As the big cardiovascular players continued to grind on toward some sort of consolidation, titan-sized conglomerate Tyco (Pembroke, Bermuda) un-veiled an opposite strategy last month. It said it would break up its diverse lines into three publicly traded businesses, one of them being a separate healthcare company.
Bruited for several weeks as in the works, the breakup will create one of the largest healthcare manufacturing entities in the world, Tyco Healthcare. The other two businesses will be Tyco Electronics and Tyco Fire & Security and Engineered Products & Services (TFS/TEPS) at a cost of $1 billion.
Cost of the breakup is expected to be about $1 billion, primarily for tax and debt refinancing.
Tyco said it would create the three companies through tax-free stock dividends to shareholders, after which they will own 100% of the equity in the three businesses. Tyco said it expects to complete creation of the separate firms by 1Q07, with each remaining incorporated in Bermuda.
Over the past three years Tyco has been recovering from accounting scandals capturing top headlines. In the wake of these scandals, Dennis Kozlowski, its former CEO, and Mark Swartz, former CFO, were sentenced to prison last year on a variety of fraud and larceny charges. They are appealing their convictions.
In a Jan. 13 conference call, Ed Breen, CEO and chairman of Tyco, didn’t detail these problems specifically, but said that that the three-part spin-off was part of the company’s “second phase of its turnaround.” He noted a variety of changes in corporate governance and reorganization of multi-billion-dollar debt and said that Tyco has more recently created an “operating culture that puts growth and operational excellence at the top of the agenda.”
The break-up into separate companies, he said, would allow “each business to take more aggressive, quicker action” to capture “growth opportunities” – among them, the ability to pursue improved financing and product partnerships.
Breen said that the company had been looking at these possibilities since spring of 2005 following the resolution of “financial and liquidity crises.”
The company is also known to have been considering this path four years earlier.
In a statement, the company said that its board and senior leadership had looked at a variety of options – including continuing its “current operating strategy” as well as spin-off of some of its many businesses and separation of just one of its businesses and concluded that separation into three companies was the best course for improved shareholder value.
It said that creation of Tyco Healthcare – with 40,000 employees and producing revenue of nearly $10 billion in 2005 – “will create a leading stand-alone healthcare company, which is expected to benefit from a focused and independent healthcare culture to help attract top industry talent and strategic partners, as well as increasing access to emerging healthcare-related technologies.”
It said that the business will be led by Rich Meelia, its current president, who will become CEO. Kevin Gould, chief operating officer, and Chuck Dockendorff, CFO, will continue in these positions with the independent company.
Tyco Healthcare’s portfolio includes advanced surgical instruments and supplies, respiratory care products, contrast media and diagnostic imaging products, needles and syringes, vascular therapies, sutures and wound care products, and generic pharmaceuticals.
Once the creation of Tyco Healthcare is accomplished, observers will be interested in watching how it develops its already broad range of products – through the conglomerate’s past strategy of gobbling up various healthcare manufacturers, or via internal R&D, the latter strategy bannered by company officials in early 2004.
Tyco Electronics, with $12 billion in yearly revenue and 88,000 employees, is a major provider of an area of electronics components. CEO will be Tom Lynch, current President of Tyco’s Engineered Products & Services segment.
TFS/TEPS – perhaps best known for its ADT home alarm systems – produces $18 billion in sales and has 118,000 employees. It will be led by Breen.
The three entities together are initially expected to pay a dividend that is equal in sum to the current Tyco dividend. Until the planned transactions are completed, Tyco said it will pay its current quarterly dividend of 10 cents a share. It said its existing debt is expected to be allocated among the three companies or refinanced.
Tyco said it expects 1Q06 earnings per share to be about 38 cents a share. This is a reduction from its previous guidance of 40 cents to 42 cents a share.
It said the reduction in guidance was the result of weaknesses in its fire and security and its healthcare areas.
Shortfalls in healthcare, it said, were the result of problems in its imaging and respiratory businesses, “primarily the impact of voluntary product recalls and regulatory compliance issues,” plus capacity problems in pharmaceutical production.
For the full year 2006, the company is now expecting EPS to be in the range of $1.85 to $1.92 per share.
