Covidien Buys Given To Build GI Business Base In Biggest Israeli Medtech Deal

Three years ago, Covidien signaled its intention to build a gastrointestinal device business with its acquisition of Barrx Medical and its esophageal ablation technology for Barrett’s esophagus. Since then, the industry has been waiting for Covidien to follow through on its strategy to expand its presence in the $3 billion GI market, and that next step came with the company’s recent $860 million acquisition of publicly traded Given Imaging Ltd.

Three years ago, Medtronic Minimally Invasive Therapies signaled its intention to build a gastrointestinal (GI) device business with its acquisition of Barrx Medical and its esophageal ablation technology for Barrett’s esophagus for $325 million up front (and now more than $409 million with milestones, around 10 times revenue). [See Deal] (See (Also see "Covidien Still Hungry For GI After Barrx Buy" - In Vivo, 27 Dec, 2011.).) Since then, the industry has been waiting for Covidien to follow through on its strategy to expand its presence in the $3 billion GI market, and that next step came with the company’s recent $860 million acquisition of publicly traded Given Imaging Ltd.[See Deal] Given Imaging pioneered the capsule endoscopy diagnostic market with its innovative camera-in-a-pill, the PillCam − a vitamin-sized, disposable camera system that is swallowed to wirelessly capture endoscopic images of the GI system. (See (Also see "Given Imaging: A Capsule View of GI Diagnostics' Future" - In Vivo, 1 May, 2002.).) In acquiring Given, Covidien continued to tap into Israel as a source of medtech innovation, following its previous acquisitions of Israeli-based superDimension Ltd. and Oridion Systems. [See Deal][See Deal] Indeed, for all of the device start-ups that have emerged from Israel, that country’s medtech sector has been criticized for not producing a blockbuster deal. This deal answers those critics, amounting to the largest Israeli medtech acquisition.

The $30 per share that Covidien paid for Given represents a 27% premium over its recent stock price and the total price tag was roughly five times its $180 million in annual sales. “Covidien really likes the gastrointestinal space and they’ve been looking to broaden the portfolio,” says Richard Newitter, medical device analyst at Leerink Swann. “This is very Covidien-like, to go after the market-leading technologies and innovative or promising growth areas where they believe they will have the ability to drive market share over time.” Bryan Hanson, Covidien’s group president of medical devices, in a statement said the addition of Given’s technology will extend the company’s GI pipeline from diagnostics to treatment. According to a senior official close to the deal, Covidien has been looking at Given for several years as part of its strategic strategy to expand its minimally invasive surgery (MIS) business in GI, building on other recent acquisitions in an effort to take costs out of surgical procedures. Initially, Given will become part of Covidien’s Early Technology group.

Given has captured 85% of the capsule endoscopy market, according to Newitter, with its devices used in more than two million procedures since being introduced. Initially, the company’s technology was primarily focused on the upper bowel, a limited market, and adoption over the years has been somewhat disappointing. With its newest product, the PillCam 2 (which has dual cameras), Given is looking to break into the $1.4 billion colonoscopy market. The new device recently gained Japanese approval and is expected to be introduced to that market early next year. Given is also close to gaining US clearance for this device, but on an expected limited basis. Reimbursement will also be difficult, limiting initial adoption largely to the private-pay market for people who either are not candidates for or who cannot well tolerate traditional colonoscopy.

Also attractive to Covidien was Given’s promising R&D efforts and product pipeline. The Israeli company’s sales force also has established close ties with GI physicians worldwide, which will help supplement Covidien’s limited sales presence in this space.

Covidien’s move to build a meaningful GI business is expected to take time and will likely require additional acquisitions, given the limited breadth of Given’s and Barrx’s product lines. Newitter says he didn’t anticipate Given contributing significant growth to Covidien’s GI sales. “They acquired it because right off the bat they could drive down cost synergies and, more importantly, they can leverage Covidien’s regulatory expertise and help Given’s pipeline products,” he explains. Newitter estimates that Given’s products won’t show double-digit growth until 2015.