.4 billion for the business at the closing of the deal and the remaining $100 million after the closing based on certain milestones, including the commercial launch of the business’s new Target detachable coils for treating hemorrhagic stroke.

Boston Scientific’s neurovascular business, which employs 1,150 people, is based in Fremont, Calif., and reported revenue of $348 million last year. The company first acquired the business in 1997 through its purchase of Target Therapeutics. That deal was valued at $1.1 billion.

Mark Paul, the current president of Boston Scientific’s neurovascular business, will continue to lead the unit after the acquisition closes. The division provides medical technologies such as detachable coils, stents, and guidewires used in the treatment of neurovascular diseases.

“The sale of our neurovascular business is part of our overall strategic plan that will refocus our portfolio to, amongst other criteria, leverage existing sales forces with least invasive, cost and comparatively effective medical devices that reduce or eliminate refractory drug regimens,” said Ray Elliott, Boston Scientific’s president and CEO.

Stryker Buys Porex Surgical

A day after the Boston Scientific deal was announced Stryker also inked a deal for bio-implantable products maker Porex Surgical Inc. for an undisclosed amount. According to Stryker officials, the cranial implant maker’s assets will complement its existing craniomaxillofacial product offering.

Porex Surgical develops bio-implantable porous polyethylene products for use in reconstructive surgery of the head and face. Its parent company, Porex Corp., based in Fairburn, Ga., manufactures porous plastic products for a variety of industries. Porex is owned by Los Angeles, Calif.-based investment firm Aurora Capital Group.

Billion-Dollar Deal for AGA

St. Jude Medical Inc. has entered the latter half of the year with a whopper of a buyout. AGA Medical Holdings Inc., a maker of devices for structural heart defects and vascular problems, will be acquired in cash-and-stock deal worth nearly $1.1 billion. St. Jude officials said the deal would not affect the company’s earnings outlook for 2010.

At $20.80, St. Jude’s offer is a premium of 41 percent compared to AGA’s closing price on the day the purchase was announced (Oct. 15). The deal, expected to close by the end of the year, also calls for St. Jude to assume $225 million of AGA’s debt (which brings the value of the deal closer to $1.3 billion). Officials at St. Jude said the acquisition would aid in the firm’s diversification into faster-growth treatment areas beyond its core heart rhythm management line of implantable cardioverter defibrillators and pacemakers—markets that have been slowed down. Defibrillators and pacemakers currently make up almost 60 percent of St. Jude’s $4.7 billion in annual revenue.

According to a regulatory filing, AGA officials agreed to pay a breakup fee ranging from about $21.7 million to $32.5 million if it were to terminate the merger agreement with St. Jude.

According to Rick Wise, analyst with Leerink Swann Healthcare Equity Research, the deal represents “a clearly positive strategic and financial fit.” He added that AGA’s extensive structural heart disease portfolio will “propel” St. Jude into one of the fastest-growing areas on the cardiovascular device sector—minimally invasive structural heart applications.

“Given AGA’s double-digit, growing top line and significantly higher gross margins, it should further accelerate St. Jude’s sales growth and margin expansion,” Wise wrote in a research note.

AGA makes a variety of patches and plugs to fix holes and other structural defects in the heart in minimally invasive ways. It is a small market, but has tremendous growth potential—making the firm a particularly attractive acquisition. Many analysts say the market for devices to treat structural heart defects could represent more than $1 billion worth of opportunities for industry—though most of the technology currently is in early stages.

AGA sells a closure device for atrial septal defect, which is a hole in the wall that separates the heart’s upper chambers. The Amplatz Septal Occluder, a tiny device used to close holes in the heart, accounts for about 50 percent of the firm’s revenue. In the past, patients with this condition were treated with open-heart surgery. AGA also sells vascular plugs that are used to block blood flow to diseased peripheral vessels and tumors.

The biggest potential for growth is expected to come from expanded indications for its products. AGA currently has a closure device in clinical trials for the treatment of patent foramen ovale, or PFO, another type of hole between the heart’s upper chambers that may be linked to stroke or migraine headaches. In addition, the company also is testing a left atrial appendage closure device that, officials claim, has the potential to reduce the risk of stroke in patients with atrial fibrillation.

According to St. Jude CEO Daniel Starks, AGA has “a strong core business with an enviable pipeline of products and clinical trials.”

St. Jude is the second-biggest maker of pacemakers and defibrillators, after Minneapolis, Minn.-based Medtronic, Inc. Natick, Mass.-based Boston Scientific Corp., is third in the market. St. Jude has gained market share recently due to recent setbacks at its competitors, though firms are working earnestly to find the next blockbuster in cardiovascular devices. Last year, Medtronic paid more than $700 million for Irvine, Calif.-based CoreValve, which makes an aortic valve replacement product.

John Barr, AGA’s CEO, will report to Frank Callaghan, president of St. Jude’s cardiovascular division. For the foreseeable future, St. Jude also plans to keep AGA’s location in Plymouth. St. Jude has 14,000 employees worldwide (2,500 in Minnesota). AGA has 550 employees worldwide (400 in Minnesota). Officials do not expect the deal to lead to any layoffs.

Founded in 1995 and based in Plymouth, Minn., AGA went public in October 2009 for $14.50. The firm had almost $200 million in sales in 2009, and predicts at least $217 million in sales in 2010. The company is named for three founders: Kurt Amplatz, Franck Gougeon and Michael Afremov.

FDA Reverses Menaflex 510(k), Adds to Ongoing Debate

In a rare acknowledgement of misguidedness, the U.S. Food and Drug Administration (FDA) is revoking approval of an orthopedic knee device that has become the poster child for a highly criticized product approval process used by the agency.

FDA officials admitted in mid-October that they made a mistake in approving the Menaflex Collagen Scaffold in December 2008 for repairing and reinforcing meniscal tissue in the knee. The surgical mesh, manufactured by Hackensack, N.J.-based ReGen Biologics Inc., is designed to stimulate the growth of new meniscal tissue in damaged knees.

Jeffrey Shuren, M.D., director of the FDA’s Center for Devices and Radiological Health (CDRH), called the move an “unusual, unique” circumstance. Though it is not uncommon for the FDA to revoke approval for a device based on new safety data, it is rare for the agency to consider the entire approval process flawed and re-evaluate a product.

The FDA’s reversal on Menaflex, together with its decision to withdraw the obesity drug sibutramine (Meridia; Abbott Laboratories) from the market at around the same time, demonstrates that the agency is more militant about patient safety than it had been during the George Bush administration, said Diana Zuckerman, Ph.D., president of the nonpartisan National Research Center for Women and Families, a Washington, D.C.-based group that specializes in health issues.

“The new FDA leadership under [President Barack] Obama is more public-health oriented. They’re more willing to admit a mistake,” Zuckerman told Medscape Medical News, adding that FDA decisions to rescind a drug or device approval are rare.

The FDA uses two different processes to approve products: the premarket approval process, in which a manufacturer must provide evidence that its product is safe and effective; and 510(k) premarket notification, in which a manufacturer needs only to show that its product substantially is the same as a “predicate” drug or device already approved by the FDA—and therefore is as safe and effective.

The 510(k) premarket notification process has been a boon to manufacturers, but critics (including U.S. Sen. Charles Grassley (R-Iowa) and some FDA scientists) have insisted the less stringent vetting method has allowed unsafe products to enter the market and be used

by consumers.

Menaflex won FDA approval through 510(k) premarket notification. But the decision soon came under fire by members of Congress who questioned whether the agency had properly followed its procedures and succumbed to undue pressure from the manufacturer. In September 2009, the FDA agreed to reevaluate its decision.

“There were in fact numerous departures from the review process,” Shuren said at the time about the CDRH’s 2008 decision. “There is no adequate information in the record establishing why the device was approved.”

That same month, the FDA commissioned the Institute of Medicine (IOM) to study its 510(k) approval process. The IOM is scheduled to publish a final report in March.

After reevaluating its decision, the FDA said it concluded that Menaflex was “technologically dissimilar” from other surgical-mesh devices the agency had approved, and it embodied differences that could affect its safety and effectiveness. Unlike predecessor products that repair or reinforce damaged tissue, for example, Menaflex helped the human body grow new meniscal tissue.

“Because of these differences, the Menaflex device should not have been cleared by the agency,” the FDA said in a news release.

Regen Biologics’ chief executive blamed the FDA’s decision on politics.

“The agency’s clearance of Menaflex has become a political football, and the FDA is not playing by the rules,” CEO Gerald Bisbee said in a statement. “Regen has invested 58 months and more than $30 million to meet (the center’s) requirements only to have the agency reverse decisions made by previous officials by stating that they were in error with no substantial evidence that is true.”

Bisbee said the company is evaluating its options. Executives already are investigating ways of financing its European subsidiary, ReGen Biologics AG, so it can continue to market Menaflex outside the United States. Menaflex has been sold in parts of Europe for the past nine years.

Revoking FDA approval can take as long as a year and does not preclude the manufacturer from reapplying for market approval. Until revocation is made final, Menaflex will remain on the market, and physicians are free to implant it during that time, according to the agency.

Because the surgical mesh is resorbed and replaced with meniscal tissue, removing it in light of the impending rescission generally would be unnecessary, the FDA stated. However, surgeons should speak to their patients with implanted Menaflex devices about any steps they might need to take.

(Editor’s note: For an in-depth look at the medical device clearance process and expert opinions on current U.S. regulatory trends, turn to the feature “Game Change” on page 44.)