Despite the challenges and uncertainties medtech companies faced this year—which include the slow and cumbersome U.S. regulatory system, lack of a permanent R&D tax credit, and the anticipated 2.3% excise tax on the medical device industry—mergers and acquisitions remained strong in 2012. Major medtech companies made transactions across most medical device and diagnostics segments this year, and cross-border transactions were also strong. HT Capital Advisors tracked more than 200 M&A transactions in the medical device and diagnostics space for the first 10 months of 2012, compared with more than 260 transactions tracked in all of 2011. The average transaction value, based on publicly available data on 75 transactions, was $178 million, compared with $195 million for the prior year, based on publicly available data on 116 transactions. Seven transactions were valued at $1 billion or more, compared with eight in the previous year and four in 2010.
Big Deal in Cancer Diagnostics
In a major diversification move, the $6.6-billion sales giant Agilent Technologies acquired Denmark-based Dako, a leader in tissue-based cancer diagnostics. Dako was sold by Swedish private equity firm EQT, which acquired it in 2007. The purchase price was $2.2 billion (5.8 × sales of $340 million). For comparison, consider that Roche Holding acquired Ventana Medical Systems for $3.4 billion (10.2 × sales of $290 million) in 2008. Dako’s products include antibodies, scientific instruments, and software sold in more than 100 countries. Molecular diagnostics and anatomic pathology is a profitable, high-growth sector of laboratory medicine. While the price might seem steep, the transaction was a prudent strategic diversification acquisition for Agilent that fits with its chemical analysis and life science operations. If clinical laboratory testing sees a convergence of different technologies as research scientists discover the secrets of proteins, RNA, and DNA from patient specimens, Dako’s tissue processing technologies will complement Agilent’s line of measuring instruments and diagnostic products. With Dako in its stable Agilent will be in a better position to compete with Thermo Scientific, Danaher, and Teradyne.
Largest Transaction of 2012
After scrutiny by U.S. and European antitrust authorities, global medtech titan Johnson & Johnson (J&J) finalized its acquisition of Switzerland-based Synthes Inc. for $19.7 billion. The transaction was announced in April 2011 and closed in June 2012. To gain FTC approval for the transaction, J&J had to divest its DVP surgical system product line for treating serious wrist injuries, which it sold to Biomet. With U.S. headquarters in Pennsylvania and sales of about $2.1 billion, Synthes is the leading producer of skeletal treatment devices in North America. The acquisition complements J&J’s DePuy operation and makes it the largest global provider of trauma implant products and surgical tools.
Big Move in Molecular Diagnostics
The second largest transaction in 2012 was made by Hologic, a provider of women’s healthcare diagnostic products with sales of $1.8 billion. The company acquired publicly held Gen-Probe Inc. for $3.8 billion (6.5 × sales of $576 million, 54 × EBITDA of $185 million). The deal enhances Hologic’s diagnostics business with several automated diagnostic platforms and substantial growth potential. If the combined company achieves its goal of realizing $75 million in cost savings within three years, the transaction will turn out to be a successful one for Hologic.
EQT Wins Auction for Germany’s BSN Medical
Not letting the proceeds from the sale of Dako burn a hole in its pocket, Swedish private equity firm EQT acquired Germany-based BSN Medical GmbH & Co. The company was founded as a joint venture between Beiersdorf AG and Smith & Nephew, and it was acquired by Montagu Private Equity in 2005, which reportedly achieved a triple return on its initial investment. The price was $2.3 billion (2.8 × sales of $830 million and 10.7 × EBITDA of $215 million).
Thermo Scientific Enters Organ Transplant Business
Diagnostic and testing equipment powerhouse Thermo Scientific ($11.7 billion sales), which has completed 27 acquisitions in the past five years for an estimated total $6.8 billion, enhanced and diversified its in vitro diagnostics offerings with the acquisition of One Lambda Inc., the pioneering leader in organ transplant diagnostics. The price was $925 million (5.4 × 2011 sales of $182 million). The transplant diagnostic market, estimated at $480 million in 2011, has excellent long-term growth potential driven by the increasing number of transplant procedures and related posttransplant patient monitoring. One of Lambda’s diagnostic tests for HLA typing and pre- and posttransplant antibody detection complement Thermo Fischer’s immunosuppressant assays, which are used for drug therapy monitoring in posttransplant patients to prevent organ rejection.
