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High-figure deal marks growth in medical device market
July 2010
by David Hutton  |  Email the author


DUBLIN, IrelandóLooking to further accelerate its strategy of building a world-class vascular platform addressing high-growth markets, Covidien PLC recently reached a merger agreement to acquire medical device maker ev3 Inc.
Under financial terms of the agreement, Covidien will pay $22.50 per share in cash, for a total of $2.6 billion, net of cash acquired.

The deal is the latest in a spree of acquisitions and divestitures by Covidien since it spun off from Tyco International Ltd. several years ago. The transaction also positions Covidien to become a leading endovascular player, with strong positions in both the peripheral vascular and neurovascular markets.

According to Richard J. Meelia, chairman, president and CEO of Covidien, the acquisition of ev3 will enable Covidien to significantly expand its presence in the vascular market and is in line with its strategy of becoming a leading partner with vascular surgeons, neurosurgeons, interventional cardiologists and interventional radiologists.

"With its broad product portfolio, clinical expertise and call-point synergies with our existing vascular franchise, ev3 will be an important addition to our innovative vascular intervention products," notes Meelia.

According to Joe Woody, Covidien's president of vascular therapies, ev3 was an attractive acquisition because its products complement Covidien's existing vascular therapy products, including dialysis catheters, vascular access products, compression products, the Trellis Peripheral Infusion System (gained in the Bacchus Vascular acquisition in 2009) and ClosureFAST (gained from the VNUS acquisition in 2009).

"The combination of these acquisitions and ev3's broad platform of peripheral vascular and neurovascular technologies will put Covidien in a leadership position in the prevention and treatment of vascular disease," he adds.

Woody also points out that Covidien has a large U.S. and worldwide sales and distribution footprint, with some of the most technologically advanced product offerings. With 2009 revenue of more than $10 billion, Covidien has more than 42,000 employees worldwide in 60 countries, and its products are sold in over 140 countries.

The transaction, which will take the form of an all-cash tender offer by a wholly owned subsidiary of Covidien, followed by a second- step merger, is subject to customary closing conditions, including receipt of certain regulatory approvals, and is expected to be completed by July 31. The boards of directors of both companies have unanimously approved the transaction.

Covidien, based in Dublin, Ireland, will fund the purchase with a combination of cash and debt. It said the transaction will reduce its earnings per share by 5 to 8 cents this year and 10 to 15 cents in 2011. According to Woody, the company employs about 1,350 globally, and additional integration plans will be discussed after July 31.

While Woody will not go into specifics about other companies evaluated as Covidien considered the acquisition, he points out that company officials conducted intense due diligence of the peripheral vascular and neurovascular spaces.

"These are two very attractive markets Covidien wanted to enter, and ev3 provided us the unique opportunity to enter both with the acquisition of one high performing company," he says. "ev3 has proven that it can develop products and markets in both of these spaces. Bringing those capabilities into the Covidien family is very exciting. However, we continue to evaluate several opportunities in many spaces, including vascular, and will continue to do transactions that we believe to be in the best interests of our shareholders. That being said, this acquisition provides Covidien with a robust, attractive portfolio of products in both the peripheral vascular and neurovascular markets."

Robert Palmisano, president and CEO of ev3, echoes those comments, noting that the transaction will provide new opportunities and create value for both companies' stockholders, patients and employees.

"We will be able to advance our broad platform of peripheral vascular and neurovascular technologies with a leading global healthcare products company that shares our vision of delivering breakthrough and innovative medical solutions for improved patient outcomes," Palmisano says. "In addition, this combination will provide the opportunity for further innovation to support endovascular market growth and procedure penetration worldwide, while our employees will be afforded the opportunity to be part of a larger organization with greater depth of resources for sustained success in our industry."

Headquartered in Plymouth, Minn., ev3's devices are used in endovascular surgeries, operations in which surgeons make small incisions and maneuver devices in the body through major blood vessels. Other products are used in neurovascular procedures, or procedures involving both blood vessels and nerves. ev3 also makes stents and balloon catheters, which are used to open arteries that have been blocked by fatty plaque. ev3 expects $520 million to $530 million in revenue this year.

