Strategic Buyers Move To Consolidate Diagnostics Industry
July posted a total of 11 acquisitions in the Medical Device sector. That represents 14% of the month’s health care M&A deal volume. However, the combined value of those 11 deals was $15.4 billion, or 47% of all dollars spent on health care M&A activity. Dealmakers are clearly bullish about the sector.
Siemens AG (NYSE: SI) has offered approximately $7.0 billion to acquire Dade Behring Holdings (NASDAQ: DADE). Dade develops, manufactures and sells clinical diagnostic instruments, reagents and consumable supplies and services to clinical laboratories. Under terms of the deal, Siemens will pay $77.00 for each common share of DADE. The price SI is offering represents a 38% premium to DADE’s prior-day price. Based on recent financials, the transaction is valued at 3.9x revenue and 17.2x EBITDA.
This acquisition complements and expands on SI’s 2006 acquisitions of Bayer Diagnostics and Diagnostic Products Corporation. The deal is expected to increase Siemens Medical Solution’s Group’s margin from 2009 onwards. It also gives the company a large footprint in the diagnostics industry both in the U.S. and globally.
Jeffrey Frelick, VP and Diagnostic Laboratories Equipment Analyst at Lazard Capital Markets, LLC, observed in a conversation with us that this deal enhances SI’s place in the continuum of care, so they can get as many “touches” on hospital patients as possible, e.g., from blood tests when they enter the hospital all the way to sophisticated imaging scans. In essence, they’re using the deal to position themselves as a one-stop shop for diagnostic testing. Generalizing to the overall diagnostics M&A market, Mr. Frelick believes that future dealmakers will tend to favor high-growth companies with molecular diagnostics, tests for infectious diseases, diabetes and cardiology.
Current estimates place SI in second place in the diagnostics industry, with a 12% market share, after Roche Diagnostics (SWX: ROCZ.S), with 18%. They are followed by DADE and Beckman Coulter (NYSE: BEC) with about 11% to 12% each. This deal helps SI overtake Roche. But Roche also wants to enlarge its own market position. It recently offered $75.00 per share, or $3.0 billion, to acquire Ventana Medical Systems (NASDAQ: VMSI). Ventana specializes in tissue-based diagnostics, particularly in the area of cancer, and would complement Roche Diagnostics’ existing cancer treatment franchise. VMSI’s board rejected the offer as inadequate even though it offered a 45% premium to the stock’s prior-day price. With shares trading up as high as $80.25, investors seem to think a richer proposal could emerge. Rebuffed, Roche has switched gears to a hostile approach.
News of the Dade-Siemens deal has also sparked some speculation that Beckman Coulter, as the last pure-play diagnostics company in the top tier, might be the next takeover target for the big players. Second-tier companies, focused on specific areas of diagnostic testing, could also come into play and include Cepheid (NASDAQ: CPHD), Gen-Probe (NASDAQ: GPRO) Hologic (NASDAQ: HOLX) and Luminex (NASDAQ: LMNX). Other possible targets? GE Healthcare (NYSE: GE) recently cancelled its $8.1 billion acquisition of the two diagnostics divisions of Abbott Laboratories (NYSE: ABT), originally announced in January. The ostensible reason was that the parties could not agree on final terms, but an FDA recall of products from one of ABT’s plants may have helped destabilize the deal. ABT now has to re-reclassify the operations as a continuing business line, and while it will continue to manage them in the near term, it is probably not averse to finding another buyer. There are likely some strategic buyers left over from the early rounds of the dealmaking that GE ultimately won. For its part, GE indicated that the company will continue to look for diagnostic opportunities, particularly in the in-vitro field. The strategy, if not the target company, remains the same: to acquire early lab tests, such as blood and urine tests, to complement the company’s existing medical scanning business and expand its continuum of diagnostic testing.
Other Medical Devices
Medtronic (NYSE: MDT) is paying approximately $3.9 billion to acquire Kyphon (NASDAQ: KYPH), a company that designs, manufactures and markets medical devices to treat and restore spinal anatomy. Under terms of the deal, MDT will pay $71.00 per share in cash and assume $350.0 million in long-term debt. The overall deal value includes $700.0 million that MDT will spend to buy shares in stock options that have vested. This deal, valued at 8.76x revenue, offers KYPH shareholders a 32% premium over the stock’s prior-day price. This acquisition expands MDT’s spinal treatment business; the company’s spinal and navigation unit represented 20% of total revenue in its most recent financial year. Goldman Sachs and Piper Jaffrey served as financial advisors to MDT; JPMorgan provided similar services to KYPH.
In a deal valued at $2.0 billion, Teleflex (NYSE: TFX) is acquiring Arrow International (NASDAQ: ARRO), a company that develops, manufactures and markets disposable catheters, heart assist devices and related products for critical and cardiac care applications. Under terms of the deal, TFX will pay $45.50 per share in cash. The acquisition, valued at 3.9x revenue, refocuses the strategic balance among TFX’s various business units; once this deal closes, the medical segment will be the company’s largest source of revenue and profitability. Banc of America Securities LLC served as financial advisor to TFX, Lazard provided similar services to ARRO.
ReAble Therapeutics is paying $1.6 billion to acquire DJO, Inc. (NYSE: DJO), a company that manufactures and markets rehab and regeneration products for the nonoperative orthopedic, spine and vascular markets. Backed by The Blackstone Group (NYSE: BX), ReAble (fka Encore Medical Corp.) is paying $50.25 in cash for each share of DJO stock, and assuming certain debt.
This transaction, valued at 3.6x revenue, offers a 19% premium to DJO’s prior-day price. This acquisition will provide ReAble with a complementary set of orthopedic rehabilitation and pain management products. The deal has a breakup fee of $18.7 million. Wachovia Securities served as financial advisor to DJO in this transaction; Credit Suisse provided ReAble with similar services.
News of this deal sent shares of Zimmer Holdings (NYSE: ZMH) up 2.6% on the speculation that the orthopedics giant would follow suit and become an acquisition target. While attractive because of low debt load and strong cash flow, ZMH’s fundamentals tend not to favor an LBO. As one equity analyst noted, “There’s nothing broken, nothing to sell off, so why do it?”
In a merger valued at $780.0 million, ev3 (NASDAQ: EVVV) is acquiring FoxHollow Technologies (NASDAQ: FOXH), a rival that develops, manufactures and sells medical devices primarily for treating peripheral artery disease and other cardiovascular disease. Under terms of the deal, FOXH shareholders are to receive 1.45 shares of EVVV common stock plus $2.75 in cash for each share of FOXH common they own. After completion of the merger, current ev3 shareholders will own 59% of the combined company; current FOXH shareholders, 41%. This deal creates an endovascular devices company with a larger footprint than either could have individually. It offers FOXH shareholders a 20% premium over the stock’s 30-day average trading price. Banc of America Securities provided financial advice to EVVV, J.P. Morgan Securities provided similar services to FOXH.
Strategic Buyers Move To Consolidate Diagnostics Industry