The Health Care M&A Monthly: Medical Devices Lead M&A Activity--

 

Eleven Deals Announced Worth $2.3 Billion

After languishing in second or third place for the past few months, the Medical Device sector emerged as the single most active sector in February’s health care merger and acquisition market, posting 11 transactions worth a combined total of $2.29 billion. This one sector accounted for 40% of all M&A dollars spent during the month.

While no single deal reached the billion-dollar mark, Medtronic (NYSE: MDT) committed nearly $1.2 billion to pursue two acquisitions that allow the company to expand its line of aortic valve replacements. These two are the first and third largest deals in this sector, respectively. In the larger of the two transactions, MDT is paying as much as $850.0 million to buy CoreValve. Based in Irvine, California, CoreValve manufactures a transcatheter, transfemoral aortic valve replacement that offers a nonsurgical alternative to high- or prohibitive-risk patients. With the company’s ReValving system, aortic valves are replaced using a catheter inserted through an artery in the groin. The system has been used with 2,600 patients in 26 countries, but could be applied to a market of about 300,000 patients. Under terms of the deal, MDT will pay $700.0 million upfront, and has committed to two $75.0 million payments contingent on achieving certain milestones. Sofinnova Partners led CoreValve’s Series A financing and is its largest shareholder. Other institutional investors include HealthCap, Apax Partners and Maverick.

In the second transaction, Medtronic is paying $325.0 million in cash to acquire Ventor Technologies. Based in Israel, Ventor is developing an aortic valve prosthesis that can be implanted in a beating heart without requiring open heart surgery. MDT already invested $7.5 million in the company last May. The potential competitive advantage of Ventor’s less invasive product over that of its two competitors, Edwards Lifesciences (NYSE: EW) and CoreValve, is the catheterization mechanism for a more stable positioning of the prosthesis. Of course, going forward, Ventor will no longer compete with CoreValve, but will complement it. At this stage, the valves are very expensive, going for about $40,000 a pop, and the valve replacements are not covered by local HMO services so there are no discounts. Ventor has raised about $20.0 million from venture capital funds and private entrepreneurs, who have done very well for themselves indeed in selling the company to Medtronic. Generating EBITDA of $5.3 billion and net income of $2.2 billion on a trailing 12-month basis, Medtronic is well equipped to fund these two deals.

Over the next few quarters, we expect to see more Medical Device deals of the latter kind, opportunistic ones focusing on early-stage companies with ideas but not a lot of financing to further development.

In the second largest deal, Olympus Corp. (T: 7733), perhaps best known for its cameras, is selling its diagnostic systems business to Beckman Coulter (NYSE: BEC) for $800.0 million. Beckman designs, manufactures and markets systems, consisting of instruments, chemistries, software and supplies for laboratory needs. Olympus’ diagnostics business is projected to generate $500.0 million by 2010 and operating income of between $40.0 million and $50.0 million. The deal is thus valued at 1.6x 2010 projected revenue and 17.8x operating income. Under terms of the deal, BEC will pay $300.0 million in newly issued stock and $500.0 million in newly issued debt. This acquisition helps expand BEC’s clinical chemistry offering, making it more comprehensive than before. It will, in effect, give BEC more tests for sale to hospital laboratories, and bring new customers to its immune system tests. Morgan Stanley provided BEC with financial advice on this transaction.

 Thoratec Corp. (NASDAQ: THOR) is offering approximately $282.0 million to buy HeartWare International (NASDAQ: HTWR), a manufacturer of heart pumps, specializing in ventricular assist devices. The core of the HeartWare System is a proprietary continuous flow blood pump, the HVAD Pump, a full-output device capable of pumping up to 10 liters of blood per minute.

Under terms of the deal, THOR will pay half in cash and half in shares of stock. HTWR’s business is to be integrated into THOR’s cardiovascular division. This bid offer represents a 107% premium to the stock’s prior-day price. Banc of America Securities, LLC is providing THOR with financial advice; J.P. Morgan is providing HTWRwith similar advice. And it comes not a moment too soon: at the end of 2008, HeartWare had cash of just $31.0 million on hand.

Merit Medical Systems (NASDAQ: MMSI) announced making two acquisitions during February. The company is paying $19.0 million to acquire assets from privately held Alveolus, Inc. which relate to nonvascular interventional stents used for esophageal tracheobronchial and biliary stenting procedures. This acquisition, valued at 2.3x revenue, allows the buyer to enter the gastroenterology and pulmonary markets.

Merit is also paying $1.6 million for Biosearch Medical Products’ (BMPI) endoscopic bipolar coagulation probe and biliary stent business. BMPI is a subsidiary of Hydromer (OTCBB: HYDI). As part of this deal, BMPI is assigning its customer supply agreements to MMSI and undertaking a seven-year noncompete agreement. This divestment gives HYDI some cash to concentrate on its core medical and animal health business. Merit intends to form a new business unit to focus on the newly acquired products and opportunities.

ZOLL Medical Corp. (NASDAQ: ZOLL) is paying $12.0 million in cash to acquire certain assets from Alsius (NASDAQ: ALUS) relating to its intravascular temperature management device business. The acquired assets include intellectual property, other intangibles, inventory and fixed assets. Management believes that the acquisition of these hypothermia technology and products, in combination with the technology and know-how ZOLL previously acquired in its 2007 $5.8 million purchase of Radiant Medical, should make the company a leader in the accurate, easy-to-use and cost-effective control of body temperature in critical care patients. ALUS intends to use part of the proceeds to pay down debt. Leerink Swann LLC provided ALUS with financial advice on this deal.

England’s ValiRX (LSE: VAL) is selling minority rights in its Belgian subsidiary ValiBIO SA to Biofield Corp. (OTCBB: BZEC) for approximately $777,250. This gives Biofield the rights to ValiBIO’s test for human papilloma virus for cervical cancer, as well as certain other tests for cancer. This agreement adds to the set of noninvasive tests BZEC can provide for detecting cancer. It plans to market them initially in China, India, the Philippines, Indonesia, Malaysia and Viet Nam.

Some Medical Device companies have run out of options. CHAD Therapeutics (PK: CHAD), a company that manufactures devices for sleeping disorders under the brand Dormio Tech, filed for Chapter 7 last month; it has assets of less than $1.0 million but liabilities greater than $10.0 million. Meanwhile, Emphasys Medical, a medical device company focused on emphysema, has hired Gerbsman Partners to find it a strategic buyer. Both CHAD and Emphasys are based in California.

Bavaguthu R. Shetty, an Indian investor who runs a health care business in the United Arab Emirates, is making a bid for the Egyptian medical equipment firm Alexandria Medical Services (CA: AMES). His offer stands at $14.41 per share, and values the company at about $20.2 million. This tops two other outstanding bids for the company. Egyptian businessman Gamal Abdel Fattah Rahman Hamada has offered $13.25 per share and Short Hills Development, a British Virgin Islands company, has offered $11.70 per share.