Covidien Buying Israeli Biomed Company for $300m

Deal signals shift in medical device industry toward more cost-effective procedures to tackle declining patient volumes.

U.S. medical devices giant Covidien has clinched a deal to buy Israeli company superDimension for $300 million. The cutting-edge technology for minimally-invasive surgical procedures on the lungs was developed from a toy.

According to Gabelli & Co. analyst Jeff Jonas, other industry giants were interested in buying superDimension. However, a rumored bidding war culminated in Covidien eventually triumphing.

"They [Covidien] paid like 10 times of [superDimension's annual] sales, which is expensive, but long-term it's a very good move," Caris & Co. analyst Jason Wittes said.

No fledging startup but a mature company founded in 1995, superDimension developed technology to navigate endoscopic imaging systems in the lungs (bronchoscopy ). The company's iLogic System provides minimally invasive access to lesions deep in the pulmonary and lymph nodes.

"Minimally invasive surgery offers many advantages over traditional surgery in the way of cost containment ... shorter patient hospital stays, fewer complications and fewer infections," Morningstar analyst Alex Morozov said.

Indeed, the deal signals a shift in the medical device industry toward more cost-effective procedures to tackle declining patient volumes. Fewer Americans have been opting for expensive treatments because of the weakening economy.

The acquisition, which follows Covidien's purchase of BARRX Medical for $325 million in November, marks the company's efforts to further consolidate in its strongest medical devices segment. The acquisition certainly won't be particularly revenue-boosting: Morozov speculates that with $30 million in annual sales, superDimension would not "move the needle for Covidien." The acquisition therefore reflects the technology's future potential.

With Covidien's sales force and marketing infrastructure, the product has the potential to become a lot bigger, he added.

The OrbiMed venture capital fund, which owns 25% of superDimension, will be getting $75 million. Oxford Bioscience, which owns 14.5%, will get $43.5 million.

Let's play

superDimension didn't start as a biomed company. It started out designing games based on technology to track objects - toys - through reality (i.e. three-dimensional space ), using magnetic field generation and detection. Sensors on the toys would communicate their position to a screen.

That did not quite take off. The company then changed management and direction, hiring David Tolkowsky as CEO and migrating its product from a game into a cardiologic navigation system, to help place stents in nephritic blood vessels. Stents are wire-mesh tubules that prop open blood vessels, for instance after their clearing by catheterization.

In mid-2002, the company developed a new business model, focusing on an entirely new area - invasive pulmonology, with an emphasis on diagnostics and cancer treatments in areas of the lung not normally accessible without radical surgery. Despite the risk involved in entering a brand new area with brand new technology, more investors came on board.