A Busy Year for Covidien
Covidien ($11.6 billion sales) continued its acquisition spree with six acquisitions, totaling about $1.2 billion. In January 2012 the company acquired BARRX Medical Inc., a producer of minimally invasive devices including the HALOFLEX Ablation system that delivers RF energy to treat diseased tissue in the gastrointestinal tract. The price was $325 million, plus additional earn-out payments in the future.
In March Covidien won its bid for Israel-based Super Dimension, which develops bronchial tube endoscopes. The company’s products provide minimally invasive access to lesions deeper in the lungs than those reached by conventional bronchoscopes, enabling safe and accurate tissue biopsies. Founded in 1995, SuperDimension raised $160 million from eight venture capital firms as well as Covidien, Boston Scientific, and Pfizer. The final purchase price was $300 million (1 × sales of $30 million, plus future milestone payments).
In June Covidien acquired another Israeli company, Oridion Systems Ltd. The addition of the company, which makes patient monitoring products that measure carbon dioxide in exhaled breath to detect restricted airways, enables Covidien to offer a complete suite of respiratory monitoring products. The price was $346 million (5.3 × sales of $64.5 million in 2011, and 54 × net earnings of $6.4 million), a 91% premium over Oridion’s average closing price in the 60 days prior to Covidien’s offer.
Covidien’s third Israeli transaction was the acquisition of Poly Touch Medical Ltd. The company produces a laparoscopic surgical instrument that enables fast and accurate delivery and placement of soft tissue prosthetics.
In May Covidien further enhanced its respiratory product line with the acquisition of Newport Medical, which sells ventilators in 115 countries, for $108 million. Covidien’s sixth transaction was the acquisition by its Mallinckrodt pharmaceutical division of CNS Therapeutics, a provider of products for site-specific administration to the central nervous system to treat neurological disorders and chronic pain.
Boston Scientific Restructures through Acquisitions
Boston Scientific made three acquisitions to enhance its cardiology and cath lab product lines, which will help counter challenges the company has in its core segments. The acquisitions further its commitment to developing innovative cardiac rhythm management products. In March Boston Scientific acquired Cameron Health, a manufacturer of the world’s first subcutaneous implantable cardioverter defibrillator (S-ICD). The S-ICD system is inserted just below the skin and leaves the heart and blood vessels untouched by the thin wires that have caused failures in other transvenous systems, while providing the same defibrillation protection of transvenous ICDs. Boston Scientific invested in Cameron to support its research and commercialization efforts. The product has been sold abroad since 2009 and is currently an investigational device in the United States. The purchase price was $150 million, plus another $150 million upon FDA approval and up to $1 billion in milestone payments during the six years after approval.
The acquisition of Rhythmia Medical will enhance Boston Scientific’s presence in the rapidly growing $2.5-billion market of electrophysiology mapping and ablation device treatments for irregular heartbeats. The deal will help the company compete more effectively with J&J and St. Jude Medical, which have products addressing this market. Millennium Research Group estimates that the U. S. market for electrophysiology mapping and ablation devices will grow to $1.6 billion by 2016. The price was $90 million plus another $175 million through 2017 upon meeting regulatory and sales milestones.
Boston Scientific’s third acquisition was Bridge Point Medical, a start-up with an FDA-cleared catheter product for the minimally invasive treatment of chronic coronary total occlusions as an alternative to coronary bypass surgery. It acquired Bridge Point medical for an undisclosed price. As is often the case when a large medtech company acquires a smaller company with a promising product that lacks distribution, this acquisition is a good example of a win-win for both parties. Boston Scientific adds an innovative product to its arsenal of cath products, and Bridgeport benefits from Boston Scientific’s financial clout and extensive global distribution network.
Japanese Companies Seek U.S. Companies
Following the lead of Terumo Corp., Sekisui Chemical, and Olympus Corp., which made significant acquisitions of U.S. medtech companies in 2011, three other large Japanese companies completed transactions in 2012. Fujifilm won a heated auction and acquired leading publicly held hand-carried ultrasound equipment maker Sonosite Inc. for $995 million (3.2 × sales of $308 million and 27 × EBITDA of $37 million) and a 75% premium to the closing price of Sonosite common stock the day before it was announced that the company was exploring a sale. Sonosite has an estimated 37% share of the portable ultrasound market and will go a long way toward achieving its publicly stated goal of having Fujifilim surpass General Electric as the top ultrasound equipment provider. The transaction should accelerate the development of advanced easy-to-use, high-quality imaging devices from the combination of Fujifilms’s proprietary imaging and laser technology and Sonosite’s advanced high-frequency ultrasound transducer technology.
