Twenty-Three Transactions Announced In June
We have long characterized the Medical Device sector as one of the great stalwarts of the health care M&A market, one which could always be counted on to produce a steady and robust stream of deals. As with much else in the recent economic upheaval, that characterization has been called into question. Large, billion-dollar deals have disappeared from the scene, and the deal flow of smaller transactions has become thinner, less dependable.

Signs have now appeared that the tide may now be changing, with deal volume in the Medical Device sector on the rise again. The second quarter of 2009 posted 49 deals, a 40% increase over the 35 deals in Q1:09. Twenty-three deals, or virtually half of the second quarter’s total, were announced in the month of June.

To be clear, we are not witnessing a return to the heady days of 2006 and 2007 when no deal seemed impossible. Not any time soon, that much is certain. Instead of the grand strategic gesture aimed at transforming a company, we are seeing a host of smaller, more opportunistic deals with a very tight focus. Some sellers are selling off small, peripheral operations to concentrate their remaining resources on their core business operations and, not coincidentally, to raise some cash. Some buyers are acquiring assets to fill in a gap in their existing business or to expand in a market they currently serve. More ominously, however, at least four deals in June were related either to a bankruptcy or to the shuttering of a business.

Out of June’s 23 deals, at least 13 involved the acquisition of something less than an entire company, such as a product or a patent estate. In at least seven of the deals, the assets acquired were intellectual property portfolios. In some instances, the company may be interested in developing the technology; in others, in preventing competitors from exploiting it, at least for the time being.

June’s largest medical device deal is a clear case of acquiring a business to enter a new geographic market, but not necessarily a new business line. Inverness Medical Innovations (AMEX: IMA) is buying Concateno plc (LSE: COT) for approximately $202.2 million. Based in London, England, Concateno is a supplier of drugs-of-abuse testing products and services; the company generated revenue of £47.5 million ($76.0 million) in 2008. Under terms of the agreement, each share of COT stock is to be exchanged for £0.79 in cash and 0.02 shares of IMA stock. This deal values each share of the target’s stock at £1.2124; this bid thus offers COT shareholders a 13% premium to the stock’s prior-day closing price. The price to revenue multiple is 2.6x. From a strategic standpoint, this acquisition provides Inverness with a European counterpart to its established American drugs-of-abuse testing business, allowing it to enter this new market more easily. IMA’s added heft may in fact help the Concateno business penetrate the European market more readily than it could have done by itself. IDJ International provided IMA with financial advice while Collins Stewart and UBS Investment Bank provided COT with similar advice.

In the next largest deal, Altor Equity Partners A/S, a private equity group based in Denmark, is acquiring Pulse Medtech from Technitrol (NYSE: TNL) for $200.0 million in cash, or 1.8x revenue. Based in Roskilde, Denmark, Pulse Medtech designs components and solutions for hearing instruments and for certain other medical devices; it has 1,700 employees in Denmark, the Netherlands, Poland, the U.S. and Vietnam. For the 12 months ended March 31, 2009, Pulse Medtech generated revenue of $110.0 million. The assets are being acquired by Altor Fund III. Technitrol acquired this business line when it bought Sonion A/S in February 2008; the divestment of this unit is now intended to help the company pay down debt. After a period of ownership change and production relocation to lower-cost Vietnam, Altor will continue to support Pulse Medtech in its focus on the hearing instrument industry. FIH Partners served as financial advisor to Altor in this transaction.

Laboratory Corporation of America (NYSE: LH) is acquiring Monogram Biosciences (NASDAQ: MGRM) for approximately $155.0 million. Based in South San Francisco, California, Monogram is a provider of companion diagnostics, that is, molecular diagnostic tests which help guide and target appropriate treatments. MGRM currently markets several tests targeting patients with HIV and one for patients with breast cancer. The company also has a number of tests in development, based on its VeraTag technology for detecting breast cancer, which may ultimately have clinical utility in detecting a broader range of cancers than hitherto. On a trailing 12-month basis, MGRM generated revenue of $61.56 million and a net loss of $21.4 million. Under terms of the deal, LH is offering $4.55 per share in cash for MGRM, and assuming net indebtedness. The deal confirms and strengthens LH’s strategic commitment to personalized medicine, giving it a series of diagnostic tests that can closely match test results with drug therapies. Further, the promotion of MGRM’s tests through LH’s existing clinical laboratory network should accelerate the usage and volume of tests. The price represents a 170% premium to MGRM’s prior-day price, and seems to be a good deal for shareholders.

