The rise in medtech merger and acquisition (M&A) activity that began last year continued in 2011. HT Capital Advisors tracked 414 M&A transactions in the first 10 months of this year compared with 262 in the same period in 2010. These included 265 closed transactions and 49 announced and pending transactions. The aggregate value of the 2011 transactions was about $60 billion compared with about $49.3 billion for the 2010, which includes Novartis’ $28.3 billion acquisition of Alcon Labs. Eight transactions were valued at $1 billion or more, versus four in 2010, three in 2009, and nine in 2008.
In 2011 there were M&A transactions in all medtech segments as indicated by the selected deals discussed in this article. Transactions included large transformational or diversification acquisitions, small strategic ‘’add-on” acquisitions, and risky acquisitions of companies with promising but unproven products based on innovative technologies. The buyers were a diverse group of both US. and foreign companies. In addition to traditional companies of various sizes, buyers included large pharmaceutical companies and some conglomerates seeking to enhance or diversify their product lines. Private equity firms were very active; some sought acquisitions for their existing medtech platform companies, while others were looking for a new platform company. Some large private equity firms expressed interest in very large targets, such as Synthes and Beckman Coulter, but lost out to strategic buyers.
J&J’s Acquisition of Synthes
The blockbuster M&A transaction of 2011 was Johnson & Johnson’s acquisition
of privately-held Swiss trauma device maker Synthes Inc. (when this issue went to press, the deal was still under antitrust review by The European Commission) for $21.3 billion (5.8× revenues and 16.4× operating earnings; net acquisition cost of $19.4 billion). Synthes produces instruments, implants, and biomaterials for the surgical fixation, correction, and regeneration of the human skeleton and soft tissues. Surpassing its $16.6 billion acquisition of Pfizer's consumer products business five years ago, Synthes is J&J’s largest acquisition ever and the third largest medtech transaction to date.
Combine its new acquisition with its DePuy subsidiary, and J&J becomes the world’s largest producer of trauma implants and surgical tools. The acquisition significantly enhances the company’s product range in the estimated $37 billion global market for orthopedic products. For an acquisition of this size, the product fit is excellent. DePuy is a leader in joint replacement products, and Synthes is a leader in many key orthopedic segments—including trauma, craniomaxillofacial, and power tools—where DePuy has little or no position. The deal was made shortly after rumors began circulating that J&J had been turned down after making an offer worth $11.7 billion to purchase rival orthopedic company Smith & Nephew.
Stryker Strikes Again
Stryker, blessed with an estimated $2 billion cash stockpile, has been on an acquisition binge during the past couple of years in an effort to diversify its core hip and knee transplant business, which has slowed with the troubled U.S. economy. As an add-on to last year’s $1.5 billion acquisition of Boston Scientific’s global neurovascular business, Stryker acquired Concentric Medical for $135 million. Concentric is believed to have developed innovative minimally invasive products to treat acute ischemic strokes, which account for more than 85% of strokes.
Stryker acquired Orthovita
Inc., which is part of the estimated $5 billion global orthobiologics market, for $316 million (3.3× sales of $95 million). Combining Orthovita’s portfolio of products and proprietary biomaterials pipeline with Stryker’s global sales and marketing teams should result in another growth-driving acquisition for Stryker. The sale of Orthovita was reportedly a major home run for Essex Woodlands, a venture capital fund that had a major investment in the company. Stryker also acquired Memometal Technologies, which produces hand, foot, ankle, and wrist implant products, for $150 million (5× sales of about $30 million) plus up to $12 million in milestone payments. This acquisition can also be viewed as a diversification into a specialty product area that is not usually significantly affected by economic downturns.
