Aesthetic Medical Device Market, February 2011

Aesthetic medical devices are used in body contouring, dermal tightening, dermal resurfacing, acne prevention, the reduction of skin pigmentation blemishes, and age related vascular/dermal lesions as well as hair removal.

These procedures use a wide array of devices which include microdermal abraders, dermal lasers, light emitting diodes (LEDs) and intense pulsed light. Additionally, a large portion of the industry’s revenue is derived from implants and fillers used in cosmetic surgeries which typically see an uptick in sales when consumer discretionary spending increases.

In 2009, the United States spent $10 billion on aesthetic treatments which represented a 23% drop from the 2007 total of $13 billion. With the US economy starting to show signs of recovery from the financial crisis and with the aging baby boomer population, US spending on aesthetic treatments in 2011 is expected to increase from the 2009 levels.

Article on Recovery of Healthcare M&A References Brocair Partners

Clean Bill of Health

The Deal
by Thomas Zadvydas
Updated 02:07 PM, Dec-10-2010 ET

M&A activity has recovered from a two-year decline, and the healthcare industry is a driving force of the revival.

There have been 1,037 healthcare mergers announced year to date, according to a November M&A report from William Blair & Co. LLC, topped only by the computer and electronics (1,993) and business services (1,287) sectors.

The industry’s prominent return to the auction tables is a result of several conspiring factors. For starters, drastic healthcare reform in the U.S., coupled with uncertainty for much of the year about potential changes in the country’s tax code, have cast a pall over the biotechnology and pharmaceutical industries, pushing many companies to seek deals in order to adapt to an amorphous landscape. At the same time, looming patent expirations for compounds are driving many companies to go hunting for targets to fill holes in their pipeline. All of this is happening in a market still recovering from the worst economic downturn since the 1930s, leaving valuations restrained and obscured.

“We continue to see a lot of consolidation; you’re seeing big companies like Amgen Inc., Pfizer Inc., Johnson & Johnson to be actively looking in the market,” says Jones Day life sciences partner Jonn Beeson.

One driving factor is the pending loss of patent exclusivity on key drugs for many pharmaceutical companies. IMS Health Inc., which collects marketing data for the pharmaceutical and healthcare industries, says that more than three dozen drugs that produce about $137 billion in annual revenue are expected by 2013 to fall off the patent cliff, an apocalyptic term the industry uses to describe the coming end to the brand-name exclusivity that laws across the world grant their medications.

Pfizer is one big pharmaceutical company grappling with this issue.

“Everybody knows Lipitor is one of Pfizer’s biggest products. It’s a blockbuster [drug] and they’re losing patent protection soon,” says Gregg Blake, a managing partner at healthcare investment bank Brocair Partners LLC. “They’re buying King Pharmaceuticals Inc. in order to bring in a bunch of new products and also diversify a little. King has a drug delivery business with injectibles and also an animal health business.”

Lipitor, which generated $13 billion in sales in 2009, falls off the patent cliff at the end of November 2011. Blake explains that sales of a drug can crater by as much as 90% in a year after a patent is lost and generic alternatives enter the market.

Pfizer announced an agreement on Oct. 12 to buy Bristol, Tenn.-based King Pharmaceuticals for $3.6 billion cash. About one week later, on Oct. 20, the New York pharma bought a 40% stake in Brazil’s Laboratório Teuto Brasileiro SA for $240 million in an effort to expand its presence in both an emerging economy and the generic drugs market. Meanwhile, Pfizer has also placed its Capsugel hard capsules unit on the auction block, a move that could portend other noncore divestitures by the conglomerate, analysts say.

“They’ve made a big strategic move into generics over the last 20 years,” says Blake of Pfizer. “A lot of other big pharmaceutical companies are diversifying that way too.”

Adding drugs new to the market, or even drugs in the late stages of development, through acquisitions also allows pharmaceutical companies to sidestep the long and arduous process of developing drugs from scratch, a costly undertaking that can take years, with no guarantee that the drug will ever reach the market, let alone become a financial success.

“At the end of the day, pharmaceutical companies are finding that it is cheaper to buy than to just research,” says Alden Philbrick, chief executive of Oxford Finance Corp.