Minnesota’s ev3 (NASDAQ: EVVV) is paying up to $150.0 million to buy Chestnut Medical Technologies. Based in Menlo Park, California, the target is a new medical device company focused on minimally invasive therapies for interventional radiology; its products are designed for ease of use and to reduce complications in treating neurovascular disease. The transaction is structured as a purchase of equity interests. Under terms of the deal, ev3 is to pay $75.0 million at closing; of that amount, between 30% and 40% is to be paid in cash, with the remainder in shares of EVVV stock. Additional payments of up to $75.0 million may also be made, based on reaching certain milestones. This acquisition gives the buyer a new technology for the treatment of aneurisms, thereby enlarging its own portfolio of neurovascular products. Given that EVVV focuses on endovascular technologies for the minimally invasive treatment of vascular diseases and disorders, this deal does not stray far from its core business competency. Asante Partners provided Chestnut Medical with financial advice on this transaction.

Baxter International (NYSE: BAX) recently engaged in a bit of vertical integration when it acquired a hemofiltration product line from Edwards Lifesciences (NYSE: EW) for $65.0 million, or 1.3x revenue. The product line is known as continuous renal replacement therapy, or CRRT. BAX has been EW’s long-term supplier and partner for this business, but should now reap the rewards that flow from owning the CRRT line. The deal also expands BAX’s existing CRRT business, which is predominantly in the United States and China, into new markets such as Europe and Australia. Under terms of the agreement, BAX is making an initial payment of $56.0 million. It has also committed to making up to $9.0 million in earnout payments, based on revenue objectives during the two years following the closing of this deal. On the flip side of the coin, this sale allows EW to focus on its global strategic priorities, which obviously no longer includes CRRT.

Hatch Medical, LLC, a medical device incubator based in Duluth, Georgia, is selling the assets pertaining to the EN Snare foreign body retrieval device to Merit Medical Systems (NASDAQ: MMSI) for $21.0 million in cash. Developed with Phase One Medical, the EN Snare improves the efficacy of foreign body retrieval; it is used as an adjunct to certain endovascular procedures. This device is used by surgeons for the retrieval and removal of stents, vena cava filters and embolic coils as well as the manipulation of AAA stent grafts and guidewire pull-throughs. Under terms of the deal, Merit Medical is to make an upfront payment of $14.0 million, and is committed to an additional $7.0 million in milestone payments. At the full price of $21.0 million, the deal is valued at 3.5x revenue. It expands the range of adjunct devices that Merit Medical can now market to its customers. The transaction is to be funded from existing cash reserves and a partial use of MMSI’s $30.0 million credit facility.

To enlarge its urology business, HealthTronics (NASDAQ: HTRN) is acquiring Endocare (NASDAQ: ENDO) for $16.0 million. Based in California, Endocare develops, manufactures and distributes health care products for use in cryoablation procedures. A minimally invasive technique, cryoablation is used to freeze and destroy cancerous tumors. On a trailing 12-month basis, ENDO generated revenue of $31.6 million and a net loss of $8.7 million. HTRN’s bid offers ENDO shareholders a 50% premium to the stock’s prior-day price. Under terms of the agreement, ENDO shareholders may elect to receive $1.35 in cash per share, up to 50% of the total consideration. Alternatively, they may elect to receive 0.7764 shares of HTRN stock for each share of ENDO, up to 75% of the consideration. This deal effectively concludes ENDO’s long-suffering attempt to expand its business and shore up its finances. Before agreeing to this merger with HRTN, ENDO terminated its merger agreement with Israel’s Galil Medical Ltd. along with the related private placement of its common stock. In November 2008, ENDO agreed to buy privately held Galil Medical in an all-stock deal that would have given current ENDO shareholders 52% of the combined company and current Galil shareholders, 48%. As that deal was being worked out, ENDO was becoming more stretched financially; in May, the company received a letter of warning from the NASDAQ Stock Market that its stockholders’ equity did not comply with the minimum $2.5 million requirement for continued listing. HTRN’s bid, considered to be a better one than Galil’s, effectively skirts that issue. Aspen Advisors, LP provided HTRN with financial advice on this deal while Oppenheimer & Co. provided ENDO with similar advice.

