Facing looming costs from the many lawsuits it faces over its faulty Avaulta surgical mesh, C. R. Bard's acquisition of Medafor with a $200 million up-front cash payment is an attempt to move into new, less hazardous areas. Medafor's flagship technology, Arista, is marketed as a way to aid blood clotting during surgery and is therefore not a world away from Bard's core strengths. With a jury yesterday awarding an Avaulta recipient $2 million in damages and more than 8,000 other claims yet to be heard, Bard needs a new source of revenue fast.
Bard will, of course, appeal yesterday's court decision and -- despite suggestions that staff at the company's Davol unit knew that the polypropylene used in some of its surgical meshes was not suitable for use in humans -- might well avoid paying the full $2 million. But much damage has already been done. In the second quarter of 2013, Bard's sales reached $498 million, 2% more than in the same period in 2012. Unfortunately, legal costs, including penalties from Avaulta lawsuits, wiped the company's profits out entirely and left it with a $162 million net loss.
Play to Its Strengths
Partly as a consequence of its legal worries, Bard has embarked on a programme of strategic change intended to allow it to focus on high-growth areas. It sold its electrophysiology business, which made $111 million in 2012, to Boston Scientific (NYSE:BSX) last month. The Medafor purchase, expected to close later this year, will see Bard pay investors in the Minnesota firm up to a further $80 million on the achievement of revenue-based milestones through to June 30, 2015. Bard says that the buy will increase revenue growth by around 1% next year, and will be slightly dilutive to adjusted earnings per share this year and neutral to 2014.
Medafor's technology is much closer to the areas in which Bard is already well known. Arista is a powder manufactured from potato starch, used to slow bleeding during surgery by aiding blood clotting. It is broken down by the body within 48 hours. It was granted pre-market approval in the U.S. in 2006 and has also been CE marked in Europe. Medafor has stated that the global market for surgical hemostats is worth more than $1.4 billion, but Arista is indicated for use after conventional means have failed or are impractical, so it is unlikely to address this whole opportunity.
It is too much to hope that Medafor's sales will make up for the money that Bard has lost, and will continue to lose, in its surgical mesh cases. Completing these sorts of deals will allow the company to play to its traditional strengths. Nevertheless, C. R. Bard is clearly in retreat.