EV3 and FoxHollow Merger Establishes Peripheral Leader

FoxHollow's striking success in peripheral vascular disease was not lost on EV3, which, like FoxHollow, abandoned earlier efforts in coronaries to focus exclusively on peripherals. Now the companies are merging to form what is surely the biggest vascular device company dedicated to the peripheral market. (Sidebar to, "EV3/Novation: Can Group Contracting Work in High Tech?")

Half a decade ago, the peripheral vasculature market was a clinical backwater for most cardiovascular device companies. Why spend a lot of time trying to develop products for that market when the coronary marketplace is so much larger and more dynamic, most big cardiovascular device companies reasoned. To the extent that the CV giants pursued the peripheral market at all, they did so, for the most part, by trying to jerry-rig coronary devices—with predictable results. The very different anatomy of the peripheral vasculature almost guaranteed that such devices wouldn’t work, leading only to more shrugs about the potential of the marketplace.

The peripheral market has come a long way since those days; the successful launch of carotid stents by both Guidant’s vascular business, now part of Abbott Laboratories [See Deal], and Cordis, has shown that the big companies are realizing both the potential of the non-coronary markets and the fact that the key to success lies in a focused development effort. But it was arguably FoxHollow Technologies’s striking success in peripherals, particularly as a public company, that did the most to change a lot of the thinking among cardiovascular device companies about the value of the peripheral market.

Though FoxHollow no longer has the billion-dollar-plus market cap that it once enjoyed, the rapid adoption of its atherectomy system for use in the peripherals—and the way public investors rewarded the company’s efforts—showed dramatically that the peripheral market was of growing importance. It was a story not lost on ev3, which, like FoxHollow, early abandoned its efforts in coronaries to focus exclusively on peripherals. The announcement in August that the two companies are now merging to form what is surely the biggest vascular device company dedicated to the peripheral market, in a deal that puts the market cap of the combined company at $1.7 billion (just over 40% of which is represented by FoxHollow), with combined sales of around $600 million, makes all the sense in the world.

For one thing, for as successful as each was on its own, both companies were feeling the pressure to expand their offerings in order to form a more broad-based peripheral vascular company. FoxHollow, in particular, has seen the atherectomy market become more competitive, with new products from Spectranetics Corp. coming to market and new companies emerging like Cardiovascular Systems Inc. and Pathway Medical Technologies Inc. The ability to link atherectomy systems with ev3’s line of innovative stents, including its fracture-free-guaranteed EverFlex, and embolic protection devices, such as its SpiderRX, does away with one criticism of FoxHollow—that, for all its success, it was essentially a one-product company. (FoxHollow does have an innovative service-based relationship with CV drug company Merck, but that alliance does little to shore up its business with peripheral specialists.)

Jim Corbett, ev3 CEO, notes that ev3 and FoxHollow first talked about a merger as long ago as early 2006, though the merger agreement wasn’t signed until last summer and the deal is expected to close in early October. "Both of us had a common vision of building a company that improves the lives of patients with vascular disease," says Corbett of his early discussions with FoxHollow CEO and founder John Simpson, MD, PhD. Thanks to FoxHollow, atherectomy was developing nicely as a market, and says Corbett, "We saw it as a very important tool to be used by our customers, and they had the same view."

Indeed, the synergies between the two are clear: ev3 and FoxHollow call on the same customers, their products are used on the same patients, and both are committed to technology innovation focused on peripherals, says Corbett. At the same time, there are also clearly complementary opportunities, most notably, in international markets: while 40% of ev3’s sales come outside the US, FoxHollow has been almost exclusively focused on building its business in the US.

The two companies first tested a kind of collaboration earlier this year with an alliance, launched in January, that was designed to link ev3’s embolic protection device with FoxHollow’s atherectomy device. [See Deal] Under the terms of the deal, ev3 and FoxHollow were to conduct a joint clinical trial seeking approvals for both companies’ products in the peripheral vasculature, with each company independently owning any FDA approval. The goal was to establish the safety and efficacy of embolic protection used with FoxHollow’s RockHawk atherectomy device. There’s also a distribution agreement that would have allowed FoxHollow to sell SpideRx devices along with its RockHawk.

For both companies, however, the collaboration was as much about market development as technology enhancement. As FoxHollow’s atherectomy technology evolved and the company’s ability to cut away calcium grew ever more precise, it could expand the number and type of cases it treated, but in the process, issues of embolic protection naturally surfaced. For ev3, the FoxHollow deal opened the door to take a technology, embolic protection, that had been used primarily in the coronary and carotid arteries, and develop peripheral applications. For both companies, the goal of the alliance was as much to expand treatment options for patients with peripheral artery disease and create new markets in peripherals as it was to sell more products in the current market.

