Buyer’s Market Prevails for Medtech Firms

Medtech merger and acquisition (M&A) activity for the first 10 months of 2010 increased significantly over the depressed levels of 2009. A better M&A environment began to take hold in late 2009, and continued to warm up in 2010 as the U.S. economy began to recover from one of the most severe recessions and tight credit periods ever. Also, both potential buyers and sellers in 2010 were better able to assess and plan for healthcare reform and regulatory changes, and therefore were more prepared to get back on the M&A trail.

Clyde A. Burkhardt

November 10, 2010

18 Min Read
Buyer’s Market Prevails for Medtech Firms

HT Capital Advisors tracked 262 medtech and related healthcare transactions in the first 10 months of  2010—228 closed transactions and 34 announced or pending transactions (see Table I). The aggregate dollar value of the 2010 transactions was about $21.3 billion, excluding the $28.3 billion Novartis paid for a controlling interest in Alcon Labs. Four transactions were valued at $1 billion or more compared with 3 in 2009, 9 in 2008, and 17 in 2007. Acquisition price multiples based on revenues and EBITDA (earnings before interest, taxes, depreciation and amortization) increased significantly. As a multiple of acquisition price, revenue multiples averaged 4.1 in 2010 compared with 3.4 in 2009, 3.5 in 2008, and 4.2 in 2007. For the transactions tracked where the information was available, the average EBITDA multiple was 17.1 compared with 12.2 in 2009 and 20.9 in 2008. Just as in 2009, approximately 25% of 2010 transactions have been structured with some form of contingent payment tied to the achievement of revenue or earnings milestones.

The medtech M&A market in 2010 was clearly a buyers’s market. Although the initial public offering (IPO) market warmed up for many industries, it remained in a deep freeze for the medtech industry. The tight credit markets began to loosen up, but primarily for large companies. Small- and middle-market medical device companies and their private equity and venture capital investors had no choice but to consider lower valuations if they wanted to complete a sale transaction. Many of the larger medtech companies successfully began bargain hunting (see Medtronic’s acquisition of ATS Medical and Covidien’s acquisition of Somanetics discussed later).

Blockbuster Transaction after Two-Year Takeover

The largest transaction in 2010 was Novartis’ acquisition of Alcon Labs Inc., the world’s largest and most profitable pharmaceutical ophthalmology company, with 2009 sales exceeding $6.5 billion. The transaction is the largest medtech acquisition by a big pharma company, and the largest medtech acquisition since Boston Scientific’s acquisition of Guidant Corp. in 2006 for $28.4 billion. The takeover process began in April 2008 when Nestle agreed to sell its 77% majority stake to Novartis in two steps. In July 2008, Novartis paid $10.4 billion for a 25% interest, and in October 2009, it paid $28.3 billion for a 52% interest. Novartis will be the 100% owner after it purchases the remaining 23% held by the public, in what is expected to be a negotiated transaction with Alcon’s board of directors. The total cost will be about $50 billion (7.7× 2009 sales of $6.5 billion and 25× net earnings). With the acquisition, Novartis gets the leading ophthalmic device product portfolio to add to its extensive contact lens and eye care pharmaceutical product base. Overall, Novartis will account for over 70% of all products sold in the global vision care market.

Merck Wins Takeover Battle for Millipore

The second-largest acquisition transaction in 2010 was Germany’s Merck KGaA’s acquisition of Millipore Corp., the leading producer of a broad line of bioscience products and services, including filters and purifiers. Having received an unsolicited offer of $6 billion from Thermo Fisher Scientific, Millipore management decided to sell the company through a full-blown auction. Merck was the winning bidder with an offer of $7.2 billion (4.2× sales of about $1.7 billion). Given Merck’s setbacks for some of its experimental drugs, we view the transaction as a timely defensive diversification move.

Having been thwarted in its quest for Millipore, Thermo Fischer proceeded to acquire Ahura Scientific Inc., a producer of innovative, sophisticated infrared spectroscopy analytical instruments used to detect and analyze chemical components. The acquisition price was $145 million plus an unspecified earn-out (2.2× sales of $45 million). Thermo Fischer also acquired Fermentas, a Canadian company with operations in Lithuania, which produces a broad range of cellular and research products, including reagents, enzymes, and kits. The acquisition price was $260 million (4.7× sales of $55 million). The acquisition significantly enhances Thermo Fischer’s PCR (polymerase chain reaction) instrument platform, which addresses the rapidly growing PCR-based molecular diagnostics market.