Danaher Wins Battle for Beckman Coulter
The second largest 2011 medtech acquisition was industrial and healthcare conglomerate Danaher Corp.’s takeover of Beckman Coulter for $6.8 billion (1.85× sales of $3.7 billion and 8.1× EBITDA of $840 million). In a heated full-blown auction process, Danaher beat out two major private equity consortiums, Blackstone/TPG Capital and Carlyle Group/Apollo Global Management. The transaction ends months of speculation about the future of Beckman Coulter, which went through difficult times in 2010 following the recall of a faulty heart test product and the unexpected resignation of the its CEO. Danaher, which has a reputation for being a very shrewd buyer, must believe that the company’s problems can be fixed. The transaction positions Danaher to meet the anticipated increased demand for diagnostic testing and preventative medicine products as the U.S. population ages.
Major Acquisition for Private Equity Firm
The third largest acquisition of the year was that of publicly held Kinetic Concepts (KCI). In a “going private” transaction, the company was acquired for $6.3 billion (3.1× estimated sales of $200 million and 10.1× EBITDA of $624 million) by Apax Partners, a private equity fund, and two Canadian pension funds. In 1997, KCI was taken private in a transaction valued at $850 million, but went public again in 2004. In August, after Apax and the pension funds made their offer, private equity-owned pharma company Convatec made a higher offer for KCI, but dropped out when financing could not be arranged.
Immucor Inc., a producer of preinfusion blood analysis systems was acquired for $1.945 billion (4.9x sales and 11x EBITDA) by TPG Capital, one of the losing bidders on the Beckman Coulter transaction. The price represented a 30% premium to the valuation of the company on the day prior to the announcement of the proposed transaction. Immucor derives about 75% of its sales from markets in the United States, where the demand for blood softened over the past two years due to the sluggish economy. TPG indicates that it will work with Immucor’s management team to expand the global footprint for the company’s products.
Thermo Fisher Hooks Diagnostics Companies
Thermo Fisher Scientific, the powerhouse $11 billion sales producer of diagnostic and testing equipment and consumables, acquired Phadia AB for $3.5 billion (6.7× sales of $525 million). As a leader in allergy and autoimmunity diagnostics, Phadia’s products significantly expand Thermo Fisher’s specialty diagnostics operation. In vitro allergy testing is estimated to be growing 9% annually on a global basis and has major untapped growth potential in the United States and in emerging market countries, where very little allergy testing is performed. It is believed that one in five people in North America and Europe suffer from allergies. Autoimmunity is also a growing worldwide medical problem, with an estimated 100 million people suffering from various autoimmune disorders.
Thermo Fisher also acquired publicly held Dionex Corp., a producer of chromatography systems, for $2.1 billion (4.8× sales of $430 million and 20.4× EBITDA of $103 million), a premium of 21% over the valuation of Dionex prior to the announcement of the proposed transaction. The transaction unites two complementary chromatography portfolios to create the most extensive chromatography instrument, software, and consumables offering available. Specifically, it combines Dionex’s ion and liquid chromatography products with Thermo Fisher’s gas chromatography systems and consumables.
Thermo Fisher was also active on the divestiture front. It sold its Athena Diagnostics operation, which specializes in diagnostic tests for neurological conditions (including Alzheimer’s disease) to Quest Diagnostics Inc. for $740 million (7.4× sales of $100 million). It sold its Lancaster Laboratories operation, a contract testing laboratory, to Eurofins Scientific SE, a producer of laboratory services for the pharmaceutical and other industries, for $200 million (1.7× revenue of $115 million).
Other Diagnostics Transactions
Quest Diagnostics acquired Celera Corp., a provider of disease management services, for $344 million (2.7× sales of $128 million) The acquisition significantly enhances Quest’s gene-based medical testing capabilities. Celera was the pioneer in sequencing the human genome to identify links between genetic variations and diseases.
