Extremities Market Update - May 2012


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May 2012 Extremities Market Update

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Extremities Market Update - May 2012

  1. 1. Carleton McKenna & Company – Healthcare InsightsExtremities Market UpdateMay 2012 © 2012 Carleton McKenna & Company 1801 East Ninth Street Suite 1425 Cleveland, OH 44114 | 216.523.1962 | www.carletonmckenna.com Securities offered through Financial America Securities, Inc., Member FINRA, Member SIPC and the affiliated broker-dealer of Carleton McKenna & Company, LLC
  2. 2. For more information, please contact: Extremities Market Update Author: Dominic M. Brault Managing Director (216) 523-1962 dmb@carletonmckenna.com To learn more about Carleton McKenna, please contact: Paul H. Carleton Christopher J. McKenna Managing Partner Managing Director (216) 523-1962 (216) 523-1962 phc@carletonmckenna.com cjm@carletonmckenna.com or visit us at: www.carletonmckenna.com 2
  3. 3. I. Orthopedic Market Overview 3
  4. 4. Worldwide Orthopedic Market• The worldwide orthopedic market generates over $20 billion in global revenue, with the large joint (hip, knee, and spine) market representing the large share of the total market.• The large joint market is generally characterized as stable, competitive, and challenging, related to pricing pressures, procedure deferrals, payer pushback, supply cost containment at hospitals, higher co-pays, and COBRA.• The extremities market is pegged at roughly $2.4 billion and is underserved relative to the large joint market. Most large orthopedic companies (J&J, Zimmer, Stryker, and Smith & Nephew) have weak offerings in the extremities market. Although the extremities market faced macroeconmic headwinds like its larger joint brethren, the overall growth rate continues to be in the high single-digit (some argue low double-digit) range, which offers a nice respite from the other challenging ortho markets. Worldwide Orthopedic Market Extremities Market Large Joint Market Upper Extremities Lower Extremities Hip Knee Spine Shoulder Elbow Wrist/Finger/Thumb Foot / Ankle Market Size Total Global: ~$19 Billion Total Global Extremities: ~$2.4 Billion Upper Extremities Global: $1.4B U.S. $2.7B $3.9B $4.3B $575M $200M $300M $800M ROW $3.0B $2.8B $2.9B $225M $50M $50M $200M Global $5.7B $6.7B $7.2B $800M $250M $350M $1.0B Low Single Low Single Business Single High High Single Growth Rate Digit Digit Planning / Flat Digit Digit High Single Digit High Single Digit Key Players Biomet Biomet Reporting Medtronic JNJ/DePuy Biomet JNJ/DePuy JNJ/DePuy/Synthes J&J/DePuy J&J/DePuy J&J/Synthes Zimmer Zimmer Wright Medical Wright Medical Smith & Nephew Smith & Nephew Stryker Biomet Acumed Integra LifeSciences Integra LifeSciences Stryker Stryker NuVasive Tornier Wright Medical Small Bone Innovations Small Bone Innovations Wright Medical Wright Medical Zimmer DOJ Surgical Tornier Biomet Tornier Zimmer Zimmer Biomet Stryker Stryker/Memometal Orthofix Smith & Nephew Alphatec Source: BMO Capital Markets, RBC Capital Markets, Credit Suisse, BernsteinResearch, and Carleton McKenna 4
  5. 5. Extremities Market OverviewThe extremities market is relatively more rosey than in hips and knees, Hips, Knees, Spine Extremitiesgiven younger patients, private payors that are less affected by Medicarereimbursement, a largely untapped revision pool, and generally lowerpenetration rates.While growth rates may have slowed related to deferrals of electiveprocedures and lower price increases (analysts suggest it is hard to tellsince the market is highly fragmented), growth is still relatively attractive,hovering in the high single-digit range. • According to ThinkEquity, the size of the U.S. extremity hardware market is estimated at approximately $1 billion (70% foot & ankle, with the balance hand, wrist, and elbow), growing at an 8% CAGR. • A late 