M&A Market Rebounds from Lows

The merger and acquisition (M&A) climate for all segments of the medical device industry cooled off significantly in 2009 due to the difficult tight credit and recessionary economic environment. Many of the active strategic acquirers from previous years, both U.S. and foreign, went into a survival mode by conserving cash, cutting costs, and postponing potential acquisitions. Private equity firms, both those with existing medical device platforms and those with a desire to establish a platform, were sidetracked by the almost total lack of bank financing.

Clyde A. Burkhardt

December 1, 2009

20 Min Read
M&A Market Rebounds from Lows

But unlike many industries in which M&A activity came to a complete stop, there were acquisitions in most segments of the medical device industry.


HT Capital Advisors tracked 282 M&A transactions in the first 10 months of 2009 compared with 347 transactions in the same period in 2008. These included 227 closed transactions and 55 announced and pending transactions. The aggregate dollar value of the 2009 transactions was about $15 billion, compared with about $38 billion for the 2008 transactions. Only 3 transactions were valued at $1 billion or more, versus 9 in 2008 and 17 in 2007.

Valuation multiples based on revenues declined somewhat, and those based on EBITDA (earnings before interest, taxes, depreciation, and amortization) declined significantly. Purchase-price-to-revenue multiples averaged 3.4 times revenues in 2009, compared with 3.5 times in 2008 and 4.2 times in 2007. The average EBITDA multiple was 12.2, which was a major decline from 20.9 times in 2008. For the 282 transactions tracked, the purchase-price-to-EBITDA multiples ranged from 3.8 to 34.7.

IPO Market Still Has Very Faint Heartbeat

For more than a year, an initial public offering (IPO) has not been a viable exit strategy or capital raising opportunity for medical device and diagnostics companies. The only medical device company to go public in 2009 was AGA Medical Holdings, which completed its IPO on October 20. AGA is a developer and manufacturer of medical devices for the treatment of heart defects and vascular diseases. AGA’s Amplatzer occlusion devices work like stoppers to plug structural heart defects and abnormal blood vessels. The IPO raised $185 million, $98 million of which went to selling stockholders and $88 million to the company. AGA had initially indicated that the IPO price was expected to be between $19 and $21, reflecting demand and market conditions. The price was lowered to $14.50 per share and on October 30, it traded at $13.37 per share. The AGA experience is not a very good omen that the IPO market will be a viable option for device firms in the near future.

Venture Capital

Venture capital firms fared better than most of the private equity firms. Deal volume and dollar transaction values were not far from all-time highs in the medical device and equipment sector during the first three quarters of 2009. In the first 9 months of the year, $2.6 billion went into 292 medical device and equipment deals. The majority of the transactions were mid-to-late-stage transactions, which is why the average investment is approximately $8.9 million.

Clinical Diagnostic Transactions

A significant international acquisition in the diagnostics area was powerhouse Beckman Coulter’s acquisition of Tokyo-based Olympus Corp.’s clinical diagnostic testing systems, principally automated chemistry analyzers and blood transfusion testing systems. It is likely that this divestiture by Olympus was prompted by the rapidly changing dynamics of this segment, including increasingly intense competition from established and new entrants. The acquisition would seem to be a major coup for Beckman Coulter. “This compelling transaction combines the chemistry product lines of two companies into a complete chemistry systems,” says Beckman’s chairman Scott Garrett. “It enhances Beckman Coulter as a leading provider of chemistry products with additional opportunities to expand our immunoassay reach into [Olympus’s] chemistry-installed base.” The purchase price was approximately $800 million (1.6 times estimated 2010 sales of $500 million).

Table 1. (click to enlarge) A sampling of significant mergers and acquisitions in the medical device industry in 2009. Mergers are ranked by deal size. Source: HT Capital Advisors LLC.

Inverness Medical Innovations, a provider of diagnostic tests and health management services, has grown rapidly over the past five years. It has made several acquisitions during that time, including seven in 2007. Its one major transaction this year was the April 2009 acquisition of Acon Laboratories’ worldwide business of producing lateral flow immunoassay diagnostic test kits for the consumer, point-of-care, and laboratory markets. The acquired business includes tests sold within Inverness’s focus areas including infectious disease, cardiology and oncology, and women’s health. What is rather unique about this transaction is that it results from an agreement in 2006 when Inverness acquired Acon’s rapid diagnostic business for the United States, Canada, Europe (excluding Russia and certain other countries), Australia, Israel, Japan, and New Zealand. At that time, the companies agreed that if certain financial performance and operating conditions were met, Inverness would agree to buy and Acon would agree to sell its rapid diagnostic business for the rest of the world. The purchase price was about $200 million (4.4 times sales of $45 million).

Another large cross-border acquisition in the diagnostic area was Thermo Fisher Scientifics’s acquisition of Brahms AG, a producer of many specialized in vitro diagnostic (IVD) tests. Brahms’s flagship product is an IVD test based on its patented biomarker for sepsis. This test is the gold standard in Europe for the early diagnosis of sepsis, which is critical for patient survival and the subsequent monitoring of treatment. The European testing model is expected to be replicated in the United States, where approximately 750,000 cases occur every year (one third of which are fatal). The acquisition of Brahms nicely complements Thermo’s many immunoassay tests and gives it an extensive R&D pipeline of additional patented diagnostic tests. The purchase price was $470 million (4.7 times sales of approximately $100 million).

Gen-Probe Inc., which provides nucleic acid tests that are primarily used to diagnose human disease and screen donated blood, also made a cross-border acquisition. In April 2009, Gen-Probe acquired Tephel Life Sciences. Tephel provides GenProbe with diagnostic testing products in the transplant diagnostics area, which has excellent growth potential, as well as in the genetic testing and pharmaceutical services segments. Tephel will also strengthen Gen-Probe’s marketing and sales distribution and manufacturing capabilities in the attractive and rapidly growing European molecular diagnostics market. The purchase price for Tephel was $136.4 million.

Agilent Technologies, which manufactures analytical measurement tools including instrumentation and liquid chromatography instruments, acquired Varian Inc. for approximately $1.3 billion (1.2 times revenue and 10.3 times EBITDA). The price represented a 35% premium to Varian’s closing price the day before the transaction was announced. Agilent president and CEO Bill Sollium says, “This acquisition is a major step in Agilent’s transformation into a leading bioanalytical measurement company. This acquisition will establish Agilent as a clear market leader in analytical solutions and give us the talent and technology base for creating unique new products and markets.”

Orthopedics: Fallen Firms Find a Home

There were no blockbuster acquisitions in the orthopedic area, which had been a hotbed of acquisition activity in prior years. But there were some interesting acquisitions in the estimated $4.6 billion sales spine implant market. Publicly held NuVasive Inc., the only global pure play developer of minimally invasive products for the surgical treatment of spine disorders, acquired Cervitech Inc. NuVasive is anticipating FDA approval of Cervitech’s cervical disc system, a motion-preserving total-disc replacement device, in early 2010. The price was
$47 million initially and $33 million upon FDA approval of the device.

Following up on its acquisition of highly regarded and innovative Theken Spine in 2008, diversified regenerative medical device company Integra LifeSciences acquired Innovative Spine Technologies (IST). IST developed spinal implant products focused on minimally invasive surgery and motion-preservation techniques. Unfortunately, IST, which reported revenues of about $2.2 million in 2008, ran out of cash and ceased operations in January 2009. It filed for bankruptcy protection in May. For what could turn out to be a true bargain acquisition, Integra paid $9.25 million in a bankruptcy auction for IST’s portfolio of more than 100 U.S. and foreign patents and patent applications, trademarks, and inventory of products. Randy Theken, Theken Spine’s founder and now president of Integra Spine, says, “This acquisition gives us innovative products that can be available near term as well as intellectual property that will support a pipeline of new products, particularly in the rapidly growing field of minimally invasive spine surgery.”

In another orthopedic transaction, Synovis Life Technologies, a producer of implantable biomaterials for soft tissue repair, also acquired a fallen company. It purchased Pegasus Biologics, a manufacturer of bioimplants and products for diabetic wound care. The price was about $12 million (1.33 times sales of $9 million). Pegasus had reportedly raised about $32 million of venture capital, but shut down in early 2009 after being unable to find additional funding.

The spine implant market is one of the largest orthopedic markets, and its growth is driven by favorable worldwide demographic trends and the high incidence of back pain. Medtronic, DePuy, Synthes, and Stryker control about 75% of the worldwide market, but their position is gradually being eroded by smaller niche companies with innovative products. Most of these smaller companies would greatly benefit from the financial resources and marketing clout of the major companies, and we expect many of them to welcome acquisition overtures in the coming years.

