Pulse of the industry

Building value through creative deal structures

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Steven Dyson
Health Care Partner
Apax Partners

It is an exciting time for private equity investors looking at medtech. The industry continues to grow and evolve thanks to technological advances transforming how health care is delivered and paid for. While we have seen an abundance of M&A activity in recent years, more recently, private equity has often been outbid by corporate buyers demonstrating a willingness to pay premium prices, particularly for those medtech assets enjoying high revenue growth.

At Apax Partners, a leading global private equity advisory firm, we see a number of diverse and interesting investment opportunities, but are mindful of record-high valuations. We believe it’s important to seek out niche opportunities off the beaten path to execute investments at reasonable valuations. To do this, we think creatively around deal sourcing and how transactions can be structured to reduce competition.

For example, this could include looking at product niches less popular with corporate buyers or assets that are not currently growing very fast, but have the potential to do so in the future. Indeed, the ability to create more complicated deal structures, such as carve-outs from a parent company or joint ventures, can create a unique angle.

Often, divesting non-core assets via so-called carve-outs isn’t the highest priority for a seller as it is easier to sell the asset to another corporate buyer. In some cases that is because the assets don’t generate enough revenue to justify the effort to create a new stand-alone company.

You need a certain amount of scale to build a viable commercial entity, particularly in the current environment where category leadership is important. In other cases, it is simply easier to sell products or entire product lines to another company if the synergistic fit is good.

Sometimes a joint venture is the best option for all parties. This was the case when funds advised by Apax (“Apax Funds”) partnered with Becton Dickinson to create Vyaire Medical. In 2015, when Becton Dickinson completed its acquisition of CareFusion, it inherited a Respiratory Solutions business with a global footprint of approximately 5,000 employees and a product portfolio including diagnostics, ventilation products, patient monitoring services and anesthesia.

Embracing complexity to create value

Even though the Respiratory Solutions business earned around $800 million in annual revenue with value creation potential, its therapeutic focus wasn’t a priority for Becton Dickinson. They believed generating new growth was going to require significant investment which they weren’t in a position to make due to their focus on integrating other parts of the CareFusion business. At Apax, we saw an opportunity to reposition the Respiratory Solutions business as a stand-alone company through a joint venture in which Apax Funds acquired 50.1% and Becton Dickinson retained 49.9%. The business was later renamed Vyaire Medical.

In a carve-out, business functions such as HR, finance, legal and quality management departments have to be rebuilt from scratch. This requires a lot of engagement from the owner divesting the assets, as well as the new company itself, and can often lead to mixed success. With a traditional sale, the parent can often lose interest at a critical time.

In the instance of Vyaire, because Becton Dickinson retained an equity stake and a seat on Vyaire Medical’s board, it had a greater understanding of the ongoing operational issues and was incentivized to share in the future value creation.

The joint venture ownership model for Vyaire works for all parties. For the company itself, its independence from a parent allows strategic focus and the ability to attract the best managerial talent. For Becton Dickinson, its minority ownership provides participation in future growth. And, for Apax Funds, its investment and health care experience strengthens Vyaire’s position as a leading global player, enabling us to back a business with an exciting future.

This article is excerpted from our annual report, Pulse of the industry: Medical technology report 2017. Download the pdf for more from our report, including these featured guest articles: