Michael Barbella, Managing Editor12.01.14
The difficulty about living backwards and thinking forwards is that you become confused about the present. It is also the reason why one prefers to escape into the abstract.”
The irony is so cruel, it’s almost unfathomable. Merlyn—the wise but absent-minded wizard in T.H. White’s anthology of King Arthur tales—is blessed with the mind-blowing ability to summon dragons or looking-glass, turn royalty into animals (for educational purposes), and accurately predict adventure. Yet he’s forever damned to live his life in reverse, enduring an upside-down existence that ravages his psyche by making him oblivious to the past and resentfully cognizant of the future.
“Ordinary people are born forwards in Time... and nearly everything in the world goes forward too,” Merlyn tells Wart, the future king, shortly after meeting him in the Forest Sauvage. “But I unfortunately was born at the wrong end of Time, and I have to live backwards from in front, while surrounded by a lot of people living forwards from behind. Some people call it having a second sight. You see, one gets confused with Time when it is like that. All one’s tenses get muddled up, for one thing. If you know what’s going to happen to people, and not what has happened to them, it makes it so difficult to prevent it happening, if you don’t want it to have happened, if you see what I mean? Like drawing in a mirror.”
Or predicting the past. With an exclusive peek at the future, Merlyn watches the world unmake itself one confusing day at a time, losing each yesterday to the knowledge of tomorrow. Such a penance would be devastating to most forward-living mortals but Merlyn wisely exploits his gift, using his “memories” as a guide. He creates his future in real time before living it, shaping his life from prophetic visions rather than past history. Merlyn doesn’t dwell on a past he’ll never have (he calls it “a waste of good memory”); rather, he carves an existence from his knowledge of the future and lives backwards from there.
Challenges notwithstanding, Merlyn’s reverse-order living is strangely comforting. He proves it possible to envision the future and work backwards to fulfill that destiny through present-day decisions. There’s nothing magical about the approach—any modern-day Merlyn can implement the strategy to achieve a specific goal, as long as he lives for the future.
“To create a future, not wish for it,” advises psychotherapist/teacher/self-development expert Michael J. Formica, M.S., M.A., Ed.M., “we must make the future happen in the moment... this moment.”
Any moment, really. Each of the 31.5 million seconds contained in a calendar year is an ideal opportunity for future-building. Some moments naturally become more consequential than others in retrospect, but all have the potential to shape our tomorrows.
With a fresh installment of 31.5 million morrow-making moments looming, Orthopedic Design & Technology sacrifices several hundred seconds of its own dance with destiny to recap the most defining and influential bits of the past year in medtech finance. Our analysis follows:
Metamorphic megadeals: The life-sciences M&A market finally is bear-free.
After years of lackluster merger activity, the life-sciences sector (medical devices included) experienced a bullish run in 2014, with total deal value reaching $76.2 billion through mid-October. The largest and perhaps most transformative is Medtronic Inc.’s $43 billion bid for Covidien plc, a union that potentially could affect future power rankings and forever change companies’ growth strategies. EY analysts claim the deal is representative of the steps device manufacturers are willing to take to remain competitive in a changing healthcare market.
“Together, the combined entity will be one of the leading medtech distributors in multiple hospital purchasing categories,” EY analysts note in the firm’s annual “Pulse of the Industry” report. “If the combined company’s additional heft improves its contracting capabilities, it is highly likely the deal will put pressure on other medtechs to pursue mergers with equals as a relatively quick way to gain the scale required to remain competitive in the marketplace.”
Some companies already are feeling the pressure. Just two weeks after Medtronic announced its deal in mid-June, contact lens and surgical tool manufacturer Cooper Cos. agreed to buy Sauflon Pharmaceuticals Ltd. of the United Kingdom for roughly $1.2 billion. Roughly three months later, Becton, Dickinson & Co. wooed CareFusion Corp. with a $12.2 billion pre-nuptial agreement, and Tornier N.V. followed suit on Oct. 28 by partnering with Wright Medical Group Inc. in a $3.3 billion deal.