Gregory B. Brown, a managing director at Cowen Healthcare Royalty Partners, a healthcare private equity firm affiliated with Cowen Group Inc., agrees, adding that many pharmaceutical companies face increasing shareholder pressure to find cheaper, safer, alternatives.

“It’s an industry that has been acculturated or accustomed to taking capital that’s generated from product revenue and plowing it back into research, but shareholders today are saying, ‘Wait a minute, there may be a better way,’ ” Brown says, referring to the increase in M&A.

Expanding drug offerings via M&A to appease shareholders is no sure bet, of course. Consider the plight of San Diego-based Cypress Bioscience Inc., which in September put itself up for sale after rejecting a sweetened $4.25 per share bid from shareholder Ramius Value & Opportunity Acquisition LLC. The affiliate of New York hedge fund Ramius LLC, a 9.9% shareholder, on July 19 offered $4 per share, then a 60% premium over Cypress’ share price, complaining that management had destroyed the drugmaker’s shareholder value. Specifically, Ramius deemed Cypress’ purchase of Proprius Pharmaceuticals Inc. “a complete failure,” one that cost the company $40 million while generating less than $600,000 in revenue. Lagging drug production at Cypress was also a concern of Ramius. Two days before rejecting the hedge fund’s first bid, Cypress said it would discontinue its co-promotion of the Savella drug with partner Forest Laboratories Inc. (Ramius raised its bid for Cypress to $5.50 per share on Friday.)

Brocair Partners Advises Public Pharmaceutical Intermediates Company on Sale to Strategic Buyer

Brocair Partners LLC, an investment bank serving the healthcare industry, advised Synthetech, Inc. (OTCBB:NZYM) in the sale to W. R. Grace & Co. (NYSE:GRA)

NEW YORK, NY – November 18, 2010 – Brocair Partners LLC, an investment banking firm serving the healthcare industry, advised Synthetech, Inc. (OTCBB:NZYM), a U.S. public company, in the sale to W.R. Grace & Co., (NYSE:GRA) based in Maryland. In addition, Brocair also issued a fairness opinion to the Special Committee of the Board of Directors of Synthetech.

Grace acquired Synthetech from shareholders for an aggregate purchase price of $19.2 million. The transaction closed November 18, 2010. Synthetech will be integrated into Grace Davison’s Specialty Technologies business and become a wholly owned subsidiary of Grace.

Rusty Ray, Partner at Brocair, explained, “This has been a transformative transaction for our client, Synthetech, and provides the company with a tremendous advantage that comes with being part of a larger entity.”

On June 28, Synthetech Inc. announced that it had engaged Brocair Partners LLC to conduct a comprehensive review of strategic alternatives aimed at enhancing shareholder value. Strategic alternatives Synthetech considered included, among others, the execution of Synthetech’s operating plan, the sale or acquisition of assets or businesses, partnering or other collaboration agreements or arrangements, a merger or sale of the company or other strategic transactions.

“We worked with the Board of Synthetech to explore options to create shareholder value,” explained Gregg Blake, Managing Partner at Brocair. “In the end the transaction with Grace delivered value for shareholders, and a significant premium over Synthetech’s recent trading range.”

The definitive merger agreement was announced on September 14.

Synthetech, Inc., a fine chemicals company, specializes in organic synthesis, biocatalysis, and chiral technologies. The company develops and manufactures proprietary custom chiral intermediates, amino acid derivatives, specialty amino acids, peptide fragments, and specialty resins primarily for the pharmaceutical industry, as well as produces pharmaceutical intermediates. Synthetech’s products are used in the development and manufacture of therapeutic peptides and peptidomimetic small molecule drugs at various stages of a customer’s clinical development pipeline, and are used as ingredients in drugs for the treatment of AIDS, cancer, cardiovascular, and other diseases. The company was founded in 1981 and is headquartered in Albany, Oregon.

Grace is a leading global supplier of catalysts and other products to petroleum refiners; catalysts for the manufacture of plastics; silica-based engineered and specialty materials for a wide range of industrial applications; sealants and coatings for food and beverage packaging, and specialty chemicals, additives and building materials for commercial and residential construction. Founded in 1854, Grace has operations in over 40 countries.

Brocair Partners Quoted in Article on Medical Device Industry

Spare Parts Inc.

