Bigger is better for Sorin-Cyberonics combination

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The starting gun on the medtech M&A derby of 2015 was fired yesterday with the tie-up of the US-based Cyberonics and Italian company Sorin, a combination that should offer bargain-hunting hospital buyers a wider product line.

A combination of the two appears sensible, with Cyberonics' US sales base and neuromodulation speciality creating little redundancy with Sorin’s focus on cardiovascular care largely outside America. Choosing a UK domicile will be an added benefit, allowing Cyberonics to shield hundreds of millions of dollars in sales from higher US corporate taxes.

As smaller players in a medtech market where scale is increasingly important, both Cyberonics and Sorin have been seen as targets by the biggest companies. Cyberonics is essentially a one-product company and so it was susceptible to a trade sale; Boston Scientific, Medtronic and St Jude Medical are bigger companies active in neuromodulation.

Sorin is more diversified, generating significantly more revenue than Cyberonics – nearly $1bn versus $292m in 2014 – but it, too, would have made an attractive target. The resulting combination, with a pro forma valuation of $2.4bn, looks a little less cheap than the predecessor companies, putting it in a stronger negotiating position as M&A continues red-hot through the medtech sector.

Former Cyberonics investors will hold 54% of the equity in the new company, making it not quite a merger of equals. The new entity will be headed up by Sorin's chief executive, André-Michel Ballester, with Cyberonics head Dan Moore serving as non-executive chairman.

Back door

For Cyberonics, this is a back door not just into cardiology but also to support the European launch of its heart failure device Vitaria, which received a CE mark on Wednesday.

Vagus nerve stimulation has not been the success in cardiology as it has been in refractory epilepsy, with Boston Scientific's device shown to be a failure and Cyberonics' Vitaria having limited efficacy in the Anthem-HF trial (ESC – Cyberonics fails a bit better than Boston, September 1, 2014).

Persuading European hospitals to adopt the technology – and payers to support it – was probably going to be a big task for Cyberonics by itself, as it derived just 20% of its sales outside the US. Meanwhile, achieving US approval for Vitaria will probably require additional clinical trials, as achieving only one of two primary endpoints in Anthem-HF will not be received charitably at the FDA.

Conversely, Cyberonics offers an attractive position in neurostimulation devices, an expertise Sorin lacks, and a US sales force that can expand Sorin’s presence; just 23% of the Italian group’s sales are in the US. And, of course, on both sides of the Atlantic a broader product array makes the new company a more attractive vendor for clinics and hospitals.

Big deal

As an all-share transaction this merger is hard to value next to cash takeouts, but it has every sign of being one of the bigger deals of 2015 – Sorin closed Wednesday valued at €1.1bn ($1.2bn) and Cyberonics at $1.6bn.

Billion-dollar transactions do not happen every day in medtech, as only seven deals above this benchmark closed in 2014.

Cyberonics-Sorin has set the bar high already in 2015 (Best is yet to come as medtech mergers come roaring back, January 19, 2015). With expanding scale an effective counter to the calls for price cuts from cash-strapped buyers, it should be matched or exceeded.

To contact the writer of this story email Jonathan Gardner in London at jonathang@epvantage.com or follow @ByJonGardner on Twitter

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