And it did, though not as fast or as much as the pundits had anticipated. Based on a 65.2 percent increase in the number of 2010 transactions (using a minimum deal value of $68 million) and a 27.2 percent jump in total deal value ($14 billion compared with $11 billion in 2009), analysts expected 2011 to be the year M&A activity returned to normal. Or close to normal, at least.
“Although the total deal value for the year remains below average, the average EV/revenue multiple increased substantially to 4.5x in 2010 (the 10-year average is 3.9x). It appears that as the economy stabilized and visibly improved, management teams became more willing to pay for growth platforms that might help to drive the top-line in the next few years,” said a BMO Capital Markets report released last January, titled “2011 Medtech Outlook—Navigating the New Normal.”
“At the same time, it seems that so-called ‘transformative’ acquisitions are less attractive, as management commentary during the year clearly favored ‘tuck-in’ acquisitions. As the economy improves, however slowly, we expect larger acquisitions to take place…,” the report noted.
And the market did not disappoint in this area. According to BMO Capital Markets data, there were six deals worth more than $1 billion last year, a 50 percent increase compared with the four that took place in 2010 and tripling the number that occurred when the market was at its worst in 2009. In addition, there were 35 total M&As worth more than $68 million, and the average deal value more than tripled, reaching $1.3 billion in 2011.
Not a bad turnaround, considering the venture capital market is still bone-dry, the nation’s economy is limping along at a snail’s pace and the euro zone’s escalating debt crisis continues to threaten global growth. Still, analysts expected more from the market last year.
“M&A, we would have thought there would have been more by now,” according to the report. “We have been writing about a consolidatedmedical technology industry for some time, and yet the deals are not coming at the pace, or at the valuations, we would have expected. On the surface, the number of transactions in 2011 is not far off from the average, yet we would have anticipated more given the low cost of debt, as the environment is more difficult for smaller companies to maneuver and as larger companies are in search of growth and scale given a more rigorous hospital purchasing environment.”
Report authors added: “Yet, peeling the onion back a bit shows that the price point has dropped, the average 2011 EV/trailing 12-month (TTM) sales multiple was 3.4x versus the 10-year average of 4.0x and the EV/TTM EBITDA multiple was 12.5x versus 19.0x. We suspect that herein lies the rub: There is a mismatch between what the acquirer wants to pay and what the acquisition candidate believes it is worth.”
Despite such a mismatch, there were some noteworthy deals that occurred last year. Those of significance included:
NuVasive Inc. acquires Impulse Monitoring Inc. Though it was worth only $80 million ($40 million cash, $40 million in stock), this acquisition has far-reaching implications for NuVasive. In a formal statement, NuVasive CEO and Chairman Alex Lukianov said the deal would enable the San Diego, Calif.-based company to offer better operating room clinical support of neuromonitoring and professional neuromonitoring oversight, as well as expand its relationships with surgeons and hospitals. In addition, Lukianov expects the move to increase adoption of the firm’s XLIF eXtreme Lateral Interbody Fusion procedure and give NuVasive access to the $800 million inter-operative monitoring market.
According to company data, only 50 percent of spine procedures currently undergo inter-operative monitoring. Bigwigs expect that market to grow about 15 percent annually over the next few years. That gives NuVasive ample time to make inroads in new hospitals and new procedures, particularly in areas such as scoliosis. “The combination could benefit NuVasive’s presence on the East Coast, where Impulse’s 150 neurophysiologists are in hospitals where NuVasive has yet to make a dent,” BMO Capital Markets analyst Joanne Wuensch said of the deal.
Integra LifeSciences Holdings Corporation purchases SeaSpine Inc. This $89 million deal added a key component (the combined orthobiologics product portfolio) to Integra’s orthopedic division. With $50 million in reported revenue in fiscal 2010, SeaSpine makes and distributes a comprehensive set of spinal fixation devices, including both hardware and biologics. The Vista, Calif.-based firm has access to the under-penetrated spine hardware market in the United States and parts of Europe; as a result, the deal likely will add more colors to Integra’s business by effectively doubling its distribution footprint and customer base.
Stryker Corp. acquires Memometal Technologies S.A. Stryker was on a spending spree for a while last year as it attempted to find other revenue sources amid flat sales of its replacement hips and knees. One of the more notable deals was the $150 acquisition of Memometal Technologies, French metal alloy manufacturer that reported $30 million in 2010 sales. The deal, which includes up to $12 million in milestone payments, is expected to strengthen Stryker’s presence in the fast-growing market for foot and hand products. Stryker CEO Stephen P. MacMillan believes the acquisition also could help his company capture a greater share of the podiatric surgery market.
