As of mid-year, hospital products buyers may find one fewer sales representative knocking on their doors. The reason: a major consolidation in the hospital products sector, with Cardinal Health (Dublin, Ohio) rolling out its plan to acquire Alaris Medical Systems (San Diego, California), a leader in intravenous medication safety products and services, for about $2 billion, including the assumption of outstanding debt. Cardinal has agreed to make a cash tender offer to acquire all of the outstanding shares of Alaris common stock for $22.35 a share. The acquisition will extend Cardinal's portfolio of products and services to healthcare providers with particular focus on the acute care/hospital marketplace and is expected to increase its global presence via the addition of Alaris.
In a conference call, Robert Walter, chairman and chief executive officer of Cardinal, compared the deal "in the racehorse sense, to winning the Triple Crown," based on the company's three main criteria for growing via acquisitions. First, he gave the strategic fit of the two firms "a solid A" because of complementary technologies and Alaris' strong No. 3 market share in the U.S. and No. 1 position "in over 20 countries outside the U.S," primarily in infusion pumps. Alaris develops systems for the delivery of intravenous medications, many via long-term contracts, with nearly two-thirds of its revenue generated by the sale of proprietary disposable supplies. It also provides a suite of technical training services to more than 5,000 hospitals and healthcare systems globally.
Terming Alaris's combination of pumps and disposable administrative sets a "razor/razor blade market," Walter pointed to especially high margins in this arena because "there's no giving away the razors to sell the blades here."
For the second point of the Triple Crown win, he gave another "A" to Alaris's management, calling them "very buttoned-up, extremely well-organized and transparent in the due diligence process. They have a clear, cohesive vision, and we don't get that all of the time when we travel and talk to people. They have our spirit and we like them." And he gave a third "A" to the financial opportunities offered by the consolidation. "On a stand-alone basis," Walter said, "[Alaris] would have grown [its] operating earnings in the high teens to 20% with a high return on capital. Combined with Cardinal, the synergies are large, achievable and near-term because of the connectivity with Cardinal operations."
Calling Alaris "a cash generator, not a cash consumer," Walter said that the synergies between the firms "will be meaningful in year one and significant by year three. This is as significant as any acquisition I can remember." Those synergies are expected to reach $80 million to $100 million of earnings on a pretax basis by the end of FY07, Walter said.
Dave Schlotterbeck, president and chief executive officer of Alaris, said during the call that joining Cardinal will "significantly accelerate" his firm's ability to define and develop the medication safety market on a global basis. "Opportunities brought about by our new technologies are expanding faster than we have the resources to improve them," he said, adding that this would result from "rapid introduction of new products and insights gained at the patient bedside." Schlotterbeck, who will remain at the head of Alaris, said that, with the consolidation, "our ability to compete against the large companies eyeing our market space is going to be significantly enhanced."
Alaris launched 19 new products into the hospital market in 2003, and it predicted the launch of nearly two dozen more in 2004. The company said these "automated, proprietary systems with patented technology are used by the same hospital and provider customers that use Cardinal Health products and services." The adoption of safer delivery of medications and other infusion products is likely to get a strong push from studies indicating that medication errors occur in as many as one of every five doses given to patients, Cardinal said. And it offers the opportunity for Cardinal to combine the presence of its Pyxis automation systems with Alaris's bedside infusion systems, which Cardinal called "pioneering advances in the field of medication safety."
Non-approval letter for Cardima
Further clouding the status of cardiovascular device manufacturer Cardima (Fremont, California), the company in early June reported receiving a letter from the FDA saying its premarket approval (PMA) application for the Revelation Tx Microcatheter with NavAblator Ablation System is not approvable. The turndown was for Cardima's application for use of the system in treating drug-refractory paroxymal atrial fibrillation (AF).
While Cardima has received a variety of FDA clearances for its ablation systems, in April it issued a statement reporting its independent auditor's "substantial doubt about [the company's] ability to continue as a going concern" that statement issued in compliance with Nasdaq rules about such disclosures. At the time, the company said the doubt about its continuing operations was the result of "recurring losses from operations and . . . a net capital deficiency." As of March 15, the company reported about $7.1 million in cash and cash equivalents, enough, it said, to fund operations through 4Q04. It added that it was pursuing "potential funding opportunities, including the sale of equity securities, partnership and the exercise of certain outstanding warrants."
Cardima has developed the Revelation Tx, Revelation T-Flex and Revelation Helix linear ablation microcatheters; the Naviport deflectable guiding catheters; and the Intellitemp energy management system for the minimally invasive treatment of AF. The company also has developed a Surgical Ablation System, which is expected to be used by cardiac surgeons to treat AF by ablating cardiac tissue during heart surgery using radiofrequency energy.
Pitch: 'Have trocar line, will sell'
CA Guard (Punta Gorda, Florida) recently reported receiving its 10th U.S. patent covering a new type of trocar, part of a line of laparoscopic trocars and trocar accessories developed by Steve Moenning, MD, a colon and rectal surgeon in private practice in southwest Florida. Now the company is searching for a larger device manufacturer to turn its technology into a marketable product that could help laparoscopic surgeons avoid needlestick injuries. CA Guard is essentially a research and development company, Moenning noted. The company's founder, president and sole employee, he has developed the TrocarX controls, a set of patented engineering controls that would enable the placement of a drug-delivery system on a standard trocar.
"I have figured out a way to improve on a trocar," Moenning said. "I have taken the engineering aspect of that device, [and] I have controlled and altered it to where it is an improved device that eliminates a needlestick injury." In most laparoscopic procedures, surgeons generally inject the patient's port site with a local anesthetic using a needle and a syringe, exposing the surgeon and other healthcare workers to a potential needlestick injury.
What is unique about CA Guard's trocar, Moenning said, is its ability to deliver drugs to the patient. The drug delivery trocar is a combination device that allows surgeons to perform the usual laparoscopic maneuvers and simultaneously infuse medication directly into the port site, without a needle. "My device eliminates, not just reduces, needlestick injury during laparoscopic surgery, and that is really important," Moenning told The BBI Newsletter, noting it would be the only trocar to do so.
CA Guard is in the process of changing its name to RxTrocar, to better reflect the company's technology, Moenning said. RxTrocar is the protected name the company has given to a patent-pending device under development to irrigate port-site incisions created during laparascopic surgical procedures.