Round 2 for Healthcare Deals

If past is prologue, 2005 could go down as another busy year of deals for Orange County healthcare companies.

The past year saw a handful of deals involving some big names here as well as younger medical device and drug companies.

Bankers, lawyers and others say that’s just for starters.

“2005 is certainly going to show a pickup in merger and acquisition activity, in all areas of healthcare,” said Paul Kacik, a senior vice president and head of healthcare investment banking at Barrington Associates’ Newport Beach office.

Conditions are ripe, according to Charles Ruck, a partner at Latham & Watkins LLC’s Costa Mesa office who runs the firm’s M & A; and life sciences practice.

“You’ve got some pent-up demand,” he said “And you’ve got favorable sort of economic conditions for M & A; to continue into this year.”

Smaller public companies and privately held ones with several rounds of funding under their belts could face stiffer competition and the weight of regulatory burdens this year, Ruck said. That makes them attractive acquisition targets, he said.

Among smaller healthcare companies, those that provide home healthcare, laboratory and practice management services could be targets this year, according to Michael Ellington, managing partner of Strategic Equity Group, a Santa Ana-based valuation advisory services company.

Laboratory deals “accelerated quite a bit last year and will continue to accelerate,” he said.

The $155 million sale of U.S. Labs Inc., an Irvine-based diagnostic testing lab, to Laboratory Corporation of America Holdings of Burlington, N.C., was among last year’s deals.

And there’s already activity under way this year: Genyx Medical Inc., an Aliso Viejo-based maker of urinary incontinence fighters, was sold to C.R. Bard Inc. of Murray Hill, N.J., for $60 million last week (see story, this page).

Besides big corporate acquirers, private equity funds could be likely buyers of midsize, more mature healthcare companies, Barrington’s Kacik said.

“Healthcare services, as well as medical devices, is a pretty big area that private equity funds are going after,” he said. “The traditional private equity companies are looking to invest in more mature companies, ones that are revenue and earnings-driven companies.”

The Players

There’s a cohort of rapidly maturing OC healthcare companies, particularly on the medical device front, that may be ripe for the picking:

& #149; MicroVention Inc. of Aliso Viejo, which has raised more than $50 million in venture capital funding.

MicroVention is developing a device to target cerebral aneurysms, which occur when a blood vessel within the brain balloons. If left untreated, aneurysms could weaken until they rupture.

& #149; SenoRx Inc., another Aliso Viejo company that’s making devices to find and treat breast cancer.

SenoRx’s makes disposable, minimally invasive devices for breast biopsies. SenoRx officials have estimated that the market for their devices could exceed $1 billion annually.

& #149; Orqis Medical Inc., a Lake Forest heart device developer that is one of several OC device companies started up by alumni of Baxter International Inc.

Orqis is looking to treat congestive heart failure, one of the leading causes of death.

& #149; 3F Therapeutics Inc., which also is in Lake Forest.

3F, which boasts Natick, Mass.-based device heavyweight Boston Scientific Corp. as an investor, is developing a heart valve that doesn’t require major surgery. Some believe it could be the biggest threat to Edwards Lifesciences Corp. of Irvine.

& #149; Alsius Corp., an Irvine maker of catheters and body temperature monitors for the neurology and heart markets.

Alsius’ catheters either cool or warm a patient’s blood as it circulates past the catheter.

& #149; Eyeonics Inc. of Aliso Viejo, creator of the Crystalens, a Food and Drug Administration-approved implantable intra-ocular lens that is designed to provide “natural vision” after cataract surgery.

Eyeonics’ managers hail from Chiron Ophthalmics (now part of Bausch & Lomb Inc.) and Allergan Inc. of Irvine.

The prospect of public offerings for healthcare companies isn’t expected to be robust this year.

“Right now you’re looking at most of the deals taking place as M & A; transactions,” Kacik said. “The market is not there yet where every medical device company that’s got a decent product can go.”

As for offerings from healthcare service companies, forget about it, Strategic Equity’s Ellington said.

“The service business never has been a great IPO anyway because they are somewhat generic,they don’t really have that much (that’s) proprietary,” he said.

IntraLase Corp., an Irvine maker of laser eye surgical devices, was the only healthcare public offering locally in 2004. IntraLase’s October offering raised $86 million.

IntraLase plans to use a good portion of its proceeds for research and development.

“Ours is a technology story,” said IntraLase Chief Executive Robert Palmisano. “We are going to be an R & D-intensive; company for quite a while.”

A trend is “the pre-IPO sale,” said Ruck of Latham & Watkins. That’s where a company hires an investment bank to groom it for a potential offering,as well as talking to potential suitors.

Big 2004

The sector starts 2005 with wind in its sails. Last year saw a flurry of deals, including several big ones.

On the buying side, Cooper Cos. of Lake Forest spent $1.2 billion for rival Ocular Sciences Inc. in a deal that started last year and just closed this month.

Advanced Medical Optics Inc., the Santa Ana eye products company, spent more than $1 billion last year to buy Visx Inc., a Santa Clara laser maker, and the eye surgery business of Pfizer Inc.

And Cypress-based PacifiCare Health Systems Inc. spent $500 million late last year on American Security Medical Corp. of Green Bay, Wis., in a bid to boost its preferred provider organization healthcare business.

On the selling side, Sicor Inc., an Irvine maker of generic and brand name drugs, took a $3.4 billion buyout from Israel’s Teva Pharmaceutical Industries Ltd.

Warsaw, Ind.-based Biomet Inc. snapped up Interpore Cross International, an Irvine bone-repair device maker, for some $280 million.

“Last year was particularly busy for us on the M & A; front,” said Ruck, whose unit worked on deals involving PacifiCare, Interpore and San Juan Capistrano-based Opus Medical, which was sold to ArthroCare Corp. of Sunnyvale for $130 million.

ON THE RADAR

Healthcare startups to watch:

– MicroVention Inc.: Aliso Viejo aneurysm device maker that’s raised $50 million in venture funding

-SenoRx Inc.: Aliso Viejo maker of FDA-approved biopsy device

– Orqis Medical Inc.: Lake Forest heart device company started up by ex-Baxter International Inc. executives

– 3F Therapeutics Inc.: Lake Forest valve maker, backed by Boston Scientific Corp.

– Alsius Corp.: Irvine maker of neurology, heart catheters

– Eyeonics Inc.: Aliso Viejo creator of FDA-approved implantable eye lens