Device/Diagnostics Quarterly Deal Statistics, Q3 2016

Q3 medtech financing doubled in dollar volume to $3 billion, with debt offerings again representing the majority of the aggregate; acquisitions totaled $5.3 billion, mainly due to Johnson & Johnson’s $4.3 billion buy of Abbott Medical Optics. Diagnostics financings, which brought in $85 million, continued to decline, but at $5 billion, acquisitions showed a slight increase over the previous quarter, with Danaher’s takeover of Cepheid accounting for most of the M&A volume.

Device Transactions

Financing by device companies during the third quarter of 2016 totaled $3 billion, doubling Q2's $1.5 billion. As in the past two quarters, debt offerings continue to make up the highest percentage of the financing dollars at 72% in Q3. (See Exhibit 1.) Most of the $2.2 billion in Q3 debt dollars are attributed to the outlier $1.75 billion sale of 9.625% second lien senior secured notes due 2021 by Acelity LP Inc.’s wound care and regenerative medicine subsidiaries Kinetic Concepts Inc. and KCI USA Inc. [See Deal]; this single transaction accounted for 57% of Q3’s total dollar volume and is also the largest-know debt raise by a medtech company since Strategic Transactions started tracking this activity in 1991. Acelity says the proceeds will repay existing debt. (The company also offered $400 million principal amount of first lien senior secure notes in February 2016 [See Deal].)

Exhibit 1

Q3 2016 Device Financing

By Deal Type

Open Media

Strategic Transactions | Pharma Intelligence, 2016

Venture funding made up a decent chunk of the Q3 financing picture, with early- and late-stage rounds together accounting for 20%, or $612 million, of the total dollar volume. Cardiovascular was the therapeutic area accounting for most of the quarter’s venture activity, making up 55% of the VC funding category total. Nine cardio-focused device companies brought in $334 million. (See Exhibit 2.)

Implantable cardio device company CVRx Inc. raised the most through a $93 million Series G financing led by Johnson & Johnson Development Corp., with participation from other returning shareholders New Enterprise Associates and Ysios BioFund, and first-time backers Gilde Healthcare Partners, Action Potential Venture Capital and Windham Venture Partners. [See Deal] (Also see "CVRx Funding Boost Will Sustain Barostim Heart Failure Device To US Launch" - In Vivo, 20 Sep, 2016.) The company initially got $57.7 million, and an additional $35.3 million tranche (already subscribed by the investors) will close upon CVRx achieving an operational milestone. CVRx also entered a concurrent $20 million term loan with Oxford Finance to help repay an existing loan. The company will use the proceeds to complete a Phase III clinical trial of its Barostim neo implantable device for chronic heart failure.

Exhibit 2

Cardiovascular Device Companies Bring In The Most Venture Dollars During Q3 2016

Date	Company (Area of Focus)	Round	Amount Raised ($m)
Aug.	CVRx (implantable device for chronic heart failure)	Series G	93*
July	VytronUS (imaging and ablation device for cardiac arrhythmias)	Series C	49
Sept.	Rox Medical (minimally invasive hypertension devices)	Series E	40
Sept.	SentreHEART (left atrial appendage closure device)	Series D	35
July	Endotronix (cardiac monitoring)	Series C	32
July	Direct Flow Medical (transcatheter heart valves)	Undisclosed late-stage	27
Sept.	Veniti (stent system for deep venous disorders)	Series D	25
Sept.	Vivasure (percutaneous vessel closure device)	Series C	18
Sept.	Essential Medical (large-bore closure devices following cardiac catheterization vascular access procedures)	Series B	15

*Note: CVRx also brought in an additional $20 million through a concurrent term loan, for total proceeds of $113 million.

Strategic Transactions | Pharma Intelligence, 2016

Three other implantable cardio device firms – Direct Flow Medical Inc., [See Deal]Veniti Inc.[See Deal] and Vivasure Medical Ltd.[See Deal] – also brought in late-stage money. Vascular closure device company Essential Medical Inc. raised $15 million through its Series B financing (from Amzak Health, DSM Venturing and other investors), representing the largest early-stage round of Q3. [See Deal]

The sole initial public offering completed during Q3 was by pneumatic compression device maker Tactile Systems Technology Inc.[See Deal] The company will use most of the $38 million in proceeds to expand sales, marketing, reimbursement, clinical, regulatory and product development activities. Sales of Tactile's Flexitouch intermittent pneumatic pump – an at-home therapy system for lymphedema and non-healing venous leg ulcers – made up 87% its 2015 revenues. It also sells the ACTitouch dual-compression in-home system to treat chronic venous insufficiency.