The Swiss pharmaceutical giant Novartis acquired publicly-held Genoptix, an oncology laboratory services company, for $470 million (3.2× sales of $148 million and 10× EBITDA of $47 million), a 27% premium over Genoptix’s valuation the day before the announcement of the transaction. Roche Holding AG ($53 billion sales), another Swiss company, acquired PVT Probenverteiltechnik GmBH, PVT Lab Systems LLC, a Germany-based developer of automation and workflow products for in vitro diagnostic testing, for $91 million, plus up to $28.5 million in milestones. The acquisition enhances Roche’s existing position in the area of in vitro testing in hospital and commercial venues, which is a growing market worth more than $15 billion.
PerkinElmer Inc. acquired publicly held Caliper Life Sciences Inc., which provides imaging and detection solutions for life sciences research, diagnostics, and environmental markets, for $600 million (4.3x sales of $140 million and 128x EBITDA). The transaction broadens PerkinElmer’s molecular, cellular, tissue imaging product lines, and adds Caliper’s innovative microfluidics platform for genomics and proteomics applications and its sample preparation technologies for crucial scientific workflow areas, including next generation DNA sequencing.
QIAGEN N.V. a Netherlands $1.1 billion sales provider of technologies for analyzing biological samples acquired publicly-held, France-based Ipsogen S. A., a producer of cancer diagnostic products for $101 million (9.2x sales of $11 million). The acquisition broadens QIAGEN’s molecular diagnostics offerings through access to Ipsogen’s assays covering 15 biomarkers used for the diagnosis, prognosis, and monitoring of patients with various blood cancers.
Pelvic Health Transactions
Endo Pharmaceuticals Holdings Inc. acquired American Medical Systems Holdings Inc. (AMS) for $3.2 billion (5.6× sales of $540 million and 16.7× EBITDA of $173.5 million). The acquisition is a major diversification for Endo and is a significant step in achieving its core strategy to become the leading provider of pelvic health devices. AMS holds the leading position in several minimally invasive product categories, including products for erectile dysfunction prostheses, male and female incontinence, and laser technology for enlarged prostrate treatment.
Royal Philips Electronics, a provider of medical imaging equipment and supplies, acquired Sectra Mammography. The price was $82 million, plus $18 million of potential milestone payments. Another women’s pelvic health transaction was the acquisition by Utah Medical Products, a producer of surgical products for women’s health and childbirth, of Femcare Group Ltd for $40.8 million. Femcare, which is based in the UK and was a portfolio company of Barclays Private Equity, produces disposable surgical and laparoscopic instruments.
Hologic Inc. made two acquisitions to beef up its product offerings. It acquired, and will further develop and commercialize, the microwave endometrial ablation system of Microsulis Medical Limited, a UK producer of microwave therapeutic devices. The system will be used to treat female urological and gynecological conditions. Hologic also acquired Interlace Medical Inc. for $125 million plus milestones. The transaction is believed to have been a home run for the six venture capital firms that provided the financing to support the development of the company’s products.
HT Capital initiated two substantial women’s health transactions: the acquisition by Insight Pharmaceuticals (a portfolio company of a large private equity fund) of e.p.t. (a leading brand in home pregnancy testing) and of the Monistat operation of McNeil-PPC Inc. (a producer of vaginal antifungal products).
Major Diversification Move by Dentsply
After a heated competitive sale process, dental products company Dentsply acquired Astra Tech, a unit of pharma company AstraZeneca, for $1.8 billion (3.3× sales of $535 million and 17× EBITDA of $106 million). Astra Tech has two main business divisions—dental implants and medical devices focused primarily on surgery and urology. The acquisition doubles Dentsply’s position in dental implants and expands its portfolio of other dental products. It also is a major diversification move into the urology and surgery medical device segments in which Astra Tech has a strong market position and a promising pipeline of new products.
