Monday, April 11, 2011

Endo to buy American Medical Systems for $2.9 billion

MINNEAPOLIS American Medical Systems Inc. of Minnetonka, Minn., said Monday that it is being purchased by Chadds Ford, Pa.-based Endo Pharmaceuticals Holdings Inc. for $2.9 billion in cash.

The deal enables Endo to add American Medical Systems' market-leading devices to treat pelvic conditions, such as incontinence and erectile dysfunction, to its existing portfolio of urology-related drugs.

News of the deal came as a surprise on Wall Street and sent shares of American Medical soaring 32 percent. That made the stock one of the market's top movers on Monday.

"This is a surprise and a nice gift for investors," said Thomas Gunderson, an analyst with Piper Jaffray.

American Medical shares closed at $29.50, up $7.17, while Endo shares rose 21 cents to $41.06.

Endo Pharmaceuticals, which markets cancer, urology and pain drugs, will also repay $312 million of American Medical Systems' debt in the $30-a-share deal. The purchase is subject to approval by American Medical Systems' shareholders and antitrust authorities and is expected to close late in the third quarter.

Endo Pharmaceuticals doesn't anticipate wholesale job reductions at American Medical Systems' Minnetonka headquarters, where about 650 people work. CEO Anthony Bihl will continue to run the local operation for at least a year.

The combined company will have about $3 billion in annual revenue and employ 4,000 worldwide.

Was American Medical Systems for sale? Not necessarily, said Bihl. But the two companies nonetheless began talks in late 2009.

"I think we'll be really strong partners," Bihl said. Responded Dave Holveck, CEO of Endo Pharmaceuticals: "Tony is a tough guy to court."

Drug and device companies have largely operated independently in recent years, but Holveck said a more integrated model focused on specific outcomes is a better strategy in the wake of health care reform.

Founded 39 years ago by a urologist, American Medical Systems was once owned by Pfizer. Endo Pharmacuticals was spun off by DuPont-Merck in 1997.

Despite the deal, Morgan Stanley analyst David Lewis doesn't expect an impending wave of pharma-device mergers and acquisitions in the near term.

"This transaction appears very specific considering Endo's desire to diversify its business and exposure to urology markets," Lewis wrote in a note to investors Monday.

Broadly speaking, Lewis does expect an acceleration of small and mid-cap mergers and acquisitions in the device world - a trend that has been apparent in Minnesota with the recent purchases of AGA Medical, ATS Medical and EV3.

Endo Pharmaceuticals has been an active acquirer in the past year in an effort to mitigate its reliance on the pain drug Lidoderm, which accounted for almost half its $1.7 billion in annual revenue last year. Lidoderm is slated to come off patent in 2015, exposing it to generic competition.

Endo has recently consummated at least three deals totaling about $1.6 billion. A key acquisition was Healthtronics, a supplier of urological services and products, for $223 million in 2010.

Gunderson said the American Medical Systems purchase could fill in any gaps in Endo's portfolio. "If you made a small acquisition into urology, it's hard to do things in a bold way," he said. "It's like you have parts of an outfield, but you need to fill in the whole team. In that sense, American Medical is a solid play."


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