The Deal
by Thomas Zadvydas
Updated 12:48 PM, Nov-12-2010 ET

Despite political uncertainty over the fate of healthcare reform, the medical device business keeps chugging along. The sector has seen almost 20 deals since President Obama signed healthcare legislation into law March 24. According to the Advanced Medical Technology Association, America’s medical device sector, or medtech, produced about $136 billion in products in 2008, the last year for which data is available, a 21% increase over 2005.

Healthcare boutique Walden Group Inc. of Tarrytown N.Y., reported 55 medtech deals over the first six months of 2010, compared with 12 in the same period in 2009.

Medtech has long been a rich vein of M&A — though not for private equity. “Traditionally, strategics have dominated M&A, and having a private equity player come in is significantly rarer than in other industries,” says Goodwin Procter LLP partner Raymond Zemlin. “Strategics tend to be willing to pay more because they see synergies. You don’t have to add a whole new sales force.”

The industry is diverse, high tech and highly regulated. Funding for startups, often based on innovations from academia or research hospitals, is relatively abundant, and capital costs are high — but not nearly as high as for, say, biotech. The big strategics then sort through emerging companies and acquire regularly.

Currently, cardiovascular and orthopedics look particularly attractive to big players — Medtronic Inc., Boston Scientific Corp., Johnson & Johnson, Abbott Laboratories , Cardinal Health Inc. and European players Covidien plc, and Roche Holding Ltd.–which have either struck deals or are on the prowl, utilizing large cash hoards amassed during the downturn and fueled by 78.2 million aging baby boomers. “People are getting older, they need new hips, new knees, new backs,” says Zemlin.

Another factor: a 2.3% excise tax taken from the sales of any instrument, apparatus, implement or machine intended to affect the structure or any function of the body or diagnose or treat disease, according to a definition from the Federal Food, Drug, and Cosmetic Act. The levy is designed to generate $20 billion over a decade to help fund healthcare reform. The tax takes effect in 2013, and companies are rethinking strategy because of it, including M&A, say observers.

Valuations remain relatively healthy, say bankers. “I think 10 times to even low teens in terms of [Ebitda] multiples are things we’ve seen,” says Rusty Ray of healthcare investment bank Brocair Partners LLC.

“For your Ebitda-based businesses that actually produce positive cash flow, I think 10 times is probably a better estimate; in the peak of the market it was more 12, 13, 14 times,” says Leerink Swann LLC healthcare banker Adam Berger. Data from HT Capital Advisors LLC reported Ebitda multiples as high as 20.9 times in early 2008. Of course, says Berger, “there are medtech companies that don’t make any money. They’re more revenue multiples. It’s highly variable, but typically those are probably 5 times revenues.”

One of the biggest medtechs is Minneapolis-based Medtronic, which on April 30 grabbed local heart valve and cardiovascular device maker ATS Medical Inc. for $370 million. It retains a sizable cash hoard: $1.3 billion as of July 30, according to a Sept. 8 10-Q. Four months later it snatched up Eatontown, N.J., bone-grafting materials manufacturer Osteotech Inc. for $123 million.

Medtronic has 20% of the world’s heart valve market and wants to expand into tissue valves, an ATS product, says analyst Ernest Andberg of Feltl and Co. Tissue valves have a global market of $800 million to $900 million. “It gives [ATS] more feet on the street and really solid financial backing to expand,” Andberg says.

ATS reported $37.6 million in net sales for the six months ended July 3, compared with $38.1 million for the prior-year period. Its $10.3 million operating loss amounts to 27.5% of sales.

Medtronic’s ATS deal builds on three prior transactions: the February 2009 acquisition of Ventor Technologies Ltd. for $325 million, the $700 million deal for CoreValve Inc. two months later and the purchase of Italy’s Invatec SpA, which develops heart disease treatments, for up to $500 million in January 2010.

Medtronic bought Osteotech to beef up its bone-healing franchise. Osteotech had tapped Deutsche Bank Securities Inc. for a strategic review after its stock hit a 52-week low. Osteotech reported a $1.4 million loss on $46.5 million in revenue for the six months ended June 30, compared with a $3 million loss on $47.4 million for the same period last year. Its $3.1 million in Ebitda for 2009 was down 63% from a year earlier. Analyst Matt Dolan of Roth Capital Partners LLC believes the target was on the block for at least a year, though the company would not confirm this. “Osteo[tech] was trying to break even for the year. With Medtronic they’ll be able to eliminate a lot of redundant costs,” he says.

