The Health Care M&A Monthly: Pricing Medical Device Companies

From one quarter to the next, the Medical Device sector has consistently produced the greatest number of deals of any single sector in the health care industry, seemingly invulnerable to the ups and downs of the economy.
For the period from July 1, 2000 through June 30, 2001, a total of 141 deals were announced in the Medical Device Sector. The subsequent period from July 1, 2001 through June 30, 2002 saw virtually level activity with a total of 139 deals.
But despite the steady trend in deal volume, a number of indicators suggest a decline in the finances of the deals. For the year ended June 30, 2001, the purchase prices ranged from a low of $210,000 to a high of $3.3 billion while for the year ended June 30, 2002, the range declined, with a low of $40,500 and a high of just $1.1 billion. All things being equal, with the onset of the current recession, less money has been available from companies and investors to fund M&A activity.
The chart below further indicates a general relaxation in the pricing of Medical Device transactions. For example, the median price to revenue (P/R) multiple for all Medical Device deals dropped from 1.93x for the year ended June 30, 2001 to 1.36x for the year ended June 30, 2002. The contracting of the economy appears to have made buyers less generous in the terms they can offer. The chart on page 1 shows that the gap between the median and average P/R multiples is generally narrower for targets with revenues of $20 million or more than it is for targets with lower levels of revenue. In many of the latter deals, the target company is often relatively new and untried, without a history of significant revenues behind it, tending to skew their valuation and, consequently, the multiples.
What a Medical Device company makes clearly affects its pricing as much as the revenue stream it generates. The table opposite presents the 12 largest deals in this sector during the past two years. Three of the target businesses (Medinol, The Cook Group, Thermo Cardiosystems) are involved in the design and production of implantable cardiac systems, such as stents. Three other targets (MiniMed, Inverness’ (AMEX: IMA) diabetes care, Medical Research Group) are engaged in manufacturing systems for treating diabetes, such as insulin pumps. Two additional companies (Marconi’s Medical Systems, ADAC Laboratories) produce devices that are used in radiological diagnoses and interventions.
As noted in August’s lead story, increased reimbursements for drug-eluting stents have increased the revenue potential for this sector, thereby garnering the renewed interest of investors and Medical Device manufacturers. It was in this context that Guidant Corporation (NYSE: GDT) announced last month its proposed $3 billion acquisition of The Cook Group for its stent technology. True, this deal technically comes after the two-year period under consideration, but if included, would be the second largest Medical Device deal in two years with a healthy P/R multiple of 6.0x. This suggests that the dip in pricing may be short-lived, and that levels will resume their previous course as the economy works its way out of its current straits.