Even the most casual observer can see that there's an abundance of activity in the healthcare sector these days insofar as initial public offerings (IPOs) and mergers and acquisitions are concerned. So, how do the pros see it? "I've never seen the level of dialogue [about IPO and M&A activity] that I'm seeing now," said Luke Sarsfield III, vice president in the investment banking division of Goldman, Sachs & Co. (New York). Sarsfield led a breakfast roundtable discussion on the subject during last month's annual meeting of the Advanced Medical Technology Association (AdvaMed; Washington) in Dana Point, California.
Noting the preponderance of deals being done by the larger players in the sector, he cited the increase in the number of firms getting to the range of $2 billion to $7 billion a year in revenues. "It's tough to work at the middle level" these days, he said.
Roundtable participant Stuart Randle of GI Dynamics (Watertown, Massachusetts) observed that from the venture capital perspective, "if [a company] has an interesting technology, there is more venture capital money available than they know what to do with." However, he added that "there's not enough capital available to companies at the very early stage of development."
Sarsfield said of the public funding market that it "has been a little more exciting of late." He added: "We had a 'nuclear winter' in 2001-2003, so we now are seeing some of the backlog from that period filter its way through the pipeline," particularly on the new-issues side. "Investors are quite focused on the opportunities in new issues," he said, calling it "a more normalized new-issue market."
Noting that "growth stocks matter to the public investor," he said, "Message One is that predictable growth in a company's core businesses is very important."
Referring to comments that had been made a day earlier at the AdvaMed meeting, he noted the belief that there are two types of companies those that are being operated for growth and those that are for sale. But, he added: "some are in a grey area, and having a dual-track strategy [of both growth and eventual sale] is good."
Fiscal performance is key, Sarsfield said. "I've never seen investors be more focused on quarterly re-sults," he added. "They want to know, 'What does the next quarter look like?'" And, he said, "If you hit it [analysts' expectations}, they'll reward you for it." But "if you miss it, watch out."
Investors, he said, "are much more risk-adverse than in the past."
In the M&A area, Sarsfield observed that "a lot of the macro-merger activity is past." There may be "one more big deal in the cardio space," he said, "maybe one or two more such deals in orthopedics." The view of the big players, he said, is that "we're consolidated." That, Sarsfield said, "is good from the small-company perspective. What we'll see is a 'string of pearls' strategy being adopted by potential buyers."
He cited two basic reasons for increased merger activity:
- "Renewed confidence" at the CEO level in the overall economic outlook.
- The availability of what he called "cheap cash" with which to do deals, with companies able to finance their M&A activity "quite cheaply."
The key question for acquisition-minded CEOs, he said, is "What technology do I need to add in order to protect my business?"
From the investment perspective, he cited urology as a med-tech space that is getting "renewed emphasis and focus." Sarsfield noted that investors "are waking up to the fact that urology benefits from the same demographics as orthopedics, just 10 years later." He also sees "more focus on the ophthalmology space as an attractive niche" for investors, and characterized the dental implant market as "a rocket ship ready to soar."
As for device/drug convergence, a buzzword at many med-tech investor gatherings, Sarsfield's view is that the segment is going to be "slow to emerge," but that "we're seeing more partnering between biotech and device companies."
He noted the differences between financing available for device firms vs. the difficulty biotech firms are having in finding such funding. "Device companies generally have products approved and some form of reimbursement in place, compared to biotech, where their products often still are in early trials and have only a 50/50 shot at even getting to the next phase of trials."
J&J, Cytyc eye deals for growth
Speaking of dealmaking, two companies that have used acquisitions to expand their positions in various med-tech sectors ventured once again into that realm last month.
Johnson & Johnson (J&J; New Brunswick, New Jersey) has signed an agreement to purchase Closure Medical (Raleigh, North Carolina), a leader in biomaterial-based medical devices, in a cash-for-stock exchange deal. Closure shareholders will receive $27 for each outstanding Closure Medical share held.
The value of the transaction, as of the anticipated closing date, is estimated at about $370, million based upon Closure's fully diluted shares outstanding of about 15.6 million.
Following completion of the deal, Closure is expected to operate as a stand-alone entity reporting through J&J's Ethicon (Somerville, New Jersey) unit, with which Closure has worked since 1996 on the development of topical adhesives.