Cardiac Acquisition Activity Gets a Healthy Jolt

In moves that further expanded its already extensive cardiac rhythm disease management cardiovascular treatment portfolio, Medtronic completed three acquisitions. Following up on its $380 million acquisition of Cryocath Technologies in 2008, Medtronic acquired Ablation Frontiers in January for an initial payment of $225 million, plus additional payments contingent upon achieving certain clinical milestones. Like Cryocath, Ablation Frontiers is developing cardiac rhythm therapies to treat atrial fibrillation. Both Cryocath and Ablation have been marketing certain products in Europe that do not yet have FDA approval. The acquisition improves Medtronic’s chance of bringing to market the first FDA-approved ablation catheter to treat atrial fibrillation.

Visualizing tremendous growth for aortic heart valve replacements, which are an alternative to open-heart surgery, Medtronic acquired two leading companies in early 2009. Medtronic paid $325 million upfront plus future milestone payments for Ventor Technologies, which is developing a minimally invasive replacement aortic valve currently under clinical investigation in Europe. In its press release announcing the acquisition, Medtronic says, “this acquisition adds two technologies to Medtronic’s transcatheter valve portfolio: a minimally invasive, surgical transapical technology and a next-generation percutaneous, transremoval technology. These complementary technologies offer compelling clinical benefit to distinctly different subsets of patients with aortic stenosis who are at high or prohibitive risk for surgery.”

In February, Medtronic acquired CoreValve Inc. for $700 million, plus two potential $75 million milestone payments. CoreValve received a CE mark in Europe in 2007 and its heart valves have been implanted in more than 2600 patients worldwide. FDA approval is expected in 2014.

Commenting on both the CoreValve and Ventor acquisitions, Daniel Beach, a spokesman for Medtronic, says that Medtronic wanted to get into aortic valve replacement in a big way before the market reached the United States. “It was increasingly apparent to us just how much this space was growing” and “if we are in early, we have the ability to shape it.” The acquisitions will fuel Medtronic’s rivalry with Edwards Lifesciences, which is also developing transcatheter valves. CoreValve and Ablation were venture-backed companies. CoreValve is believed to be one of the largest acquisitions ever of a venture-backed medical device company and provided the investors with a very healthy return on their estimated $58 million investment.

Abbott Labs enhanced its cardiac business by entering the minimally invasive heart valve repair field with the acquisition of Evalve Inc. Evalve focuses on treatment for mitral regurgitation, a condition in which blood leaks through the mitral valve and one that affects millions of people worldwide. Traditionally, mitral regurgitation is treated through open-heart surgery. But only about 20% of the estimated 600,000 patients diagnosed with the condition annually in the United States and Europe undergo surgery. Evalve provides Abbott with a potential global leadership position in a nonsurgical treatment option. The company’s system has a CE mark in Europe and is an investigational device in the United States, currently in clinical trials. Abbott already owned 10% of Evalve. The purchase price for the remainder was $320 million and up to an additional $90 million tied to meeting regulatory milestones.

In June, ev3 Inc., an endovascular device company with $422 million in sales, acquired privately held Chestnut Medical Technologies, a company focused on developing minimally invasive therapies for interventional neuroradiology. The acquisition by ev3 broadens its neurovascular product portfolio by adding Chestnut’s Pipeline embolization device for the treatment of cerebral aneurysms and its Alligator retrieval device for foreign body retrieval to ev3’s existing embolic product and access technologies. The initial purchase price was approximately $75 million ($26 million in cash and $49 million in ev3 common stock) plus an additional milestone payment of up to $75 million upon FDA approval of Chestnut’s Pipeline device.

Abbott Sets Sights on Eye Care

A major diversification move for Abbott in January was its acquisition of publicly held eye care products company Advanced Medical Optics Inc. (AMO; renamed Abbott Medical Optics). Cataract surgery products account for about half of AMO’s sales. Although the laser vision market correction was slightly down, Abbott must have seen near-term improvement given the leading position of LASIK equipment. It may have also seen an opportunity to increase AMO’s research and development pipeline. In another move in the eye care area, Abbott acquired privately held Visiogen for $400 million in October. Visiogen’s innovative Synchrony Dual Optic accommodating intraocular lens (IOL) expands AMO’s diverse portfolio of cataract treatments and gives it a product for the treatment of presbyopia, which, according to estimates, affects more than 1 billion people worldwide. Although available in Europe, the Synchrony IOL is currently under FDA review. The acquisition of Visiogen will increase Abbott’s competition with Bausch & Lomb’s Crystalens, currently the only FDA-approved accommodating IOL. The Crystalens technology was developed by privately held Eyeonics, which Bausch & Lomb acquired in 2008.