CAS second to win U.S. cerebral oximeter okay
With its FDA 510(k) clearance in December, CAS Medical Systems (Branford, Connecticut) became the second company to have a cerebral oximeter monitor approved for sale on the U.S. market. The company’s Near Infrared Spectroscopy (NIRS) Adult Cerebral Oximeter Monitor is a continuous, non-invasive monitor that measures absolute levels of brain tissue oxygen saturation.
CAS’ oximeter approval follows Somanetics (Troy, Michigan) with its Invos Cerebral Oximeter – to gain an approval for this type of device in the U.S. The company said it plans to launch the new device sometime in late 2006.
Earlier this month, CAS, founded in 1984, reported that Nasdaq had approved the company’s application for listing its common stock on the Nasdaq SmallCap Market under the symbol “CASM.”
Andrew Kersey, the company’s chief operating officer, said the timing of the Nasdaq listing was coincidental and that all CAS’ business segments, which include blood pressure measurement technology, vital signs monitoring equipment, apnea monitoring equipment and products for neonatal intensive care, are doing quite well
“I think we’ve seen significant improvement in the core business,” Kersey told Biomedical Business & Technology. “We’re seeing growth and improvement in all areas [of our business] at this moment. The timing of the Nasdaq listing was purely to do with the company performance over the past couple of years.”
The CAS Cerebral Oximeter utilizes the company’s optically based NIRS technology, which was developed with the help of a series of Small Business Innovative Research (SBIR) grants from the National Institutes of Health (NIH; Bethesda, Maryland). Results from a study conducted by Duke University Medical Center (Durham, North Carolina), detailing the performance of the CAS oximeter, were presented at the American Society of Anesthesiologists (ASA; Park Ridge, Illinois) annual meeting in Atlanta in October.
According to Kersey, the cerebral oximeter is similar to the ubiquitous pulse oximeter “in the sense that it’s an optical-based technique using fairly similar wavelengths of light.” What differentiates the CAS cerebral oximeter, other than the fact that it does not require a pulse to make readings, is the fact that it uses four lasers to gain a signal in contrast to a pulse oximeter that generally uses two light-emitting diodes.
Since the cerebral oximeter does not require a pulse to measure brain oxygenation, Kersey said that it has several advantages, particularly in the operating room (OR). “Certainly that’s true in cardiac surgery, where the heart can be on bypass,” and thus no pulse is available to make readings. The other significant advantage, he said, is the fact that “the brain is really what you’re interested in. Measuring the oxygen concentration in your fingertip [as is done with pulse oximetry] is nice, but really doesn’t tell you what’s going on in the most critical organ. [Pulse] oximeters monitor the amount of oxygen that you’re delivering into the bloodstream, but that doesn’t necessarily tell you that it’s actually getting to the brain.”
Louis Scheps, president and CEO of CAS Medical, called the oximeter approval a “milestone” for the company. He noted that the initial market for the product would be in the OR, for use in high-risk procedures such as cardiac surgery, carotid surgery and neurosurgery.
“The CAS oximeter will give healthcare providers absolute, accurate, real-time information to guard against neurological injuries due to compromised brain oxygenation that can occur during many surgical and clinical procedures,” Scheps said. “We believe it may also assist in important clinical decisions in post-operative intensive care units.”
In the OR the device, which consists of monitoring system incorporating measurement software and measurement display, is attached to the patient’s head via sensors. Generally the anesthesiologist is the person in the OR setting monitoring the preset thresholds that are customized to the individual patient. It is up to the anesthesiologist to determine whether brain oxygenation has been compromised and to correct the problem either by changing ventilation, increasing oxygen or CO2 intake or tilting the patient’s neck back.
According to Kersey, the surgeons who have championed the use of these cerebral oximeters in the OR setting, because they can contribute to much better patient outcomes and can lessen the chance of severe adverse cerebral outcomes such as stroke, coma or potentially even death. He noted that the company’s aforementioned target areas in the OR are potentially quite lucrative by themselves, but that the system can ultimately become the “standard of care” for virtually all OR procedures.
In November, competitor Somanetics received 510(k) clearance to market the Invos technology to monitor changes in blood oxygen saturation in regions of the body other than the brain.