Acquisitions of device companies totaled $5.3 billion in the third quarter, with 81% of these aggregate dollars coming from Johnson & Johnson’s $4.3 billion buy of Abbott Laboratories Inc.'s ophthalmic device business Abbott Medical Optics Inc. (AMO; a 2002 spin-off of Allergan PLC[See Deal]). [See Deal] (See Exhibit 3.) The Q3 total is 81% less than the $28 billion Q2 aggregate, but this isn’t surprising given that most of the Q2 total was due to another Abbott outlier: its $25 billion takeover of St. Jude Medical Inc.[See Deal] However, the Q3 dollars show a slight increase over Q2’s total of $4 billion if the Abbott/St. Jude transaction is not included.

The J&J acquisition benefits both parties in that it enhances the surgical offerings in J&J’s current eye care business that sells contact lenses and related supplies with AMO’s intraocular lenses, cataract surgery tools and laser vision correction systems. AMO also has consumer offerings, including contact lens solutions and eye drops. Meanwhile, with the divestiture of the AMO business (which Abbott acquired for $2.9 billion in 2009 [See Deal]), Abbott – looking to revamp its medtech portfolio – can now focus on its cardiovascular and diagnostics businesses. (Also see "J&J Buys Abbott's Ophthalmics Business For $4bn-Plus" - Medtech Insight, 16 Sep, 2016.)

Exhibit 3

Top Device M&As, Q3 2016

Date	Acquirer/Acquired (Business)	Terms
Sept.	Johnson & Johnson/Abbott Medical Optics (ophthalmic surgery and contact lenses)	$4.3bn in cash; 3.83x sales
July	Santen/InnFocus (cataract and glaucoma surgery devices)	$225m in cash
Sept.	Boston Scientific/EndoChoice (gastrointestinal endoscopy)	$210m: $8 in cash per share (an 85% premium); 2.9x sales
Sept.	Natus Medical/GN Store Nord’s GN Otometrics (hearing assessment and screening equipment)	$145m in cash; 1.32x sales
July	Zimmer Biomet/Medtech SA (robotic neurosurgery devices)	$132m: $77.6m in cash up front ($55.16/share, a 62% premium) for a 58.77% stake, plus $54.3m in the future for remaining 41.23% stake

Strategic Transactions | Pharma Intelligence, 2016

Ophthalmic firms were a popular acquisition target, with three other deals (besides the J&J/AMO deal) in this space during Q3. Santen Pharmaceutical Co. Ltd. acquired InnFocus Inc., gaining its MicroShunt glaucoma drainage system, designed to lower and sustain intraocular pressure (IOP). [See Deal]Allergan PLC bought ForSight Vision5 Inc. for $95 million, mainly for the private company’s lead program, a non-invasive peri-ocular ring for drug delivery and reduction of elevated IOP. [See Deal]Presbia PLC’s $1.5 million acquisition of fellow European ophthalmic device firm Neoptics AG will give it the Icolens for the refractive treatment of presbyopia, which is complementary to Presbia's own Flexivue microlens. [See Deal] (Also of note is ophthalmic device maker AcuFocus Inc., which brought in $66 million in a late-stage financing round [See Deal].)

Medtech giant Boston Scientific Corp. bought gastrointestinal endoscopy specialist EndoChoice Holdings Inc. to boost its endoscopy portfolio with the latter’s Full Spectrum Endoscopy (Fuse) colonoscope. [See Deal] (Also see "Boston Scientific Buys EndoChoice, Mulls De-FUSEing Potential Weakness" - Medtech Insight, 27 Sep, 2016.) The Fuse system uses cameras, gastroscopes, and tools for image processing/management to provide a 330-degree view of the colon. Endochoice, which was formed in 2008, also offers other endoscopic instruments. BSC also acquired private neurosurgical device maker Cosman Medical Inc. (radiofrequency ablation systems to treat pain) for an undisclosed amount. [See Deal]

Another big device player, Zimmer Biomet Holdings Inc., had a large acquisition with its buy of robotic neurosurgery device firm Medtech SA, giving it leverage in the minimally invasive spine surgery space. [See Deal] The public French company’s FDA-cleared ROSASpine robotic system is used to navigate instruments and position implants in MIS procedures for vertebral fusion. (Also see "Zimmer Biomet Mirrors Medtronic's Robotics Move With Medtech SA" - Medtech Insight, 19 Jul, 2016.) This deal marks Zimmer Biomet’s fourth 2016 medtech acquisition; other transactions include spine device maker LDR Holding Corp. (for $1 billion in June) [See Deal] as well as musculoskeletal device firm Cayenne Medical Inc.[See Deal] and skeletal implant developer Ortho Transmission LLC. [See Deal]