These are not unusual stories in medtech. Will dealmaking continue? “I think 2011 will be a better year, there will be more M&A activity, but it’s still going to be choppy,” says Zemlin. “I know companies, some of my clients included, certainly hope that we haven’t heard the last word on the device tax.”

CRO Market, July 2010

Contract research organizations, also referred to as clinical research organizations, or CROs, provide a wide range of outsourced pharmaceutical research services to the pharmaceutical and biotech industry to aid in the drug and medical device research and development process.

Services offered by CROs include product development and formulation, clinical trial management (from pre-clinical through phase IV), central laboratory services for processing trial samples, data management services for preparation of a FDA New Drug Application or an Abbreviated New Drug Application, and other complementary services.

Despite continued consolidation in the industry, it is estimated that there are over 1,100 CROs worldwide. The key growth drivers of the CRO industry are: 1) the increasing complexity of clinical trials, which require more time and staff, 2) an increasing amount of data required from clinical trials for regulatory review that must be managed effectively, and 3) the multinational and multi-center nature of current clinical trials.

Behavioral and Mental Health Services Report, May 2010

This report covers two similar markets, each of which has some distinct characteristics. The first market is Mental Health and Substance Abuse services. The second is Mental Disability services. We have chosen to incorporate both in this research piece due to their similarities, and because firms frequently compete in both areas. In both markets, there is high participation by government and non-profit service providers.

The mental health and substance abuse industry is growing in response to both an increased awareness of the diseases, along with a growing de-stigmatization of treatment. It is estimated that in 2010 the industry will generate roughly $11.9 billion in revenue, which will be a 6.4% increase over 2009. Over the next five years, industry revenue is forecasted to grow by 4.1% annually with revenue in 2015 projected between $14.0 and $15.0 billion.

Mental health and substance abuse treatment services are delivered in a variety of settings. Residential care is around-the-clock care to patients living in the facility. These facilities can also include group homes (or halfway houses) and centers for the rehabilitation of substance abusers, which can include the supply of methadone for reducing opiate dependency. Outpatient facilities deliver similar services, but treatment is less intensive, or is primarily directed toward follow up care and reinforcement. The most common illnesses treated are alcohol, cocaine and marijuana abuse, depression, anxiety, eating disorders, post-traumatic stress disorder, phobias, schizophrenia, obsessive-compulsive disorder, and bipolar disorders. Dementia can fall into this category, but is generally not included in the scope of this report.

The mental disability services industry comprises group homes, hospitals, and outpatient care facilities for the mentally handicapped and for patients with autism spectrum disorders. The mental retardation component of this market alone is estimated to generate $20.2 billion of revenue annually, and is expected to grow 3% annually.

Dental Products Market, January 2010

The dental products market encompasses products for the diagnosis, treatment and prevention of disease and ailments of the teeth, gums and supporting bone. Currently, there are nine recognized dental specialties in the U.S.: orthodontics, oral and maxillofacial surgery, pediatric dentistry, periodontics, prosthodontics, endodontics, dental public health, oral pathology, and oral and maxillofacial radiology.

In 2008, the U.S. total dental products and services spending reached $102.4 billion and is expected to grow at about 6 percent annually through 2017. The market has enjoyed a steady growth due to a number of facts, such as the growth in disposable income, an increased desire for aesthetics, a demographic shift towards an aging population and a desire to retain tooth structure later in life, as well as a greater utilization of dental preventive care.

The U.S. dental market structure consists of dentists and their practices, dental distribution companies as well as dental manufacturers. Currently, there are 120,000 office-based dental practices, which are supplied by dental distributors. The biggest dental products distributors in the U.S. include Henry Schein, Inc. and Patterson Companies, Inc. which account for approximately 40% and 32% of the market share respectively. The U.S. dental products manufacturer industry is more fragmented, with ten companies accounting for approximately 50% of market share.

In 2008, the global dental products market, excluding dental services, has reached almost $18 billion. The largest segment of the market is restorative and preventive dentistry, while the fastest growing segment in the global dental market is dental implantology. Even though current global economic conditions have impacted the growth of the dental implant market, the long-term growth of the implant industry is very robust. This segment is expected to grow at a compound annual growth rate of 16.3 percent in the U.S. from 2004 to 2014 and 13.7% in the E.U. from 2003 to 2013.