Significant Vascular and Neurovascular Acquisitions

After already bringing in $10 billion in revenues and making several smaller acquisitions in 2009, diversified medtech giant Covidien completed one of the largest in 2010 with the acquisition of publicly held vascular device producer eV3. The price was $2.6 billion (5.2× sales of approximately $500 million, and a 20% premium over eV3’s market price the day before the transaction was announced). eV3 produces a broad product line of stents, catheters, and other endovascular and minimally invasive vascular devices to treat clogged veins and arteries. The acquisition was Covidien’s largest since its spin-off from Tyco International. eV3’s devices complement—without overlapping—the products of VNUS Medical Technologies, which Covidien acquired in 2009. The purchase of eV3 also broadens Covidien’s product offerings and new product pipeline in the high-growth vascular market.

One month after Covidien acquired eV3, Johnson and Johnson, a pharma and medical device giant with $63 billion in sales, agreed to acquire Micrus Endovascular, a producer of catheters and other minimally invasive devices for treating stroke-related brain problems such as aneurysms and arterial thickening. The acquisition price was $480 million (5.2× sales of $91 million and 36× EBITDA of $13.3 million). The acquisition significantly strengthens J&J’s position in the stroke technology market and will fit nicely with Codman Neurovascular, a new division that J&J formed in 2009. We think it is highly possible that J&J acquired Micrus as a strategic move in reaction to Covidien’s acquisition of eV3. Having heard that other major companies such as Medtronic and Abbott Labs are interested in acquiring a specialty neurovascular company with devices for the prevention and treatment of strokes, we expect additional acquisitions to be forthcoming in the months ahead.

In another acquisition move, Covidien acquired publicly held Somanetics Corp., a leader in cerebral and somatic oximetry, for $250 million (5× 2009 sales of $50 million, and a 32% premium over Somanetics’ market value prior to the announcement). Somanetics’ patient monitoring technology continuously measures blood oxygen levels in the brain and body of patients who are at risk for restricted blood flow so that clinicians can detect and correct various complications. The company’s Invos system is the only commercially available cerebral-somatic oximeter shown to improve patient outcomes. The acquisition is consistent with Covidien’s stated strategy to acquire fast-growing, high-margin medical product companies where it can develop a global competitive advantage. In accordance with this strategy, Covidien sold its continuous positive airway pressure (CPAP) sleep therapy business to PH Invest, a Luxembourg company.

In October, St. Jude Medical Inc. announced that it would acquire publicly held AGA Medical Holdings for about $1.1 billion (6.5× 2009 revenues of $199 million, and a 41% premium over AGA’s market value prior to announcement of the transaction). The acquisition gives St. Jude complementary products that provide diversification into the structural heart defect treatment segment beyond its maturing core product lines of cardiovascular implantables. The structural heart defect market is estimated to be a $2 billion market in the early stages of development. AGA Medical produces a comprehensive line of devices to treat structural heart defects and vascular abnormalities through minimally invasive transcatheter treatments. The company’s Amplatzer products have strong brand name recognition for being safe and effective as well as easy to use. AGA was the only significant medical device company to complete an IPO in 2009, and it has grown at a compound rate of 19% since 2005.

St. Jude also acquired Lightlab Imaging Inc., the pioneer and leader in the development of optical coherence tomography (OCT). OCT is a high-resolution diagnostic intravascular imaging technology used by physicians for the diagnosis and treatment of cardiovascular disease. The acquisition price was $90 million cash. Lightlab’s technology provides image resolution 10× greater and 20× faster than images produced by intravascular ultrasound technology. The transaction was announced two weeks after Lightlab received FDA 510(k) clearance for its advanced OCT-based C7-XR imaging system and related C7 Dragonfly imaging catheter. The transaction is an excellent illustration of the importance, for both buyers and sellers of medtech companies, of not proceeding with an acquisition until intellectual property results in a proven, marketable product or technology.

