An Orange County exception: Recent large deals in the U.S. medical device industry have followed a trend of portfolio diversification as hospital customers pressure device makers to hold down costs and move away from pricey implants.
Orange County’s device deals haven’t necessarily followed that pattern. Instead, local companies over the past year have sought to build up their primary competencies through acquisitions.
Branching out has come to the forefront in recent weeks after Chicago-based Abbott Laboratories, owner of Santa Ana-based Abbott Medical Optics, and Kalamazoo, Mich.-based Stryker Corp. announced a pair of deals worth nearly $9 billion.
Abbott, a diversified device maker with a large cardiovascular portfolio, is buying Alere Inc., a Waltham, Mass.-based diagnostic testing company, for $5.6 billion, and Stryker, a maker of replacement hip and knee implants, is paying $2.78 billion to acquire Cary, Ill.-based Sage Products LLC, which makes products used to reduce the risk of hospital-acquired infections.
Abbott and Stryker, in particular, have been facing hospitals’ requests to negotiate better discounts on implanted devices.
Orange County device companies likely chose to make core market deals because there was room for growth, said Greg Presson, senior managing director and head of healthcare banking at B. Riley & Co., which has offices in Newport Beach and Los Angeles.
“An Edwards, as you well know, has such good opportunity in its core markets in structural heart disease, providing the technologies and the products there,” he said in an interview. “That’s all they need to be focused on right now. They’ve got plenty of opportunity in front of them.”
Meanwhile, major Orange County deals have taken place:
• Irvine-based Edwards Lifesciences Corp., the county’s largest medical device maker by market capitalization at $17.5 billion, has said it will remain firmly focused on its core replacement heart valve franchise.
Edwards added to that in July when it bought startup CardiAQ Valve Technologies Inc. in Irvine in a deal that could eventually be worth more than $400 million.
CardiAQ develops replacement mitral heart valves delivered by minimally invasive catheters. Its valve isn’t commercially available in any country, although in 2012 it was the first to be implanted in a person.
The mitral valve is between the heart’s left atrium and left ventricle. CardiAQ’s valve treats mitral regurgitation, or leakage—a condition that currently requires open-heart surgery.
Edwards Chief Executive Michael Mussallem said at the time of the CardiAQ deal announcement that there were parallels between the acquisition of the startup and its 2003 purchase of New Jersey-based Percutaneous Valve Technologies Inc., which helped create its bellwether Edwards Sapien transcatheter valve business.
“We believe the acquisition and integration of CardiAQ will advance our development of patients with mitral valve disease who aren’t well-served today, much like we experienced with prior transactions, such as PVT,” Mussallem said.
• Irvine-based Endologix Inc. also used an acquisition to broaden its core competency of devices to treat abdominal aortic aneurysms, or a ballooning of the body’s primary artery. It announced in October that it would buy Santa Rosa-based TriVascular Technologies Inc. for $211 million in cash and stock.
“Together we will provide the broadest product offering in [abdominal aortic aneurysm treatment] and be the only company that enables physicians to pick the best device platform for each original patient,” said Endologix Chief Executive John McDermott at the time of the deal’s announcement.
He emphasized that the deal would give the company an entry to the complex endovascular aneurysm repair market.
TriVascular’s lead product is Ovation Prime, a device that allows less-invasive access to abdominal aortic aneurysms and provides doctors with the capability to treat patients with narrow or tortuous blood vessels. Endologix has estimated that those types of patients make up a third of the abdominal aortic aneurysm market.
• Fellow Irvine abdominal aortic aneurysm device maker Lombard Medical Inc. made its own complementary deal in July when it bought Menlo Park-based Altura Medical Inc. for $23 million upfront and payments of up to $27.5 million based on the meeting of certain commercial and regulatory milestones.
Altura makes an endograft device that treats abdominal aortic aneurysms. The device has European regulatory approval, and Lombard has said it will file for an investigational drug exemption with the Food and Drug Administration early this year.
• Down the road in San Clemente, ICU Medical Inc. spent about $60 million to buy New Jersey-based Excelsior Medical Corp., which makes medical devices that disinfect and protect access to a patient’s bloodstream. That’s complementary to ICU, whose devices help protect healthcare workers from exposure to infectious diseases or hazardous drugs.
Core competencies also came into play for devices unaffected by hospital pricing pressures.
• Irvine-based Alphaeon Corp. spent $59 million in November for Orlando, Fla.-based Lensar Inc., which makes lasers used in cataract surgeries.
Alphaeon concentrates on what it calls “lifestyle medicine,” which encompasses products and services paid for out-of-pocket. Cataract surgeries traditionally are covered by Medicare, but there is a self-pay segment: premium intraocular lenses to replace the diseased lenses that lasers remove.