Non-Clinical Diagnostics Market, December 2009

This research report focuses on companies that provide non-clinical diagnostic products applicable to crop, environmental, food and beverage, industrial and livestock safety testing.

Crop safety testing encompasses all agricultural sectors including ornamental, vegetable, fruit and field crops. Companies specializing in this area develop and offer products for agricultural pathogen, genetically modified organism (GMO)/trait testing, as well as tests for plant hormones and proteins.

The global market for analytical testing associated with the water and environmental industries is estimated at $1.4 billion. The overall growth rate in developed markets is estimated at 2-3 percent, while the growth rate in developing markets, primarily Asia, is estimated at 7-9 percent. The biggest driver for growth is government regulations associated with water quality and environmental protection.

Food safety testing refers to examination of food products for disease causing organisms, chemical residues and other hazardous material. In 2007, the U.S. market for food safety testing was worth $2.1 billion and is expected to increase to over $2.8 billion by 2012, a compound average annual growth rate of 5.8 percent. Strong U.S. market growth is due to an increase in food production, corporate liability concerns, renewed federal efforts to eliminate food-borne illness outbreaks and increased regulation, as well as consumer food safety concerns.

The food safety testing market is broken down by type of target such as pathogens, genetically modified organisms (GMOs), toxins and residues. Pathogen testing represents the largest share of the U.S. market.

Brocair Participates in Life Sciences Panel at the German Consulate

Innovative Solutions to Challenges in Life Sciences Panel, October 7, 2009

Brocair Partners LLC, an investment banking firm serving the healthcare industry, yesterday participated in a panel at the networking event "Innovative Solutions to Challenges in Life Sciences", hosted by the German Consulate General and the State of Hessen U.S. Office for Economic Development in New York.

Members of the panel also included Dr. Christian Garbe, Managing Director of FIZ Frankfurt Biotechnology Innovation Center GmbH (FIZ); Dr. Scott Lauder, Global Head of Protein & Cell Sciences at EMD Serono, Inc. (a subsidiary of Merck KGaA); and Christian Scheiner, who represents the German Society for Regenerative Medicine e.V. in New York.

The event included the signing of "Memorandum of Understanding" between Dr. Nathan Tinker, Executive Director of New York Biotechnology Association, Inc. (NYBA), and Dr. Christian Garbe of FIZ to promote international business in biotechnology and to encourage companies to collaborate on joint projects.

Gregg Blake, Managing Director at Brocair Partners explained, "I think the panel was able to offer the audience an insight on new developments in the area of life science research as well as innovative ways to exchange ideas. An example of the successful business model of FIZ to cluster businesses under "one roof" and to provide them with ideal conditions for research and development was greatly admired by the audience. The discussions on global approaches to business development and corporate finance were very well received as well; the points addressed included advantages to cross-border acquisition and strategic sale opportunities, licensing and distribution opportunities, as well as opportunities to look for capital from overseas investors."

"It was a great opportunity to learn about the challenges companies face in biotechnology sector internationally and to encourage cross-border M&A transactions for strategic business development and greater synergies. It was a terrific venue to share those ideas with people representing various sectors."

Overview of the Hospice Care Market, October 2009

Hospice is a special concept of care designed to provide comfort and support to patients in the final phase of a terminal illness and to focus on comfort and quality of life, rather than cure. In 2007, an estimated 1.4 million patients received services in approximately 4,700 hospice care facilities across the U.S.

The U.S. market for hospice care totaled more than $13.7 billion in 2007 and is still growing due to rising patient utilization as well as annual price increases. It is projected that by 2012, total U.S. hospice revenues will exceed $23.3 billion. Currently, the U.S. hospice market is extremely fragmented, where some of the agencies focus exclusively on hospice care, while other nursing and home-care companies include hospice programs as part of their diverse operations.

In 2007, the average length of hospice service was 59.8 days and the average cost per patient totaled about $9,200. The sources of payments for hospice care include Medicare and Medicaid benefits, private insurance and self-pay. In 2007, the percentage of patients covered by Medicare and Medicaid was 83.6% and 5.0% respectively, indicating that the market is highly dependent upon government regulations and the level of participation in these programs.