Another cardiovascular acquisition of note was C.R. Bard’s acquisition of Flowcardia Inc. for approximately $80 million cash from private equity investor Glide Healthcare Partners. Flowcardia has innovative technologies to facilitate the crossing of totally occulated coronary and peripheral arteries. Chronic total occulusions (CTOs) are one of the last clinical challenges in interventional therapy. The absence of safe and effective devices to treat CTOs and the high incidence of restenosis when metal stents are used has been one of the major reasons CTO patients undergo bypass surgery. Flowcardia’s  Crosser recanalization catheter, steerable support catheters, and guidewires compose a family of tools that enables physicians to quickly cross CTOs, allowing for subsequent balloon angioplasty, atherectomy, and stent placement.

Orthopedic leader Stryker Corp. continued to diversify with the acquisition of Boston Scientific’s neurovascular unit. The price was $1.4 billion in cash plus milestone payments of $100 million upon successful commercialization of a device for treating strokes (4.3× 2009 sales of $348 million). The unit, a leader in the estimated annual $900 million global neurovascular market, produces spinal cord stimulators to treat severe pain of the lower back and legs. The acquisition complements Stryker’s other neurosurgery products and is a timely diversification into the fast-growing therapy market. Another significant product enhancement move by Stryker was its acquisition of the surgical division of Porex Corp., a global producer of bioimplantable porous polyethylene products (PPE) for use in reconstructive surgery of the head and face. The acquisition price was $150 million. Stryker also acquired Gaymar Industries, a manufacturer of pressure ulcer treatment technology, for $150 million (2× 2009 sales of $77 million). The acquisition was a culmination of a 10-year relationship between the companies. Stryker had the exclusive rights to sell certain Gaymar products to acute care customers in North America.

Boston Scientific Returns to the Acquisition Trail

Boston Scientific, which has gone through a painful and complicated restructuring for several years, made its first significant acquisition since acquiring Guidant for $28.4 billion in 2006. In October, the firm  completed its acquisition of Asthmatx Inc., which developed the Alair bronchial thermoplasty system, a catheter-based system for the treatment of severe persistent asthma. The acquisition price was $193.5 million, plus up to an additional $250 million, contingent on achieving specified revenue milestones through 2019. The Alair system was approved in April, and it is the first device-based asthma treatment with FDA approval. Growth prospects for the system are believed to be excellent given that there are an estimated 6–7 million patients worldwide 18 years old or older whose asthma is not controlled with inhaled medications. Interestingly, two years ago Boston Scientific sold its major equity stake in Asthmatx to venture investors.  The acquisition, while relatively small, may signal the return of Boston Scientific as a strategic buyer to enhance its growth prospects and profitability.

Another Acquisition Attack on the Heart Valve Market

Acquisitions have been the way Medtronic has grown its cardiovascular operations, which generated sales of about $2.5 billion in 2009.  The company acquired publicly held ATS Medical Inc. for $370 million (4.9× 2009 sales of $76 million). ATS reported a loss of $6.3 million in 2009. ATS’ key product lines overlap the two segments where Medtronic has indicated it wants to expand—structural heart valve disease and cardiac arrhythmias. Medtronic has catheter ablation technologies using radio frequency and cryoablation energy. What ATS has that Medtronic lacks is surgical cryoablation procedures for the treatment of cardiac arrhythmias. With ATS under its wing, Medtronic now becomes a full-service provider for the treatment of cardiac arrhythmias, with a focus on the expanding atrial fibrillation market. We believe that this acquisition transaction is a good example of why a small medical device company with outstanding technology, but lacking deep financial resources and distribution clout in the form of extensive access to surgeons and patients, should explore being acquired as a viable alternative. Medtronic, with its worldwide leadership position, strong financial resources, and global distribution network, was an ideal buyer for ATS.

Another Medtronic cardiovascular transaction was the acquisition of Invatec SpA, based in Italy. Invatec manufactures stents, angioplasty balloons, and accessory products. Medtronic expects the acquisition to accelerate the growth of its cardiovascular business by adding new coronary and peripheral vascular products to its product offerings. It is estimated that more than 20 million people in the United States and Western Europe have peripheral vascular disease; the market is $2 billion and growing 10% annually.

