Smith & Nephew (NYSE:SNN) has long been spoken of as a takeover target, but instead it has itself pounced on Healthpoint Biotherapeutics, a specialist in bioactive woundcare – the fastest-growing area in the wound management sector. The $782m acquisition, financed with a combination of existing cash and debt, allows S&N access to the $1bn biotherapeutics market. The deal ought to close this year -- S&N must pay an additional $10m if completion comes after December 31.
The privately held Healthpoint looks like a sensible purchase, with 2011 revenue of $151m and profit of $11m, as well as double-digit growth. The deal will double the size of S&N’s U.S. wound management operations, signalling a desire to build on its traditional bastion in Europe, where its woundcare business is the market leader. Nonetheless, the UK company’s shares fell 1.4% to 649.5p on the London stock exchange.
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Healthpoint’s biggest driver is Santyl, an ointment containing collagenase used to debride dermal ulcers and burns, in which, oddly enough, S&N formerly had an interest -- rights to 75% of Santyl revenue in a deal struck with its then-manufacturer, Abbott Laboratories (NYSE:ABT). S&N exited the deal in 2003 owing to manufacturing issues, “long since resolved in Healthpoint’s hands.”
Healthpoint's other products include Oasis, a family of leading acellular skin substitutes for venous leg ulcers and diabetic foot ulcers, and Regranex, a topical gel containing a growth factor for neuropathic foot ulcers in diabetics. S&N said the product portfolio should deliver growth at “a mid-teen percentage rate for the next few years.”
Healthpoint is expected to generate revenues of $190m in 2012, so at more than four times sales, S&N has paid a relatively high multiple, although this would be mitigated if the expected growth materialses.
Eventually, and gradually, Healthpoint will be integrated into S&N’s advanced wound management division. The company expects $20m in efficiency savings by 2015, but will spend $25m on aligning the two businesses. Healthpoint’s 460 employees, including a 215-strong sales force, will continue to be headquartered in Fort Worth, Texas.
Healthpoint’s lead product candidate, called HP802-247, is a cell-based therapy containing keratinocytes and fibroblasts and has started phase III trials for the treatment of venous leg ulcers. Launch is pencilled in for 2017.
Smith & Nephew will have to make a significant R&D investment in HP802-247, funding phase III and commercialisation over the next five years. It says it will spend $40-50m a year on Healthpoint’s R&D, an increase from $23m in 2011.
Bernstein analysts said that S&N’s investors would have to decide whether the company should be spending money on M&A or returning cash to shareholders. They noted that bioactive products lying somewhere between pharma and medtech, and a phase III candidate, are riskier elements than S&N’s shareholders might be used to.
At $782m, the deal is one of the top 10 M&As done this year so far – even if Baxter’s (NYSE:BAX) much hinted-at purchase of Gambro comes off in the next few weeks (2012 sees largest pure medtech buy for seven years, but value of deals slump 27%, October 29, 2012). Owing to the debt financing element and Healthpoint's marginal profitability, the acquisition will be neutral to S&N's earnings in 2013 and accretive in 2014 – though only very slightly, according to UBS analysts – with profitability accelerating thereafter.
According to EvaluateMedtech, the wound management sector was worth $12bn last year and, with an annual growth rate of 5%, is expected to reach $16bn in 2018. Smith & Nephew clearly believes that buying Healthpoint will enable it to outpace the market.