Reviving stalled merger talks, new chief executive oversees major device company acquisition after four years of discussions.
The “on-again, off-again” discussions about the acquisition of Navilyst Medical by AngioDynamics were off at the time Joseph DeVivo was named president and CEO of AngioDynamics in August 2011. Valuation concerns and turnover at the top had put the talks on hold, says the new chief executive. However, DeVivo had heard enough details to pique his curiosity and then flip the switch back on. The companies announced January 31 that the Albany, NY—based device manufacturer acquired Navilyst Medical for $372 million in cash and stock.
AngioDynamics bought the Marlborough, MA—based maker of vascular, radiology, and cardiology devices from Avista Capital, which itself had acquired the company in 2008 from Boston Scientific. After the deal closes by May 31 AngioDynamics says it will have $50 million in cash, $150 million in debt, and $50 million in revolving credit with J.P. Morgan, Bank of America, and KeyBank National Association.
DeVivo sees the fact that Avista agreed to accept an equity stake as a sign of trust in the company and confidence in the future success of the merger. The acquisition strengthens AngioDynamics’ line of minimally invasive vascular, surgery, and oncology devices, doubling the size of its vascular access market in particular, he says. AngioDynamics’ second quarter net sales grew 9% over the previous fiscal year to $58.1 million, the company reports. Domestic sales increased 6% to $49.7 million over the second quarter of FY11, while international sales of $8.4 million rose 27% from the same period of the previous fiscal year.
In addition to its headquarters in Albany, AngioDynamics has plants in New York, Georgia, and California as well as a manufacturing site in the UK, an international HQ in Amsterdam, and a sales office in Hong Kong. DeVivo says the proximity of AngioDynamics’ plant in Queensbury, NY, to Navilyst’s manufacturing site in Glens Falls, NY—they’re four miles apart—played a small but important role in the transaction’s success. Family members in the area work at the companies, creating a “palpable” excitement among employees of both firms, he says.
DeVivo came to AngioDynamics from Smith & Nephew in Memphis, where he had headed the orthopedics division since 2006. He left the company when it was restructured and the orthopedics business was merged with Smith & Nephew’s endoscopy unit in Andover, MA. While at Smith & Nephew DeVivo served as chairman of the Greater Memphis Chamber of Commerce. Before joining the company he was president and CEO of RITA Medical Systems, a maker of cancer therapy devices that was acquired by AngioDynamics in 2006. He has also held executive positions at several other device companies, including Computer Motion Incorporation and Tyco International Healthcare. DeVivo earned a bachelor of sciences degree in business administration from the E. Clairborne Robins School of Business at the University of Richmond.
In this MX interview, DeVivo discusses his concerns going into the merger, the two factors that sealed the deal, management lessons he carried with him from the chamber of commerce, and the squeeze that the Affordable Care Act puts on device manufacturers.
MX: How long had AngioDynamics been considering the acquisition?
Joseph DeVivo: There had been conversations between AngioDynamics and Navilyst going back four years. It was on-again, off-again for a period of time.
It was in motion at AngioDynamics before the time you came onboard after the Smith & Nephew transition?
I don’t think it was any more in motion. Once there was a CEO change occurring at the company everyone decided to put things on hold. When I came in, I had learned that there were some conversations, so I was curious and I reengaged.
What was the nature of the on-again, off-again aspect of the purchase?
It was mostly valuation. I think both sides have achieved from the beginning the [appropriate] synergy from a market and an overall standpoint. Avista Capital had acquired the business for $425 million and had invested another $45 million. [Because of their initial costs] they were looking for a premium on the transaction that we weren’t willing to get near.
So what sealed the deal then?
Two things sealed it. One was when we learned that there was a tax asset that would be valued at roughly $80 million at present value for us. That really helped us bridge the gap. And when they were willing to take all our consideration in our stock, meaning that they’d hold our stock for a medium to long period of time. That’s where they’re betting on the deal to be successful in order for them to even be able to break even again. It’s an enormous leap of faith and trust that they have in the transaction and in our management team.
It’s a mark of respect for the way you are running the company then, I would think.
We’re pleased that they believe in us enough to put their consideration in holding the paper.
Closing’s expected at the end of the fiscal year?
At the end of May. We’re a May-June [fiscal year] company. That’s in motion. We filed a proxy. We think we’ll close sometime in May.
You’ve already addressed this to an extent, but what were your concerns going into the acquisition? Were there issues that could have scuttled the deal?
Strategically, no. The biggest thing that held up the deal was, again, valuation. Strategically, it’s a very solid deal for both companies, and probably if there was a concern it was a $200 million and a $150 million company being merged, which is just a lot of moving parts and a large merger of two organizations with a lot going on.
One aspect of the merger that was mentioned in the announcement is that the AngioDynamics plant in Queensbury, NY, is just four miles from a Navilyst facility in Glens Falls. Does an element like that, as relatively minor as it may be, factor into a huge decision like this?
Yes, it does, actually. And that factors into integration risk. If the company was in Seattle, for example, or if it was in San Diego, and it was a completely different culture [and] a different location…that takes integration risk up by levels of magnitude. Our plant and a core part of our facilities are four miles apart. We have employees who have worked in both companies. We have employees with family members who work in the other company. Culturally, the businesses are very close, and upon announcement when each learned of this transaction, unlike any other deal I’ve done the amount of unanimous excitement around the transaction in the employee base of both sides was palpable.
Those conditions for such a transaction are probably rare, actually.
It would be a good thing to study. It may be.
Yes, maybe from a business school standpoint. Widening the scope here a bit, would you characterize AngioDynamics’ market segments—peripheral vascular, vascular access, oncology surgery—as very competitive?
In each of those segments AngioDynamics will have significant either number one or number two positions. That allows the company to, of course, be more competitive than it would have been.
Are they particularly rugged segments for you or for devices in general? Are there competitors nipping at your heels, as it were?
It really is specific to the segment you’re talking about.
Of course. Pick one, for example.
For example, venous ablation is our fastest growing product. We are number one in the laser category and growing well above market. The transaction will give us a pure sales force just focusing on peripheral vascular, which should help us even further accelerate our position and our competitiveness.
A big upside then. Were there any companies under consideration for acquisition instead of, or even in addition to, Navilyst?
We went through an extensive set of opportunities and continue to evaluate the pipeline for our future.
How are investors responding to the acquisition news—and your conference presentations, by the way?
We’ve made a significant move that represents an evolution in the investment criteria of the business. Investors have smart questions, and I think we’ve been doing a good job explaining the benefits of the transaction. Some will find the company’s direction does not meet their portfolio criteria, but overall I think most we’ve spoken with understand the strategy.
Was there any response to the acquisition that surprised you? What concerns were brought up?
I think the reaction of the majority has been expected in terms of wanting to understand how execution and integration will occur and to see evidence that we will make that a success.
The U.S. market, according to company data, represents 85% of your sales and rest of world is 15%. Can you increase sales in either of those regions?
We’ve grown sales over the last eight quarters in excess of 20% of growth internationally year over year, and our sales have gone from 8% to 15% in that period. It’s a corporate objective to get our sales to 50% of revenue with the next 5 to 10 years.
You stepped down as head of Smith & Nephew orthopedics in August 2011 during a company restructuring. Is there a preferred way to handle executive turnover? Any broad guidelines that smooth the transition?
I think the healthiest transitions are when successors for business are groomed over time, are identified, [take] the opportunity to communicate to investors, and the incumbent gets to graduate in the appropriate manner. Whenever there are abrupt changes at any level it’s a surprise to investors and the organization. As much as a successor is identified, groomed, and then a timeline given for a change, I think that’s the best for the organization as well as the investor community.
Is there anything you learned as chairman of the Greater Memphis Chamber of Commerce that you bring to your position as head of AngioDynamics?
I learned a lot. Employees care about the community that they live in, and they care more about the companies they work for when the companies are involved and give back to the community they live in. It’s a cycle. The more you care about the community the more the employees get endeared to the company, and the more you can strengthen the community the more you create a better living environment for current and future employees.
Smith & Nephew was a very large player in Memphis. It’s the largest manufacturer with over 2000 people in a city that had many social needs. The company had the employee base and the position in the community to help make a difference, and I think we did.
When Smith & Nephew was redesigning its Memphis headquarters I read that you requested that at least a third of the work go to women, minorities, and local business, which ties into the ideas you were just expressing. I understand ultimately that at least 55% of the work was done by these groups. Why did you do that? For the reasons you were just stating?