2011 survey of extremity surgeons conducted by RBC Capital Markets also points to relative stability in the upper extremity market with expectations for high single-digit to low double-digit growth. BusinessGiven the comparable growth rates to the other large joint markets, the stocks that participate in this sector (i.e., Planning /Tornier, Integra LifeSciences, and Wright Medical) are garnering quite a bit of attention (as evidenced by Tornier’s Reportingpremium valuation), and the companies that do not have a stalwart portfolio (i.e., Zimmer, Stryker, etc.) seem to bemaking forays into this segment. • Management @ Zimmer announced an anatomical combined shoulder adapter at the American Academy of Orthopedic Surgeons • Stryker suggested on its 4Q11 conference call that it will be investing in shoulders 5
  6. 6. Extremities Market Commentary“The upper extremity market, which is how we categorize shoulderand elbow and the hand and the wrist, we believe that the market isgrowing at a 10% to 12% rate. And others may agree with that, theymay disagree with that, but we see that as a solid double-digit marketgrower.” Tornier 4Q11 Earnings Call on February 23, 2012“Our pricing in the fourth quarter held up very nicely and we anticipatethose trends will continue.” Tornier 4Q11 Earnings Call on February23, 2012“During the fourth quarter, we did not see any deterioration in thegrowth profile of the Foot and Ankle market, and we continue tobelieve that this market is currently growing approximately 8%.”Wright Medical 4Q11 Earnings Call on February 23, 2012 Business Planning /“Extremities has slowed down some but Reporting is still kind of the clearly itshining star in the space.” Integra LifeSciences 4Q11 Earnings Callon February 23, 2012 6
  7. 7. Extremities Growth OpportunitiesAn increasing foot and ankle surgeon base should enable growth in the US foot market. • An AAOS surgeon survey showed that only 10% of orthopedic surgeons identified the foot and ankle as one of their specialties versus nearly 3.5x as many for adult knees • This number is expected to increase as better implant technology expands the market size (big players spending on R&D in this area given relatively low competition)Increasing coverage for US total ankle replacement. • Reimbursement issues have constrained growth in the total ankle replacement market is the past, as most insurers consider this procedure experimental • Now, some are considering this procedure medically necessaryThere is a very strong patient demographic tailwind, as roughly 1.3 million people will turn 65 eachyear between now and 2015.Should the Patient Protection and Affordable Care Act pass, roughly 32 million individuals maygain access to health care. BusinessDespite persistent pressures in the U.S. and Europe, emerging markets are starting to gain traction, Planning /with most attention paid to China, Brazil, and India. • Reporting China is by far the most attractive market opportunity, given the size of the population, upward mobility, increasing government spending, and migration to urban centersPrivate equity could step into the orthopedic market with the companies trading at historical lows. • Notably, all are trading at discounts to where Biomet and KCI sold to private equity and depending on leverage ratios and exit multiples, the Med Tech stocks are becoming attractive targets with potential returns in the 20-30% range 7