Pain Management Activity

Kimberly-Clark Health Care, the billion-dollar-sales medical and healthcare products division of giant Kimberly-Clark Corp., announced two acquisitions in the pain management area. On October 5, it announced that it had acquired the pain management business of Baylis Medical Co. The acquired business includes several innovative, minimally invasive radio-frequency pain management products, with an emphasis on products for minimally invasive chronic spinal pain management. The acquisition is an example of how a marketing relationship can lead to outright acquisition. Kimberly-Clark Health Care had been the exclusive distributor of Baylis Medical’s products in the United States since 2001. “The acquisition of Baylis Medical’s pain management business is consistent with our global business plan strategy to invest in the high-growth, high-margin medical device market,” says Joanne Bauer, president of Kimberly-Clark Health Care.

On October 9, Kimberly-Clark Health Care announced that it had a definitive agreement to acquire publicly held I-Flow Corp., which produces technically advanced, low-cost drug-delivery systems and innovative products for postsurgical pain relief and surgical site care. The indicated purchase price is approximately
$276 million (two times I-Flow’s 2008 revenue of $133 million, and a 31% premium to I-Flow’s 60-day average share price prior to the announcement of the transaction).

Reconstructive and Cosmetic Transactions

Johnson & Johnson acquired publicly held Mentor Corp., a leading producer of breast implant and other aesthetic and reconstructive medical products. The acquisition fits nicely with J&J’s Ethicon operation, a leading provider of suture, mesh, and other products for a wide range of surgical procedures. The United States accounts for the vast majority of Mentor’s sales. J&J, with its extensive global sales, marketing, and distribution operations, is in a position to expand Mentor’s business into many international markets. The acquisition price was $1.1 billion (2.9 times sales of $382 million and 13.4 times EBITDA of $85.3 million).

The acquisition of publicly traded Candela Corp. by Syneron Medical Ltd. combined two producers of medical laser products for cosmetic treatments including hair removal, skin condition treatment, and wrinkle reduction. The price was approximately $42 million.

A Corporate Spinoff Goes on an Acquisition Spree

Covidien Ltd. is the result of the July 2007 spinoff by Tyco International of a healthcare business with $10 billion in revenues into an independent publicly held company. It was one of the largest corporate spinoffs in history. In the 2007 M&A analysis for MD&DI, the authors predicted that with its strong market position and financial strength, Covidien would pursue acquisitions of other trophy brand-name medical product companies in the year to come. Our prediction came true in 2009.

In June, Covidien acquired publicly held VNUS Medical Technologies, a producer of medical devices for the minimally invasive treatment of venous reflex. This condition is the major underlying cause of varicose vein problems that can lead to severe leg pain and swelling, fatigue, and skin ulcers. VNUS’s treatment system uses a disposable radio-frequency catheter that effectively closes diseased veins, and it has fewer side effects and faster recovery than the traditional open-surgery vein-stripping procedure. The price was $440 million (4.44 times sales of $10 million and EBITDA of $14.8 million). It is interesting to note that VNUS was one of 17 medical device companies, among them FoxHollow Technologies, NuVasive, and Cutera, that had successful IPOs in 2004, thereby ending a seven-year IPO drought for the medical device industry.

In September, Covidien acquired publicly held Power Medical Interventions, a producer of computer-aided power surgical cutting and shaping products. The company’s main product, the SurgAssist, is a stapling device that has been used in more than 45,000 surgeries. The transaction is a nice add-on for Covidien’s large U.S. Surgical business. The price was
$64 million (7.1 times sales of $9 million). Like many smaller medical device companies, Power Medical was thinly traded and undercapitalized. Now under Covidien’s wing, it will have the financial resources and distribution clout needed to expand the global market penetration of its products.

Also in September, Covidien announced a definitive agreement to acquire publicly held Aspect Medical Systems by December 31, 2009. Founded in 1987, Aspect is recognized as a pioneer in brain monitoring. The company’s Bis technology was the first clinically proven and commercially available way to measure the effects of anesthetics on the brain, thereby allowing medical professionals to reliably gauge the precise amount of anesthetic and sedative medication appropriate for each patient. The company’s technology is utilized in about 74% of operating rooms (OR) in the United States and further expands Covidien’s already formidable OR presence. The purchase price was $210 million (2.1 times sales of $99 million).

