The only predictable part of Medtronic Minimally Invasive Therapies’s acquisition strategy is there’s no sign of it slowing down. For the past five years, since its spin-out from Tyco International Ltd., [See Deal] the multinational device company has spent close to $5 billion acquiring public and privately held device companies, with more than $1 billion of that being spent just over the past six months on privately held Barrx Medical Inc., Newport Medical Instruments Inc., Reverse Medical Corp., Oridion Systems Ltd., and superDimension Ltd. [See Deal] [See Deal] [See Deal] [See Deal] [See Deal]

The string of purchases bulked up every one of Covidien’s existing medical device businesses. (See Exhibit 1.) For example, Covidien’s most recent acquisition of Oridion Systems, maker of products to measure patient breathing, will fit into its Oximetry and Monitoring business unit, which already had been bolstered by the past acquisitions of publicly traded Somanetics Corp. and Aspect Medical Systems Inc. [See Deal] [See Deal]. Meanwhile, the purchases of Vnus Medical Technologies Inc. and ev3 Inc., with the latter deal accounting for $2.5 billion of the capital spent, have successfully brought the company into the vascular and neurovascular markets. [See Deal] [See Deal]

Exhibit 1

Covidien Acquisitions (2007-2012)

Covidien Business

Acquisitions (publicly traded companies in italics)

Disclosed Price (All Deals)

(M)

Disclosed Revenue at Time of Deal (All Deals)

(M)

2011 Covidien Revenue

(M)

2011 Growth

(Year to Year)

Endomechanical Instruments

SuperDimension*, Power Medical Innovations

$364

$39

$2342

9%

Energy Devices

Barrx Medical*

$325

$34

$1170

18%

Soft Tissue Repair Products

Tissue Science

$73

$900

5%

Vascular Products

Bacchus Vascular, Reverse Medical Corp., Orthofix vascular business unit, ev3, VNUS

$3,306

$1436

76%

Oximetry and Monitoring

Oridion Systems,* Somanetics, Aspect Medical

$810

$213

$853

13%

Airway and Ventilation

Newport Medical Instruments*

$108

$770

-2%

*Companies not included in 2011 financial results.

Elsevier’s Strategic Transactions

Wall Street largely supports the strategy. Joanne K. Wuensch, medical device analyst for BMO Capital Markets, says Covidien has demonstrated that it knows how to spend well. With the exception of ev3, the acquired companies have been relatively small, so assimilation isn’t a challenge. Still, Wuensch says, the company deserves credit for working to hold onto executive talent. “They integrated their deals like clockwork,” she says. “They’re very efficient and they manage to do it without disrupting the management team.” Wuensch noted that ev3’s CEO and President Robert Palmisano did leave ev3 after the acquisition – he now heads orthopedic company Wright Medical Technology Inc. But Covidien kept much of the senior management, she says.

Wall Street looked favorably upon Covidien’s recent acquisition of superDimension, for example. Covidien paid $300 million plus earn-outs for the maker of the iLogic system, which uses electromagnetic navigation bronchoscopy technology, enabling access to lesions located deep in the lungs and mediastinal lymph nodes to ensure more effective biopsies for cancer, emphysema, and tuberculosis. (See Also see "superDimension: Navigating Interventional Pulmonology" - In Vivo, 1 November, 2007..) SuperDimension reported $30 million in annual sales from the product. SuperDimension will be added to the endomechanical product line, making it the first outside addition since Covidien’s acquisition of Power Medical Innovations in 2009. [See Deal]

JP Morgan Analyst Michael Weinstein writes that superDimension fits Covidien’s overall strategy to “identify higher growth assets with runway to address an unmet medical need.” Covidien and superDimension both declined to discuss the acquisition. But Weinstein reports that superDimension – with 130 employees – calls largely on interventional pulmonologists and thoracic surgeons. Covidien currently calls on the latter, but not the pulmonologists so the company “plans to build out this call point over the next several years,” he states. This is potentially good news for the group of venture-backed start-ups targeting the specialty. Up until this point the field of potential acquirers for interventional pulmonology has been limited withBoston Scientific Corp. scooping up Asthmatx Inc., maker of an energy-based device used to treat severe asthma, and Olympus Corp. of the Americas, which bought airway valve maker Spiration Inc. [See Deal] [See Deal]

No doubt, Covidien’s appetite has been a boon to venture capitalists. The price paid for superDimension presents a respectable return for venture investors who committed $120 million to the company. Covidien Ventures, the corporate venture arm, was a notable member of superDimension’s investor list. The group led superDimension’s last private round, an $11 million late stage round in September. [See Deal] While not a guarantee, such late stage investments might be seen as an early sign that Covidien might want to advance the relationship from investor to buyer. According to one investor in Barrx, which sells a radiofrequency-energy device to treat esophageal disorders, Covidien’s corporate venturing arm was eager to invest in the last round of Barrx, suggesting that the due diligence performed could smooth the way for a strategic buyout. Barrx’s board had several term sheets from which to choose, and they eventually went with a round led by Highland Capital Partners, a $15 million Series D round. [See Deal] (See Also see "Barrx Medical: Making A Case For Ablation" - In Vivo, 1 October, 2010..)

But Covidien and Barrx management kept in close contact. Eventually, Covidien executives saw Barrx as a potentially integral part of its energy division. Barrx, meanwhile, was talking with investment bankers about a possible auction or IPO, which might have been possible given the company’s projection to surpass its $40 million in sales. Covidien came in requesting exclusive negotiations. “I think that they believed they could get to a price we would consider fair without Covidien management risking committing to a new strategic area only to lose at an auction price they might have paid anyway,” says Doug Kelly, MD, general partner at Alloy Ventures. Barrx held firm to its price and walked away once or twice. Covidien agreed to pay $325 million up front with the potential earn-out payments. The company had raised $75 million in capital. “Overall, they were pretty fair, once they understood we were willing to ride the business all the way to a public offering,” he says. Kelly adds that Covidien did an extremely deep review of Barrx’s operations and IP, “unlike few acquisitions I’ve been involved with.” Since the acquisition, Covidien indicated that Barrx would be the first of several purchases of gastrointestinal technologies.

The due diligence has worked in Covidien’s favor. Nearly all of the purchases have worked well. Covidien’s vascular business – comprised of products and IP from Vnus, Reverse, and Bacchus Vascular Inc. [See Deal] – grew sales by 76% from 2010 to 2011. (See Also see "Covidien Runs Familiar But Different Plays to Build Vascular Franchise" - In Vivo, 1 June, 2010..) Last month, the Food and Drug Administration approved Covidien’s Solitaire clot retrieval device, which performed well in a clinical trial that pitted it against Concentric Medical Inc.’s Merci device, which is now owned by Stryker Corp. [See Deal] JP Morgan’s Weinstein expects Solitaire to be “the next leg of Covidien’s neurovascular growth story.” The only deal that might have disappointed was Covidien’s purchase of sports medicine company, Scandius BioMedical [See Deal]. A spokesman for Covidien says, “As a result of reorganizations over the past year, we have reprioritized Covidien’s potential opportunities and the sports surgery business has been deemphasized versus other faster-growing businesses in our Surgical Solutions unit.” It’s difficult to argue with where Covidien is placing its emphasis.

Covidien Acquisitions Keeps Buying Spree Alive

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