Stryker Corp. purchases Orthovita Inc. Stryker executives consider the $316 million price of this deal a good investment, as it will enable the orthopedic manufacturing behemoth to complement its existing orthobiologics offering through Orthovita’s signature products, including Vitoss (a bone graft substitute), Cortoss (a bone augmentation material) and the Vitagel surgical hemostat. The move also is likely to help Stryker better compete with rivals Medtronic Inc. and Johnson & Johnson in the $5 billion orthobiologic market. The deal’s benefits, however, are not all one-sided. Analysts are confident that Stryker’s marketing heft will bolster sales of Orthovita’s product lines. Robert W. Baird & Co. analyst Jeff Johnson said the acquisition should help improve Orthovita’s performance in the next 12 to 24 months. Time will tell.
Baxter International Inc. acquires Synovis Life Technologies Inc. The reason for this $325 million acquisition was simple: Baxter wanted to expand its footprint in the biosurgery and regenerative treatment markets and enter the soft tissue repair sector. And Synovis seemed like a near-perfect fit, with its $68.6 million in 2010 sales and a product line—including Tissue-Guard and Varitas Collagen Matrix—that is used in such procedures as hernia repair, vascular surgery and obesity surgery. The deal is expected to reducefull-year 2012 earnings for Baxter by about 4 cents a share and most likely will have no effect on earnings next year. After that, the purchase should be increasingly accretive and add boost Baxter’s coffers several years from now. Such a business strategy should help Baxter achieve the long-term growth it craves. “[The acquisition] seems to fit well with their regenerative medicine business. It’s a small company, kind of a niche player, and it does make sense,” Michael Matson, an analyst with Mizuho Securities USA Inc. in New York, N.Y., said after the deal was announced. “It’s not going to move the needle in the near term but these are big markets and could add meaningful revenue down the road. It’s a trade off—short-term dilution for longer-term growth.”
Medtronic Inc. purchases PEAK Surgical and Salient Surgical Technologies. Annual revenue in Medtronic’s surgical technologies business reached $1 billion for the first time in fiscal 2011. To mark the milestone, the Minneapolis, Minn.-based medical device manufacturer acquired Salient Surgical Technologies Inc. of Portsmouth, N.H., and Peak Surgical Inc. of Palo Alto, Calif. Both companies have develop advanced surgical techniques; Salient’s technology heats soft tissue and bone to seal wounds in orthopedic, spine, abdominal and thoracic surgery, while Peak’s expertise leverages radio frequency energy to help surgeons make incisions in various procedures, including ear, nose and throat, plastic and reconstructive, and orthopedic procedures. Medtronic Restorative Therapies Group President Chris O’Connell said the $645 million deal will help the company serve new customers and better meet the needs of existing ones. Analysts, however, claim the acquisition illustrates Medtronic’s need to find new areas of growth amid slumping sales of its heart devices and spinal surgery products.
But at least one expert questioned the company’s choice of a new growth area: “Long-term questions remain regarding how relevant these products are to the general surgery and how aggressive Medtronic will be in a largely new distribution channel,” Morgan Stanley analyst David Lewis wrote in a note to investors. For now, those questions will remain unanswered.
Johnson & Johnson acquires Synthes Inc. This deal arguably is the most significant in recent memory, though not for its hefty $21.3 billion price tag. Rather, J&J’s blockbuster purchase potentially could affect the entire orthopedic industry, forcing heavy hitters such as Zimmer Holdings Corp., Stryker and Smith & Nephew plc to re-evaluate their long-term growth strategies. The deal immediately boosted J&J’s share of the $5.5 billion trauma products market 11-fold (to 55 percent) and doubled its slice of the $9 billion spinal-care segment to 22 percent, analysts noted. Such mind-boggling increases could pressure Zimmer and Stryker, which mostly build devices for knee and hip replacements, to bulk up their own portfolios by acquiring smaller orthopedic companies in faster-growing parts of the industry, said David Turkaly, a Susquehanna Financial Group analyst in New York, N.Y. “What clearly happens is J&J becomes number one in all of orthopedics,” Turkaly said. “The Strykers and Zimmers of the world are probably now a good distance behind the animal that J&J is in those markets.”
Once the transaction is completed, Johnson & Johnson will combine its DePuy segment with the Synthes business. Industry experts believe the products made by both DePuy and Synthes should complement each other—DePuy is considered a leader in joint replacement and sports medicine, while Synthes is looked at as a leader in several important market segments where DePuy has little or no presence at all. J&J segments that should benefit from the acquisition include trauma, cranio-maxillofacial and power tools. The company expects the $5 billion trauma market to grow at about 7 percent annually going forward.