Ultimately, the acquisition of ev3 brings two new franchise opportunitiesóneurovascular and peripheral vascularóto Covidien's vascular business.

"ev3 has the broadest portfolio in the industry and when coupled with our global presence, venous markets and our training and education capabilities, we offer a unique and differentiable position to our customers," Woody says. "We are very excited about ev3's development and clinical capabilities that can be leveraged across the vascular business, including emerging markets. We also believe there are synergies around call points and technology from the prior VNUS and Bacchus acquisitions."
With the acquisition, Covidien brings into the fold ev3's global infrastructure, physician education and training. Woody says these were also attractive elements to the deal.
Covidien officials also are excited about the prospects of leveraging ev3's development and clinical capabilities across the vascular business, including emerging markets.

"We also believe there are synergies around call points and technology from the prior VNUS and Bacchus acquisitions," Woody says. "ev3 has a robust pipeline in high-growth market segments which will complement Covidien's strong pipeline of innovative new products."

Woody notes that the acquisition stands a great chance of being a successful one for Covidien because company officials believe that ev3 is already competing effectively as they have gained share in both of the franchises.

"We will continue to leverage the strength and breadth of ev3's portfolio, now supplemented by Covidien's peripheral venous products, including ev3's No. 1 position in atherectomy," he says. "We will continue the focus on clinical evidence and delivering high quality products to our customers. In the atherectomy space, we will continue ev3's focus on clinical data and product enhancements to maximize the benefits to clinicians and their patients. We are confident that Covidien can continue and augment that success."

Covidien/ev3 is the latest mid-size deal in healthcare, including Abbott Laboratories' $3.7 billion deal for the branded generics business of India's Piramal Healthcare and Astellas Pharma's $4 billion acquisition of biotechnology company OSI Pharmaceuticals.
Companies are flush with cash and borrowing rates are favorable, while potential sellers may be more likely to make a deal because valuations have strengthened, says David Heupel, a portfolio manager with Thrivent Investment Management.

In a note to clients, Jefferies & Co. analyst Joshua Jennings says the deal makes sense for both companies because there is little overlap between ev3's products, especially its central vein access and neurovascular devices, and the products sold by Covidien.

"From a product standpoint, the acquisition of ev3 will enable Covidien to significantly expand its presence in the vascular market, which has been an area that Covidien management frequently highlighted as an area of strategic growth for the company," he says. Jennings thinks the deal could boost Covidien's profit by 15 cents per share per year after the businesses are combined.

Covidien's acquisition of ev3 also could be the first ripple in a new wave of deals among large medical device players that are cash rich and starved for growth, while many smaller companies have products in attractive areas, notes Jason Mills, an analyst with Canaccord Genuity.

Separately, Covidien also said it was selling its sleep therapy product line for an undisclosed amount to privately held PH Invest.

Covidien sells Mallinckrodt Baker specialty chemical business

PHILLIPSBURG, N.J.óCovidien also announced in late May that it signed a definitive agreement to sell its specialty chemicals business to an affiliate of New Mountain Capital LLC, for $280 million in cash.

The specialty chemicals business, headquartered in Phillipsburg, N.J., manufactures and markets high- purity chemicals and related products and services under two brand names, J.T. Baker and Mallinckrodt Laboratory Chemicals. These products are widely used in research and quality control laboratories, microelectronics, environmental testing laboratories and universities, and for manufacturing in the pharmaceutical, biotechnology and other industrial markets.

Covidien said the decision to divest the unit was made "following a thorough evaluation of a number of strategic alternatives."

"The decision is consistent with Covidien's strategy to streamline its portfolio and reallocate resources to its faster-growing, higher-margin businesses, where the company has or can develop a global competitive advantage," the company said in a statement.
Fiscal 2009 sales of the product line were $414 million. For the first six months of fiscal 2010, sales of this product line were $216 million.

Completion of the transaction is subject to customary closing conditions, with closing expected by the end of fiscal 2010. Covidien said the transaction is expected to dilute reported earnings-per-share by approximately 9 to 11 cents in each of fiscal 2010 and 2011.

New Mountain Capital is a New York-based firm that manages private and public equity funds and has approximately $8.5 billion in aggregate capital commitments.
Code: E071001



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