Royal Phillips NV is set to acquire Spectranetics Corp. for €1.9 billion ($2.2 billion). The proposed acquisition is the latest in a string of efforts the Amsterdam, the Netherlands-based company has made to strengthen its position in health care. The deal is set to close in 3Q17. Upon news of the proposed deal, shares of the Colorado Springs based-company (NASDAQ:SPNC) were up on Wednesday by about 26.15 percent and trading at $38.35.
Philips said the acquisition will further expand and strengthen its image-guided therapy business group, which was bolstered significantly by the company agreeing to acquire San Diego-based Volcano Corp. for $1.2 billion about three years ago. (See BioWorld MedTech, Dec. 18, 2014.) The Volcano deal closed in early 2015.
Philips CEO Frans van Houten said, "building on the successful integration of the Volcano acquisition, we are now accelerating our strategic expansion into therapy devices with the agreement to acquire Spectranetics."
As a result, the combined Spectranetics and Philips image guided therapy devices business, within the image-guided therapy business group, is expected to grow to about $1.1 billion by 2020.
Spectranetics' device portfolio includes a range of laser atherectomy catheters for treatment of blockages with laser energy in both coronary and peripheral arteries; the Angiosculpt scoring balloon used to mechanically push a blockage aside in both peripheral and coronary arteries and the Angiosculptx scoring balloon.
The deal specifically calls for Philips to acquire all issued and outstanding shares of Spectranetics for $38.50 per share in cash. The enterprise value of the deal represents a 27 percent premium over the closing price of Spectranetics shares on Tuesday.
Peter Reilly, an equity analyst with Jefferies LLC, called the acquisition "expensive," noting that Phillips was paying seven times the revenue for a business that is "not currently profitable."
Philips said Spectranetics is expected to have sales of about $300 million in 2017 and to be profitable in 2018.
The deal comes during a transformative period in Philips history. Late last year, Philips signed an agreement to sell an 80.1 percent interest in Lumileds, its lighting business to certain funds managed by affiliates of Apollo Global Management.
"Philips continues to move towards a med-tech company – they are expecting to sell Lumileds for $1.5 billion June 30," said Ryan Gregory, an analyst with U.K.-based Liberum.
Philips also revealed a new €1.5 billion share buyback program that will begin in 3Q17 and run for two years.
Stellarex is golden ticket for DCB entry
The acquisition would give Philips entry into the drug coated balloon (DCB) space through Spectranetics' Stellarex product. Spectranetics received CE mark for the device last year, but could gain FDA approval sometime in the second half of this year. (See BioWorld MedTech, Nov. 23, 2016.)
In a recent earnings call, Spectranetics President and CEO Scott William Drake said the company was "well down the path" and that the "second half of '17 the commentary [on expected approval] stands at this point."
To date, only Dublin-based Medtronic plc and Murray Hills, N.J.-based C.R. Bard have PMAs for DCBs. Bard's Lutonix 035 was the first to cross the U.S. finish line in the space in late 2014, followed closely by Medtronic's In.Pact Admiral.
Spectranetics entered the DCB market when it acquired Covidien's Stellarex drug coated balloon for $30 million. (See BioWorld MedTech, Nov. 4, 2014.) Covidien sold the assets to address antitrust law concerns going into its $43 billion merger with Medtronic.
Jason Mills, an analyst with Canaccord Genuity said that Stellarex was the "coveted asset in the deal, with the DCB platform representing a no compromise solution."
"Behind the impending U.S. Stellarex launch and solid recent growth trends out of Spectranetics base business is a strong pipeline – Stellarex below-the-knee (BTK), Stellarex ISR study enrolling, new laser platform coming, advanced atherectomy catheter technology to address calcium, and Stellarex for AV fistulas," Mills said.
During Spectranetics' most recent earnings call, Drake said he was encouraged by the momentum of the product pipeline.
"In vascular Intervention, we are in the midst of expanding our clinical data compendium, launching new products internationally and domestically, and preparing for Stellarex approval in the U.S," he said. "We're making progress towards the approval of our BTK IDE."
A BTK indication has been elusive for Medtronic, which has had a couple of failed trials with its DCB technology.
In March, Medtronic executives said the company would try once again to obtain the BTK indication through a small European study that would use improved technology and a clinical trial design.
Bard started its pivotal DCB trial in below-the-knee PAD in 2013. It's expected to enroll up to 1,000 patients with a September 2019 date to complete the study.
While this indication would certainly bolster Philips position in the space, Suraj Kalia, an analyst with Northland Capital Markets sharply criticized the company making a move prior to Spectranetics garnering any sort of U.S. approval for Stellarex.
"With the DCB market estimated to be over $1 billion, the logic of selling the company prior to Stellarex PMA approval befuddles us," Kalia said. "A Stellarex PMA approval itself would have carried the stock to levels higher than the current amount, hence the 27 percent premium to the stock price, in our view, does not properly reflect the premium that should have been deserved for the stock."
Kalia added, "how Spectranetics' shareholders react to this tender offer will be interesting to watch."