Medtronic, however, may have been pressured itself to find a suitable partner: The Carlyle Group hooked up with Johnson & Johnson subsidiary Ortho-Clinical Diagnostics Inc. on Jan. 16 (paying $4.2 billion for the privilege), while Smith & Nephew plc entered wedded bliss with ArthroCare Corp. on Feb. 3, and Zimmer Holdings Inc. proposed to Biomet Inc. on April 24. The latter union, a $13.4 billion cash/stock deal, is under investigation by the European regulators to determine whether the move could reduce competition in the hip/knee implant markets and drive up prices.
Medtronic’s deal is under scrutiny as well, but it is not subject to outside regulatory approval. The deal has sparked resistance from shareholders and Washington Democrats because the combined company would be based in Ireland for tax purposes—a type of deal known as a corporate inversion. Medtronic plans to assume $16 billion in U.S. debt to help fund the Covidien acquisition, slated to close later this year or in early 2015. The Minneapolis, Minn.-based company had planned to use about $13.5 billion in overseas cash for the merger, but new U.S. Treasury rules instituted in September prompted it to change the structure of the deal. The new debt, at a rate of 4 percent to 4.5 percent, is expected to be in place before the deal closes.
IPO window wide open: A deluge of initial public offerings (IPOs) ended medtech’s six-year drought in 2014, as nearly 30 companies filed for or became publicly traded enterprises—more than double the 12 that did so in 2013. Eighty percent of the initial public offerings occurred in the first six months, with nine popping up between April and May. Notable debuts included molecular diagnostics firm Exagen Diagnostics Inc. ($69 million); spinal device manufacturer K2M Group Holdings Inc. ($120 million); surgically implanted lens maker Presbia ($90 million); breast implant maker Sientra Inc. ($75 million); and endovascular stent graft developer Lombard Medical Inc. ($120 million).
Lombard Medical was among several companies that resuscitated long-dead IPOs this year: Blood filtration specialist Vital Therapies Inc. raised $54 million in an April IPO that was first proposed in October 2013 and cardiovascular genomic diagnostics firm CardioDx revived its canned IPO from May 2013.
EY analysts link the IPO uptick to lower amounts of investable capital as well as the potential to raise healthy amounts of cash, which in turn, enables companies to simultaneously launch products in multiple markets.
“Given that U.S.-based medtechs raised close to $70 million on average via public listings in 2013-14, the amount garnered through an IPO is likely to be more generous than what the company could raise via a late-stage round, often resulting in less dilution to current investors,” EY’s “Pulse of the Industry” report states. “The extra financial runway enables medtechs to launch products in multiple markets simultaneously, thereby increasing revenues and potential exit valuations should acquirers materialize.”
Tax inversion infatuation: Multinationals have become quite clever accountants through the years, using gimmicks like incorporation, subsidiaries, tax havens and “active financing exceptions” to dodge their financial obligations to Uncle Sam. Such ploys have transferred more than $2 trillion in U.S.-based profits to offshore accounts and withheld in excess of $500 billion from the Internal Revenue Service—a windfall that could have erased the 2014 federal deficit. Lately, however, companies seem to be favoring inversions, a loophole in American tax law that permits U.S. firms with just 20 percent foreign ownership to reincorporate abroad. By “inverting”—i.e., becoming a subsidiary of the foreign affiliate—companies legally can shirk a huge portion of their liability to the Internal Revenue Service and keep majestic sums of money overseas. Government officials estimate the practice could cost the U.S. Treasury nearly $20 billion through 2024.
Though it’s existed for decades, the inversion loophole has been used only sparingly in the last 30 years or so. Statistics show just 31 companies renounced their U.S. citizenship between 1982 and 2012, including Accenture, Fruit of the Loom Inc., Foster Wheeler AG, Ingersoll Rand, Tyco International, and Covidien plc (a Tyco spinoff). The pace picked up steam in 2012 and reached a fever pitch in 2014, as some of the biggest names in corporate America—Allergan Inc., Burger King, Pfizer Inc., Chiquita Brands International Inc., AbbVie, and Medtronic, among others—filed change of address forms with the federal government, hoping to free themselves from the planet’s highest corporate tax rate (35 percent). Executives justified the inversions by citing the tax code and touting their obvious fiscal benefits but a few, like Medtronic CEO Omar Ishrak, insisted the deal was motivated by strategy: “Our Covidien transaction was about strategy. It helps us accelerate our growth strategies and it helps us fulfill our mission,” he told Modern Healthcare in August. “That was the primary consideration. Having decided that Covidien is an attractive strategic partner, we then looked for the most optimum financial structure through which we can make the company most profitable, and the inversion structure was the most attractive, but not because the tax rates will change, because our tax rates will not change. Covidien’s won’t change and Medtronic’s won’t change.”