Four joint-venture alliances were penned during Q3, including two big pharma JVs. (Also see "The Rise Of The Alt-Deal" - In Vivo, 14 Sep, 2016.) GlaxoSmithKline PLC and Google spin-off Verily Life Sciencesformed Galvani Bioelectronics, which aims to develop bioelectronic medicines for neuromodulation. [See Deal] (Also see "New GSK-Verily JV Aims For Smart, 'Grain Of Rice' Neuromod Tech" - Medtech Insight, 2 Aug, 2016.) Verily also created with Sanofi a diabetes-focused JV called Onduo to combine medicines, devices and software. [See Deal] (Also see "Sanofi Joins Google’s Verily In Diabetes Venture" - Medtech Insight, 13 Sep, 2016.) Intuitive Surgical Inc. and Shanghai Fosun Pharmaceutical Group Co. Ltd.’s Fosun International Ltd. together invested $100 million in a Shanghai-based robotic-assisted surgical device JV. [See Deal] Also of note was Colibri Heart Valve LLC’s transaction with private cardiovascular device firm Venus Medtech (Hangzhou) Inc. to create an Asian-based joint venture to develop and commercialize structural heart valve products for the Chinese and emerging Asian markets. [See Deal]

Diagnostics Transactions

Diagnostics financing continued the downward trend seen since the start of 2016. In the third quarter, companies in this industry raised a total of just $85 million, a mere fraction of Q2's $531 million. Further, less than half the volume of transactions was done in Q3 compared with Q1, six versus 14. (See Exhibit 4.)

Exhibit 4

Q3 2016 Diagnostics Financing

By Deal Type

Open Media

Strategic Transactions | Pharma Intelligence, 2016

Most of the money (38%) was from the early-stage venture round group, which brought in $32 million from two Series A financings. [ReadCoor Inc.], a Harvard University/Wyss Institute spin-off, raised the majority, $23 million, from Decheng Capital, Lilly Asia Ventures, Vivo Capital and individual Hansjorg Wyss. [See Deal] ReadCoor simultaneously licensed a next-generation sequencing technology from Wyss to use in drug discovery applications and diagnostics. IDbyDNA collected $9 million in its round. [See Deal] ARTIS Ventures led and was joined by ARUP Laboratories and other private investors. The start-up was formed around methods used in the Human Genome Project, and hopes to commercialize metagenomics-based clinical tests for infectious diseases.

Two FOPOs were completed, totaling $25 million. Quotient Ltd. netted $17 million in its offering, which will go toward developing its MosaiQ donor and patient blood screening and characterization platform. [See Deal] Between 2015 and 2025, Ortho-Clinical Diagnostics Inc. has distribution rights to MosaiQ in the developing world and Japan. [See Deal]CareDx Inc. completed an $8 million FOPO. [See Deal] The company is evaluating AlloSure in a clinical utility trial; the test quantifies the amount of donor-derived cell-free DNA in transplant patients' blood. This allows clinicians to identify allograft DNA without requiring independent genotyping of the donor and the recipient.

Infectious disease companies rounded out the remaining financing of Q3. Mobidiag Oy's $17 million loan from the European Investment Bank Group, making up the entire debt group, represented over a quarter of the total. Mobidiag will put the money toward manufacturing scale-up of Novodiag. [See Deal] The multiplexed platform may be used with cartridges to screen for multiple types of infections, including gastrointestinal, hospital-acquired and respiratory tract. Genetic Signatures Ltd. raised $3.9 million initially through a PIPE, plus an additional $7.2 million in a second tranche in October. [See Deal] The company has a rapid infectious disease-screening technology called 3Base.