This new application of the Invos technology is intended as an adjunct trend monitor of hemoglobin oxygen saturation of blood in skeletal muscle tissue beneath the sensor in infants, children and adults at risk of reduced- flow or no-flow ischemic states in critical care settings.
Philips growing in home health
Continuing to expand its already large presence in the healthcare/monitoring space – and seeing opportunity in aging populations worldwide – Royal Philips Electronics (Amsterdam, the Netherlands) unveiled plans in mid-January to acquire Lifeline Systems (Framingham, Massachusetts), a large North American provider of personal emergency response services.
The deal is valued at $750 million. Philips will pay $47.75 a share for Lifeline, or a total equity of $690 million net of $60 million cash and cash equivalents, in a deal approved by its board.
“The acquisition of Lifeline is an important step on our roadmap for growth in healthcare,” said Gerard Kleisterlee, president and CEO of Philips. “By targeting seniors and other people who want to continue living independently and exerting more control over their health and lifestyle, we aim to become a global player in the evolving home healthcare market.”
Ron Feinstein, president and CEO of Lifeline, in a Thursday afternoon conference call, said that the link-up with Philips would give opportunities to expand “far faster than we could on our own” as a stand-alone company and thus be in a “far stronger position to develop technology and services for future generations of seniors.”
The company estimated seniors as about 15% of the population in the developed world – with expectations to nearly double over 25 years – and wanting to stay increasingly active in managing their health.
“Personal response services are already the largest category of home healthcare solutions purchased out-of-pocket by older adults and their caregivers,” Philips said in a statement, while noting just single-digit penetration of these services for those 65 and older.
While Lifeline’s presence is primarily in North America, Feinstein more than once referred to “worldwide” opportunities, and the linkup with Philips suggests expansion to international markets.
Lifeline’s revenues in 2005 are expected to be about $150 million, a 15% increase over 2004. Its ’05 operating margins are expected to be about 15%, with strong U.S. and Canadian market presence through a network of more than 2,500 hospitals and other healthcare providers. It reports a subscriber base of nearly 470,000.
Lifeline provides 24/7 monitoring and two-way communication with its response locations and enabling instant access to a person’s health history and the provision of appropriate action or emergency services notice or family notification, if needed.
“Our many years of understanding consumers and their needs have led us to identify ‘healthcare at home’ as a key sector for us,” said Ivo Lurvink, CEO of Philips Consumer Health & Wellness. Lifeline, he said, “complements our existing presence in telemedicine, showcased in Motiva, our advanced interactive healthcare system.”
Feinstein noted important synergies, through the combination “of two industry leaders,” for benefiting the “at-risk” elderly and their families.
As of Sept. 30, Lifeline said it had nearly 470,000 subscribers from its response centers in Massachusetts, Ontario and Quebec.
Lifeline also supplies emergency response equipment and services to owners and developers of independent and assisted living and continuing care retirement communities across North America.
In its conference call, Lifeline officials said the company would supply additional specifics on the deal when it submits proxy materials.
Abbott Labs faces class action
A federal judge has granted class-action status to thousands of former employees of Abbott Laboratories (Abbott Park, Illinois) who say that their jobs were unfairly terminated during the spin-off of the company’s hospital products business into Hospira (Lake Forest, Illinois). A group of the former employees, who lost their jobs in 2003 and 2004, had sued Abbott and Hospira on behalf of a class of all affected workers under the Employee Retirement Income Security Act.
“The plaintiffs allege that Abbott designed the spin-off to cut off the employees’ pension benefits and insulate itself from ever paying any of the increased pension obligations accrued by its older employees as they approached their peak salary years,” the law office of Sprenger & Lang (Washington) said in a release on Wednesday.
The firm said Chicago Federal District Judge Robert Gettleman, in a decision rendered on Dec. 30, certified a class of plaintiffs for each of the three counts of the complaint by plaintiffs. Abbott said in a statement that Gettleman’s ruling was procedural and “has no bearing on the merits of the case.” It said it was confident of prevailing in the case.
Abbott spun off Hospira in 2004 because its products were no longer a primary company focus. “Allegations that Hospira was created for any other purpose are unfounded and without merit,” Abbott said.