The Health Care M&A Monthly: Devices Dominate Dealmaking

Seventeen Transactions Announced Worth $1.4 Billion

The health care merger and acquisition market for January 2010 generated a total of 70 deals with a combined value of $5.4 billion. As we have come to expect, the four sectors of the health care technology segment captured the majority of that activity with 41 deals  (59% of the total deal volume) worth $3.6 billion (67% of total dollar volume). The Medical Device sector by itself accounted for 17 deals (24%) worth a combined total of $1.4 billion (26%). Eight of the 17 targets involve medical device companies outside the United States.

After some months of inactivity, Medtronic (NYSE: MDT) returned to the M&A market with its $500.0 million acquisition of Invatec S.p.A., a medical device company based in Roncadelle, Italy. Together with its affiliated companies, Fogazzi and Krauth Cardiovascular, Invatec is engaged in the manufacture and distribution of stents and angioplasty balloons. Under terms of the deal, MDT will pay $350.0 million upfront and commit to $150.0 million in milestone payments. This acquisition expands MDT’s peripheral vascular business. Fogazzi supplies polymer technology to Invatec while Krauth Cardiovascular distributes Invatec products in Germany.

Inverness Medical Innovations is responsible for the second- and third-largest device deals of January.  In the larger of the two, it is offering up to $255.0 million to buy Epocal. Based in Ottawa, Canada, Epocal develops, manufactures and markets the epoc Blood Analysis System, a point-of-care testing solution to leverage SmartCard technology and provide real-time, laboratory quality test results at the patient’s bedside. Under terms of the deal, IMA is committing to a base price of $172.5 million if certain milestones are reached by the end of November 2014. The company will also make additional  payments of $82.5 million if certain other conditions are met. At full price, the deal is worth approximately 2.7x revenue. IMA also entered into a distribution agreement with Epocal to distribute its system for blood gas and electrolyte testing. In the second deal, IMA has proposed a cash tender offer of approximately $224.65 million to acquire South Korea’s Standard Diagnostics (SD). Traded on the KOSDAQ, SD offers diagnostic reagents or devices for hepatitis, infectious diseases, tumor markers, fertility, drugs of abuse, urine strips and protein strips. Under IMA’s proposal, the company would pay $35.46 per share to acquire up to 75.79% of SD’s shares.  The offer price represents a 33% premium to SD’s 90-day trailing average share price. This acquisition, if completed, would enlarge Inverness Medical’s presence in East Asia.

Thermo Fisher Scientific (NYSE: TMO) is buying Ahura Scientific, a Massachusetts-based company involved in field-deployed analytical instruments for human health and public safety. Ahura specializes in identifying chemicals for safety, security and pharmaceutical applications. Under terms of the deal, TMO will pay $145.0 million; additionally, it will pay a potential earnout, whose amount is undisclosed, based upon Ahura achieving certain 2010 financial milestones. At the $145.0 million base price, the deal is valued at 3.2x 2009 revenue. This acquisition enhances the buyer’s position in the market for hand-held analyzers, and expands its portfolio with complementary technologies. Ahura is to be integrated into TMO’s analytical technologies segment.

Quidel Corporation (NASDAQ: QDEL) is acquiring Diagnostic Hybrids, an Ohio-based company that manufactures and commercializes direct fluorescent in vitro diagnostic assays for a variety of diseases. QDEL is paying $130.0 million in cash, or 3.4x revenue, to acquire a complementary set of assays so it can offer the market place a continuum of diagnostic products. William Blair & Company, LLC served as exclusive financial advisor to Diagnostic Hybrids for this transaction.

Hearing care specialist Sonova Holding AG (VX: SOON) is paying $75.0 million in cash to acquire InSound Medical, a California company that develops and markets hearing systems under the Lyric brand. These systems are placed deep within the ear canal and are invisible from the outside. In addition to the upfront $75.0 million payment, SOON may also make some earnout payments. Relying on the base price alone, the price to revenue multiple is a lofty 15.0x, so the buyer clearly has high hopes for this company. According to its rationale, with the Lyric brand in its portfolio, the Swiss company will now be able to expand into the market for people with mild to moderate hearing loss.

Barco (Euronext: BAR), a specialist in visualization solutions for various markets, including medical imaging, is paying €29.0 million ($41.8 million) to acquire FIMI, a provider of dedicated modality monitors, patient monitoring and mobile point-of-care devices based in Saronno, Italy. The seller is Philips Healthcare. Payment consists of a €19.0 million payment at closing and a €10.0 million earnout payable over five years. At full price, the deal is valued at 0.72x revenue. This deal extends Barco’s geographic reach in Italy, as well as the portfolio of devices it can offer its customers. Of specific interest to Barco is FIMI’s selection of mobile point-of-care devices.
 
CryoLife (NYSE: CRY), an implantable device and cardiovascular tissue processing company, has bought 1.6 million shares of Minneapolis-based Medafor at $2.00 a share. CRY currently has the right to distribute Medafor’s HemoStase product in the U.S. and certain other territories for use in cardiac and vascular surgery. With 8% of Medafor’s stock, CRY is now the company’s single largest shareholder. In addition to this investment, CRY management has proposed acquiring the remainder of the company at $2.00 per share. CRY’s offer thus values Medafor at approximately $40.0 million. Based on CRY’s $6.0 million in sales from HemoStase in 2009 (but not revenue from other distribution agreements), the price to revenue multiple is 6.67x. This proposed acquisition may not proceed smoothly, however. Despite their past collaboration, Medafor sued CRY last year for breaching its three-year distribution agreement and CRY countersued Medafor for violating that agreement by entering into distribution agreements with other parties in certain territories believed reserved for CRY.