Any trend line describing deals and consolidation activity in the medical products and technology field during year 2000 would show few major deals during most of the year but heavy consolidation activity toward the end. This was underlined by the heaviest action coming in the last quarter of last year, as some big players stepped up to the plate to grow even larger.
In November, BBI reported on Siemens Medical Engineering Group's (Erlangen, Germany) $700 million acquisition of Acuson (Mountain View, California), and Thoratec Laboratories' (Pleasanton, California) $571.5 million stock swap to acquire Thermo Cardiosystems (Woburn, Massachusetts). And this month, BBI's lead story focuses on Royal Philips Electronics (Amsterdam, the Netherlands) and its move to become the third big player in patient monitoring by purchasing two companies: Agilent Technologies' (Palo Alto, California) Healthcare Solutions Group (Andover, Massachusetts) and ADAC Laboratories (Milpitas, California). Announced in late November, those deals will cost Philips approximately $2.2 billion.
In early December, Cardinal Health (Dublin, Ohio), a broadly based provider of health care products and services, said it will make a deal valued at nearly that much for one acquisition. It will purchase Bindley Western Industries (Indianapolis, Indiana), a distributor of pharmaceuticals and nuclear pharmacy services, in a stock-for-stock transaction valued at about $2.1 billion. While adding to Cardinal's pharmaceutical operations, the deal will give it added market clout in the nuclear medicine market. With annual revenues of $6 billion, Bindley Western operates 32 nuclear pharmacies, giving it a substantial presence in the area of nuclear medicine, a fast-growing field that Cardinal does not serve today.
The purchase agreement calls for Bindley Western shareholders to receive a fixed exchange of 0.4275 Cardinal Health common shares for each outstanding share of Bindley Western, with Cardinal Health issuing approximately 16.8 million shares on a fully diluted basis. The transaction, to be accounted for as a pooling of interests, will include the assumption of Bindley Western's debt of about $430 million. Upon completion of the transaction, William Bindley, Bindley Western's founder, chairman, CEO and president, will join Cardinal's board of directors, and Bindley Western will become part of Cardinal's pharmaceutical distribution and provider segment, which reported $19 billion in revenues its last fiscal year.
"This merger is a great fit, both operationally and culturally," said Cardinal Health chairman and CEO Robert Walter. "There are substantial synergies in the areas of facilities rationalization, elimination of redundant overhead, improved inventory and capital usage, and expanded product merchandising. We believe that synergies should exceed $100 million on an annualized basis by the end of the third year following the completion of the merger."
In ongoing large-deal activity, Tyco International (Pembroke, Bermuda) said that the Securities and Exchange Commission has declared its acquisition offer for medical device maker InnerDyne (Sunnyvale, California) effective. Tyco offered InnerDyne shareholders a fraction of a Tyco share valued at $7.50 for each InnerDyne common share. The deal was valued at about $180 million, based on InnerDyne's roughly 24 million shares outstanding.
InnerDyne makes minimally invasive surgical access products that incorporate the company's radial dilation technology, including the Step expandable needle system. Radial dilation provides surgical access through expansion of a very small opening using progressively larger blunt instruments. Tyco is a diversified manufacturing and service company with strong positions in disposable medical products, diagnostic imaging, bulk pharmaceuticals, wound closure, plastics and adhesives.
VISX staving off Icahn moves
Another large deal – though not mega-sized – may be in the works, as vision correction specialist VISX (Santa Clara, California) last month said it is looking to make a deal, either as the acquirer or the acquired. The company issued a letter to its shareholders basically promising to seek such a deal, a move clearly intended to stave off takeover plans by Carl Icahn, an aggressive acquirer of companies that he feels are floundering.
Although VISX has an estimated 70% of the laser vision correction market in the U.S., the company is not exactly acting like it is king of the hill in this sector. Competition is increasing and, with a proliferation of price wars for laser correction procedures, VISX has seen flattened profits and rising shareholder dissatisfaction. Icahn has provided further fuel to those criticisms by charging that the company's management is responsible for its under-valued shares.
In early December, Icahn made a Securities and Exchange Commission filing in which he submitted his own name and the names of five others to fill board member seats at the company's annual meeting next year. Icahn's strategy is well known. He takes over – or threatens the takeover – of companies that he believes to be significantly undervalued, forces their sale to larger firms and pockets the proceeds from the sale. That would seem to be the course he is pursuing in eyeing control of VISX. In October, he purchased 9.9% of the company's stock, bumping up against the firm's 10% poison pill threshold. And he made public a letter that he sent to VISX Chairman Mark Logan, asking that the threshold be lifted so that he could purchase a larger stake. The company has not made public its answer, if any.