Initially, the company was under a tax abatement agreement with the city, which we wished to have extended, given the initial investment we were making. One of the requirements for that tax abatement was a minority participation in the project. I believe it was around a 20% threshold we needed to get to. In learning about the needs of the community, minority-owned businesses, and small local Memphis business, we actually ended up the project at 85% participation. Where we did not get minority- and women-owned businesses, we were able to support local, Memphis-owned businesses.
A local businessman in the insurance industry did an analysis that said every dollar spent in the local Memphis business [community] would spur the economy by an additional $1.70. The more we invested at home the better it could help the community, and we felt that—for the reasons stated before—it was a worthwhile cause. The project came in under budget and on time, and we did the right thing for the people in Memphis.
You’ve also expressed a preference for communal working space. Is that correct?
It’s something I learned to appreciate. At Smith & Nephew we had a building that was a set of cubicles that was such a maze. It was impersonal and difficult to navigate as it grew over time. Given the footprint of our new facility, we chose an open work environment, which had many common workspace areas for collaboration and also private areas when they were needed. I wasn’t there long enough to see if it was a success. I can tell you in the first six months there was more grumbling than anything, because it impeded a lot of privacy. So I’d be interested to see today how they’re doing with it.
They should trying working in a newsroom. When you were with Smith & Nephew you were able to increase business in Russia, China, and India. Is that something you think you can do with AngioDynamics?
Absolutely. It’s a major part of our growth imperative. We’ve invested heavily in our direct channels and our sales and marketing teams. It’ll be a major part of our growth going forward. That said, we still believe there is growth in the U.S., while others seem to be giving up. We intend to have a balanced approach to grow globally.
Why do you think there’s growth in the U.S.?
Because it’s the best healthcare market in the world. While it may be contracting for someone with 80% market share, someone with 20% market share still has an opportunity to grow share in one of the most lucrative markets in the world, and I wouldn’t count the United States out.
AngioDynamics has plants in three different states as well as one overseas. Regarding the overseas presence, what are some of the challenges, if any, in overseeing foreign manufacturing facilities?
We have a facility in the UK, yes. There are no significant challenges. There’s a time difference, but that is not an issue, and we hope to continue to expand our global footprint as the company grows. It’s important to invest in the markets that you intend to grow in and having a local footprint is seen very favorably, and we intend to build that out.
The U.S. economy has improved slightly, or at least it seems to have stabilized. How do macroeconomic trends affect your business?
Historically, the medical device industry has been relatively isolated from the macroeconomic effects. When the market’s hot we do well, and when the market’s soft we do okay. We don’t have the high “highs” or the low “lows.” In today’s environment with the Affordable Care Act, our world has changed. As hospital CEOs have looked to contain their costs, they have taken very aggressive efforts to lower prices, and most medical device companies have felt that. I think we’re in a period of correction, and I think that correction will continue through 2014 and then hopefully by then the more people who are coming in who are insured through the Affordable Care Act, and more importantly the demographics of the aging population, will kick in and help the market grow again.
In the near term it is most certainly an effect of the most recent change in healthcare policy.
In one interview you indicate you’re not a fan of the legislation. You just mentioned one of the potential upsides for some of the CEOs I’ve spoken with, which is the influx of new patients. As for the 2.3% excise tax my sense is that few executives would be a fan of that despite the influx.
Personally, I think the tax is horrible. It’s shortsighted and politically well-meaning but completely misunderstood [in its effect]. The belief by Senator Baucus’s committee was to have those who were benefiting by the Affordable Care Act pay. What I don’t think they completely understood was that the medical device industry is in a free-market economy with floating prices. As hospital CEOs are compressing pricing and purchasing to help pay for the Affordable Care Act—which is represented in some significant price concessions—on top of that we have to pay an excise tax. I think the industry would have considered one or the other, but both happening to us is not only painful but is also one of many government interventions that are forcing the medical device industry offshore.
I assume that those concerns didn’t put any constraints on finalizing the acquisition, but have investors brought up the healthcare policy issue as a concern?
I think the long-term view of the medical device industry is that the value is a bit impaired, given these dynamics.
Finally, on the AngioDynamics Web site there are links to 14 organizations such as the National Cancer Institute and the American Venous Forum. How important is this type of outreach to a device company?
It’s very important. Most patients who seek therapy do much more homework today and have more access to information than they ever have. It’s a double-edged sword in as far as being partially educated can be dangerous and can become frustrating to clinicians. But information is important and to the extent we have information to share, it’s only the right thing to do.