In addition to its acquisitions, Covidien was not asleep on the divestiture front. In September, it announced that it was selling its sleep diagnostic business, which operates under the trade name Sandman, to Embla, the world’s largest company focusing entirely on the sleep diagnostics area. Another small sleep-oriented transaction was the acquisition by Resmed, a $900 million-revenue developer of products to treat sleep apnea, of Laboratories Narval for $12 million. Its mandibular repositioning devices complement the line of air generators and masks that Resmed produces.

Medical Device Outsourcing

The medical device outsourcing industry includes companies providing value-added manufacturing, component manufacturing, engineering, materials processing, and assembly services to medical device OEMs. The precision and quality requirements of medical device OEMs have contributed to the creation of a very fragmented outsourcing industry comprising highly specialized niche providers. The consolidation trend of this segment continued in 2009.

Medical service provider PolyMedex Discovery Group acquired Putnam Plastics Co., a manufacturer of specialty polymer extrusions, from Memry Corp. Memry is a U.S.-based subsidiary of Saes Getters. The total consideration value is $25 million, representing 1.6 times revenue and 6.8 times EBITDA. The acquisition is in line with Saes Getters’s strategy of divesting the polymer business to focus on the main business of nitinol. The acquisition also enables Putnam Plastics to provide a wider and more sophisticated range of polymer capabilities for its customers.

Aurora Capital Group, a private equity firm, agreed to acquire Porex Corp., a developer, manufacturer, and distributor of porous plastic products and components used in healthcare and other applications, for a total transaction value of $142 million.

Consort Medical launched an offer to acquire The Medical House Plc, a UK-based company engaged in the design, development, and assembly of drug-delivery products for various healthcare markets. Consort is also a UK-based healthcare company focused on medical device technologies for drug-delivery and hospital precuts for the management of patient airways. The acquisition is part of Consort’s strategy to expand its operations in adjacent drug-delivery markets, gain technical manufacturing and regulatory synergies, broaden its customer base and product offerings, and strengthen its operation capabilities. The total transaction value was $27 million, representing a revenue multiple of 4.3.

Since 2006, Moog Inc., a leading designer, manufacturer, and integrator of precision control components and systems, has increased its medical device activity through several acquisitions focused on various types of pumps. Early in the year, Moog broadened its pump product line with the acquisition of Lithuania-based AITECS Medical UAB, a producer of syringe-style infusion therapy pumps and devices. The acquisition price was $21 million. Moog also acquired Ethox International, which specializes in the contract manufacture of medical disposables and provides microbiology, toxicology, and sterilization services. The acquisition price was $27 million (1.8 times sales of $27 million).


We see this year’s decrease in M&A activity in the medical device and related industries as an aberration due to one of the longest and most severe recessionary and tight credit periods ever experienced in the United States. We expect overall general M&A activity, and medical device M&A activity in particular, to increase in 2010. Unlike many industries, the medical device industry has growth momentum and is relatively recession resistant because so many medical procedures are truly essential rather than discretionary. In addition, there is a substantial number of small and medium-sized medical device and component companies that have products or technologies that make them attractive acquisition targets for a large group of very motivated potential buyers, both strategic and financial.

On a long-term outlook, demographic factors worldwide favor the industry as the aging population increases. As emerging markets such as China and India grow, their populations will become a major market for the industry. As has been the case for many years, mergers and acquisitions will continue to play a significant role in the growth strategies of the major medical device companies as they seek to add to their product lines, enhance their technological capabilities, and broaden their distribution reach. Their activity will probably continue to be the main driving force behind the expected continuation of the industry’s consolidation trend.

The owners of many medical device and component companies were very unhappy that the boat left the dock without them back in the 2006–2007 period, when strategic and private equity buyers were aggressively seeking acquisitions and paying very attractive valuations. A window of opportunity is beginning to open again, and the owners of well-positioned successful companies may have the chance to sell their companies at fair and attractive valuations in 2010.

About the Author

Clyde A. Burkhardt

Clyde A. Burkhardt is senior managing director of HT Capital LLC, a private investment banking firm. He leads HT Capital’s groups focusing on the medical device, healthcare services, and precision component industries. HT Capital provides a full range of financing, merger and acquisition, venture capital, valuation, management buy-out, and recapitalization services. Prior to joining HT Capital more than 15 years ago, Burkhardt was with the merger and acquisition department of Deloitte & Touche and the private placement financing unit of Aetna Life & Casualty. He can be contacted at [email protected] or by phone at 212/759-9080.

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