Meanwhile, company executives would appear to be looking to cut a separate, better deal, a view accepted by Joanne Wuensch, medical technology analyst with ING Barings (San Francisco, California). The letter to shareholders looked like a "response to Carl Icahn's rattling their cage before shareholder value erodes further, or at least an attempt to respond in a constructive manner. They are trying to acquire [another firm] or sell at a reasonable price," Wuensch told BBI. Wuensch said that the potential acquirers probably made up only a short list of companies, with CIBA Vision (Atlanta, Georgia) and Johnson & Johnson (New Brunswick, New Jersey) – or another medical products Goliath – the most likely suitors.
Another goal of the VISX letter, according to Wuensch, was simply to prop up investor support of the company. VISX recently reported declining counts in procedures by two of its providers and overall procedure growth that ING Barings, in a report, described as "flat." While that report continued to rate VISX a "strong buy," it characterized developments at the company as indicating "that the LVC industry is moving through a painful transition period." It went on to say: "It is interesting to us that a procedure that has only been FDA approved since 1995, and, with less than 4% of the eligible patient population penetrated, it appears that we are out of the emerging growth stage and into the consolidation phase of the market's life cycle."
Stent sector focus of legal action
Stents are essentially just tiny tubes used to prop open injured vasculature. Though small, they have produced both big profits and active litigation among the competitors in this sector. In late November and mid-December, the Cordis (Miami Lakes, Florida) division of Johnson & Johnson won two patent infringement battles against its competition, with juries in the U.S. district court of Delaware ruling that the company's patents had been infringed. First, a jury said that Medtronic AVE (Santa Rosa, California), a unit of Medtronic (Minneapolis, Minnesota), had infringed upon Cordis' groundbreaking work in the stent sector. And this was followed by a jury decision saying that Cordis patents had been infringed by Boston Scientific (Natick, Massachusetts).
Both cases were focused on determining liability, not damages. Damage determinations – if the rulings withstand appeal – have yet to be decided. Any damage or royalty payments are not likely to have much impact on Medtronic, according to industry observers, because of its size and diversity. The potential impact on Boston Scientific is likely to be greater, given that company's other recent difficulties. Boston Scientific responded to the ruling against it by calling it only a partial victory for Cordis. In a statement, Boston Scientific noted that the decision related only to its NIR stent product and that the jury had found no infringement in three other patents at issue and had ruled "in Boston Scientific's favor on five of the six claims at issue." Boston Scientific President Jim Tobin said that the ruling also affirmed his company's belief "that J&J's patents do not cover the NIR stent's unique and patented multi-cellular design, and that several of [the Cordis/J&J] claims do not meet the requirements of U.S. law."Eclipse makes workforce cuts
Eclipse Surgical Technologies (Sunnyvale, California), one of two pioneering firms in the transmyocardial revascularization (TMR) sector, reported that it will reduce its workforce by 37 employees in what it termed "non-essential job positions" and make some research cutbacks. The reductions come in the wake of a recently released clinical study that has again raised concerns that the efficacy of TMR might be simply a placebo effect. TMR is a heart treatment in which a laser is used to create a number of additional small channels in the heart muscle, with those channels supposedly stimulating angiogenesis, or the growth of new blood vessels, thus helping to relieve the pain of angina. However, neither Eclipse nor PLC Systems (Franklin, Massachusetts), the other major player in this sector, has been able to explain the exact clinical dynamics of the therapy. Those skeptical about the procedure have been supported in their view by a report released at the October Transcatheter Cardiovascular Therapeutics conference in Washington.
That trial showed no benefit of direct myocardial revascularization when measured by exercise tolerance or angina assessments among symptomatic patients not candidates for CABG or PTCA, over placebo. The DMR in Regeneration of Endomyocardial Channels Trial (DIRECT) was headed by Martin Leon, MD, who said the study demonstrated "no clinical benefit associated with laser myocardial revascularization procedures" and that the blinding process used in the study demonstrated "a profound placebo effect."
Without making reference to the conflicting claims, Eclipse President Michael Quinn said that, besides making the personnel cutbacks, the company also was canceling "certain dispensable research projects" – those projects going unnamed. Together, the personnel and research cutbacks will produce more than $3 million in annual savings for the company, according to the statement.