  8. 8. Extremities Risk FactorsIncreased competition in the extremity market could hamper growth. • The extremity market is one of the faster growing markets in orthopedics and has begun to gain the attention of the larger manufacturers. This increased attention may not be favorable if companies build out their extremity business internally rather than through acquisition.A MedTech excise tax is slated to begin in 2013. • This is a 2.3% tax on all U.S. device sales. The impact across the sector will be significant, particularly for small-cap companies.European volumes may drop off with new austerity measures in place to reign in public spending. • For example, Greece enacted measures to cut spending on medical devices by 25% over two years.There are key structural changes underway in healthcare, including shift of burden to consumer,cost consciousness among hospitals, decreasing reimbursement, and hospital consolidation, amongothers.The FDA approval process is “difficult” and expensive as there is a need for clinical and economic Business Planning /data to demonstrate utility and the adoption of new technologies. ReportingHeading into 2012, key macro indicators remain largely negative. • US real GDP growth is still struggling • Consumer confidence (which is correlated to physician office visits) is showing improvement but off historic lows • Still high unemployment 8
  9. 9. II. Recent Transactions Summary 9
  10. 10. MedTech M&A OverviewConsolidation is expected to draw interest in smaller M&A candidates, particularly in the more highlyfragmented extremities market. The 10-year average EV / sales and EV / EBITDA multiples are 4x and 19x,respectively. The average premium paid has been nearly 50%. Average Average Average 30 Total Deal Average Deal Number of EV / Sales EV / EBITDA Day Deal Value (In Value (In Number of Deals >$1 Year Multiple Multiple Premium Billions) Millions) Deals Billion 2011 3.41x 12.5x 54% $47.0 $1,344 35 6 2010 4.53x 23.4x 55% $14.1 $370 38 4 2009 2.85x 14.6x 118% $10.6 $462 23 2 2008 3.76x 21.3x 51% $37.0 $1,193 31 6 2007 4.03x 24.5x 41% $45.0 $1,124 40 12 2006 5.81x 14.8x 37% $44.5 $1,483 30 7 2005 4.38x 26.6x Business 42% $37.8 $1,990 19 4 2004 4.82x 18.3x Planning / 20% $35.5 $1,774 20 6 2003 3.08x 12.7x Reporting 63% $18.1 $1,062 17 3 2002 2.55x 12.0x 38% $2.3 $208 11 0 2001 4.56x 22.1x 21% $20.7 $1,091 19 4 10-yr 4.04x 19.0x 48% $26.7 $1,076 25 5 Average Source: BMO Capital Markets 10
  11. 11. Select Med Device Transactions EV Target Target (In Sales (In EBITDA EV / EV / Date Target Buyer Target Description Millions) Millions) Margin Sales EBITDA11/4/2011 KCI Private Equity Wound care and $5,793 $2,055 31% 2.7x 8.5x regenerative medicine9/23/2011 Ascension Integra Provides orthopedic devices $67 $19 n/a 3.5x n/a Orthopedics LifeSciences for the hand, upper extremity, and foot8/31/2011 Salient Surgical Medtronic Devices and tools for $496 $100 n/a 5.0x n/a surgical procedures8/31/2011 PEAK Surgical Medtronic Surgical tools and tissue $118 $20 n/a 5.9x n/a dissection for physicians8/31/2011 Cocentric Stryker Minimally invasive surgery $135 $30 n/a 4.5x n/a Medical6/6/2011 Memometal Stryker Extremities implants $162 $30 n/a 5.4x n/a Technologies5/23/2011 SeaSpine Integra Business Orthopedic trauma and $89 $50 n/a 1.8x n/a LifeSciences spine Planning / products4/27/2011 Synthes J&J Reporting Orthopedic trauma and $19,300 $3,758 43% 5.2x 12.1x spine products12/21/2010 Beijing Zimmer Artificial joints in China $50 $9 n/a 5.5x n/a Montagne8/25/2010 Gaymar Stryker Patient temp and ulcer $151 $77 n/a 2.0x n/a devicesSource: Capital IQ, Inc. and Pitchbook 11
  12. 12. Select Med Device Transactions Target Target EV (In Sales (In EBITDA EV / EV / Date Target Buyer Target Description Millions) Millions) Margin Sales EBITDA10/16/2008 Abbott Spine Zimmer Devices for neck and back $360 $109 n/a 3.3x n/a8/1/2008 Theken Spine Integra Spinal fixation devices $186 $35 18% 5.3x 30.3x LifeSciences11/2/2007 Kyphon Medtronic Spinal fracture devices $3,953 $488 20% 6.4x 28.7x9/25/2007 Biomet Private Equity Orthopedic reconstruction $11,271 $2,107 28% 4.9x 13.6x5/31/2007 PLUS Smith & Orthopedic reconstruction $708 $300 n/a 3.0x n/a Orthopedics Nephew Averages $2,856 $612 28% 4.3x 18.6x Business Planning / Upper Quartile $2,331 $394 31% 5.4x 28.7x Reporting Lower Quartile $127 $30 20% 3.2x 12.1xSource: Capital IQ, Inc. and Pitchbook 12
