High-figure deal marks growth in medical device market

DUBLIN,Ireland—Looking to further accelerate its strategy of building aworld-class vascular platform addressing high-growth markets,Covidien PLC recently reached a merger agreement to acquire medicaldevice maker ev3 Inc.

 

Under financialterms of the agreement, Covidien will pay $22.50 per share in cash,for a total of $2.6 billion, net of cash acquired.

The deal is thelatest in a spree of acquisitions and divestitures by Covidien sinceit spun off from Tyco International Ltd. several years ago. Thetransaction also positions Covidien to become a leading endovascularplayer, with strong positions in both the peripheral vascular andneurovascular markets.

According toRichard J. Meelia, chairman, president and CEO of Covidien, theacquisition of ev3 will enable Covidien to significantly expand itspresence in the vascular market and is in line with its strategy ofbecoming a leading partner with vascular surgeons, neurosurgeons,interventional cardiologists and interventional radiologists.

"With its broadproduct portfolio, clinical expertise and call-point synergies withour existing vascular franchise, ev3 will be an important addition toour innovative vascular intervention products," notes Meelia.

According to JoeWoody, Covidien's president of vascular therapies, ev3 was anattractive acquisition because its products complement Covidien'sexisting vascular therapy products, including dialysis catheters,vascular access products, compression products, the TrellisPeripheral Infusion System (gained in the Bacchus Vascularacquisition in 2009) and ClosureFAST (gained from the VNUSacquisition in 2009).

"Thecombination of these acquisitions and ev3's broad platform ofperipheral vascular and neurovascular technologies will put Covidienin a leadership position in the prevention and treatment of vasculardisease," he adds.

Woody also pointsout that Covidien has a large U.S. and worldwide sales anddistribution footprint, with some of the most technologicallyadvanced product offerings. With 2009 revenue of more than $10billion, Covidien has more than 42,000 employees worldwide in 60countries, and its products are sold in over 140 countries.

The transaction,which will take the form of an all-cash tender offer by a whollyowned subsidiary of Covidien, followed by a second-step merger, issubject to customary closing conditions, including receipt of certainregulatory approvals, and is expected to be completed by July 31. Theboards of directors of both companies have unanimously approved thetransaction.

Covidien, basedin Dublin, Ireland, will fund the purchase with a combination of cashand debt. It said the transaction will reduce its earnings per shareby 5 to 8 cents this year and 10 to 15 cents in 2011. According toWoody, the company employs about 1,350 globally, and additionalintegration plans will be discussed after July 31.

While Woody willnot go into specifics about other companies evaluated as Covidienconsidered the acquisition, he points out that company officialsconducted intense due diligence of the peripheral vascular andneurovascular spaces.

"These are twovery attractive markets Covidien wanted to enter, and ev3 provided usthe unique opportunity to enter both with the acquisition of one highperforming company," he says. "ev3 has proven that it can developproducts and markets in both of these spaces. Bringing thosecapabilities into the Covidien family is very exciting. However, wecontinue to evaluate several opportunities in many spaces, includingvascular, and will continue to do transactions that we believe to bein the best interests of our shareholders. That being said, thisacquisition provides Covidien with a robust, attractive portfolio ofproducts in both the peripheral vascular and neurovascular markets."

Robert Palmisano,president and CEO of ev3, echoes those comments, noting that thetransaction will provide new opportunities and create value for bothcompanies' stockholders, patients and employees.

"We will beable to advance our broad platform of peripheral vascular andneurovascular technologies with a leading global healthcare productscompany that shares our vision of delivering breakthrough andinnovative medical solutions for improved patient outcomes,"Palmisano says. "In addition, this combination will provide theopportunity for further innovation to support endovascular marketgrowth and procedure penetration worldwide, while our employees willbe afforded the opportunity to be part of a larger organization withgreater depth of resources for sustained success in our industry."

Headquartered inPlymouth, Minn., ev3's devices are used in endovascular surgeries,operations in which surgeons make small incisions and maneuverdevices in the body through major blood vessels. Other products areused in neurovascular procedures, or procedures involving both bloodvessels and nerves. ev3 also makes stents and balloon catheters,which are used to open arteries that have been blocked by fattyplaque. ev3 expects $520 million to $530 million in revenue thisyear.