The board of directors of Closure has approved the transaction. The agreement requires the approval of that company's stockholders and is expected to close during 2Q05.
Closure develops a number of medical adhesives and delivery devices based on a proprietary medical-grade cyanoacrylate technology for specific applications in wound care and wound closure. This technology is found in the family of Dermabond Topical Skin Adhesive (2-octyl cyanoacrylate) products, marketed by Ethicon under an exclusive distribution agreement. It is also found in Band-Aid Brand Liquid Bandage and other products for consumer and veterinary use.
Ethicon and Closure both have focused on further developing topical adhesives. Closure Medical's Omnex Surgical Sealant recently received CE mark approval for use as an adjunct to sutures to achieve hemostasis in peripheral vascular surgery. Approval for a similar indication in the U.S. is anticipated in 2006.
Women's health company Cytyc (Marlborough, Massachusetts), the leading provider of Pap smear testing products, reported closing the acquisition of privately held Proxima Therapeutics (Alpharetta, Georgia), a developer of radiation delivery systems for the treatment of cancer.
The two companies disclosed in February that they had entered into a definitive merger agreement for Cytc to acquire Proxima for a purchase price of $160 million, plus a two-year earn-out based on incremental sales growth in breast-related products, to be paid out of existing cash.
Proxima's lead product, the MammoSite radiation therapy system, is a single-use device for the treatment of breast cancer that positions radiation sources directly into the post-lumpectomy site to optimize radiation treatment delivery while minimizing damage to healthy tissue. Proxima launched the MammoSite RTS following FDA clearance in May 2002. The company reports, to date, more than 7,000 breast cancer patients treated with the system.
Cook Biotech, CorMatrix in license pact
Cook Biotech (West Lafayette, Indiana) and CorMatrix Cardiovascular (Marietta, Georgia) reported in late February that they have established a cross-license agreement to encourage the development of certain cardiovascular medical devices using proprietary extracellular biomaterials held by each company. CorMatrix, a tissue engineering and medical device manufacturer, will develop products for repair of the heart using the licenses it has obtained from Cook. It said potential products from the merger include cardiac patch applications for adult and pediatric heart defect repair and myocardial grafts to treat congestive heart failure, as well as applications to stimulate myocardial angiogenesis.
"CorMatrix is focused on the research and development of a proprietary group of extracellular matrix materials for the treatment of cardiac tissue diseases," said Beecher Lewis, company president and COO. "We are excited about the addition of Cook's widely used biomaterials to our existing technology platform and believe that Cook Biotech's experience in the manu- facture of these materials should greatly enhance our development efforts."
The extracellular matrix (ECM) biomaterials providing the basis of this cross-license agreement are biological substrates that guide cell growth and act as tissue scaffolds to support tissue specific remodeling that is, restoring both form and function to injured tissues. Remodeling then occurs over time as the implant is replaced by host tissue.
"Cook Biotech is actively working to provide a selection of well-characterized ECM biomaterials for use in tissue-engineered medical products. We believe CorMatrix is an excellent partner to fully utilize our ECM tissue scaffolds as a basis for new products for cardiovascular applications," said Dennis Abbott, dir-ector of business development at Cook Biotech.
Lewis said that his company held the patents to several important ECM materials and that Cook Biotech held the rights to another key ECM patent. Lewis told The BBI Newsletter: "We gave them access to our ECMs for heart valve repair, and they gave us the rights to their ECM for repair of heart tissue in general, which is basically repair of diseased myocardial tissue."
Lewis added that the technology swap essentially gives CorMatrix exclusivity in the areas of myocardial repair, "with all of the currently known, naturally derived extracellular matrices." These rights "give CorMatrix a huge competitive advantage from the standpoint of congestive heart failure or angiogenesis applications," he said. While the company gave up its rights to the heart valve patents, Lewis noted that it picked up what he termed a "much larger" potential opportunity. "The congestive heart failure/myocardial repair angiogenesis market is projected to be somewhere in the neighborhood of $8 billion between now and 2013," he said. One of the ECM scaffolds, derived from the porcine small intestinal submucosa, is presently being used for numerous medical and surgical procedures.