For some time now, industry analysts have been predicting that with significantly lower valuations brought on by the protracted economic downturn, a number of medtech companies would become increasingly attractive as acquisition targets—particularly to larger players with strong balance sheets. Taking a look at recent medtech M&A activity over the last two months, reality may now be in sync with the forecasts.

Art Kerley

January 1, 2009

15 Min Read
Medtech M&A Picks Up the Pace

During those two months such industry stalwarts as Johnson & Johnson Inc. (J&J; New Brunswick, NJ), Abbott (Abbott Park, IL), Boston Scientific Corp. (Natick, MA), Medtronic Inc. (Minneapolis), and St. Jude Medical Inc. (St. Paul, MN) have all made acquisitions that either added complementary products to their portfolios or took them into a new market segment.

While not all blockbusters, billion-dollar deals were announced by Abbott, with its acquisition of Advanced Medical Optics Inc. (AMO; Santa Ana, CA) and J&J, which added Mentor Corp. (Santa Barbara, CA) to its deep and diverse line of medical products and devices.

Abbott paid $1.36 billion for AMO, which is the leading provider of equipment for LASIK  vision-correction surgery. The company also makes devices and instruments for cataract surgery as well as contact lens solutions in the consumer health category.

AMO's stock price has taken a beating over the last year along with other medtech companies that provide products for the aesthetic and cosmetic market. The demand for LASIK procedures, which are generally seen as elective rather than absolutely necessary to restore health or function, has fallen off dramatically. 

Yet, Abbott sees great potential here.

Capek_Abbott.jpg

John M. Capek

In a conference call with analysts, John M. Capek, executive vice president, medical devices, Abbott, said, “The business is poised for long-term growth, driven by advances in refractive surgery technologies, including LASIK, and an aging global population. The acquisition of AMO strengthens and expands Abbott's medical device business adding a market leading and sustainable new growth platform with more than $1 billion in annualized sales.”

Jim Mazzo, AMO's chairman and CEO, will remain with Abbott as president of AMO.

AMO, with 4100 employees worldwide, has not yet released annual financial data for 2008. The company reported revenues of  $1.1 billion in the year earlier. Commenting on the value and potential of the acquisition, Capek added, “We expect AMO to be a steady high-single-digit grower on the top line and a profitable contributor over the long-range plan.”

J&J's acquisition of Mentor also took the company deeper into the aesthetic space. Mentor is a leading manufacturer of breast implants, liposuction equipment, and skin-repair products and will be absorbed as a stand-alone under J&J's Ethicon business unit, which provides sutures, mesh, and other products for surgery, including bariatric weight-loss procedures.

Commenting on the acquisition, Gary Pruden, company group chairman for J&J's Ethicon franchise, said, “Mentor will become the cornerstone of a broader Johnson & Johnson strategy for aesthetic medicine—serving both consumers and medical professionals. We will use our combined strengths and experience to build a market-leading aesthetic business that capitalizes on Johnson & Johnson's broad-based commercial capabilities, worldwide surgical-care footprint, and clinical scientific capabilities.”

Mentor has 1300 employees and posted revenues of $373.2 million for the fiscal year ending on March 31, 2008—a 19.1% increase over 2007 sales of $302 million.

When details of the Abbott and J&J deals were announced, many news stories noted that the companies had paid a hefty premium for the acquisitions. The AMO valuation was predicated on a stock price of  $22 despite the fact that it had closed at $8.85 at the close of the last trading day prior to the announcement. Yet, medtech industry analysts noted that AMO's stock price had been at that level just months earlier and that the purchase price was 2.5 times AMO's annual revenues—a multiple that is fairly consistent with similar deals. As part of the transaction, Abbott will also assume approximately $1.4 billion in AMO debt.

In picking up Mentor, J&J paid nearly a 100% premium. The purchase price was based on $31 a share, whereas Mentor stock closed at $16.15 on the day prior to the deal's disclosure. Yet again, analysts were quick to point out that Mentor's stock had traded at $40.82 in January 2008.

Bargain Hunting

So will large medtech companies on the lookout for bargain acquisitions actually find any?

