Covidien to purchase ev3 for $2.6 billion, expand in vascular market

Tuesday, June 1, 2010

Covidien to buy ev3 for $2.6 billion

NEW YORK — Covidien PLC said Tuesday it is buying medical device maker ev3 Inc. for $2.6 billion in cash in a deal that could help it step up sales growth.

Covidien, which makes drugs and medical devices, will pay $22.50 for each share of ev3, a premium of nearly 19 percent over Friday’s closing price.

Ev3’s devices are used in endovascular surgeries, operations in which surgeons make small incisions and maneuver devices in the body through major blood vessels. Other products are used in neurovascular procedures, or procedures involving both blood vessels and nerves. Ev3 expects $520 million to $530 million in revenue this year.

Ev3 also makes stents and balloon catheters, which are used to open arteries that have been blocked by fatty plaque.

The boards of both companies have approved the deal, and investors who own 24 percent of ev3 shares have also agreed to vote in favor of the sale. The companies say the deal should be complete by July 31 assuming regulators approve.

Covidien, based in Dublin, Ireland, will fund the purchase with a combination of cash and debt. It said the transaction will reduce its earnings per share by 5 to 8 cents this year and 10 to 15 cents in 2011.

Ev3 shares gained $3.30, or 17.4 percent, to $22.22 in afternoon trading, and reached an annual high of $22.27. The stock has traded between $8.83 and $20 over the last 12 months. The shares set an annual high in May after the Plymouth, Minn., company said it finished filing for regulatory approval of a device that is intended to divert blood away from cerebral aneurysms during surgery. The company hopes the Pipeline Embolization Device will be approved in 2011.

A cerebral aneurysm is a weak spot in the wall of a blood vessel inside the brain.

Covidien expects more than $11 billion in revenue in its current fiscal year, which ends in September. It gets most of its revenue from medical devices, including surgical instruments, tissue grafts, monitoring devices and ventilators. It also sells brand-name and generic drugs and drug ingredients.

In a note to clients, Jefferies & Co. analyst Joshua Jennings said the deal makes sense for both companies because there is little overlap between ev3’s products, especially its central vein access and neurovascular devices, and the products sold by Covidien.

“From a product standpoint, the acquisition of ev3 will enable Covidien to significantly expand its presence in the vascular market, which has been an area that Covidien management frequently highlighted as an area of strategic growth for the company,” he said. Jennings thinks the deal could boost Covidien’s profit by 15 cents per share per year after the businesses are combined.

Covidien, the former health care business of Tyco International, became a separate company in June 2007. Last September, Covidien began remaking itself through a series of deals, saying it wanted to focus on faster-growing and more profitable businesses.

It had already spent close to $700 million as part of that effort. Its acquisitions included VNUS Medical Technologies, which makes products that treat vein conditions. It also sold off several less-profitable businesses including sleep diagnostics and oxygen therapy products.

The company announced Tuesday that it closed the sale of its radiopharmacy business to Triad Isotopes, and agreed to sell some of its sleep apnea treatment products to PH Invest of Luxembourg.

Terms of the sale were not disclosed. Covidien said it sold its GoodKnight and Sandman product lines and a manufacturing facility in Nancy, France. It did not sell its Adam, Breeze, and Dreamfit lines. That deal is expected to close within the next 90 days.

Canaccord Adams analyst Jason Mills said he expects to see more acquisitions like the ev3 deal because the largest medical device companies — also including Medtronic Inc., St. Jude Medical Inc., Johnson & Johnson, and C.R. Bard Inc. — rely on products with little to no revenue growth.

“I think the key point is that the industry (…) will see the most robust M&A cycle over the next 12 to 18 months that we’ve seen in the last 15 to 20 years,” Mills said.

He said companies including Thoratec Inc., Edwards Lifesciences Corp., Volcano Corp., ResMed Inc., Intuitive Surgical Inc. and Heartware International Inc. could be targets.

Covidien shares fell 49 cents to $41.90.

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