Boston Scientific Corporation (NYSE: BTX) – market cap as of 27/11/2018: USD 48.57bn
Introduction
On November 20, 2018, Boston Scientific, a company operating as a provider of innovative medical solutions, successfully reached an agreement to acquire BTG plc, the UK developer and distributor of tools employed in the treatment of cancer and other vascular diseases, for a total consideration of $4.24bn. With the deal, Boston Scientific gets its hands on a variety of healthcare products – including a famous and renewed rattlesnake bite antidote – and it is expected to sensibly boost its capabilities in the field of interventional medicine.
About Boston Scientific Corporation
Boston Scientific was founded in 1979 with the purpose of making cheaper, more accessible and less invasive medical solutions to patients. Since the beginning, the company has been constantly growing by implementing strategic acquisitions. In 1992 it went public, becoming a leader in cardiology and vascular disease treatment. In 2004, Boston Scientific entered the neuromodulation field with a paclitaxel-eluting coronary stent system, one of the most successful launches in the history of the industry. This system consists of a bare metal stent that is coated with a drug and a polymer, designed to deliver drugs locally in order to reduce tissue ingrowth. Since then, the company kept on creating successful products and maintained its aggressive M&A policy.
Indeed, if we focus on very recent instances of external growth, since April 2018, the company has completed transactions for a total value of approximately $1.6bn. In October, the company acquired Augmenix for $600m upfront cash. Agumenix was focused on the development and commercialization a system aimed at reducing some common and debilitating side effects that may take pace after receiving radiotherapy to treat prostate cancer. In August it completed the $270m takeover of Claret Medical, through which Boston Scientific took control of the only device cleared to protect patients against the risk of stroke in transcatheter aortic valve replacement procedures. In July, Boston Scientific announced the acquisition the remaining 65% of Cryterion Medical, a privately-held company developing a single-shot cryoablation platform for the treatment of atrial fibrillation, for a price of $202m. In April, nVision Medical Corporation was acquired for $275m, strengthening its research in the field of ovarian cancer.
Today, Boston Scientific’s portfolio of medical solutions can be divided into three main fields: cardiovascular, rhythm management and medical surgery. The acquisition of BTG is likely to have an impact on the cardiovascular division, under which both interventional cardiology and peripheral interventions are included. The common denominator along all the business lines is the commitment to minimizing the impact of treatments on patients’ lives. The peripheral intervention portfolio is one of the broadest in the market and it includes a variety of solutions, ranging from Peripheral Artery Disease and Deep Vein Thrombosis treatments to Interventional Oncology.
From a financial standpoint, the company is currently going through a restructuring process that is expected to bring to Boston Scientific savings for $100-$150mn through a “soft” layoff policy. The past three years featured a remarkable growth for the company. Sales figures strengthened (+6.6% ’15-‘17 CAGR) and operating profitability was reached, as the company successfully turned $283mn operating loss in 2015 into a $1.3bn EBIT for the year ended December 31st, 2017.
About BTG plc
BTG was founded in 1981 as a UK Government-controlled company, resulting from the merger between the National Research & Development Council and the National Enterprise Board. The firm was privatized in 1992 and was later listed on the NYSE in 1995. Since its foundation, BTG has been a pioneer in the industry: it was the first one to license the Nobel prize winning Magnetic Resonance Imaging back in the ‘80s and to launch the first rattlesnake antivenom on the US market 50 years after the forerunning technique. In 2005, BTG started a process of strategic business review aimed at transforming itself from an IP commercialization firm into a global healthcare company, focused on Interventional Medicine. This refocusing also allowed BTG to start a consistent policy of strategic acquisitions.
Today BTG operates along four product lines: Interventional Medicine, Pharmaceuticals, Named Patient Supplies and Licensed Products. Among these, Interventional Medicine and Oncology is the company’s core business. As Boston Scientific, so too does BTG conceive this fast-growing area of the business as one aimed at minimizing treatment impact.
The company’s financial profile as of March 31st, 2018 indicated strong growth, with revenues increasing at an 11.5% ’16-’18 CAGR. When it comes to operating profitability, margins of 11.4% on average in 2016-17 were eroded in 2018, pushing EBIT down to a £102.8mn loss. This was mainly due to £151.1mn worth of intangible assets impairment charges reported on SG&A and R&D expenses.
Industry Overview
The medical devices industry, i.e. medtech, has witnessed significant consolidation between and among payers and providers. Among the providers, health systems and hospitals are consolidating at a rapid pace in response to the challenges of the aging population and changing legislation. This shift in market forces will affect medtech companies greatly, as the providers now have increased negotiating strength vis-à-vis the medtech companies. Additionally, providers are also offering their own insurance plans to drive patient volume with favourable premiums. This poses an opportunity and a threat to medtech companies as there is an increasing patient volume but a reduced reimbursement per device as payer-providers look to contain overall spending. Further, the Center for Medicare and Medicaid Services (CMS) in the US, in October 2017, announced changes to its episodic payment models (EPMs), driving a shift in healthcare companies to Value Based Care (VBC) from the fee-for-service or capitated approach. Under VBC, providers are rewarded for helping patients improve their health, reduce the effects and incidence of chronic diseases, and live healthier lives in an evidence-based way. This has led to increased pressure across the sector to improve outcomes while reducing costs, as VBC focuses on the ‘value’ derived whereas the previous model focused on the cost of delivering this value.
