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The State of Medtech M&A

Prolific mergers and acquisitions activity in 2007 yields to a more uncertain climate in 2008.

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The year 2007 ended amid uncertain economic conditions, precipitated by the subprime and structured-loan debacles. The tightening credit situation will affect leveraged transactions such as private equity deals most immediately, as lenders and principals will require a higher burden of proof before permitting a deal to move forward. But the impact of the credit squeeze will extend well beyond private equity deals to affect the overall interconnected world economy. Although the aphorism that healthcare is recession-proof still applies, prospects for a particular sector, company, or deal must be evaluated according to their specific circumstances.

In general, 2007 mergers and acquisitions (M&A) activity in the diagnostics and medical device industries reflected complementary moves in which acquirers sought businesses that dovetail with their core product lines and infrastructure, as opposed to acquisitions driven by the need for diversification. Many acquirers looked to purchase platforms, technologies, and organizations that address markets expected to grow significantly in the future. Particularly hot sectors include diagnostics, orthopedics, spinal and cardiovascular products, and home-care devices, among others.

Despite the credit crunch, there were several notable diagnostics and medical device private equity transactions in 2007, some of which were announced in the prior year. Going forward, large deals of this nature will be harder to finance.

The Walden Group Inc. (Tarrytown, NY) takes a look at these and other top 2007 medtech deals in its Strategic Healthcare M&A Report for the fourth quarter and full year 2007 (see Tables I and II).1

Transaction
     Value
($ millions)
Acquiring Party
Transferring Party
7,000
Siemens AG
Dade Behring Holdings Inc.
6,200
Hologic Inc.
Cytyc Corp.
5,300
Siemens AG
The Bayer Diagnostic Unit of Bayer
3,700
Madison Deabrborn Partners
VWR International Inc.
3,000
Roche Holding AG
Ventana Medical Systems Inc.
2,000
Quest Diagnostics Inc.
Ameripath
1,680
Inverness Medical Innovations Inc.
Biosite Inc.
1,600
Qiagen N.V.
Digene Corp.
615
MDS Inc.
Molecular Devices Corp.
600
Illumina Inc.
Solexa Inc.
600
Roche Holding AG
BioVeris Corp.
525
Avista Capital Partners
The medical imaging unit of Bristol-
    Myers Squibb Co.
452
Cytyc Corp.
Adeza Biomedical Corp.
420
Quest Diagnostics Inc.
HemoCue
389
Bio-Rad Laboratories Inc.
DiaMed Holding AG
326
Inverness Medical Innovations Inc.
Cholestech Corp.
300
PerkinElmer Inc.
ViaCell Inc.
273
Roche Holding AG
NimbleGen Systems Inc.
250
Agilent Technologies Inc.
Stratagene Corp.
241
Bracco Diagnostics Inc.
E-Z-EM Inc.
230
Inverness Medical Innovations Inc.
ParadigmHealth Inc.
195
Clera Group
Berkeley HeartLab Inc.
170
Inverness Medical Innovations Inc.
BBI Holdings Plc
165
Inverness Medical Innovations Inc.
HemoSense Inc.
155
Roche Holding AG
454 Life Sciences
112
Ametek Inc.
Cameca SAS
110
Eppendorf Group
New Brunswick Scientific Company
    Inc.
Table I. Diagnostics M&A transactions in 2007 with values greater than $100 million. Source: Walden Group.
Transaction
     Value
($ millions)
Acquiring Party
Transferring Party
10,900
The Blackstone Group
    Goldman Sachs Capital Partners,
    Kohlberg Kravis Roberts & co., and TPG
Biomet Inc.
5,100
Royal Philips Electronics
Respironics Inc.
3,900
Medtronic Inc.
Kyphon Inc.
3,670
Warburg Pincus
Bausch & Lomb
2,350
Onex Corp.
The healthcare imaging
    group of Eastman Kodak
2,000
Teleflex Inc.
Arrow International Inc.
1,920
Olympus Corp.
Gyrus Group Plc
1,500
Cardinal Health Inc.
Viasys Healthcare Inc.
1,500
ReAble Therapeutics Inc.
    (formerly Encore Medical)
DJO Inc.
1,400
Johnson & Johnson Inc.
Conor Medsystems Inc.
889
Smith & Nephew Plc
Plus Orthopedics Holding AG
808
Advanced Medical Optics Inc.
IntraLase Corp.
780
ev3 Inc.
FoxHollow Technologies Inc.
771
Hoya Corp.
Pentax Corp.
750
Getinge AB
The cardiac surgery and vascular
    surgery divisions of Boston
    Scientific Corp.
525
Kyphon Inc.
St. Francis Medical Technologies Inc.
425
Avista Capital Partners
The fluid management and venous
    access business of Boston
    Scientific Corp.
274
Ecolab Inc.
MicroTeck Medical
    Holdings Inc.
221
Medtronic Inc.
Shandong Weigao Group.
    Medical Polymer Company Ltd.
160
Fresenius Medical Care AG & Co. KGaA
Renal Solutions Inc.
140
C. R. Bard Inc.
The LifeStent peripheral
    vascular product line
    of Edwards Lifesciences Corp.
137
China Medical Technologies
The fluorescent in situ hybridization-
    business of Supreme Well
    Investments Ltd. and Molecular
    Diagnostics Technologies Ltd.
125
Greatbatch Inc.
Precimed Inc
102
Greatbatch Inc.
Enpath Medical Inc.
Table II. Medical device M&A transactions in 2007 with values greater than $100 million.
Source: Walden Group