A Wide Variety of Diagnostic Acquisitions

The largest diagnostics acquisition was GE Healthcare’s pending acquisition of publicly held Clarient Inc. for $580 million (7.7× estimated sales of $75 million, and a 33.7% premium over the market value prior to the announcement). Clarient is a leading company in the rapidly growing area of molecular cancer diagnostics, with systems that provide doctors with precise information about a patient’s cancer and help them prescribe appropriate treatment. The acquisition has the potential to dramatically alter the clinical testing landscape because it could move GE Healthcare, which is an imaging systems powerhouse, closer to its goal of integrating imaging and clinical molecular diagnostics to both diagnose and monitor cancer and other diseases. The combination of imaging and molecular testing is the Holy Grail in the diagnostics spaces. GE Healthcare tried but was unable to do it with Amersham, a Bristish company it acquired in 2004. In its press release announcing the acquisition, GE Healthcare said that it expects Clarient “to accelerate the development of new integrated tools for the diagnosis and characterization of cancer” and help pathologists and oncologists make more confident clinical decisions. The market for cancer-profiling products was estimated at $15 billion in 2009, and estimated to grow to $47 billion by 2015.

GE Healthcare also agreed to acquire Orbatech Medical Solutions Ltd., which produces the cadmium zinc telluride (CZT) detectors used in GE’s Alcyone nuclear cardiology technology. GE’s system produces views of cardiac anatomy and functionality quickly and with high clarity, with exposure time as short as three minutes. The acquisition price was $9 million cash plus $5 million cash on certain milestone achievements. GE Healthcare’s parent, GE Corp., has a $25 billion war chest for acquisitions, and we would not be surprised to see GE Healthcare announce more significant acquisitions in the future.

Women’s heath specialist Hologic Inc. acquired Sentinelle Medical, a leading provider of innovative magnetic resonance imaging (MRI) breast cancer detection and intervention products. Sentinelle was purchased for $85 million (5.7× sales of $15 million, plus contingency payments tied to sales increases over a two-year period).

Another transaction was C.R. Bard’s  acquisition of SenoRx Inc., a producer of x-ray– and MRI-guided breast biopsy systems, for $200 million (3.6× 2009 sales of $55.6 million). The acquisition expands Bard’s diagnostic imaging business beyond ultrasound-guided procedures to include breast biopsy devices that are also designed to operate also in x-ray and MRI imaging modalities.

Alere (formerly Inverness Medical Innovations), a provider of a broad range of diagnostic products that has grown significantly through acquisitions over many years, acquired South Korea–based Standard Diagnostics, which manufactures rapid diagnostic products. The acquisition expands Alere’s geographic coverage and increases its diagnostic product offerings for hepatitis, infectious diseases, tumor markers, and urine and protein strips. The acquisition price for a 75% interest was $224 million (5.6× sales of $40 million). Alere also acquired Epocal Inc., a Canadian producer of blood testing equipment with wireless transmission capability, for $175 million plus a potential $82.5 million in milestone payments. The Epocal platform complements Alere’s Triage technology for wirelessly relaying point-of-care (POC) bedside test results to patient files. Alere has an extensive sales force, which Epocal lacked, to market Epocal’s existing products as well as new POC systems yet to be developed.

Laboratory Corp. of America, medical laboratory test company with $4.7 billion in annual sales, has an agreement to acquire the genetic testing business of Genzyme Corp. for $925 million (2.5× 2009 sales of $371 million).

Acquisition Activity in Orthopedics and Regenerative Medicine

An intriguing acquisition in the orthopedics area was Baxter International’s acquisition of Apatech Ltd., a producer of bone graft materials, from private equity investors for $240 million cash plus a potential additional $90 million based on achievement of milestones (5.5× sales of $60 million, assuming an ultimate price of $330 million). Apatech, under the leadership of a former Burroughs Wellcome executive since 2003, became a leading producer of biologically active bone graft products. Apatech’s  biologically active trophic glass product ACTIFUSE has the ability to grow bone. The interesting question is why Baxter ended up as the acquirer of Apatech rather than Stryker Corp., which was Apatech’s first U.S. distributor. We think that part of the answer may be that Apatech management saw a better fit with Baxter, which has a proven surgical biologics technology platform and sales exceeding $500 million for surgical biologic products for orthopedic, cardiovascular, and many other segments. Bottom line, Baxter, which had publicly stated that it had identified regenerative medicine as a potential growth engine to drive its bioscience business, paid what many believe was a premium price for Apatech. Baxter did this because it can significantly increase it biologics product sales with Apatech’s proprietary bioactive silica products, and do so in orthopedics and many other medical specialties. If Baxter accomplishes this feat, its acquisition of Apatech will be a sea change event that successfully launches the biologics era in orthopedic surgery—similar to how the 1993 merger of Danek and Sofamor marked the beginning of major spine care innovations.