Denhoy_ThosWeisel.jpg

Raj Denhoy

Raj Denhoy, medtech analyst and director of equity research for Thomas Weisel Partners (New York), is not so sure. He sees an increase in medtech M&A in the months ahead but thinks that in many cases buyers may be more motivated to consummate deals than sellers. “Many companies that may be prospective acquisition targets fully realize that they are significantly undervalued. While buyers may see once-in-a-lifetime opportunities, sellers are not about to offer up their companies at fire sale prices.”

Cohen_WaldenGrp.jpg

Richard Cohen

Richard Cohen, president of The Walden Group Inc. (Tarrytown, NY), an investment banking firm specializing in small- to medium-size mergers, acquisitions, and strategic transactions in the healthcare industry, acknowledges that “J&J's bid for Mentor and Abbott's acquisition of AMO appeared to reflect a hefty premium, but not relative to levels in September 2008, when the market nose-dived. These transactions may not be “bargain hunting,” but do reflect future value expectations relative to current depressed stock prices. AMO may be overvalued given the declines in its core laser vision-correction business and Abbott's seemingly being the only bidder, yet Abbott is clearly looking beyond the recession to profit from the deal.”

Most industry analysts took a position similar to Cohen's and saw the Abbott move as another example of the company's willingness to buck conventional wisdom and commit to building another strong franchise in the medical device sector. Many cited the skeptics' previous concerns about Abbott entering the drug-eluting coronary stent business with what many considered would likely be a me-too product in a crowded market that, at the time, was still reeling from concerns about safety and efficacy. Yet, following regulatory approval, Abbott's Xience stent quickly assumed market leadership, knocking the Boston Scientific Taxus stent from its long held dominant position. The consensus seems to be that Abbott has the talent and corporate temperament to build and expand AMO's presence in eye care.

Building Platforms and Synergies

Although the J&J and Abbott deals may have captured the headlines, other medtech companies were also active on the acquisition front. Earlier this month, Boston Scientific announced that it had acquired Labcoat Ltd. (Galway, Ireland), a privately held, development-stage drug-eluting stent company. Terms of the acquisition were not disclosed.

The two companies have collaborated on a number of product development activities in the past. Labcoat has developed a proprietary technology for coating drug-eluting stents that uses precision-metered droplets of a biodegradable polymer and drug formulation to create a very thin coating confined to the outer surface of the stent. According to Labcoat, this design will significantly reduce the amount of polymer and drug that is exposed to vessel wall, while minimizing the polymer and drug on the inner surface of the stent where endothelial cell growth is required for healing. Once the drug has been delivered, the biodegradable coating resorbs, with only the bare-metal stent remaining. This approach is intended to provide the degree of restenosis reduction found in a conventional drug-eluting stent, but with faster and more complete vessel healing after stent implantation.

Tobin_BSX.jpg

Jim Tobin

Jim Tobin, president and CEO of Boston Scientific, said, “This technology represents a major advance for drug-eluting stents and should help us maintain our strong position in this market.”

Labcoat reports that it has successfully completed a clinical trial in Europe with its Jactax stent, which consists of a Boston Scientific bare-metal Liberte stent coated on its outer surface with a biodegradable polymer containing the drug paclitaxel.

Prior to the acquisition, Labcoat said it would file for CE mark approval before the end of the year. Boston Scientific plans to evaluate the Labcoat technology for use on both its paclitaxel- and everolimus-based drug-eluting stents.

Labcoat, with 30 employees, is privately held and does not disclose financial data.

Late last month, St. Jude Medical Inc. made two acquisitions, which were generally seen as strengthening and expanding its business in cardiovascular tools and devices.

The acquisition of MediGuide Inc. (Haifa, Israel) for $283 million in cash and $17 million in assumed liabilities, is seen as boosting the company's position in the market for atrial fibrillation products and devices.