Diagnostics Lead the Way

Siemens AG (Munich) made two huge acquisitions in 2007: its $7 billion purchase of Dade Behring (Deerfield, IL), a maker of clinical diagnostic instruments, reagents, and consumables; and its $5.3 billion purchase of the Bayer Diagnostics unit (Tarrytown, NY) of Bayer HealthCare LLC (Leverkusen, Germany). As evidenced by these moves and its 2006 purchase of in vitro diagnostics specialist Diagnostic Products Corp. (Los Angeles) for $1.86 billion, Siemens is making a major move into the laboratory, clinical, and immunodiagnostic segments as it expands well beyond its core diagnostic imaging business.

Royal Philips Electronics (Amsterdam, The Netherlands) also demonstrated a stronger healthcare focus in 2007. It plans to spend $5.1 billion to buy Respironics (Murrysville, PA), a manufacturer of products serving the sleep and respiratory markets. Through the deal, Philips hopes to drive growth in the hospital and home-monitoring markets. Although Respironics' sales and profits have been growing significantly, Philips will need to reap major synergy benefits given the hefty price—which is more than four times Respironics' annual sales and 20 times its earnings before interest, tax, depreciation, and amortization (EBITDA).

Philips is also spending $430 million to acquire Visicu Inc. (Baltimore). That price is a tenfold increase over Visicu's annual sales. The company's technology, which is installed in about 180 hospitals, enables hospital intensive care units (ICUs) to link via telemedicine and computer monitors to an eICU facility where specially trained physicians can monitor and care for hundreds of patients at a time. The care teams are able to use software alerts to track patient vital trends and intervene earlier—before complications occur.

Philips' announcement of its intent to acquire Visicu came only two weeks after Philips announced it would acquire Emergin (Boca Raton, FL), a clinical IT company that specializes in medical alarm software. Other Philips acquisitions for 2007 include home heart-monitoring service provider Raytel Cardiac Services (Windsor, CT) for $110 million; Ximis Inc. (El Paso, TX), a provider of Web-based medical information management services for radiology departments; and diagnostic imaging company VMI-Sistemas Medicos (Lagoa Santa, Brazil).

Representing a significant consolidation within the women's health sector, Hologic Inc. (Bedford, MA) paid $6.2 billion for Cytyc Corp. (Marlborough, MA). The combined company will have operations in more than 20 countries and employ more than 3300 people, including 1200 sales and service people—the largest direct sales force in women's health. The purchase price represented 9.7 times Cytyc's annual sales and 22.5 times its EBITDA.

However, perhaps the most prolific corporate buyer during 2007 was Inverness Medical Innovations Inc. (Waltham, MA). During the year, the company made acquisitions in the areas of protein diagnostic testing (Biosite Inc.; San Diego; $1.68 billion), heart-disease monitoring (Cholestech; Hayward, CA; $326.3 million), disease management (Alere Medical Inc.; Reno, NV; $302 million; and ParadigmHealth; Upper Saddle River, NJ; $230 million), blood-coagulation monitoring (Hemosense; San Jose; $165 million), point-of-care testing (Instant Technologies; Norfolk, VA; and Quality Assured Services; Orlando), and drugs-of-abuse testing (First Check Diagnostics; Lake Forest, CA). The company also made several overseas purchases, including Bio-Stat (Hazel Grove, Stockport, UK), Promesan (Milan, Italy), and Panbio Ltd. (Brisbane, Australia).

Medical Devices

Medtronic Inc. (Minneapolis) accelerated its growth in the spine segment with its $3.9 billion purchase of Kyphon Inc. (Sunnyvale, CA), a developer of diagnostic and minimally invasive technologies for the treatment of spinal conditions. While Medtronic primarily serves orthopedic and neurological surgeons who specialize in spinal surgery, Kyphon adds new call points: interventional radiologists and interventional neuroradiologists.

