Medtronic/Kyphon: Averting a Shake-Up in Spine, for Now

If Johnson & Johnson’s DePuy Spine Inc. and Abbott Laboratories Inc.’s Abbott Spine weren’t overjoyed by Medtronic Inc./Medtronic Sofamor Danek’s recent $3.9 billion acquisition of Kyphon Inc., those two members of the spine market’s Big 3 at least heaved a big sigh of relief knowing that the market leader had eliminated the company that was emerging as a potentially significant competitor to the trio’s domination of this product sector. Indeed, Kyphon had already begun to flex its newfound muscle when it out-bid MSD and Abbott to acquire St. Francis Medical Technologies Inc. for $725 million last year—a deal that shocked the spine market as much for whom the acquirer was as for its huge sticker price. (See "Kyphon Steps Up," IN VIVO, May 2007 [A#2007800085].)

Kyphon’s rapid recent growth and willingness to pay a premium price to acquire new technology marked perhaps the largest shock waves threatening to disrupt the status quo in the spinal market, where small companies have had little choice other than the Big 3 when looking for potential acquirers. Recently, however, that sector has been undergoing a bit of a shake-up with the major companies losing market share; MSD, in particular, has seen its market-leading position drop from 48% to 40%. These losses have largely come at the hands of the many burgeoning spine start-ups. Analysts now estimate there are as many as 150 spinal device companies, compared with one-third that number just a few years ago.

The start-up company growth and recent deal activity in this sector appear to belie the concerns that interest in the spine market peaked. A panel of investors and entrepreneurs at Windhover/Medtech Insight’s "In Spine and Orthopedics" conference last December was quite bullish about the spine sector. (See also, "Strength in Spine," IN VIVO, February 2007 Also see "Strength in Spine" - In Vivo, 1 February, 2007..) Indeed, rather than entering a period of slower growth and retrenchment or consolidation, this group of spine industry veterans predicted that a number of product, market, and clinical forces are coming together to drive significant future growth, with one panelist suggesting that the current $4 billion spine market will more than triple in the next few years.

The factors contributing to this perfect storm in spine include innovations in diagnostics, particularly new imaging technologies, along with new implant designs, and a patient population growing not just from overall aging but from younger patients looking to take advantage of new treatment options. Clinically, the spine market is characterized by variety of conditions that can be treated by numerous therapeutic approaches; doctors are not wedded to any single therapy and continue to explore different options, resulting in a fertile environment for companies with innovative technology.

Indeed, with a clinical community receptive to new therapeutic options and a growing patient population, huge deals like Kyphon and St. Francis are likely to spur increased entrepreneurial and investor interest in spine, creating an opportunity for the growth of new mid-cap companies who themselves will be positioned to be potential acquirers.

Stephen Levin

In Vitro Diagnostics

Siemens AG—The Next General Electric?

It’s summertime and the market for in vitro diagnostic companies remains torrid. Barely a year after spending more than $7 billion to acquire Diagnostic Products Corp. [See Deal] and Bayer Diagnostics [See Deal], Siemens AG is at it again. In late July, the German industrial giant agreed to shell out another $7 billion to bring clinical diagnostic specialist Dade Behring Inc. in-house. [See Deal] Once the acquisition is completed, Siemens’ diagnostic arm, Siemens Medical Solutions Diagnostics, will vie with Roche for the top spot in in vitro diagnostic revenues, with both generating more than $3 billion in annual sales of similar products.

Analysts believe Siemens’ quest for industry dominance is the main reason for the company’s aggressive deal-making these past 18 months. With the Dade acquisition, Siemens shores up its clinical chemistry offerings, increases its commercial footprint in both large and small hospital labs, and gives the German outfit the ability to market its entire range of diagnostic offerings--from imaging devices to clinical tests to IT solutions. "Kudos to them," says Robert Easton, former director of Easton Associates and founding partner of Apex Bioventures. "The outfit has bought three major companies in less than two years to go from nothing to a leadership position," he says.

Siemens is doing what GE [General Electric Co./GE Healthcare] preaches," adds Manfred Scholz, founding partner of Scholz Consulting Partners and a former Dade executive. "They are following Jack Welch’s mantra that a company must be number one or number two to compete in a market segment and aggressively filling up their portfolio," he says.

