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Focus on neuromodulation, cardiac surgery

By Katie Pffaf

Staff Writer

Livanova plc has agreed to sell its cardiac rhythm management division to medical device manufacturer, Microport Scientific Corp., for $190 million in cash. Livanova will turn its focus to its remaining divisions in cardiac surgery and neuromodulation.

"Livanova intends to use the cash proceeds from the transaction to support our key growth drivers in neuromodulation and cardiac surgery, to advance our strategic portfolio initiatives and to invest in bolt-on or tuck-in acquisitions aligned with our focus on the 'head and heart,'" Deanna Wilke, corporate external communications manager, Livanova, told BioWorld MedTech. Currently, the priorities include "investing in our organic growth drivers which include the Perceval sutureless aortic heart valve, S5 Heart-Lung machine, Inspire oxygenators and VNS therapy," said Wilke. Additionally, Livanova will continue its move toward "investing in our strategic portfolio initiatives, which include treatment-resistant depression, transcatheter mitral valve replacement and heart failure, and finding tuck-in acquisitions that are aligned with our current businesses of neuromodulation or cardiac surgery, either through technology or a call point," she said.

Letter of intent

London-based Livanova plc and Shanghai-based Microport, medical device maker specializing in orthopedic, cardiovascular, endovascular, neurovascular, diabetes and endocrinal, and surgical areas, have signed a letter of intent and anticipate the acquisition to proceed after consultation with CRM's employee works councils, as well as meeting later regulatory standards. The acquisition is expected to close in the second quarter of 2018. Livanova reported its net sales for the entirety of 2017 are expected to dip by 20 percent with the loss of the division, and adjusted earnings per share by five to ten percent compared to a Nov. 2 guidance. Microport does not expect the sale to affect its profits in 2017. Barclays acted as financial advisor to Livanova, Latham & Watkins LLP as legal counsel, and Kirkland & Ellis LLP served as legal counsel to Microport.

"This transaction represents a great outcome for Livanova, our CRM business franchise and Microport," said Damien McDonald, CEO, Livanova, adding the firm could turn its complete attention to its cardiac surgery and neuromodulation business. "With this divestiture, we are building the right foundation. We are focusing our portfolio on businesses that contribute to our growth and drive shareholder value. In addition to the implementation of other initiatives, completion of this milestone will allow Livanova to improve margins, drive profitability and deliver on our commitments to shareholders."

Livanova began seeking options for its CRM unit, which markets the Platinum implantable cardiac defibrillators and resynchronization devices, and Kora 250 full body MRI-conditional pacemaker, earlier this year to focus on its remaining divisions. (See BioWorld MedTech, Sept. 15, 2017.) McDonald estimated the cardiac surgery portfolio generated 50 percent of the company's revenue, 30 percent from neuromodulation, and 20 percent from CRM. The company was hindered by an earlier decision to separate lead manufacturing and generator manufacturing which put them at a disadvantage with MRI compatibility. Livanova also boosted its cardiac surgery business with a spring acquisition of Caisson Interventional LLC, maker of a transcatheter mitral valve replacement. Livanova had previously invested in Caisson and the sale included 51 percent of the company for $78 million in debt payment, cash, and milestone payment. (See BioWorld MedTech, May 4, 2017.

Divesting CRM, possible future deals

"A deal was widely expected after the Sept. 14 announcement that strategic options were being explored," said Raj Denhoy, equity analyst, Jefferies, in a comment on the acquisition. "The transaction will be 5-10 percent dilutive to EPS but accretive to both growth and operating margins. While the price can be debated, the sale shows the urgency at which LIVN is transforming the business and it adds to an already hefty capacity for M&A. LIVN is buy-rated, $91 target. The purchase price of $190 million is just 0.8 times the $243 million TTM revenue and is reflective of the lack of growth and profitability —the division was 20 percent of sales but just 10 percent of operating profits. While our model is under review, LIVN guided to a 20 percent hit to 2017 revenue, 200-300bps increase in operating margin and a 5-10 percent hit to EPS from the sals, suggesting 2017 will come in close to $993 million in sales and $3.12 in EPS; a rough cut at 2018 suggests sales of $1.04 billion and EPS of ~$3.40-3.50."

According to Denhoy, Livanova is expected to look for additional M&A deals which align with the company's pipelines. "In terms of specific targets, there are numerous adjacencies to the company's core technologies in cardio pulmonary that make sense and in neuromodulation and cardiac surgery, earlier stage assets are being considered though we expect the company will not take on anything requiring significant investment as it is already funding development in a number of areas (mitral, heart failure, depression, etc.). With CRM now sold, we expect an announcement on the M&A front very soon," said Denhoy.

Focused on diagnosis, treatment, and management of heart failure and cardiac rhythm disease, the CRM business includes cardiac resynchronization devices, low-voltage pacemakers, and high-voltage defibrillators, and garnered $249 million in net sales in 2016FY. About 900 people in locations in Clamart, France, Saluggia, Italy, and Santo Domingo, Dominican Republic are employed with CRM.

Microport anticipates addition of the CRM portfolio will add to its growth worldwide. "The CRM business franchise is a global business and strong regional player with attractive assets, a robust pipeline and growth potential. Its strong position in Europe complements our leadership position in China and growing presence in the U.S. and emerging markets, enabling us to further strengthen each other's worldwide reach. Meanwhile, with the commitment and dedication of its employees, combined with the precision and innovation of the technology portfolio of the CRM business, I am confident that Microport and the CRM business can grow together faster, better and stronger in the global arena," said Zhaohua Chang, chairman and CEO, Microport." The two firms also collaborated in a joint venture in 2014, called Microport Sorin CRM Co. Ltd. to bring CRM devices to market in China. In September, the venture won Chinese market approval for its Rega pacemakers, the smallest devices available in China.

Published  November 21, 2017

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