Asahi Kasei Corp. acquired publicly held Zoll Medical, a producer of resuscitation devices and temperature management products. Asahi Kasei, a maker of chemical fiber products, has stated that it wanted to establish a presence in the United States because the country is the global leader in the medical device business in terms of size, scope, and technological innovation. In July 2011, the company reached an agreement with Zoll to distribute its AED Plus defibrillator in Japan for $2.2 billion (4 × sales of $544 million and 265 × EBITDA of $8.3 million).
Year of the Dragon: U.S. Medtechs Devour Chinese Companies
The year 2012 will be remembered as the year some major U.S. medtech companies announced that they recognize the vast potential for medtech growth in China. China is a significant driver of the overall growth in the global medical devices market. The main reason is because China is primarily import driven, and with the GDP growing 10% per year, there will continue to be increased demand for imported medical equipment, particularly from western European countries that dominate the global market. Demographics are another driver for the medical device industry in China. It is estimated that by 2050 one-third of China’s population will be 60 years or older.
In May, J&J, which has operated in China for more than 25 years, made its first acquisition of a local Chinese company, Guangzhou Bioseal Biotechnology Co. Ltd. The company makes a porcine-plasma-derived product for controlling bleeding during surgery. Its BIOSEAL product is currently the only porcine-plasma-derived fibrin sealant approved for use in China and closely aligns with J&J’s Ethicon biosurgery brands, SURGICEL and SURGIFLO (currently sold in China). Financial terms of the transaction were not disclosed. In 2011 J&J set up an innovation center to design and develop medical device and diagnostic products specifically for the Chinese and other emerging markets.
In August, Medtronic ($15.5 billion sales) became the first major medtech company to state that it intended to enhance its position in China by acquiring local Chinese companies. In September it announced it would acquire China Kanghui Holdings, a developer and producer of trauma and spine orthopedic transplants for $755 million (14 × 2011 sales of $52 million). The company also further pumped up its presence in China by investing $66 million in LifeTech Scientific, a producer of advanced minimally invasive interventional medical devices for cardiovascular and peripheral vascular diseases. LifeTech sells its products in more than 30 countries. These transactions were not Medtronic’s first exposure to the Chinese market. In 2008 it formed a joint venture with Shandong Weigao, a producer of single-use medical devices, to market Medtronic’s vertebral and joint products.
GE Healthcare is also enhancing its exposure to China’s medical device market. In September the company announced it would move the headquarters of its x-ray business from the United States to Beijing to exploit the rapid growth of China’s diagnostic imaging market. A spokesman for GE said the company made the move because China is one of the fastest growing hubs of healthcare innovation and it is a high-growth market adjacent to other high-growth markets.
We anticipate that other multinational medtech firms will establish a Chinese presence through acquisition, joint ventures, or de novo start-ups to take advantage of the country’s favorable business environment, including reduced tariff rates on foreign medical products. There are also rumors that Trauson Holdings, which produces pelvic reconstruction plates and other trauma-surgery-related orthopedic products, could be the next big Chinese acquisition target for large U.S. medtech firms.According to a recent Frost and Sullivan study, China’s orthopedic implant sales will double, to $2.7 billion, by 2015.
Other Notable Medtech Transactions
Danaher Corp. ($16 billion sales), which acquired Beckman Coulter for $6.8 billion last year, made its first major add-on acquisition to the company with the addition of Iris International, a maker of diagnostics and sample prep technologies. With the resources of Beckman Coulter behind it, Iris will be able to accelerate its diversified pipeline strategy. The price of the deal was $338 million (2.9 × 2011 revenues of $118 million).
Diversified giant Royal DSM ($11.7 billion sales) acquired Kensey Nash, a maker of regenerative medical products using its synthetic and collagen polymer technology, for $360 million (4.3 × revenues of $84 million, and 13 × EBITDA of $28 million). The company produces components for use in general surgery, spinal, sports medicine, orthopedic, and cardiology procedures. The acquisition strengthens Royal DSM’s position in the bioactive and biopassive materials market and provides the Dutch company with a strong pipeline of regenerative medicine and tissue engineering technologies. Royal DSM has stated that it wants to grow its biomedical business to sales of $1.3 billion by 2020, and the addition of Kensey Nash puts it on track to reach that goal.