Ultimately, theacquisition of ev3 brings two new franchiseopportunities—neurovascular and peripheral vascular—to Covidien'svascular business.

"ev3 has thebroadest portfolio in the industry and when coupled with our globalpresence, venous markets and our training and education capabilities,we offer a unique and differentiable position to our customers,"Woody says. "We are very excited about ev3's development andclinical capabilities that can be leveraged across the vascularbusiness, including emerging markets. We also believe there aresynergies around call points and technology from the prior VNUS andBacchus acquisitions."

With theacquisition, Covidien brings into the fold ev3's globalinfrastructure, physician education and training. Woody says thesewere also attractive elements to the deal.

Covidienofficials also are excited about the prospects of leveraging ev3'sdevelopment and clinical capabilities across the vascular business,including emerging markets.

"We alsobelieve there are synergies around call points and technology fromthe prior VNUS and Bacchus acquisitions," Woody says. "ev3 has arobust pipeline in high-growth market segments which will complementCovidien's strong pipeline of innovative new products."

Woody notes thatthe acquisition stands a great chance of being a successful one forCovidien because company officials believe that ev3 is alreadycompeting effectively as they have gained share in both of thefranchises.

"We willcontinue to leverage the strength and breadth of ev3's portfolio,now supplemented by Covidien's peripheral venous products,including ev3's No. 1 position in atherectomy," he says. "Wewill continue the focus on clinical evidence and delivering highquality products to our customers. In the atherectomy space, we willcontinue ev3's focus on clinical data and product enhancements tomaximize the benefits to clinicians and their patients. We areconfident that Covidien can continue and augment that success."

Covidien/ev3 isthe latest mid-size deal in healthcare, including AbbottLaboratories' $3.7 billion deal for the branded generics businessof India's Piramal Healthcare and Astellas Pharma's $4 billionacquisition of biotechnology company OSI Pharmaceuticals.

Companies areflush with cash and borrowing rates are favorable, while potentialsellers may be more likely to make a deal because valuations havestrengthened, says David Heupel, a portfolio manager with ThriventInvestment Management.

In a note toclients, Jefferies & Co. analyst Joshua Jennings says the dealmakes sense for both companies because there is little overlapbetween ev3's products, especially its central vein access andneurovascular devices, and the products sold by Covidien.

"From a productstandpoint, the acquisition of ev3 will enable Covidien tosignificantly expand its presence in the vascular market, which hasbeen an area that Covidien management frequently highlighted as anarea of strategic growth for the company," he says. Jennings thinksthe deal could boost Covidien's profit by 15 cents per share peryear after the businesses are combined.

Covidien'sacquisition of ev3 also could be the first ripple in a new wave ofdeals among large medical device players that are cash rich andstarved for growth, while many smaller companies have products inattractive areas, notes Jason Mills, an analyst with CanaccordGenuity.

Separately,Covidien also said it was selling its sleep therapy product line foran undisclosed amount to privately held PH Invest.

PHILLIPSBURG, N.J.—Covidien alsoannounced in late May that it signed a definitive agreement to sellits specialty chemicals business to an affiliate of New MountainCapital LLC, for $280 million in cash.

The specialty chemicals business,headquartered in Phillipsburg, N.J., manufactures and marketshigh-purity chemicals and related products and services under twobrand names, J.T. Baker and Mallinckrodt Laboratory Chemicals. Theseproducts are widely used in research and quality controllaboratories, microelectronics, environmental testing laboratoriesand universities, and for manufacturing in the pharmaceutical,biotechnology and other industrial markets.

Covidien said the decision to divestthe unit was made "following a thorough evaluation of a number ofstrategic alternatives."

"The decision is consistent withCovidien's strategy to streamline its portfolio and reallocateresources to its faster-growing, higher-margin businesses, where thecompany has or can develop a global competitive advantage," thecompany said in a statement.

Fiscal 2009 sales of the product linewere $414 million. For the first six months of fiscal 2010, sales ofthis product line were $216 million.

Completion of the transaction issubject to customary closing conditions, with closing expected by theend of fiscal 2010. Covidien said the transaction is expected todilute reported earnings-per-share by approximately 9 to 11 cents ineach of fiscal 2010 and 2011.

New Mountain Capital is a NewYork-based firm that manages private and public equity funds and hasapproximately $8.5 billion in aggregate capital commitments.