A low-key company in San Clemente might be the next high-profile deal in Orange County’s medical device sector.
ICU Medical Inc. could fetch more than $1 billion based on a share value of $80 or more, according to analysts who follow the maker of intravenous medical devices. The figure would represent a 21% premium over its stock price earlier this month, when reports first surfaced about a possible deal. ICU’s shares have held much of the recent run-up, with a current market value of close to $1 billion.
Orange County is home to a vibrant concentration of medical device makers ranging from startups to long-established and prominent companies, such as Edwards Lifesciences Corp. in Irvine and Abbott Medical Optics in Santa Ana.
Precedent
Talk of a $1 billion price for ICU—a 29-year-old company with more than $300 million in sales and $41 million in profits last year—has some precedent.
Fellow San Clemente-based heart device maker Cameron Health Inc. was acquired last year in a deal with Natick, Mass.-based Boston Scientific Corp. that’s likely to surpass $1 billion with milestones.
“The timing is opportunistic” when it comes to market speculation on ICU Medical, according to Matt Dolan, who follows ICU for Newport Beach-based Roth Capital Partners LLC. “You’re seeing a company that’s done well, a stock that’s reacted positively to its performance over the last two years. This is an opportunity to sell for a respectable valuation, potentially.”
ICU’s stock rose almost 13% earlier this month after published reports indicated the company retained New York-based investment bank JPMorgan Chase & Co. to identify potential suitors.
“We don’t comment on market speculation,” company spokesperson Tom McCall said.
Others are pointing to a field of potential acquirers that includes Lake Forest, Ill.-based Hospira Inc., a diversified medical company that is ICU’s longtime dominant customer.
Hospira accounted for about 41% of ICU’s revenue last year and “would probably have the most to gain financially” by acquiring ICU, Dolan said in an interview last week.
A Hospira spokesperson declined comment.
Other potential strategic buyers could include Chicago-based Baxter International Inc., Becton, Dickinson & Co. in Franklin Lakes, N.J., San Diego-based CareFusion Corp., and Cardinal Health Inc. of Dublin, Ohio.
Another possibility is a deal with a distributor, such as San Francisco-based McKesson Corp., according to Dolan.
Clave
ICU’s products include needleless intravenous connectors such as the Clave, which are most commonly used in drug infusions.
Clave has “seen a resurgence in demand over the last few years” from hospitals seeking to decrease the risk of infections among their workforces, Dolan said.
The company has also branched into devices that protect healthcare workers from cancer drugs, which are often toxic.
Another factor likely to attract strategic buyers is ICU’s recurring revenue from a high volume of disposable parts, Dolan said.
He added that device makers’ desire to decrease costs and increase margins through consolidation might also come into play.
ICU has consistently grown sales in recent years, and while its gross margins are below industry averages, “its profit profile is attractive and better than average,” Dolan said.
That continued in the first quarter, when ICU was in line with expectations on revenue, at $74.3 million, and beat expectations on profit, with $8.7 million, up 14% from a year earlier.
Jayson Bedford and Michael Rich of St. Petersburg, Fla.-based Raymond James & Associates Inc. mentioned in a client note other factors that could influence a deal.
Lopez
“First, ICU’s founder and [chief executive], Dr. George Lopez, is 65 years old, and while we believe he remains active in the business, he is older than most CEOs in our space,” Bedford and Rich wrote.
Lopez, who declined comment for this story, founded ICU in 1984 when he was 36, and now owns more than 10% of the device maker.
“We’ve always wondered what the end game is here for both the company and ‘Doc’ specifically since he owns such a large percentage of the company,” Dolan said.
The Raymond James analysts said ICU was “at an important point in its development,” because it has $234 million in net cash on its books and generated $47 million of free cash flow in 2012.
“This cash balance is disproportionately large relative to other companies its size,” Bedford and Rich wrote.
They added that ICU hasn’t used its cash for acquisitions or stock buybacks, despite past statements of intent in those areas.
Bedford and Rich also wrote that ICU is “worth more to a strategic buyer that could leverage its own sales force and shed a portion” of the company’s cost structures.
The analysts did not call out any specific names but said possible buyers could be other infusion-pump companies.
Major infusion-pump makers include CareFusion, Baxter, and Germany-based B. Braun Melsungen AG, which employs nearly 1,400 people here.
Medical supply companies that want an additional stream of steady cash flow might also take a flyer at ICU, Bedford and Rich wrote.
PE
They were less optimistic about the possibility of a private equity buyer, saying there “have not been many PE-sponsored deals in our space over the last few years.”
Bedford and Rich also pointed out that any potential buyer of ICU would have to be comfortable with what they called the “customer concentration risk” from its distribution relationship with Hospira.
Hospira, which was once part of Abbott Laboratories of suburban Chicago, accounted for some 60% to 70% of ICU’s sales in the past, although ICU has worked to diversify by introducing critical care and oncology products.