Another regenerative biologics acquisition was Medtronic’s acquisition of publicly held Osteotech for $123 million cash (1.3× sales of $96 million, and a 63.5% premium over the market value prior to the announcement). Osteotech produces bone graft, bone matrix, and biocomposite products used in muscloskeletal surgery. Medtronic has been positioning itself at the intersection of medical devices and biologics, where a biologic product is delivered by a medical device. Osteotech’s products add to and are complementary to Medtronic’s products. Medtronic‘s focus has been on spine and orthopedic trauma, and Osteotech’s products represent an expansion into joint reconstruction, foot and ankle surgeries, and sports medicine. The Osteotech deal is a prime example of a major medtech company focusing on strategic acquisitions to fill product line gaps. 

3M Warms Up to An Acquisition

Diversified company 3M acquired Arizant Inc., a leading manufacturer of patient warming products that prevent hypothermia in surgical settings. 3M purchased the firm from private equity investor Court Square Partners for $810 million (4× estimated sales of $200 million). Arizant’s market-leading products, extensive intellectual property portfolio, and solid proven technology platforms significantly expand 3M’s infection protection unit, which provides a wide variety of products and systems for controlling the risk of infection in healthcare facilities. The global market for patient warming is estimated at $1 billion and is projected to grow 10% annually. Arizant’s products are reportedly utilized with more than 20 million surgical patients annually.

Making M&A Noise in Hearing Systems

Consolidation of the hearing systems industry, which includes both hearing aids and hearing implant devices, continued in 2010 with some major acquisition activity. Sonova Holding AG, the world’s leading hearing aid provider, acquired Advanced Bionics Corp. for $510 million in cash (4.4× sales of $117 million). It is estimated that Advanced Bionics has 18% of the cochlear implant market behind Australia-based Cochlear Ltd., the dominant hearing implant company, which reported 2009 sales of $754 million and net earnings of $155 million. The acquisition is a strategic move by Sonova into the highly profitable cochlear implant market, which has an estimated annual worldwide growth potential of 10–15%. With the acquisition of Advanced Bionics, Sonova becomes the only global hearing systems company with brands in both hearing aid and cochlear implants. Interestingly, Cochlear Ltd. was reportedly interested in acquiring Siemens’ hearing aid outfit, which had been on the acquisition block in 2010. However, it was removed when Siemens could not achieve its $2 billion asking price.

William Demant Holding A/S, a Danish hearing aid company, offered $50 million (0.56× sales of $88 million) for U.S.-based Otix Global Inc., the hearing aid industry’s seventh largest company.  Subsequently, GN Store Nord, another Danish company, offered $58 million and then William Demant matched that offer. Faced with the likelihood that if it went to a shareholder vote, William Demant would prevail, GN Store Nord withdrew its offer.


The medtech industry acquisition model, whereby large medtech companies enhance their growth through the acquisition of smaller companies that have developed advanced technologies and products, was strained significantly in 2009 by the recession, tight money, and healthcare reform and regulatory uncertainties. But the model survived, as evidenced by the significant increase in M&A activity in 2010.

We believe that the medtech M&A environment will continue to warm up in 2011, and that trends clearly visible in 2010 will continue. The medtech M&A market will continue to be a buyer’s market that favors strategic buyers. That is, unless the credit markets loosen up, in which case private equity funds would start competing with strategic buyers for transactions. Almost all of the largest medical device companies—Johnson & Johnson, GE Healthcare, Medtronic, Baxter International, Abbott Laboratories, Boston Scientific, Covidien, Becton Dickinson, Philips Healthcare, and Siemens Healthcare—were active on the acquisition front in 2010. We expect all of them to continue to be active in 2011, including Siemens and Philips, which were not active in 2010, but continue to have tempting exchange rate advantages should they acquire a U.S. company. The most active medtech segments will probably continue to be the vascular and neurovascular areas, with particularly strong interest in minimally invasive devices, and in vitro diagnostics, with particular emphasis in the cancer area.

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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