Interestingly, the Siemens-Dade transaction comes hard on the heels of the dissolution of another closely watched IVD deal: GE’s $8.13 billion-dollar bid to buy Abbott Diagnostics and Abbott Point of Care, core diagnostic divisions of Abbott Laboratories. [See Deal] Both GE and Abbott claim the break-up was mutual, but the deal’s termination—coupled with Siemens’ emergence as a market leader and the overall increasing consolidation of the IVD industry—seems to put increased pressure on both outfits to look for new partners. Where does this leave GE?" muses Kerri Weinert, CEO of Boston Biomedical Consultants. "I get this question four times a day," she claims. (See "In Vitro Diagnostics: Innovation & Integration," this issue Also see "In Vitro Diagnostics: Innovation and Integration" - Medtech Insight, 1 September, 2007.; "What’s Next for Abbott in IVD?," IN VIVO, July 2007 Also see "What's Next for Abbott in IVD?" - In Vivo, 1 July, 2007.; and "GE Grabs the Spotlight in IVD," IN VIVO, March 2007 Also see "GE Grabs the Spotlight in IVD" - In Vivo, 1 March, 2007..)

At $77-a-share, Siemens’ offer to Dade represented a 36% premium over the Deerfield-Illinois company’s stock price at the time. But analysts say that’s in-line with other recent IVD acquisitions, including Inverness Medical Innovations Inc.’s take-outs of HemoSense Inc. (August), Cholestech Corp. (June), and Biosite Inc. (April), and Quest Diagnostics Inc.’s purchase of AmeriPath Inc. in April. [See Deal] [See Deal] [See Deal] [See Deal] And at four times revenue, the deal’s multiple is far less than the $75-a-share price Roche recently offered when it made its hostile bid for Ventana Medical Systems Inc. [See Deal] "Nothing is cheap these days," says Scholz.

Indeed, the move may be worth its hefty price tag because it significantly advances Siemens’ testing capabilities in the chemistry, coagulation, and microbiology arenas and extends the diagnostic player’s reach into smaller and mid-size laboratories. "There’s actually very little overlap between the products offered by Dade and those offered by DPC and Bayer," says Bill Quirk, a senior research analyst with Piper Jaffrey who covers the IVD sector. Another key reason for the acquisition seems to be gaining access to Dade’s Vista testing platform, which launched in 2006. This integrated work cell combines routine testing, such as screening blood glucose or cholesterol levels, with immunochemistry assays. As such, it represents a next generation detection technology that is cheaper for high through-put reference labs to operate. "This platform is a really good fit in thousands of labs," notes Boston Biomedical’s Weinert.

In addition to creating a one-stop-diagnostic shop, the Dade acquisition also gives Siemens access to top managerial talent in the IVD industry. When Jim Reid-Anderson took over Dade’s top spot in 2000, it was a troubled company. Just two years later the company was forced to reorganize, completing a pre-packaged federal bankruptcy filing that turned the company over to its creditors and cut its $1.5 billion debt level in half. Reid-Anderson deserves much of the credit for the company’s turn-around, boosting profits, expanding the customer base, and increasing cash flow. In 2006, the company’s revenues totaled more than $1.7 billion; and this year second quarter earnings jumped 34% to $50.3 million while sales increased 8.2% to $480 million. Reid-Anderson "deserves the utmost credit for doing everything right," says Scholz.

Undoubtedly it will take months before the consequences of Siemens’ acquisition of Dade become apparent. But already analysts point to two obvious losers: Abbott and GE. Abbott, which was hamstrung by the GE fiasco, now drops from leader to the number three spot in IVD revenues and must reintegrate a severely weakened diagnostic unit back into its testing franchise. The company appears to face two choices: put Abbott Diagnostics back on the market or invest heavily in additional content and assay platforms. Meanwhile, Abbott customers face continued uncertainty—a fact Siemens should be able to capitalize on as it roll’s out Dade Behring’s Vista platform. In a note to investors, Alex Morozov, an analyst with Morningstar Inc., writes "Siemens could capture a sizeable chunk of the market and further advance its already-leading share," if Abbott customers abandon that company’s product-line.

And what about GE? With the Dade acquisition, Siemens shows that it has both the chutzpah and the wherewithal to compete with GE in the healthcare ring. Many analysts believe that GE is now facing increased pressure to do some kind of deal to restore its leadership position. "The question is ‘Who do they buy?’" says Weinert. Rumors abound, but one thing is sure: with Dade Behring gone, the pool of likely acquisition targets continues to shrink.

—Ellen F. Licking

Peripheral Vascular Devices

Merger Vaults Peripherals to Bigger Stage

Half a decade ago, the peripheral vasculature market was a clinical backwater for most cardiovascular device companies, who were more interested in the larger, more dynamic coronary area. Now, the peripheral vasculature market is going Big Time.

The July merger of ev3 Inc. and FoxHollow Technologies Inc. reflects a new optimistic view of this space.[See Deal] The deal creates the largest peripheral vascular device company, one with a market cap of $1.7 billion on sales of around $600 million. But more importantly this combination establishes a single leader to push the peripheral market forward.