  13. 13. III. Comparable Public Companies 13
  14. 14. Comparable Public CompaniesThere are very few, if any, directly comparable companies with pure focus on the extremities market.Most of the large orthopedic companies focus in the hip, knee, and spine areas. Tornier is the closestto a pure play extremities company and is also one of the smaller companies in the group. Company Main Product Focus Johnson & Johnson (DePuy, Synthes) Reconstruction (large joint) Stryker Reconstruction (large joint) Zimmer Reconstruction (large joint) Smith & Nephew Reconstruction (large joint) Tornier Extremities Integra LifeSciences Extremities, spine, neuroscience Wright Medical Reconstruction (hip, knee, extremity) 14
  15. 15. Public Companies Key Stats Public Company Comparables Financial Information In Millions of Shares and U.S. Dollars, Except Stock Price 4/9/2012 Market Value Add: Add: Price Shares of Equity Total Noncontrol. Enterprise Company Per Share Outstanding ("MVE") Net Debt Int. in Subs. Value ("EV")1 Johnson & Johnson (NYSE:JNJ) $ 65.34 2,745.3 $ 179,379.9 $ (12,634.0) - $ 166,745.92 Stryker Corp. (NYSE:SYK) 55.03 381.3 20,980.7 (1,650.0) - 19,330.73 Zimmer Holdings, Inc. (NYSE:ZMH) 64.72 177.2 11,468.4 495.5 7.6 11,971.54 Smith & Nephew plc (LSE:SN.) 9.76 896.2 8,746.4 138.0 - 8,884.45 Tornier N.V. (NasdaqGS:TRNX) 24.99 39.3 982.4 (14.8) - 967.66 Integra LifeSciences Holdings Corporation (NasdaqGS:IART) 33.83 26.9 909.4 435.5 - 1,344.97 Wright Medical Group Inc. (NasdaqGS:WMGI) 19.01 38.3 727.7 8.1 - 735.8 LTM NTM LTM EBITDA NFY EBITDA Company Revenue Revenue LTM EBITDA NTM EBITDA Margin Margin8 Johnson & Johnson (NYSE:JNJ) $ 65,030.0 $ 67,487.3 $ 19,398.0 $ 21,299.2 29.8% 31.6%9 Stryker Corp. (NYSE:SYK) 8,307.0 8,672.6 2,452.0 2,544.4 29.5% 29.3%10 Zimmer Holdings, Inc. (NYSE:ZMH) 4,451.8 4,537.8 1,470.6 1,674.7 33.0% 36.9%11 Smith & Nephew plc (LSE:SN.) 4,270.0 4,305.9 1,191.0 1,259.9 27.9% 29.3%12 Tornier N.V. (NasdaqGS:TRNX) 261.2 282.1 22.1 37.9 8.5% 13.4%13 Integra LifeSciences Holdings Corporation (NasdaqGS:IART) 780.1 827.2 158.1 169.4 20.3% 20.5%14 Wright Medical Group Inc. (NasdaqGS:WMGI) 512.9 483.0 64.6 69.5 12.6% 14.4%15 Low Quartile $ 646.5 $ 655.1 $ 111.4 $ 119.5 16.4% 17.4%16 Median 4,270.0 4,305.9 1,191.0 1,259.9 27.9% 29.3%17 Upper Quartile 6,379.4 6,605.2 1,961.3 2,109.6 29.7% 30.4% Source: Capital IQ, Inc. 15
  16. 16. Public Companies MultiplesThe companies are generally trading within a range of 2-3x revenue and 8-9x EBITDA.Tornier, the most pure play extremities company, trades at the high end of the range at over 3xrevenue, given its focus on a more attractive extremities market Public Company Comparables Multiples EV / LTM EV / NTM EV / LTM EV / NTM Company Revenue Revenue EBITDA EBITDA 1 Johnson & Johnson (NYSE:JNJ) 2.56x 2.47x 8.6x 7.8x 2 Stryker Corp. (NYSE:SYK) 2.33x 2.23x 7.9x 7.6x 3 Zimmer Holdings, Inc. (NYSE:ZMH) 2.69x 2.64x 8.1x 7.1x 4 Smith & Nephew plc (LSE:SN.) 2.08x 2.06x 7.5x 7.1x 5 Tornier N.V. (NasdaqGS:TRNX) 3.70x 3.43x nmf nmf 6 Wright Medical Group Inc. (NasdaqGS:WMGI) 1.43x 1.52x 11.4x 10.6x 7 Integra LifeSciences Holdings Corporation (NasdaqGS:IART) 1.72x 1.63x 8.5x 7.9x 8 Low Quartile 1.90x 1.84x 7.9x 7.3x 9 Median 2.33x 2.23x 8.3x 7.7x 10 Upper Quartile 2.63x 2.55x 8.6x 7.9x Source: Capital IQ, Inc. 16
  17. 17. Public Companies MultiplesMultiples in the orthopedic sector have compressed over the last several years, mainly due to slowinggrowth in hip, knee, and spine area (there is still growth in the extremities market) combined with theweak macroeconomy and structural changes in healthcare Med Tech Index 4.00x 3.50x 3.00x 2.50x 2.00x 1.50x The index is comprised of the seven companies included herein Source: Capital IQ, Inc. 17