MediGuide's Medical Positioning System (gMPS), which the company touts as “the GPS of the medical world” uses proprietary technology that features submillimeter-sized sensors that can be mounted on needles, catheters and other medical devices during minimally invasive intrabody navigation. According to MediGuide, the 3-D position and orientation of the sensors can be calculated in real time and projected graphically on a fluoroscope, CT, MRI, ultrasound, or 3-D reconstructed image of the anatomy. The gMPS system is intended to provide a comprehensive solution for motion artifacts caused by patient heartbeats, respiration, or other movements in order to increase the accuracy and amount of information available to physicians during a catheterization or other minimally invasive procedure while reducing the risk of exposure to radiation for the patient and medical team.

Starks_St.Jude.jpg

Daniel Starks

Commenting on the acquisition, Daniel Starks, chairman, president and CEO of St. Jude Medical, said, “In addition to continuing our strong commitment to developing our atrial fibrillation platform, we believe MediGuide's proprietary technology may also extend across a variety of other product categories, including cardiac rhythm management, interventional cardiology, neurology, and structural heart disease. We look forward to bringing this technology into our portfolio so that we can further develop and capture these potential opportunities.”

MediGuide, which was spun off from Israeli defense contractor Elbit Systems Ltd. in 2001, will become part of St. Jude Medical's Atrial Fibrillation Division. The acquisition includes Elbit's remaining 41% stake in MediGuide. Information on company size and earnings was not available.

Just one day after announcing the MediGuide acquisition, St. Jude Medical reported that it purchased Radi Medical AB (Uppsala, Sweden) for $250 million cash and $17 million in assumed debt. With this transaction, St. Jude gains entry to two segments of the cardiovascular device market where it currently has no products.

Radi Medical's PressureWire Certus, a pressure measurement guidewire, holds approximately 70% of the $60 million global market for physiological assessment of coronary lesions, which is projected to post double-digit growth in the next few years. The company's FemoStop and RadiStop manual compression-assist products for vascular closure reportedly control about 60% a global market with a current valuation of $45 million, and a forecasted growth in the mid single digits.

St. Jude sees these new products as complementing its industry-leading Angio-Seal line of active vascular closure products, and this acquisition will be part the company's expanded efforts to tap the full potential of the global vascular closure device market, which it says is now only about 27% penetrated.

Commenting on the acquisition, CEO Starks, said, “We look forward to capturing strategic synergies through this acquisition and further expanding our investment in our cardiovascular division technology, products, and programs.”

Radi Medical Systems has 350 employees and expects to generate 2008 annual sales of about $80 million, a 19% increase over year earlier revenues.

On January 12, Medtronic Inc. announced that it will acquire Ablation Frontiers Inc. (Carlsbad, CA) for an initial payment of $225 million plus potential additional payments contingent upon achievement of certain clinical milestones. The acquisition is seen as a move to grow St. Jude's presence in the $2 billion market for medical products and devices designed to treat atrial fibrillation, an irregular quivering or rapid rhythm in the upper chambers of the heart.

The transaction complements Medtronic's November acquisition of CryoCath Technologies Inc. (Montreal), a market leader in cryoablation treatments for atrial fibrillation. With the addition of Ablation Frontiers's anatomically designed, catheter-based ablation technologies and its radiofrequency (RF) energy system, Medtronic says it will be in a position to offer the industry's broadest range of therapies to combat atrial fibrillation, a condition that affects 3 million Americans and 7 million people worldwide.

Ablation Frontier's cardiac ablation system received a CE mark in late 2006 and is distributed throughout the European Union and other international markets. Currently, it is available in the United States under FDA's investigational device exemption (IDE) for use in clinical trials.

Mackin_Medtronic.jpg

Pat Mackin

“As the leader in cardiac rhythm disease management, Medtronic is well positioned to deliver innovative therapies and expand the marketplace to address unmet needs in atrial fibrillation,” said Pat Mackin, president of the cardiac rhythm disease management business and senior vice president at Medtronic. “Once the transaction is complete, we will add Ablation Frontiers's emerging technologies to our growing atrial fibrillation solutions franchise.”

Medtronic says the acquisition will enable the company to offer physicians a choice of ablation therapies and tools to best meet the needs of their atrial fibrillation patients, as well as the needs of their practices.

Ablation Frontiers has 44 employees. The company is privately held and does not disclose financial data.

In late December, Medtronic announced the acquisition of the Repose GAHM product line for the treatment of obstructive sleep apnea from InfluENT Medical LLC (Concord, NH).