Nevertheless, the cavalcade of corporate inversions prompted the U.S. Treasury Department to issue new rules that require companies to own less than an 80 percent stake in the combined entity (a difficult, but not impossible task). The revamped regulations also deny inversion treatment to certain transactions, reduce the tax benefits of successful inversions and limit “hopscotch” loans.
While the new rules fail to address the larger issues of tax reform and accumulating overseas assets, the Treasury’s action seems to have stemmed the tide of tax turncoats: In the last two months, AbbVie scrapped its proposed $54 billion inversion deal with Shire plc; Salix Pharmaceuticals Ltd. nixed its $2.7 billion merger with Cosmo Technologies Ltd.; Auxilium Pharmaceuticals shelved its deal with QLT Inc. and agreed instead to be bought by Endo International Plc; and Chiquita Brands shareholders rejected the company’s inversion deal for Fyffes Plc. “Uncertainty plays big in any M&A deal,” Chris Ventresca, co-head of global mergers and acquisitions at JPMorgan Chase, told Fortune, “and the new rules are adding to it.”
Not everyone is backing off, though. Medtronic and Steris Corporation, which is purchasing United Kingdom-based Synergy Health for $1.9 billion in cash and stock, both have vowed to forge ahead with their deals.
Tax tiff: The U.S. government successfully defended its title in Round Two of the 2.3 percent medical device tax bout. State reinforcements were mostly ineffective, and a House-approved appeal fell victim to bad timing, coinciding with the start of the fall campaign season. The Republicans’ sweep of the Senate, however, practically guarantees a Round Three knockout. Stay tuned.
— T.H. White, “The Book of Merlyn”
The irony is so cruel, it’s almost unfathomable. Merlyn—the wise but absent-minded wizard in T.H. White’s anthology of King Arthur tales—is blessed with the mind-blowing ability to summon dragons or looking-glass, turn royalty into animals (for educational purposes), and accurately predict adventure. Yet he’s forever damned to live his life in reverse, enduring an upside-down existence that ravages his psyche by making him oblivious to the past and resentfully cognizant of the future.
“Ordinary people are born forwards in Time... and nearly everything in the world goes forward too,” Merlyn tells Wart, the future king, shortly after meeting him in the Forest Sauvage. “But I unfortunately was born at the wrong end of Time, and I have to live backwards from in front, while surrounded by a lot of people living forwards from behind. Some people call it having a second sight. You see, one gets confused with Time when it is like that. All one’s tenses get muddled up, for one thing. If you know what’s going to happen to people, and not what has happened to them, it makes it so difficult to prevent it happening, if you don’t want it to have happened, if you see what I mean? Like drawing in a mirror.”
Or predicting the past. With an exclusive peek at the future, Merlyn watches the world unmake itself one confusing day at a time, losing each yesterday to the knowledge of tomorrow. Such a penance would be devastating to most forward-living mortals but Merlyn wisely exploits his gift, using his “memories” as a guide. He creates his future in real time before living it, shaping his life from prophetic visions rather than past history. Merlyn doesn’t dwell on a past he’ll never have (he calls it “a waste of good memory”); rather, he carves an existence from his knowledge of the future and lives backwards from there.
Challenges notwithstanding, Merlyn’s reverse-order living is strangely comforting. He proves it possible to envision the future and work backwards to fulfill that destiny through present-day decisions. There’s nothing magical about the approach—any modern-day Merlyn can implement the strategy to achieve a specific goal, as long as he lives for the future.
“To create a future, not wish for it,” advises psychotherapist/teacher/self-development expert Michael J. Formica, M.S., M.A., Ed.M., “we must make the future happen in the moment... this moment.”
