Playing the mix-and-match merger and acquisition game is a favorite pastime of bored med-tech analysts everywhere, and it doesn't hurt that the combination of below-average deal activity in 2012 and the advent of the medical device excise tax in 2013 point to more deals on the way. Today, though, I wonder whether or not a large med-tech company will step up and acquire privately-held Dune Medical and its potentially revolutionary MarginProbe cancer detection system.
Getting It Right The First Time
Dune Medical's MarginProbe uses RF spectroscopy to assess the electromagnetic signature of cells and detect cancerous cells. This ought to be invaluable in breast cancer lumpectomy procedures, as doctors want to make sure there is a "negative margin" - meaning that there are no cancer cells at the outer edge of the tissue. If cancerous cells remain, they will most likely proliferate and the patient will have to undergo further procedures or treatment (and leaves cancerous cells behind runs the risk of the cancer spreading).
So far, the MarginProbe looks like an impressive step forward. A 664-patient pivotal study showed the system to be three times more effective than traditional intra-operative imaging and palpation in detecting cancerous cells. What's more, a 300-patient "real world" study in Israel showed a 56% reduction in re-operations (30% to 50% of lumpectomies require re-operations, costing many thousands of dollars, to say nothing of the risk, stress, and pain to the patient).
With this impressive data, Dune Medical got a 10-1 positive panel vote back in 2012 and final FDA approval this year.
A Good Device, A Good Market, And A Good Model
There are approximately 150,000 lumpectomies per year in the United States, and while data are sparse on the exact breakdown of primary/follow-up surgeries, I would estimate that somewhere between 100,000 and 120,000 of these are primary surgeries. While lumpectomies are more common in Europe, I'll be more conservative with the addressable market numbers and estimate a total North America/Western Europe patient population of 250,000 per year.
MarginProbe uses a familiar and popular model in med-tech - there is a fixed console that is used over and over again and a disposable probe. I've seen estimates that Dune Medical will sell the system at a per-procedure ASP of $2,000 - suggesting a total addressable market of $500 million a year.
For a variety of reasons, I believe this will prove a popular device that gets solid adoption and reimbursement - follow-up procedures start at $7,000 and the costs of recurrent breast cancer can easily soar into the six figures (to say nothing of the pain, risk, and trauma to the patient from avoidable/preventable follow-up procedures). What's more, the device takes five minutes or less to use and it is not complicated or difficult - making it easy to factor into existing protocols.
Last and not least, it looks like there are follow-on applications for the technology. Dune Medical has already conducted a small-scale study that suggests the technology works in prostate cancer. A similar indication for prostate cancer would roughly double the addressable market, though it's worth noting that Intuitive Surgical (ISRG) has been seeing some slowdowns in the number of prostatectomy procedures. In addition to breast and prostate cancer, I would think that the MarginProbe technology could also be put into service in a variety of other solid/soft tumor applications.
So, Who Makes The Bid?
As it stands today, Dune Medical has stated its intention to remain independent and market the MarginProbe system on its own. With all due respect to Dune Medical management, though, I suspect that the company is more likely to sell than to remain independent for the long term. Accordingly, who might step up to buy?
Bard (BCR) would be a likely candidate, given its existing business in breast health (including biopsy tools). Bard's biopsy business SenoRx was annualizing at about $50 million in revenue when it was bought in 2010 and that $500 million addressable market (on just the breast surgery indication) would be represent about 17% of Bard's current revenue base. To my mind, that makes it a highly digestible "tuck-in" deal, and one where the disposable component would likely fit in well from a margin standpoint, with the incremental revenue flowing to the bottom line.
Likewise, I would think Covidien (COV) would be a very logical interested party. Dune Medical would be a much smaller deal for the much larger Covidien, but the margins would likely represent an incremental improvement, and Covidien has shown in recent years that it is more than willing to buy small, promising growth products/technologies.
Last and not least, MarginProbe's status as a breast health diagnostic device would seem to be a natural fit for Hologic (HOLX), as well potentially for other breast diagnostic/imaging companies like General Electric (GE), Siemens (SI), and Philips (PHG). Suffice it to say, I don't think a dearth of bidders is going to be a problem. For Hologic, Dune Medical would slot in right along side its mammography and biopsy tools business, and with Hologic's breast health business bringing in about $572 million a year, it could be a worthwhile contributor in both revenue and margin terms.
For the sake of completeness, Medtronic (MDT) could also come into the picture, given the company's acquisition of Peak Surgical a little while back, and though Cooper (COO) has focused more on the ob/gyn market it wouldn't be a ridiculous potential bidder. For Cooper, though, this could potentially represent a sizable expansion of its device business given that it has been annualizing revenue at a little more than $300 million.
Clearly it's speculative to assert that Dune Medical will sell out, and the price of such a deal is likewise highly speculative. Nevertheless, 20% market penetration by 2018 would support a $250 million to $300 million valuation today, while the assumption of one-third penetration could lift the value to close to $500 million. For what it's worth, Japanese medical device company Sysmex has been rumored to have pursued Dune Medical prior to FDA approval, with the estimated bid in the neighborhood of $200 million.
The Bottom Line
While Dune Medical is not a must-have for any of these large med-tech companies, the reality is that there aren't too many products out there today with half-billion dollar potential and a clear edge on conventional/rival therapies. For both Bard and Hologic, Dune Medical would represent an attractive long-term asset with real synergies, even though it would likely take a few years for the deal to pay off (no product fully ramps up overnight). Given this sector's need for growth and the obvious positives of marketing a device that delivers both improved real-world patient outcomes and cost-efficacy, I would be surprised if the phones at Dune Medical aren't already ringing these days.