Industry Focus: Buyout Firms Increasingly Bullish on Tools of Medical Trade –

Successful medical professionals need good training but also good tools – devices and equipment that make treatment more accurate and, in some cases, cheaper. As the demand for health-care services rises, some private equity firms are placing their bets on companies that make these tools of treatment.

Buyout professionals who invest in medical products companies say the sector is highly fragmented and has steep barriers to entry. In addition, they say the trends to watch are the aging of the U.S. population, which will increase demand for products that help people cope with age and immobility, and managed care’s continued demand for cost control. Firms that hope to take advantage of these trends include Chase Capital Partners, Fremont Partners and American Securities Capital Partners, all of which have medical product platforms in their portfolios.

Over the years many buyout firms have dabbled in medical products.

Since 1995 Bain Capital has made several acquisitions, including home health-care supplier Medical Specialties Group and Physio-Control. In 1996, Genstar Capital Partners bought a large stake in Novametrix Medical Systems which specializes in monitoring products. Harvest Partners started a platform in the home health-care supply industry called Home Care Supply in June 1998.

More recently, in December 1999, Fox Paine & Co. financed management recapitalizations of Maxxim Medical Inc. and its subsidiary, Circon Corp., in two transactions worth $820 million in debt and equity. Maxxim makes acute and alternative care medical supplies, and Circon makes endoscopy equipment and supplies (BUYOUTS, Dec. 6, 1999, p. 10).

Earlier this month, Audax Group, comprised of breakaway Bain Capital principals, announced a final close of its debut fund on $500 million (BUYOUTS Feb. 7, 2000, p. 3). The Audax fund will invest across industries including medical devices.

Audax founder Geoffrey Rehnert, said the firm has “no specific game plan” for the area, but it is extremely likely that Audax will do deals with medical device companies.

Taking the Scalpel to Costs

Research provided by Medical Data International indicates that the strongest forces impacting the surgical marketplace include changes in procedure technique and the site of care delivery. As a result, non-hospital facilities will perform more surgical procedures and thus require more equipment. American Securities’ buyout of metal surgical tools manufacturer Miltex Instrument Co. is banking on this assessment.

American Securities’ buyout of Miltex, which closed in January, was valued at approximately $70 million. The debt-to-equity ratio on the deal was two-thirds senior bank debt and one-third equity.

American Securities managing director David Horing said his firm bought Miltex because it is a solid company with 30% cash flow margins. The company reported 1999 sales of $45 million.

Horing projected the industry would grow at a rate of 7% to 8% annually.

“There are smaller companies that are more focused on one or two segments of market with specialty product lines,” Horing said. “We want to build and grow a company that is a broad supplier to that industry.”

Horing said the firm is looking at a number of acquisition possibilities in the non-powered metal devices market and aims to acquire a few add-ons per year.

Another firm that is looking to invest in companies that are ahead of the non-hospital treatment trend is Chase Capital, which formed Fairfield Chase Medical Partners LLC, an investment entity focused on buyouts of middle-market medical product companies. Medical device veteran Charles Orsatti runs the fund, which focuses on investments in the medical device sector, particularly surgical, anesthetic and pulmonary monitoring equipment.

Orsatti said Fairfield Chase bought Donjoy, the bracing and support systems division of Smith & Nephew Inc., in a transaction valued at $200 million. Fairfield Chase made its offer to buy Donjoy in January 1999, and closed the deal in June. The deal was comprised of $110 million in high-yield debt and $90 million in equity. Orsatti said the purchase price was nine times trailing 1998 earnings before interest, tax, depreciation and amortization (EBITDA).

Orsatti said Donjoy represents a big player in the orthopedics space. Fairfield Chase plans to grow the platform through add-on acquisitions and new products to eventually reach a revenue goal of $300 million within the next several years.

“You won’t find a lot of dominant players in this part of health-care arena,” Orsatti said. “There are hundreds of sub-markets and lots of players, continual change and evolution in the area.”

Demographics play a prominent role in the medical product strategy of many firms. Fremont Partners paid approximately $900 million for Kinetic Concepts Inc. in 1997. The rising demand for Kinetic Concepts’ products is a result of changing demographics in the United States. Geared toward people who are immobile, these products are expected to be in higher demand as the baby boomers get older.

The FDA Barrier

Finally, buyout firms like medical products because the rigorous and lengthy regulatory Food and Drug Administration approval process can be a costly barrier to entry for earlier-stage companies. A medical devices maker that has first-to-market products typically enjoys dominant or at least significant market share. Companies with approved product lines make for desirable platform purchases.

“One thing that’s attractive about health-care markets is that if you can buy a franchise of products that have brand recognition in marketplace and are FDA approved, it’s very difficult for young companies to compete with those franchises,” said Damion Wicker, Chase Capital’s life sciences partner.