Any moment, really. Each of the 31.5 million seconds contained in a calendar year is an ideal opportunity for future-building. Some moments naturally become more consequential than others in retrospect, but all have the potential to shape our tomorrows.
With a fresh installment of 31.5 million morrow-making moments looming, Orthopedic Design & Technology sacrifices several hundred seconds of its own dance with destiny to recap the most defining and influential bits of the past year in medtech finance. Our analysis follows:
Metamorphic megadeals: The life-sciences M&A market finally is bear-free.
After years of lackluster merger activity, the life-sciences sector (medical devices included) experienced a bullish run in 2014, with total deal value reaching $76.2 billion through mid-October. The largest and perhaps most transformative is Medtronic Inc.’s $43 billion bid for Covidien plc, a union that potentially could affect future power rankings and forever change companies’ growth strategies. EY analysts claim the deal is representative of the steps device manufacturers are willing to take to remain competitive in a changing healthcare market.
“Together, the combined entity will be one of the leading medtech distributors in multiple hospital purchasing categories,” EY analysts note in the firm’s annual “Pulse of the Industry” report. “If the combined company’s additional heft improves its contracting capabilities, it is highly likely the deal will put pressure on other medtechs to pursue mergers with equals as a relatively quick way to gain the scale required to remain competitive in the marketplace.”
Some companies already are feeling the pressure. Just two weeks after Medtronic announced its deal in mid-June, contact lens and surgical tool manufacturer Cooper Cos. agreed to buy Sauflon Pharmaceuticals Ltd. of the United Kingdom for roughly $1.2 billion. Roughly three months later, Becton, Dickinson & Co. wooed CareFusion Corp. with a $12.2 billion pre-nuptial agreement, and Tornier N.V. followed suit on Oct. 28 by partnering with Wright Medical Group Inc. in a $3.3 billion deal.
Medtronic, however, may have been pressured itself to find a suitable partner: The Carlyle Group hooked up with Johnson & Johnson subsidiary Ortho-Clinical Diagnostics Inc. on Jan. 16 (paying $4.2 billion for the privilege), while Smith & Nephew plc entered wedded bliss with ArthroCare Corp. on Feb. 3, and Zimmer Holdings Inc. proposed to Biomet Inc. on April 24. The latter union, a $13.4 billion cash/stock deal, is under investigation by the European regulators to determine whether the move could reduce competition in the hip/knee implant markets and drive up prices.
Medtronic’s deal is under scrutiny as well, but it is not subject to outside regulatory approval. The deal has sparked resistance from shareholders and Washington Democrats because the combined company would be based in Ireland for tax purposes—a type of deal known as a corporate inversion. Medtronic plans to assume $16 billion in U.S. debt to help fund the Covidien acquisition, slated to close later this year or in early 2015. The Minneapolis, Minn.-based company had planned to use about $13.5 billion in overseas cash for the merger, but new U.S. Treasury rules instituted in September prompted it to change the structure of the deal. The new debt, at a rate of 4 percent to 4.5 percent, is expected to be in place before the deal closes.
IPO window wide open: A deluge of initial public offerings (IPOs) ended medtech’s six-year drought in 2014, as nearly 30 companies filed for or became publicly traded enterprises—more than double the 12 that did so in 2013. Eighty percent of the initial public offerings occurred in the first six months, with nine popping up between April and May. Notable debuts included molecular diagnostics firm Exagen Diagnostics Inc. ($69 million); spinal device manufacturer K2M Group Holdings Inc. ($120 million); surgically implanted lens maker Presbia ($90 million); breast implant maker Sientra Inc. ($75 million); and endovascular stent graft developer Lombard Medical Inc. ($120 million).
Lombard Medical was among several companies that resuscitated long-dead IPOs this year: Blood filtration specialist Vital Therapies Inc. raised $54 million in an April IPO that was first proposed in October 2013 and cardiovascular genomic diagnostics firm CardioDx revived its canned IPO from May 2013.
EY analysts link the IPO uptick to lower amounts of investable capital as well as the potential to raise healthy amounts of cash, which in turn, enables companies to simultaneously launch products in multiple markets.
“Given that U.S.-based medtechs raised close to $70 million on average via public listings in 2013-14, the amount garnered through an IPO is likely to be more generous than what the company could raise via a late-stage round, often resulting in less dilution to current investors,” EY’s “Pulse of the Industry” report states. “The extra financial runway enables medtechs to launch products in multiple markets simultaneously, thereby increasing revenues and potential exit valuations should acquirers materialize.”
Tax inversion infatuation: Multinationals have become quite clever accountants through the years, using gimmicks like incorporation, subsidiaries, tax havens and “active financing exceptions” to dodge their financial obligations to Uncle Sam. Such ploys have transferred more than $2 trillion in U.S.-based profits to offshore accounts and withheld in excess of $500 billion from the Internal Revenue Service—a windfall that could have erased the 2014 federal deficit. Lately, however, companies seem to be favoring inversions, a loophole in American tax law that permits U.S. firms with just 20 percent foreign ownership to reincorporate abroad. By “inverting”—i.e., becoming a subsidiary of the foreign affiliate—companies legally can shirk a huge portion of their liability to the Internal Revenue Service and keep majestic sums of money overseas. Government officials estimate the practice could cost the U.S. Treasury nearly $20 billion through 2024.
Though it’s existed for decades, the inversion loophole has been used only sparingly in the last 30 years or so. Statistics show just 31 companies renounced their U.S. citizenship between 1982 and 2012, including Accenture, Fruit of the Loom Inc., Foster Wheeler AG, Ingersoll Rand, Tyco International, and Covidien plc (a Tyco spinoff). The pace picked up steam in 2012 and reached a fever pitch in 2014, as some of the biggest names in corporate America—Allergan Inc., Burger King, Pfizer Inc., Chiquita Brands International Inc., AbbVie, and Medtronic, among others—filed change of address forms with the federal government, hoping to free themselves from the planet’s highest corporate tax rate (35 percent). Executives justified the inversions by citing the tax code and touting their obvious fiscal benefits but a few, like Medtronic CEO Omar Ishrak, insisted the deal was motivated by strategy: “Our Covidien transaction was about strategy. It helps us accelerate our growth strategies and it helps us fulfill our mission,” he told Modern Healthcare in August. “That was the primary consideration. Having decided that Covidien is an attractive strategic partner, we then looked for the most optimum financial structure through which we can make the company most profitable, and the inversion structure was the most attractive, but not because the tax rates will change, because our tax rates will not change. Covidien’s won’t change and Medtronic’s won’t change.”
Nevertheless, the cavalcade of corporate inversions prompted the U.S. Treasury Department to issue new rules that require companies to own less than an 80 percent stake in the combined entity (a difficult, but not impossible task). The revamped regulations also deny inversion treatment to certain transactions, reduce the tax benefits of successful inversions and limit “hopscotch” loans.
While the new rules fail to address the larger issues of tax reform and accumulating overseas assets, the Treasury’s action seems to have stemmed the tide of tax turncoats: In the last two months, AbbVie scrapped its proposed $54 billion inversion deal with Shire plc; Salix Pharmaceuticals Ltd. nixed its $2.7 billion merger with Cosmo Technologies Ltd.; Auxilium Pharmaceuticals shelved its deal with QLT Inc. and agreed instead to be bought by Endo International Plc; and Chiquita Brands shareholders rejected the company’s inversion deal for Fyffes Plc. “Uncertainty plays big in any M&A deal,” Chris Ventresca, co-head of global mergers and acquisitions at JPMorgan Chase, told Fortune, “and the new rules are adding to it.”
Not everyone is backing off, though. Medtronic and Steris Corporation, which is purchasing United Kingdom-based Synergy Health for $1.9 billion in cash and stock, both have vowed to forge ahead with their deals.
Tax tiff: The U.S. government successfully defended its title in Round Two of the 2.3 percent medical device tax bout. State reinforcements were mostly ineffective, and a House-approved appeal fell victim to bad timing, coinciding with the start of the fall campaign season. The Republicans’ sweep of the Senate, however, practically guarantees a Round Three knockout. Stay tuned.