Jim Corbett notes that the alliance made sense as a stand-alone effort: "We wanted to broaden embolic protection in the periphery, while they wanted to broaden the use of atherectomy in calcified lesions," he notes. "Those cutting chips have to be caught; we have a device to catch them. It was a perfect match." But, certainly, it also gave both sides experience in working together. "We got to know them better and they got to know us as well," he says.

For ev3, FoxHollow’s reputation for innovation and its focus on peripherals were critical shared values and should, says ev3, ease integration of the two companies. "What has distinguished both companies has been our abilities to develop new technologies that expand the treatment of peripheral vascular disease," says Corbett. "How we’ll do that, how we’ll combine the two organizations, what we’ll keep and what we won’t"—all those issues became the subject of discussion over the past year between the two companies. Ev3 officials have stated publicly that the combined company should realize around $40 million in cost synergies as a result of the merger.

The merger price reflects a 20% premium to FoxHollow’s share price at the time the deal was announced. The fact that FoxHollow’s market cap was nearly $1.5 billion just a few years ago, however, in comparison with the $1.7 billion market cap of the combine company, wasn’t an issue for ev3. "When they were trading at $55 a share, they were trading at something like 20-times revenue," says Corbett. "That’s an extraordinary number and not really sustainable."

Together, he goes on, ev3 and FoxHollow will be able to do more of what each did on its own, but on a larger and more efficient scale. As a much bigger company, the combined entity will have more resources focused on R&D and much greater leverage on the commercial side, especially in the US. "Before, both of our sales reps would be sitting around during cases watching the interventionalist use the other company’s products," he says. And though the combined organization is likely to see some costs savings in a rationalization of its selling efforts, customers won’t, says Corbett, feel the difference. "If you think about it, every patient who gets treated for peripheral vasculature disease gets one of the following—balloons, stents, or atherectomy—or all three," he says. "From a commercial perspective, this is a natural."

In the larger context, the merger of the two organizations clearly trumps the Novation agreement in its implications. Novation’s Dan Sweeney says he was glad to hear about the planned union, not just because "FoxHollow had great technology," but also because FoxHollow’s approach to group contracting was closer to that of most physician-preferred companies—i.e., largely defensive in its posture.

Jim Corbett can’t comment on the implications of the merger for the Novation agreement—the deal between FoxHollow and ev3 wasn’t final at press time. For the foreseeable future, the Novation contract will only cover legacy ev3 devices. But, he says, for large customers, "We want to offer the broadest product line for the treatment of peripheral disease, and the FoxHollow transaction makes it so that we’re more relevant than each of us would have been on our own." Moreover, the combined, synergistic selling effort works well within the context of today’s economically-squeezed health care environment. "To have sales reps who have a broader product line and a strong clinical knowledge and who can deliver multiple solutions—Novation and its members will benefit from all of that."

As noted, the combined companies create a clear leader in peripheral vasculature disease, and Corbett is noncommittal on whether the new expanded platform is sufficient in itself or will become part of a larger roll-up—part of ev3’s original strategy. "This is a great opportunity to create a strong, focused endovascular company," he says of the merger. "This makes us bigger and stronger. Whether we’ll do more is too early to call."

But the merger is also, to some measure, something of a response to the interest larger cardiovascular companies are now showing in peripherals. Interestingly, ev3 departed the coronary market a couple of years ago, in large part, to avoid the kind of head-to-head competition with companies like Boston Scientific, Medtronic Inc., and Johnson & Johnson that can be crushing for small companies. But as the non-coronary markets have gotten hot, avoiding such competition becomes difficult.

In fact, ev3 has found itself increasingly drawn into the game with the CV giants—and not always to its disadvantage. Two years ago, ev3 officials expected to have the fifth or sixth carotid stent on the market. Since that time, Abbott’s acquisition of much of Guidant’s vascular business, an offshoot of Boston Scientific’s merger with Guidant, has consolidated two carotid stent players into one. [See Deal] Cordis’ product has come to market, but only in an over-the-wire version in a market in which virtually all stents are placed using a rapid-exchange system. And even Boston Scientific, which has approval for its stent, has taken longer to actually launch its carotid stent than many expected. With its own stent approval, ev3 now finds itself the second company to market, rather than the fifth, and with a product that company officials believe will be more appealing to peripheralists because of its rapid exchange delivery and embolic protection feature.

But as the peripheral opportunity moves from the wings to center stage, why didn’t the big cardiovascular companies see the same kind of opportunity in FoxHollow that ev3 did? Both Medtronic and Abbott (notwithstanding its carotid system) lack peripheral vascular plays; both were seen as potential challengers for FoxHollow if the ev3 deal didn’t go through. But if breadth of product offering and, more importantly, a development effort focused on peripherals are important, it may have made sense for both Abbott and Medtronic to let this deal close since a combined ev3/FoxHollow may be even more valuable down the road.