By Thomas Lee
Given Wall Street’s turmoil of late, it’s not too surprising that buyers would search for bargains, especially struggling medical device companies with promising technology and awful balance sheets. Case in point: Medtronic Inc.’s (NYSE:MDT) $370 million purchase of ATS Medical Inc..
But ev3 Inc. (NSDQ:EVVV) and Virtual Radiological Corp. (NSDQ: VRAD) are hardly struggling. Both companies are solidly profitable and generating impressive sales in attractive growth industries. So why sell now, especially in a down market?
It helps to look at who’s selling. Private equity firm Warburg, Pincus Equity Partners is ev3’s top investor, owning about 27 million shares, or 24 percent of the company’s stock, according to documents filed with the Securities & Exchange Commission. Covidien plc (NYSE:COV) said June 1 that it will pay $2.6 billion to acquire ev3 (NSDQ:EVVV), which makes devices to treat peripheral and neurovascular diseases.
Earlier this month Warburg also sold off Lifecore Biomedical Inc. of Chaska, Minn., one of the state’s most experienced biotech companies, for $40 million to Landec Corp., a food packaging firm in California.
Generation Capital Partners, a private equity firm based in Greenwich, Connecticut, was the top investor in Virtual, which in May agreed to be acquired by Providence Equity Partners for $294 million. Though Providence Equity is another private equity firm, analysts suspect Generation needed a successful exit to attract investors to a new fund.
It wasn’t too long ago that private equity firms, also called financial buyers, were masters of the universe in deal making. Armed with cheap cash and the lure of ridiculous valuations, private equity went on a buying spree, muscling aside strategic buyers for top-flight companies.
Now the pendulum has swung the other way, thanks to the recession and tepid recovery. Faced with depressed stock prices, private equity firms are electing to cash out while they can, while strategic buyers like Medtronic, Landec and Covidien seek deals to replenish or augment their product pipelines.
The ev3 acquisition is particularly telling. Although Covidien’s $22.50-per-share offer is attractive, the deal was bit of a surprise, said Charles Haff, a healthcare analyst with Minneapolis-based investment bank Dougherty & Co.
ev3, Haff noted, was just only emerging from a difficult acquisition of FoxHollow Technologies and has just filed for Food & Drug Administration pre-market approval for its Pipeline Embolization Device, a promising technology to treat aneurysms.
ev3 bought FoxHollow in 2007 for $780 million, but struggled to integrate the acquisition’s sales force. Yet ev3 soldiered on. After losing $335.6 million in 2008, the company posted a profit of $41.9 million last year. In April, ev3 said it generated a $9.9 million first-quarter profit on sales of $123.8 million, compared to a loss of $1.8 million on revenue of $100.4 million during the same period last year.
Even more impressive, the company raised its 2010 profit guidance to 51 cents to 56 cents per share, up from its earlier prediction of 42 cents to 48 cents a share.
“We understand that the baseball analogy can oversimplify the complexity of turning around companies,” Haff wrote in a research note titled “This is only the fourth inning.”
“However, since our hometown Minnesota Twins have a new stadium and [American League MVP] Joe Mauer has created excitement here in Minneapolis, we thought that it would be appropriate in this instance,” Haff wrote. “We believe that ev3 has successfully completed the turnaround phase of their business and now is poised for sustainable growth over the next few years.”
ev3, Haff said, is a great buy for Covidien.
“COV is acquiring a great company which is in two fast-growing areas of medical device with huge unmet patient needs,” he said.