Integra Completes Takeover Of Covidien's Confluent Surgical Business
Espicom View: Continual modification of its portfolio is a dynamic strategy for Covidien; however, the company would be wise to step back and allow some of its newly acquired businesses to flourish, before it begins its next round of portfolio assessment. For Integra LifeSciences, the acquisition of a US$235mn business is significant for the mid-sized firm, and will allow the company to grow its neurosurgery segment at above-market rates.
Covidien has completed the sale of its Confluent Surgical business to Integra LifeSciences for approximately US$235mn in cash. In addition, Covidien may receive up to an additional US$30mn, contingent upon the achievement of certain performance measures related to the transition of the Confluent product line to Integra. The Confluent business consists of surgical sealants, adhesion barriers and, most importantly, DuraSeal sealant.
While Covidien expects this transaction to be several cents dilutive to FY2014 earnings per share, it also expects that the underlying strength of its existing businesses will offset this dilution. As a result, Covidien does not anticipate this transaction will have a material impact on its FY14 outlook.
According to Covidien, the completion of the transaction allows the company to better focus resources on its global strategic priorities. A substantial portion of the company's business strategy is focused on portfolio management, and Covidien periodically reviews its entire portfolio and considers the merits of de-emphasis or divestiture of under-performing or non-strategic product lines. The sale of the Confluent business allows Covidien to focus on its core endomechanical instruments and energy devices product lines, as well as its newly acquired businesses.
Most recently, in an effort to accelerate a key component of its emerging markets strategy, Covidien acquired WEM Equipamentos Eletrônicos, a privately held manufacturer of electrosurgical generators, disposables and accessories, based in Ribeirao Preto, Brazil; while in China, the company entered into a joint venture with Changzhou Kangdi Medical Stapler, a manufacturer of open stapler products, based in Jiangsu Province. Furthermore, in December 2013, Covidien entered into a definitive agreement to acquire Yoqneam, Israel-based Given Imaging, a provider of one of the broadest technology platforms for visualising, diagnosing and monitoring the digestive system, including its flagship PillCam, a swallowed capsule endoscope.
For Integra, the DuraSeal product line of Confluent fits well within the company's neurosurgery segment growth strategy by providing a broader set of solutions for surgical procedures in and around neurosurgery. Integra will now offer products in both dural grafting and dural sealing. DuraSeal is a first-to-market dural sealant approved for use in both the cranium and spine. The product will complement Integra's existing DuraGen range of dural repair grafts.
In addition to its strategic value, Integra believes that Confluent will add scale and increased profitability without introducing new complexity into its structure. Confluent products include: DuraSeal, DuraSeal Exact/Xact, VascuSeal and SprayShield. These products generated approximately US$65mn in revenue during FY12 and gross margin comparable with Integra's regenerative medicine product portfolio. Preliminarily, Integra expects the acquisition to add US$57mn-US$60mn in revenue in the first full year of the combination, and to then grow by 3-5% in the longer term.