It is therefore no surprise that M&A in the healthcare sector witnessed the strongest start in over a decade in January 2018, with a total deal value of $315.74bn in the first half of the year.
The medtech megamergers of the past few years such as Medtronic-Covidien of 2015 ($49.9bn deal) and Abbott Laboratories-St. Jude Medical of 2017 ($25bn deal) have created huge medtech companies that are looking for acquisitions of companies in their early stage of development to provide innovative solutions that treat a large unmet medical need in a cost-effective and reimbursable manner.
Meanwhile, the sector is witnessing new yet powerful entrants, possibly signalling further disruption in the future. For instance, Amazon in collaboration with JPMorgan and Berkshire Hathaway has announced its venture into healthcare with a company set to innovate by cutting costs from the health-care system, starting with the more than 1 million employees of the three companies behind the venture. The vision of this venture, albeit at an extremely early stage, is to deploy an easy-to-use platform where patients can readily assess the price and quality of competing providers and quickly schedule appointments or perhaps even initiate an online consultation. Another new entrant into the sector is CVS, with its $69bn merger with Aetna about to close after being in the pipeline for almost a year now. The merger focuses on creating a healthcare leviathan with a broad range of control over the industry, from selling insurance to negotiating drug prices with pharmaceutical companies to providing drugs to consumers. Furthermore, in August 2018, tech giants such as Amazon, Google, Microsoft, IBM, Oracle, and Salesforce announced their intent to commit jointly “to removing barriers for the adoption of technologies for healthcare interoperability, particularly those that are enabled through the cloud and AI”.
Deal Structure
Boston Scientific has agreed to acquire BTG for £3.3bn ($4.2bn) in cash. As per the agreement, common shareholders of BTG will be paid £8.40 per share in cash. The transaction is to be funded by a combination of cash on hand and proceeds from a £3.3bn bridge financing debt facility committed by Barclays Bank. The transaction will be $0.02 to $0.03 accretive to Boston Scientific adjusted earnings per share in 2019, and increasingly accretive thereafter. The £8.40-per-share offer represents a 36.6% premium over BTG’s closing price and a 51.0% premium over the stock’s 90-day volume-weighted average price as on 19 November 2018.
Deal rationale
According to Mike Mahoney, chairman and CEO of Boston Scientific, the major purpose of this acquisition is to expand the company’s product portfolio, while extending the company’s capabilities to areas of unmet needs, such as cancer and pulmonary embolism. Indeed, through this move Boston Scientific will enhance its presence in healthcare categories (e.g. oncology and heart disease) that will advance patient care in a way that cannot be realized by either company alone. The bidder is particularly interest in BTG Interventional Medicine portfolio, which encompasses a wide interventional oncology franchise focusing on minimally invasive treatments for today’s most challenging conditions such as liver, kidney and other cancers. This portfolio is strongly complementary with Boston Scientific’s $1.2bn Peripheral Interventions Division and is an effective tool in addressing significant surges in cancer statistics. Indeed, 840,000 people are expected to be diagnosed with liver cancer in 2018, and 1.1 million by 2030 (GLOBOCAN Database). In addition to biting the markets for interventional medicine, the acquisition will also give Boston Scientific the access to CroFab, an expensive rattlesnake bite antidote on which BTG has strongly relied since 2004, but which has faced increased competition in the past 3 years. Confidence in the merger derives also from the cultural and strategic fit with Boston Scientific.
From a financial perspective, the value creation for Boston Scientific shareholders is compelling. The deal is expected to be $0.02 – $0.03 immediately accretive to Boston Scientific 2019 EPS and more so thereafter. Revenue and cost synergies for $175m+ are expected in year 3, delivered through Boston Scientific’s enhanced global manufacturing capabilities and through combined geographic footprint of NewCo.
An additional reason backing the rationale of the deal could be the depressed valuation of UK healthcare companies compared to global competitors, as testified also by the fact that BTG represents the eighth company in the British healthcare sector to be acquired over the past 18 months.
Market reaction
On the date of the announcement, shares in BTG climbed to 827.5p, hitting its highest level (832p) in nearly 4 years. While on Monday the FAANGs were sliding into bear territory, shares of BTG, a company that ceased to be a technology player decades ago, were spiking. Although BTG shares rose 16% in the week prior to the bid on the back of solid first half results, it would be naïve to interpret BTG’s decision to immediately accept the offer as a step back, given that a counterbid would have been very unlikely. Indeed, the entrance in the market of a Mexican company in the rattlesnake antivenom space represents a serious threat for the CroFab product line and to the overall profitability.
On the other hand, following the announcement, Boston Scientific shares faced the biggest intraday drop in more than 3 years, as much as 10%, before recovering to sit 2% lower in mid-afternoon trading.
Financial advisors
Barclays and Shearman & Sterling are acting as financial and legal advisors on behalf of Boston Scientific, whereas BTG has been advised by Goldman Sachs International, J.P. Morgan Cazenove and Rothschild & Co as to the financial terms.
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