Gentinge Expands into Cardiovascular Sector
Unlike in prior years, there was only one significant cardiovascular transaction in 2011. In a move to bolster its cardiac device business, Maquet Cardiovasular, a subsidiary of Sweden’s diversified medtech powerhouse Getinge Group , acquired privately held Atrium Medical for $680 million (3.4x sales of $200 million and 12.8x estimated 2012 earnings of $53 million). Atrium, which has grown at an average rate of 19% for the past five years, makes medical device products for interventional cardiology and radiology, chest trauma care, thoracic drainage, and vascular and general surgery. The company is expected to continue expanding rapidly and will benefit from Maquet’s existing sales and marketing organization, which features proprietary representation in a significant number of markets in which Atrium is not currently active. Maquet is a major growth story in the cardiovascular segment. In 2006, the company had sales of $70 million; in 2011, its sales are estimated to be over $1 billion. This enviable record of growth was achieved both organically by improving upon and penetrating the cardiovascular market with existing therapies and through acquisitions. In 2007, the company acquired Boston Scientific’s cardiac surgery and vascular divisions for $750 million and intraaortic balloon pump maker Datascope for $840 million one year later.
Medtronic’s Hyperactive Year
Medtronic Inc. kicked off 2011 with an acquisition of privately owned Ardian Inc. for $800 million, plus additional cash milestone payments equal to Ardian’s annual revenue growth rate through 2015. Medtronic had previously invested in Ardian and held an 11.3% ownership interest. Ardian’s flagship Symplicity catheter system, which treats uncontrolled hypertension through ablation of the nerves lining the renal arteries, has received the CE mark and Australia’s TGA listing, but is not FDA approved. The acquisition augments Medtronic’s existing interventional therapies and complements its expertise in catheter design and ablation technologies. The price seems high for an early stage company with only phase II data and which is unlikely to commercialize before 2014, but the market for catheter-based hypertension systems is projected to be worth more than $1 billion.
On the same day in July, Medtronic announced definitive agreements to acquire two companies, both of which boost its surgical products portfolio. For $525 million (5.2× sales of $100 million), Medtronic acquired Salient Surgical Technologies Inc
., which has an innovative patented technology to hemostatically seal soft tissue and bone, thereby enabling surgeons to reduce blood loss during surgery. For $120 million (6× revenue of $20 million), Medtronic also acquired PEAK Surgical Inc., a company in the emerging field of advanced energy surgical incision technology. Medtronic had previously had small ownership interests in both companies.
Medtronic’s fourth transaction was the acquisition by its Physio-Control subsidiary, which makes defibrillators, of Swedish-based Jolife, maker of the Lucas chest compression system. Lucas administers nonstop chest compressions, thereby allowing medical personnel to focus on other critical tasks. Physio-Control had worked with Jolife for several years on the development of mechanical cardiopulmonary resuscitation devices. In November it was announced that Physio-Control will be acquired by Bain Capital (from Medtronic) and become a privately-held stand-alone company.
Medtronic’s fifth transaction was the investment, with other investors, of $31.4 million in Tengion Inc., a clinical-stage biotech company. The company went public in 2010 to raise capital for commercializing an organ regeneration technology for producing replacement organs and tissue using a patient’s cells. When Tengion ran out cash and a merger fell through, Medtronic and other investors came to the rescue. As part of the bargain, Medtronic received a right-of-first-refusal on Tangion’s leading product candidate, which is called the neo-kidney augment.
Japanese Companies Acquire U.S. Companies
Terumo Corp., Japan’s largest medtech company (sales of more than $3.4 billion), acquired Gambro AB’s Caridian BCT operation, a producer of blood transfusion equipment used by blood banks. The price was $2.6 billion (5× sales of $524 million and 15× EBITDA of $173 million). This acquisition was the largest ever by a Japanese company; Terumo is now the largest producer of blood transfusion equipment in the world. In addition, Terumo’s U.S. subsidiary, Terumo Americas Holding Inc., acquired biotech company Harvest Technologies Corp. for $70 million plus milestone payments of $35 million payable from 2012 until 2015. In 2010 Harvest’s sales were $25.9.