InfluENT Repose Genioglossus Advancement and Hyoid Advancement (GAHA) surgical devices advance the base of the tongue and the hyoid bone to prevent obstructions of the airway during sleep. The Repose system will expand Medtronic's surgical technologies business, which currently offers the PillarPalatal implant system, used to treat the soft palate component of sleep breathing disorders, and an existing family of market-leading ENT instruments used to treat other upper-airway obstructions.

“The Repose GAHM devices provide our surgeon customers with another minimally invasive, low morbidity option to treat patients suffering from OSA,” said Bob Blankemeyer, president of the surgical technologies business and senior vice president at Medtronic.

Privately held InfluENT Medical, founded in 2001, has six employees. Terms of the transaction were not disclosed.

These were not the only medtech acquisitions over the last two months as several others were also reported.

Watching for Opportunities

So is a wave of medtech acquisitions anticipated going forward?

Cohen says predicting the extent of medtech mergers going forward may be difficult. “Yet, with stock prices low, well-capitalized companies are likely to be hunting for deals that fit specific strategic needs, especially involving convergent technologies, like information systems, biologics, and diagnostics.”

He sees the recently announced larger medtech deals as opportunistic in nature. “In the recession, well-capitalized companies, with sufficient cash and credit resources, can position themselves to benefit when the economy improves. While the volume of discretionary procedures like breast implants, in the case of Mentor, and laser refractive surgery, in the case of AMO, have declined, these markets will eventually come back. J&J, Abbott, and other large medtechs have the staying power to ride out the recession and eventually participate in growth markets.”

Gunderson_PiperJaffray.jpg

Thomas Gunderson

Thomas Gunderson, senior medtech analyst and a managing director with Piper Jaffray & Co. (Minneapolis) doesn't particularly see the current flurry of medtech M&A as the beginning of a trend or a random confluence of events.

“Medtech has been associated with consolidation since inception,” says Gunderson, “and 2008-2010 will be no exception. What is surprising is that given the need for new products and growth by the bigger medtech companies that we have not seen more acquisitions. With a major (close-out?) sale going on as stock prices have declined 40-90%, I would have thought that the strategic buyers would have stepped up their acquisitions considerably more than what we have seen to date. Many of these larger companies such as Medtronic, Abbott, and J&J still have slow growth (relative to historical metrics) and too much cash. Acquisitions still make sense and with the bargains now available, I would expect that more M&A will occur in the next two years than in the last two years. The questions remain: who, when and how much.”

McGlynn_WilsonSonsini.jpg

J. Casey McGlynn

J. Casey McGlynn, chairman of the Life Sciences Group at Wilson Sonsini Goodrich & Rosati (Palo Alto, CA) says, “M&A is the natural path for medtech growth. With IPOs essentially closed and in many cases inappropriate, M&A is way to get emerging and innovative technologies into real-world products. Historically, this is the way medtech has worked best…with bigger companies buying the next-generation technologies developed by the smaller, more-entrepreneurial companies.”

“Of course,” says McGlynn, “the Abbott and J&J acquisitions did not exactly involve small companies, but these moves make a great deal of sense. The J&J deal is much more than a line extension and Abbott's decision to acquire Advanced Medical is nothing short of brilliant…considering the nature and extent of all the promising technologies in the ophthalmic area.”

Analyst Denhoy says he would be very surprised if the uptick in medtech M&A activity did not continue and thinks the pace could even accelerate—particularly if buyers are realistic about price. “We are looking at valuations cheaper than we've ever seen. They may indeed represent once-in-a-lifetime opportunities. Many of the large cap medtechs are well positioned to execute and absorb these acquisitions.”

But, again, Denhoy cautions: “No one's going to give these companies away. In this economy, current stock prices are generally not realistic indices of market value.”

Forward-thinking companies know this, say most analysts, which is why they expect more medtech M&A on the horizon—with a realization and a willingness on the part of buyers to pay what may appear to be a significant premium to orchestrate the deal.

© 2009 Canon Communications LLC

Return to MX: Issues Update.

Sign up for the QMED & MD+DI Daily newsletter.

You May Also Like