In cardiovascular, CR Bard ($2.9 billion sales) acquired venture-capital-backed arterial device maker Lutonix Inc., which developed a drug-coated percutaneous transluminal angioplasty balloon. Drug-coated balloons are a new way to treat patients with diseased arteries without leaving a permanent implant. Lutonix’s third-generation product is not yet FDA approved, but it has CE approval and is being sold in Europe. The price was $225 million ($100 million upon premarket approval).
AngioDynamics ($220 million sales), a provider of devices for minimally invasive diagnosis and treatment of peripheral vascular disease, ramped up its sales and exposure to international markets by picking up rival Navilyst Medica Inc., which makes vascular access devices that are surgically implanted into a large vein for blood transfusion and antibiotic and nutrition delivery. Navilyst’s products are used in more than 75 countries. The price was $372 million (2.5 × sales of about $150 million). The transaction was an exit by private equity firm Avista Capital Holdings, which acquired the company from Boston Scientific in 2008.
Private equity firm Bain Capital acquired Physio-Control, a maker of emergency cardiology products, including defibrillators, chest compression systems, and information management tools used by emergency medical providers. Medtronic sold the company for $487 million (1.1 × sales of $425 million). There is an interesting history here. Bain acquired the company from Eli Lilly in 1994 and took it public in 1995. In 1998 Bain sold it to Medtronic for $535 million. Medtronic subsequently decided that Physio-Control was not a core business and tried to sell it in 2006 but was unable to due to FDA quality control issues.
Baxter International ($13.9 billion sales) acquired Synovis Life Technologies, a producer of surgical tools and implantable biomaterials, microsurgery, orthopedic, and wound care products, for $278 million (4 x Synovis' sales of about $70 million). The move will expand Baxter’s presence in the growing soft tissue repair market.
Teleflex ($1.5 billion sales) continued its growth-through-acquisition strategy and expanded its anesthesia product line by acquiring LMA International, a provider of laryngeal masks used in anesthesia and emergency care, for $276 million (2.1 × LMA’s 2011 sales of $124 million).
Corning Inc. ($7.8 billion sales), a manufacturer of specialty glass and ceramics as well as life science products, enhanced its portfolio of laboratory research instruments, bioprocess solutions, and tools with the acquisition of Becton & Dickinson’s Discovery Labware operations for $730 million (3 × sales of $235 million).
Conclusion and Future Outlook
A major driver of the significant number of medtech mergers and acquisitions in 2012 was the fact that many sellers wanted to take advantage of the record-low 15% federal capital gains tax that will increase to 20% in 2013. They were probably also concerned that the rate could increase more if Barack Obama was reelected as U.S. president. The Affordable Care Act’s (ACA’s) 2.3% tax on medical device sales will also go into effect in 2013 and is another factor that drove many of this year’s acquisitions. The tax is likely to continue to influence the level of medtech mergers and acquisitions moving forward.
There was hope in 2012 that the medical device tax might be repealed, but it is unlikely considering that the Obama administration will be in power another four years. The tax is a major problem for medical device companies—particularly small and medium-sized companies—because it is levied on sales, not profits, before expenses are deducted. Therefore, a company might be losing money and still have to pay tax. Venture capital firms, which historically have invested in start-up medtech companies with promising innovative products, will probably be less inclined to do so in the future. Therefore, over the long term, there will be fewer attractive and innovative small companies to feed the acquisitive appetite of the major medtech companies.
Medtech mergers and acquisitions will not come to a standstill because of the ACA in general or as a result of the device tax. Given the maturation of some of their most important legacy product lines in the United States, major medtech companies will continue to resort to mergers and acquisitions, both domestically and abroad, to enhance their product portfolios. The tax probably won’t cause U.S medtech firms to shift production abroad because it applies to both imports and domestic products.
However, many major U.S companies will increasingly focus their marketing efforts on emerging markets, particularly China, India, and Brazil. Other major domestic and foreign medtech companies will follow the lead of J&J and Medtronic to acquire Chinese companies in the future.
Clyde A. Burkhardt is senior managing director of HT Capital Advisors LLC (New York City), a private investment banking firm. He leads HT Capital Advisors' groups focusing on the medical device, healthcare services, and precision component industries. Contact Burkhardt at [email protected].