In diagnostics partnerships, next-generation sequencing and liquid biopsy technologies featured in multiple deals. Genomic Health Inc. could pay Epic Sciences Inc. up to $14 million – in milestones, convertible promissory notes and an equity investment – for exclusive rights to sell Epic's ARV7 liquid biopsy test in the US. [See Deal] ARV7 may be used in treatment planning for metastatic castration-resistant prostate cancer patients. Harvard University partnered four of its patents with Vortex Biosciences Inc.[See Deal] The patents protect inventions covering microfluidic vortex-assisted electroporation, and Vortex will use them to develop a liquid biopsy instrument for cancer diagnosis. (Also see "Liquid Biopsy In Oncology: An Increasingly Crowded Landscape" - Medtech Insight, 6 Sep, 2016.) Harvard was also involved in one of the next-generation sequencing deals. Its Wyss Institute licensed ReadCoor the FISSEQ (fluorescent in situ sequencing) technology. [See Deal]Illumina Inc. also penned an alliance in this area, agreeing to co-develop and co-promote analysis software with FlowJo LLC. Illumina plans to integrate the software with its single-cell RNA BaseSpace app. [See Deal]

In the third quarter, there was a total of $5 billion done in diagnostics acquisitions, slightly higher than Q2's $4.5 billion. Once again, one outlier deal in the third quarter represented the majority of the value – Danaher Corp.'s $4 billion takeover of publicly traded Cepheid. [See Deal] (See Exhibit 5.) Following a string of diagnostics deals that Danaher has done over the recent years, including Beckman Coulter Inc. in 2011 [See Deal] (see Exhibit 6), Cepheid joins Danaher's $5 billion diagnostics operations. Cepheid's flagship offering is GeneXpert, an automated, rapid, molecular diagnostic product line. (Also see "Danaher Buys Cepheid For $4bn, Citing Molecular Diagnostics Strength" - Medtech Insight, 7 Sep, 2016.)

Exhibit 5

Top Diagnostics M&As, Q3 2016

Month	Acquirer/Acquired (Business)	Terms
Sept.	Danaher/Cepheid (rapid molecular diagnostics)	$4bn: $53 in cash per share (a 52% premium); 7.43x sales
Aug.	Myriad Genetics/Assurex Health (genetic testing for behavioral health)	$410m: $225m up front and $185m based on performance milestones; 3.75x sales
Aug.	BioTechne/Advanced Cell Diagnostics (genomic analysis consumables)	$325m: $250m up front and $75m in earn-outs; 10x sales
July	LabCorp/Sequenom (non-invasive prenatal testing)	$302m: $2.40 per share in cash (a 179% premium); 2.35x sales
July	Sartorius/ViroCyt (rapid virus quantification)	$16m in cash

Strategic Transactions | Pharma Intelligence, 2016

Exhibit 6

Danaher Builds Diagnostics Operations Through Acquisitions, 2011–Present

Year	Target	Business	Deal Value ($m)
2011	Beckman Coulter	Clinical diagnostics and analytical systems	6,800
2012	IRIS International	Body fluid analysis, sample processing and early disease detection	352
2013	HemoCue	Point-of-care diagnostics	300
2014	Siemens Healthcare Diagnostics’ clinical microbiology business	Microbial identification and antibiotic sensitivity testing	NA
2014	Devicor Medical Products	Minimally invasive breast cancer diagnostics	NA
2016	Cepheid	Rapid molecular diagnostics	4,000

Strategic Transactions | Pharma Intelligence, 2016

Besides Cepheid, three other companies got acquired in big Q3 deals. For $410 million, Assurex Health Inc. got scooped up by Myriad Genetics Inc.[See Deal] The purchase price includes $225 million up front and the potential for $185 million in earn-outs. Privately held Assurex has used technology in-licensed from the [Cincinnati Children's Hospital Medical Center] and the Mayo Clinic to produce the GeneSight neuropsychiatric test. Based on genetic variations in the patient, the test can offer recommendations on appropriate psychiatric medications. The deal importantly brings Myriad into the neuroscience category; the GeneSight market alone could be worth $4 billion globally. (Also see "Myriad To Enter Neuroscience Market With $225m Assurex Acquisition" - Medtech Insight, 4 Aug, 2016.)

Bio-Techne Corp.'s Q3 transaction, like Myriad, also provided the company with entry into a new field. In BioTechne's case, its buy of privately held molecular pathology firm Advanced Cell Diagnostics Inc. (ADC) for $250 million marks its foray into genomics. [See Deal] ADC's offerings include genomic analysis consumables for its RNA in situ hybridization technology RNAscope. And Laboratory Corp. of America Holdings built up its assets in reproductive health by acquiring women's health diagnostics company Sequenom Inc. for $302 million. [See Deal] Sequenom makes laboratory-developed tests, including prenatal screenings for genetic disorders. (Also see "Myriad To Enter Neuroscience Market With $225m Assurex Acquisition" - Medtech Insight, 4 Aug, 2016.)