  18. 18. Public Companies Share PricesThe S&P 500 is up over 15% during the last six months, while the orthopedic device companies aregenerally flat, which suggests an uncertain near term outlook. 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% -5.00% -10.00% Med Tech Index S&P 500 The index is comprised of the seven companies included herein Source: Capital IQ, Inc. 18
  19. 19. Historical Merger PremiumsMergerstat Review 2011 also breaks down acquisition premiums by industry classification. Thepremiums in the drugs, medical supplies and equipment industry ranged from 39% to 78% witha median premium of 54% (which is essentially in-line with the 10-year premium of 48%discussed in Section II) as follows: Number of Median Survey Year Deals Premium 2006 29 51.6% 2007 38 39.1% 2008 46 78.7% 2009 30 56.2% 2010 37 54.0% Source: Mergerstat Review 2011 19
  20. 20. IV. Extremities Market Multiple Conclusion 20
  21. 21. Extremities Market Multiple ConclusionsApproach Revenue EBITDA Extremities market Multiple Multiple attractive growthM&A Transactions prospects should result in a premium valuation, in- 10-Year Average 4.0x 19.0x line with Tornier and the upper quartile of our Select Deals – Average 4.3x 18.6x select M&A transactions Select Deals – Upper Quartile 5.4x 28.7x or roughly 4-6x revenuePublic Companies (No Acquisition Premium) Average 2.3x 8.3x Upper Quartile 2.6x 8.6x Business Tornier 3.7x nmf Planning / ReportingPublic Companies (Including Implied Acquisition Premium of 50%) Average 3.5x 12.5x Upper Quartile 3.9x 12.9x Tornier 5.6x Nmf 21
  22. 22. V. Carleton McKenna 22
  23. 23. Carleton McKenna Overview• For more than thirty years, Carleton McKenna & Company and its predecessor firms have been providing merger and acquisition advisory, capital raising and valuation services for small to mid-cap regional clients – both public and private – with expertise across a broad array of industries. Merger & Acquisition Capital Raising Services Valuation Services Advisory Carleton McKenna specializes in Carleton McKenna assists clients in Carleton McKenna provides providing M & A Advisory services to capital raising to support plans to grow, objective and comprehensive small- and mid-cap clients, including consummate acquisitions, address valuations for complex both public and privately-held shareholder liquidity or effectuate engagements. Our transactional businesses. Our experience shareholder recapitalizations. Capital experience and industry encompasses a broad array of alternatives include private equity, expertise allow us to add industries with diverse transaction senior debt and mezzanine/ substantial value in achieving the structures typically less than $100 subordinated debt. Funding sources strategic and financial million in value. include high net worth individuals, goals of our clients. venture capital funds, mezzanine lenders and commercial banks. 23
  24. 24. Carleton McKenna Overview Why Us? Experienced Carleton McKenna’s thirty-plus years in the investment banking industry enable us to deliver unbiased, strategic advice and capital solutions. Our principals have held positions as founders, presidents, board members and investors providing us the experience necessary to manage and execute complex financial transactions. Entrepreneurial As a regional boutique firm, Carleton McKenna enjoys a creative entrepreneurial spirit unencumbered by the bureaucracies inherent in larger investment banks. Our independence allows us to remain free from potential conflicts of interest, therefore, benefiting our clients. Client Focused Carleton McKenna’s principals share a common vision based on dedication, loyalty and trust empowering us to serve our clients with uncompromised integrity and professionalism. 24
  25. 25. Carleton McKenna Overview Industries Served• Carleton McKenna concentrates its efforts on serving corporate clients in seven primary sectors: Health Care IT & Software Materials Industrials Consumer Products Commercial & Clean Tech & Retail Professional Services 25