Sekisui Chemical Co. Ltd., a Japanese conglomerate that does $9 billion in sales, acquired Genzyme’s diagnostic business for $265 million (1.6× sales of $167 million). Genzyme and Sekisui's medical operation had cooperated in the diagnostic area since 1995; the acquisition is a significant global expansion for Sekisui. Olympus Corp., a $10.5 sales diversified Japanese company, acquired the Osteogenic Protein-1 implant putty product line from Stryker Corp. for $60 million. The products, which are used in lumbar spine fusion procedures and for the treatment of long bone fractures, fit well with Olympus’ existing biomaterial and regenerative medicine technologies.
Through its American subsidiary, Sony Corp. acquired Micronics Inc.
, producer of point-of-care devices for disease diagnosis, treatment monitoring, and blood testing. Formed in 1996 and backed by venture capital firms, Micronics currently has 30 employees. The transaction is Sony's first medtech acquisition. Sony, which produces cameras, printers, and displays sold to medical institutions, has publicly stated that it is considering ways to expand in the healthcare field where its electronics technologies can be applied. One of Micronics's key strengths is its microfluidics technology that has enabled the company to develop effective near patient point-of-care products in both the molecular and immunoassay diagnostic test areas.
Boston Scientific Plows on the Acquisition Trail
Boston Scientific continued on the acquisition trail in 2011 with four deals. The company acquired Atritech Inc.
, a developer of nonvascular atrial fibrillation technologies, for $100 million plus milestones of up to $275 million. Atritech’s closure device, the Watchman, closes the left atrial appendage in patients with atrial fibrillation who are at risk of suffering an ischemic stroke. It is the first device to be proven as an effective alternative to anticoagulant drugs. The acquisition enhances Boston Scientific’s position in the developing structural cardio market, and its cardiology sales force has the clout to drive further commercialization of the Watchman device. Boston Scientific’s second cardio acquisition was that of S.I. Therapies, an Israeli start-up with advanced reentry cardiac catheter technology, for $5 million plus milestones. If achieved, this would result in a total price of about $24 million. Boston Scientific also acquired ReVascular Therapeutics Inc. to enhance its peripheral interventions business.
ReVascular has an intraluminal chronic total occlusion crossing device that allows endovascular treatment in situations that usually require surgery or lower extremity amputation. The device provides a new alternative for treating patients who cannot be treated with guidewires or other catheter-based products. Boston Scientific’s fourth transaction was the acquisition of Intelect Medical Inc., a developer of devices for deep brain stimulation (DBS) therapy, for $60 million. Boston Scientific estimates that the worldwide market of DBS therapy products is worth $400 million, and is projected to grow to more than $1.5 billion by 2020.
Conclusion and Future Outlook
We believe that the uptick in 2011 M&A transactions will continue in 2012. The current positive M&A environment is due to a near-perfect confluence of several key factors. Most of the leading medtech strategic buyers came through the financial crisis and recession with strong balance sheets and a large amount of cash available for acquisitions. There are many private equity investors, some with existing medtech platforms, that are eager to deploy their capital in acquisitions. They view medtech as attractive, given the industry’s strong fundamentals and the aging population, and will probably be fueled by some of the successful exits they have witnessed during the past two years. Entrepreneurial owners of privately held medtech companies, venture capitalists, and private equity owners are all expected to explore the M&A route for exiting from medtech investments made over the past several years. We are currently having discussions with owners exploring the sale of their companies, which indicates that companies want to lock in the current record low maximum federal capital gains tax rate of 15%, which is due to expire at the end of 2012 and could be increased.
While the list of potential megasize acquisition candidates is relatively short, there will likely be some large medtech M&A transactions over the next few years, driven by the decreasing growth rates of large medtech companies. As this year's acquisitions illustrate, medtech companies want to acquire leading-edge technologies with high potential for growth. Because payers increasingly demand proof that a product or procedure is effective before authorizing reimbursement, medtech buyers will continue to be attracted to acquisition prospects with technologies that improve health outcomes for patients.
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.