Healthcare is accounting for some of the biggest buyouts in Orange County’s merger and acquisition scene.
Still in the first quarter, OC already has seen three major deals involving locally based healthcare companies, and industry watchers don’t expect the trend to stop anytime soon.
The deals kicked off in January, when Abbott Laboratories of Abbott Park, Ill., spent $2.8 billion for what was then Advanced Medical Optics Inc. of Santa Ana. Advanced Medical now is called Abbott Medical Optics Inc.
Abbott, a diversified healthcare company with annual sales of $29 billion, was looking to gain a foothold in the ophthalmic market through the deal, which added laser vision correction, cataract surgery instruments and contact lens solutions to its lineup.
“We’ve been looking at the ophthalmology market for several years,” said John Capek, Abbott’s executive vice president of medical devices. “It’s a large market. The long-term growth potential is significant.”
The other two healthcare deals went down in February.
On the buying side, Beckman Coulter Inc., a Fullerton maker of diagnostic testing instruments and supplies used by healthcare providers and researchers, said it would spend $800 million to buy the diagnostic business of Japan’s Olympus Corp.
Beckman is buying the Olympus unit to get a bigger market share in Europe where it competes with large rivals Siemens AG of Germany and Roche Diagnostics Corp., part of Switzerland’s Roche Holding Ltd.
The Olympus diagnostic deal is Beckman’s largest since 1997, when predecessor Beckman Instruments Inc. bought Miami’s Coulter Corp. for $1.15 billion to create today’s Beckman Coulter.
Dennis McCarthy, a managing director at investment bank B. Riley & Co., said that Beckman “didn’t pay a crazy price”,roughly 1.6 times the unit’s revenue of nearly $500 million.
“It’ll be a very nice business add-on for them,” McCarthy said.
On the selling side, Irvine-based CoreValve Inc., an Irvine maker of less-invasive heart valves, is being bought by Minneapolis device maker Medtronic Inc. for $700 million and milestone payments.
Medtronic, which employs about 550 people at a Santa Ana heart valve plant, wants CoreValve to boost its position in the market for replacement heart valves that don’t require major surgery for implantation.
CoreValve and Edwards Lifesciences Corp., which also is based in Irvine, are considered that market’s pacesetters.
Although both CoreValve and Edwards sell their products in Eur-ope, some analysts say that Edwards is at the forefront of breaking into the U.S. market because its less invasive Sapien valve is in a clinical trial here and could be launched in 2011.
Medtronic doesn’t expect CoreValve’s ReValving systems, which include its less invasive valve and catheter, to be available domestically until 2014.
More to Come
Industry watchers say to expect more healthcare merger and acquisition activity,specifically for certain products,as the year goes on, largely because other growth paths are blocked by the recession.
“There are a lot of companies like CoreValve that are just going to find it a lot more appealing to get the values associated with a strategic (buyer) as opposed to trying to find venture money or, if there was an IPO market, go public,” said McCarthy.
McCarthy expects to see a much tougher funding environment for smaller healthcare companies. But he sees larger strategic buyers like Medtronic targeting new technologies that its established sales force and hospital network could sell.
“So it’s a real natural,” McCarthy said.
BMO Capital Markets analyst Joanne Wuensch predicted in a Reuters article that the deal pace overall should continue throughout 2009.
Medical technology stocks “have outperformed, so these companies still have a currency. A lot are in hunker-down mode, but they are not in crisis mode,” Wuensch said.
Wuensch later named Masimo Corp., an Irvine maker of patient monitoring devices and supplies that went public in 2007, as among the device makers that could be takeover targets.
Meanwhile, even though Beckman is buying, it continues to be the subject of periodic whispers about being bought itself, as mentioned in a recent column by Morningstar Research analyst Pat Dorsey.
Potential buyers are attracted to Beckman’s $3 billion annual revenue, including 80% of it coming from recurring sources, particularly reagents, according to Dorsey.
Beckman also is expanding products in growing fields. It has “a key unit focused on modern diagnostic technologies that’s growing 15% to 20% a year, which is considered light speed in this mature industry.”
Dorsey also said that Beckman was one of the last pure-play medical testing companies that are still standing, “so it would be a logical target for a large player looking to enter this healthcare niche.”
Last Year
This trend of buying healthcare companies started last year.
In 2008, a pair of mid-sized OC health services companies was snapped up by private equity firms.
Apria Healthcare Group Inc., a Lake Forest home healthcare provider, was bought for $1.7 billion in October by private equity group Blackstone Group LP. Blackstone’s buy of Apria was notable because it was one of few big deals that came at a time when financing was hard to come by.
Back in the spring, TriZetto Group Inc., a Newport Beach-based company that makes healthcare software, was taken private for almost a billion dollars by Apax Partners Inc., another New York-based private equity firm.
Both TriZetto and Apria sought to go private as a way to continue growing without facing the pressures typical to public companies, such as risking their stock prices being slammed by investors if their quarterly results were disappointing.
“You’re going to continue to see deals on an ad-hoc basis with smaller in nature, middle-market companies,” said Paul Kacik, senior vice president and head of healthcare investment banking for Barrington Associates, an investment bank.
Private equity groups, Kacik said, still are interested in putting their money to work and devoting investment dollars to middle-market healthcare companies.
