Status Report: LifeCell - Kinetic Concepts

The purchase of LifeCell Corporation (LIFC) looks like a fairly routine acquisition by Kinetic Concepts Inc. (KCI) from a regulatory and timing standpoint, although the products/services involved certainly are not routine. LIFC is in the business of creating and selling human tissue repair/replacement products derived directly from human and animal soft tissue. This is obviously a relatively new industry in terms of public availability, and as such the markets for LIFC's products have not fully been established at this point. The company quite obviously competes with a variety of companies that offer a wide range of alternative approaches to soft tissue repair.

Listed in LIFC's annual report are the following competitors:

Our tissue matrix products compete with synthetic surgical mesh products marketed by such large medical device companies as Johnson Johnson; C.R. Bard; W.L. Gore Associates; and Integra Life Sciences Holdings Corporation. They also compete with animal-derived products marketed by companies such as C.R. Bard; Cook, Inc.; and Tissue Science Laboratories, plc. Two tissue processors, Musculoskeletal Transplant Foundation [“MTF] and Tutogen, distribute human tissue-based products that compete with our products. MTF distributes its products through a direct sales force and through Synthes, Inc. and Johnson Johnson. Tutogen distributes its products through C.R. Bard and Mentor.

Our AlloCraft DBM product competes with other similar bone repair products produced by companies such as Regeneration Technologies, Inc.; Osteotech, Inc.; AlloSource; Wright Medical Group; Isotis Orthobiologics; and MTF.

This is purely a vertical move for KIC, which specializes in wound and tissue repair and after care via non-living tissue processes. Although the products are somewhat similar in a broad sense, the companies respective products are quite different -- KIC does not offer living-tissue products -- and address different physical treatment areas. Even if the companies did actually have directly competing, overlapping niche products, this combination probably would not draw much regulatory interest due to the variety of alternatives currently on the market.

In short, KCI should be able to complete this transaction in well under 60 days, and probably very close to a 45-day time frame.

Disclosure: We have no positions of any kind, in any security. We are a completely neutral source of research and analysis.

Comments

[borisb]

Kinetic Concepts has saleforce strength of 1,500 people and may enjoy some extra success smartly widening the distribution of Lifecell's wound care tissues.

[MichiganChet]

This is a horrendous move from the standpoint of the KCI shareholder. There are very few cost synergies as I see it - and I am a physician who uses both products. The deal is partially funded by convertible debt, thus diluting shareholder value in both the short term - institutions often short the common when releasing debt in this form - and the long term as it caps the appreciation before the conversion kicks in.
All in all, a major mistake from an overpaid and inexperienced CEO, who still thinks it's the go-go 90's of healthcare.