Medical Device Daily National Editor

Given worldwide aging demographics, urology is an attractive space for med-tech providers. But spaces that attract, attract competition.

That is certainly one of the drivers behind this week's proposal by HealthTronics (Austin, Texas), to purchase Endocare (also Austin), thus merging the two companies' efforts in urology and prostate cancer treatment and giving HealthTronics both broader and deeper presence in these markets.

HealthTronics – heavily focused in the urology markets through its fleet of lithotripsy systems and other services – is offering $2.28 a share to acquire Endocare, the proposed deal having an implied value of $26.9 million, based on 11.8 million shares of Endocare stock as of June 30.

Endocare specializes in cryotherapy technologies to treat tumors, its initial emphasis being on cryoablation to treat prostate cancers.

Given an ongoing partnership between the companies, Endocare is certainly likely to be listening closely to the offer. But it issued a boilerplate response indicating no preference and saying that it will consult various parties, review the offer and "pursue the best course of action for the long-term value" to stockholders.

Though Endocare said that HealthTronics bid was unsolicited, in its earnings call earlier this week it noted its partnership with AMPI/HealthTronics – AMPI (Advanced Medical Products Inc.), a provider of cryosurgical urology services purchased by HealthTronics in April – and acknowledged discussions between the firms.

Importantly, that acknowledgement was linked to an admission of stagnant growth in its flagship offering of cryotherapy services.

Craig Davenport, CEO and chairman of Endocare, during the company's earnings call, said, "Given the importance of the AMPI/HealthTronics partnership to Endocare, we've met with [HealthTronics] several times in the past two quarters to discuss how we can correct the current performance and get back growing again."

He added: "Their cryo business is flat also. Both sides agreed that we have to regain momentum and do it quickly."

As a matter of note, HealthTronics' bid for Endocare comes on the heels of HealthTronics' purchase of UroPath (Arlington, Texas) for $7.5 million in July (Medical Device Daily, July 23, 2008). UroPath describes itself as the largest provider of group practice-owned urological pathology laboratories in the U.S., those labs processing hundreds of thousands of specimens, serving more than 450 urologists across 17 states.

HealthTronics said that its proposal to acquire Endocare represents a 20% premium above that company's closing stock price on Aug. 6, and it posted its letter to Endocare, officially making its offer.

James Whittenburg, president/CEO of HealthTronics, said in that letter: "After carefully considering Endocare's recent performance, balance sheet and comments during Endocare's earnings call today, HealthTronics believes that its proposal to purchase Endocare's outstanding shares represents a significant premium that reflects HealthTronics' unique ability to better leverage Endocare's technology and assets."

Thus, he said that HealthTronics' offer should be considered "attractive" by providing "greater control over promotion, costs, margin and distribution."

He noted that any final proposal would be subject to due diligence and development of a final agreement.

In the Endocare earnings call referred to by Whittenburg, Michael Rodriguez, CFO for Endocare, reported "flat and disappointing revenue."

The company had a small increase in revenue to just over $7.9 million in 2Q08, but a loss of $2 million, somewhat less than the loss of $2.3 million in the comparable '07 quarter (and a loss of $1.1 million, compared to $1.1 million for the year-ago quarter, after adjustments for interest, taxes, depreciation and amortization).

Davenport acknowledged the increasing pressure of competition by other technologies, primarily the "emergence" of robotic prostatectomy and intensity modulated radiation therapy. And he outlined a variety of initiatives to expand on the uses of its cryoablation technologies, such as a push for additional training of physicians, increased emphasis on patient education and increased efforts in marketing.

"An important element of these programs," Davenport said, "is an increased emphasis on focal cryoablation, since we believe that this is an area where we have a potentially substantial competitive advantage."

HealthTronics held its 2Q earnings call yesterday afternoon, reporting 2Q08 revenue of $42.6 million, compared to $35.6 million in 2Q07. The company's net income for the quarter was $710,000, or 2 cents a diluted share, compared to $317,000, or 1 cent a diluted share, in 2Q07.

The company's Urology Services revenue for the second quarter was $37.9 million, up 23% from the $30.8 million recorded in 2Q07, with the company saying that growth in this area was driven by the acquisition of AMPI.

The company reported a loss in 2007 (ended Dec. 31) of $14.5 million, or 41 cents a share, somewhat down from its loss of $16.4 million in 2006, or 47 cents a diluted share, on year 2007 revenue of $140.4 million.

HealthTronics says that besides providing a variety of healthcare services and technologies in the urology sector, its benefits include urologist partnership opportunities, surgical and capital equipment, maintenance services offerings, and anatomical pathology services.