There is an irony to the success that both FoxHollow and ev3 have enjoyed in the peripheral market. Like other cardiovascular companies developing peripheral products, both Fox Hollow and ev3 were founded to focus on coronary applications, and only after finding that challenge to be too great did they eventually find their primary success in the peripherals.

FoxHollow’s success, in fact, is built on a technology—atherectomy—that has largely been shunted aside in the coronaries by the success of stents. The technology’s growing peripheral adoption is a vindication of sorts for company founder and current CEO John Simpson, PhD, MD, an angioplasty pioneer, who has long advocated that restenosis is best treated by taking the plaque out, not by putting a stent in.

Indeed, FoxHollow’s rapid growth, particularly as a public company, did much to change the thinking among CV device companies about the value of the peripheral market, while also reviving atherectomy: witness the emergence of new peripheral atherectomy players such as Cardiovascular Systems Inc. and Pathway Medical Technologies Inc./B-/ Though FoxHollow’s market cap is no longer north of $1 billion, adoption of its technology remains strong, creating a compelling basis for this deal.

As successful as each was on its own, both companies were feeling the pressure to offer more broad-based product lines. The ability to link atherectomy systems with ev3’s line of innovative stents and embolic protection devices potentially solves FoxHollow’s problem of being a one-product company and ev3’s issue of lacking a market-leading product. (FoxHollow does have an innovative service-based relationship with the drug company Merck & Co., but that alliance does little to shore up its business with peripheral specialists.)

Indeed, the merger represents the logical conclusion of a product development and distribution collaboration the two companies initiated this past January linking ev3’s embolic protection device with FoxHollow’s atherectomy system. (See "ev3: The Virtues of Focus," IN VIVO, February 2007 Also see "ev3: The Virtues of Focus" - In Vivo, 1 February, 2007..)

For both companies, however, the collaboration was as much about market development as technology enhancement. As FoxHollow’s atherectomy technology evolved and the company’s ability to remove plaque grew more precise, it could expand the number and type of cases it treated, but in the process, issues regarding the potential need for embolic protection naturally surfaced. For ev3, the FoxHollow deal opened the door to take a technology, embolic protection, which had been used primarily in the coronary and carotid arteries and develop it for peripheral applications. Combining with ev3 should also help FoxHollow expand in Europe, where ev3 has a strong distribution platform and FoxHollow hardly any at all.

As the peripheral opportunity moves from the wings to center stage, this deal begs the question: won’t big CV device companies, particularly Medtronic Inc. and Abbott Laboratories Inc., who currently lack peripheral (non-carotid) vascular plays, see the same kind of opportunity in FoxHollow that ev3 prizes? But if breadth of product offering and, more importantly, a development effort focused on peripherals are important, it may make even more sense for the Medtronics and Abbotts and any other interested parties to let this deal close since a combined ev3/FoxHollow may be even more valuable to them down the road.

Stephen Levin

In Brief

The Centers for Medicare and Medicaid Services (CMS) announced in early August that it will revisit its long-standing no-reimbursement policy for artificial hearts. CMS’ decision to reconsider national coverage was spurred by a request from SynCardia Systems Inc., which makes the FDA-approved CardioWest artificial heart for use as a bridge to transplant (BTT). In this national coverage analysis, CMS will review the use of artificial hearts both as BTT and as destination therapy. The agency has requested published peer-reviewed medical evidence about artificial hearts, as well as hospital requirements, including staffing, equipment, experience, transplant status, and training requirements for surgeons and their teams. CMS expects to render a final decision on May 1, 2008.

The American College of Cardiology and the American Heart Association have revised their Guidelines for the Management of Patients with Unstable Angina (UA)/Non-ST-Segment Elevation Myocardial Infarction (NSTEMI). Last published in 2002, the guidelines--developed for physicians who evaluate and treat patients with acute coronary syndrome--focus on the diagnosis, treatment, and management of patients with UA and the closely related condition of NSTEMI. While the 2002 guidelines recommended an early invasive strategy--diagnostic angiography and revascularization--the revised guidelines draw a more distinct line between high- and low-risk UA/NSTEMI groups. They recommend an early invasive strategy for unstable and high-risk patients, with an initial non-invasive strategy--stress test, echocardiogram, or radionuclide study--as a possible treatment option in stabilized UA/NSTEMI patients and low-risk patients.

It’s been a busy month for medtech firms hoping to take their place in the public markets: Israel’s InterCure Ltd., which markets the RESPeRATE device for hypertension, raised $16 million from its IPO of three million common shares. The company will use the proceeds to expand sales into US and international markets. After withdrawing an initial public offering in 2001, Masimo Corp., which makes the Masimo SET signal extraction technology, has finally gone public, netting $48 million. A spate of new filings includes intraocular lens maker eyeonics Inc., which is looking for $86.3 million in its IPO; TranS1 Inc., which is developing a percutaneous approach to lumbar surgery, has filed to raise up to $80.5 million; Concentric Medical Inc., developing a clot removal device for ischemic stroke, has filed for a $69 million IPO; heart monitoring company CardioNet Inc. is looking for up to $150 million; and molecular diagnostics play Nanosphere Inc. hopes to raise up to $100 million in its public offering.

Following a May 2007 deal in which it gained gastroenterology pH and manometry recorders, diagnostics maker Alpine Biomed Corp. is once again purchasing a product line from Medtronic Inc., this time the device giant's neurodiagnostics unit. Alpine had been exclusively distributing the products for Medtronic in the US since 2005. Alpine now gains full ownership of several devices and accessories used to treat and diagnose carpal tunnel syndrome, sleep disorders, and other neurological diseases. Included in the deal are software programs to support electromyography (EMG) analysis (sold under the Keypoint name); the handheld device Clavis, which records EMG and guides/monitors injections into nerves and muscles; the MagPro brand of magnetic stimulation systems, which are connected to an EMG machine and used to examine the motor pathways in the PNS; plus several EMG or nerve conduction studies (NCS) needle electrodes and surface electrodes.

Baxter International Inc. will work on the creation of a next-generation home hemodialysis machine with R&D company Deka R&D Corp. and HHD LLC, which owns patents that would be used to develop the new unit. Baxter already holds an exclusive license to Deka's US patent for use in the peritoneal dialysis field. As part of the new agreement, Baxter has received the option to buy HHD's assets and has agreed to fund Deka's R&D activities as they pertain to the deal and pay royalties. Home hemodialysis units are used by end-stage renal disease patients to remove waste and excess fluid from the body. In-clinic hemodialysis requires that patients be treated for four hours a day, three days each week; home units enable patients to receive treatments more frequently if needed, which Baxter says has led to fewer hospital visits and better control of anemia and blood pressure.

Patient-monitoring equipment maker Axon Systems Inc. and Medtronic Inc. agreed to develop and sell spinal neuromonitoring devices to the surgical market. The companies will initially focus on Axon's recently 510(k)-cleared NIM-Eclipse, which assesses a patient's neurological status during surgery so that nerve damage can be prevented. Eclipse simultaneously measures evoked potentials (EP), electromyography (EMG), and electroencephalography (EEG). In addition, the system has two built-in pulse oximeters and a number of other features including the ability to automatically evaluate pedicle screw placement and test motor function with transcranial electrical motor evoked potential (TCeMEP) stimulation (versus using expensive external stimulators). In the past Axon has developed simultaneous multimodality monitoring technologies for not only neurological surgeries, but also for the intensive care unit, where doctors can use the devices for long-term diagnostic monitoring and guiding patient care. Eclipse should fit in well with work done by Medtronic's Medtronic Sofamor Danek subsidiary, which produces minimally invasive spinal and cranial surgical devices such as METRx, neurosurgery products including neuroendoscopes and catheters, and navigation devices it gained through its 2005 partial acquisition of Image-Guided Neurologics Inc.

Radiation therapy companies Cytyc Corp. and Xoft Inc. have announced a settlement to an intellectual property and patent dispute initiated by Xoft in 2005. Xoft claimed that Cytyc's patents covering its own therapy system (MammoSite, developed by Proxima Therapeutics Inc. before Cytyc acquired the company in 2005) were invalid, and that Xoft was not violating patent laws by developing its Axxent electronic brachytherapy system. Terms of the patent settlement call for all related legal disputes to cease, and for Xoft to pay Cytyc undisclosed royalties. The companies also agreed to discuss the potential of a future partnership to develop new technologies for women's health and other areas.

Diversified company Teleflex Inc. has agreed to acquire Arrow International Inc. for $2 billion in cash.[See Deal] Shareholders will get $45.50 for each Arrow share they own, a 19% premium. Teleflex, which has created a business to develop and market disposable respiratory, anesthesia, urology, and surgery devices, says the acquisition will widen its offerings. Arrow sells catheters for critical and cardiovascular care; in particular, it offers the Wave intra-aortic balloon pump system, Arrow Edge and Cannon chronic hemodialysis catheters, arterial catheters for hemodynamic monitoring, IV tubing, anesthesia nerve block catheters, and central and peripheral venous access products. Last year Arrow netted $56 million on revenues of $482 million. Officials say that disposables and single-use devices will be the largest source of income for the new company--more than 80% of total revenue.

Nancy Dvorin is the Managing Editor of Medtech Insight (E-mail: ndvorin@windhover.com

Business & Technology Briefs (09/2007)

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