Medtronic also expanded its reach in China with a $221 million joint venture deal for Shandong Weigao Group Medical Polymer Company Ltd. (Weihai, China), a supplier of medical devices and single-use consumables. It also made some smaller acquisitions, including that of Biophan Technologies Inc. (Pittsford, NY), a developer of technology to make implantable devices safe for magnetic resonance imaging. It also purchased the O-arm imaging system assets of Breakaway Imaging (Littleton, MA). The system provides orthopedic surgeons with 3-D images, as well as multiplane 2-D and fluoroscopic imaging.

Also in 2007, Teleflex Medical (Research Triangle Park, NC) made a major transformative move with its $2 billion acquisition of Arrow International (Reading, PA), a leading global provider of catheter-based access and therapeutic products for critical and cardiac care.

Other large deals in 2007 included the pending $1.92 billion purchase of Gyrus Group (Wokingham Berkshire, UK) by Olympus Corp. (Tokyo). Gyrus is a manufacturer of radio-frequency devices and energy-based technologies for minimally invasive surgery. In addition—similar to the Philips-Respironics deal--the $1.5 billion purchase of Viasys Healthcare (Conshohocken, PA) by Cardinal Health Inc. (Dublin, OH) reflected expected growth in the sleep diagnostics and therapy market. In addition, Johnson & Johnson Inc. (New Brunswick, NJ) closed its $1.4 billion acquisition of drug-eluting stent maker Conor Medsystems. And in orthopedics, Smith & Nephew (London) paid $889 million for Plus Orthopedics Holding AG (Rotkreuz, Switzerland), a supplier of cementless hip prostheses.

Private Equity Deals

The largest private equity deal in 2007 was the $11.4 billion buyout of Biomet Inc. (Warsaw, IN) by the Blackstone Group (New York City), Goldman Sachs Capital Partners (New York City), Kohlberg Kravis Roberts & Co. (New York City), and TPG (Fort Worth, TX). The deal reflected the prominence of orthopedic implants as the population continues to age and life spans lengthen. Biomet represents a major platform on which to propel expansion as a private company with prominent financial backers.

The importance of orthopedics also drove the $1.5 billion purchase of noninvasive brace manufacturer DJO Inc. (San Diego) by ReAble Therapeutics (Austin, TX). Blackstone has a majority interest in ReAble.

On the diagnostics distribution side, Madison Dearborn Partners (Chicago) spent $3.7 billion on lab products distributor VWR International (West Chester, PA). Madison Dearborn owns several distribution companies and is bullish on lab distribution. Drug and chemical group Merck KGaA (Darmstadt, Germany) sold VWR to buyout firm Clayton, Dubilier & Rice (New York City) in 2004.

Warburg Pincus (New York City) took Bausch & Lomb Inc. (Rochester, NY) private in a $3.7 billion buyout, giving the company greater flexibility to focus on long-term strategies compared with the reporting pressures of being public. In addition, Onex Corp. (Toronto) purchased the healthcare imaging group of Eastman Kodak Co. (Rochester, NY) for $2.35 billion, reflecting Kodak's desire to reduce debt and focus on its core business.

Meanwhile, Boston Scientific Corp. (Natick, MA) and private equity firm Avista Capital Partners (New York City) have signed a definitive agreement under which Avista will acquire Boston Scientific's fluid management and venous access businesses for $425 million in cash. Avista also recently signed an agreement to acquire Bristol-Myers Squibb Medical Imaging, a business unit of Bristol-Myers Squibb (New York City), for approximately $525 million.

2008 Outlook

Concerns about a recession and the upcoming election—which could have an impact on budget and FDA regulatory matters—are likely to weigh down M&A activity in 2008. The economy is slowing down, and consumer confidence is dropping. Regardless, healthcare spending is largely nondiscretionary, with the exception of cosmetic and other elective surgeries.

Economic weakness is likely to motivate companies to become more efficient, less bloated, more inclined to lower costs (via outsourcing, technology, and improved work flows), and more exacting in terms of acquisitions. Lenders will be raising the bar, and successful deals will require more compelling rationales, less risk, and built-in cushions to tolerate an economic downturn. Yet, 2008 will present buying opportunities, and companies should be positioning themselves with disciplined R&D and strategic M&A initiatives to take advantage of the inevitable economic rebound.


References

1. Strategic Healthcare M&A Report (Tarrytown, NY: Walden Group, 2008); available from Internet:
    www.waldenmed.com/newsletters.asp.

Richard S. Cohen is a principal at the Walden Group Inc. (Tarrytown, NY; www.waldenmed.com), a strategic investment-banking firm specializing in the healthcare industry.

Copyright ©2008 MX
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