Tolmar Holding is paying $16.0 million to acquire Zila, Inc. (NASDAQ: ZILA), a diagnostic company that is engaged in the prevention, detection and treatment of oral cancer and periodontal disease. On a trailing 12-month basis, Zila generated revenue of $38.5 million and a net loss of $32.0 million. Awash in red ink, when Zila reported third quarter earnings, it warned that it might have to consider filing for bankruptcy protection. But a privatization such as this deal offers would permit the company to regain its financial footing and stay in business. Tolmar is a private company based in Fort Collins, Colorado that develops and manufacturers both proprietary and generic pharmaceutical products with specific focus on therapeutic areas of dental, dermatology and oncology products. Under terms of the deal, Tolmar is offering $0.38 in cash for each share of ZILA stock and assuming about $12.0 million in indebtedness. This deal, which is valued at 0.4x revenue and offers Zila shareholders an 18% premium on the stock’s prior-day price, gives Tolmar an enhanced capacity to provide diagnostic tests in two of the markets it currently serves, oncology and dental care.

Wound Care Innovations, a subsidiary of Wound Management (OTCBB: WNDM), is acquiring BioPharma Management Technologies in a deal worth approximately $13.0 million. BioPharma Management owns a platform of proprietary and patented technologies for topical pain management and resorbable orthoses. The transaction is structured as a share exchange. WNDM will issue 5 million shares of common stock at $2.60 per share. Management believes that this acquisition brings to WNDM a platform technology that is complementary to its own CellerateRx technology, thereby enlarging the company’s footprint in the wound care market.

SonoSite (NASDAQ: SONO), a company that develops, manufactures and distributes hand-carried ultrasound systems, is paying $12.3 million to buy CardioDynamics (NASDAQ: CDIC), a company that develops, manufactures and markets noninvasive ICG diagnostic and monitoring devices, and proprietary impedance cardiography sensors. Under terms of the deal, valued at 0.5x revenue, SONO is offering $1.35 in cash for each share of CDIC stock. The purchase price is net of debt and cash acquired. This acquisition offers CDIC a 73% premium to the stock’s prior-day price. Strategically, it strengthens the buyer’s ability to serve the cardiovascular disease management industry by adding a new line of monitoring devices to its product offerings. Given CDIC’s recent losses, management concluded that a sale of the company was the best way to maximize shareholder value. GCA Savvin provided SONO with financial advice on this transaction; Cain Brothers and Company LLC provided CDIC with similar advice.

Northstar Neuroscience (NASDAQ: NSTR) is selling its noncash assets to St. Jude Medical (NYSE: STJ) for $2.0 million. The assets include an intellectual property portfolio, clinical study data, device designs and manufacturing equipment. The technology relates to the electrical stimulation of targeted areas of the cortical layer of the brain. This divestment follows through on the seller’s plan to shut down its operations. After a $112.0 million IPO in May 2006, NSTR failed to live up to its potential, prompting a closure of its business. This deal gives the buyer NSTR’s Renova Cortical Stimulation System, an investigational device designed to deliver targeted stimulation to the cerebral cortex.

Venture Capital Notes. Torax Medical, a Shoreview, Minnesota-based company that is developing a medical device to treat acid-reflux disease, has raised $18.0 million in venture capital, and may raise an additional $3.0 million in the near future. Its Lynx device, now in clinical trials, consists of a ring of magnetic beads that strengthens the lower esophageal sphincter, preventing acid from seeping into the throat, but allowing food to pass into the stomach. Investors are betting Torax can succeed when two giants of the medical device industry, Boston Scientific (NYSE: BSX) and Medtronic (NYSE: MDT), abandoned their efforts at producing an effective acid-reflux disease device. If and when it does succeed, investors will seek a return on their investment by selling to a larger company better able to develop and market its system. After all, with the effective closure of the IPO market, a sale would seem to be the only near-term exit strategy open to them. New investors in Torax include Accuitive Medical Ventures, which led the round, and Kaiser Permanente Ventures. Previous backers, Thomas, McNery & Partners and Sandlering Ventures, also took part.

Another device company garnering venture capital is Transcend Medical of Menlo Park, California, which raised $35.0 million in a Series B round meant to fund development of the Transcend CyPass System for glaucoma. The device is focused on replacing existing approaches with a less invasive procedure, and one therefore with fewer complications. Lead investor HLM Venture Partners joined new investors Canaan Partners, Technology Partners and Latterell Venture Partners and current investors Morgenthaler Ventures and Split Rock Partners to complete this round.