deal team: gerson r. guzman vassil georgiev ricardo wilson russell workman finance 751 professor...

Deal Team:Gerson R. GuzmanVassil GeorgievRicardo WilsonRussell Workman

Finance 751Professor Vinay B. Nair

Investment Proposal

for

to acquire

Investment Recommendation

Guzman | Workman | Georgiev | WilsonFNCE 751 Confidential Investment Memorandum

Boston Scientific provides CryoCor with the most dependable and tested means of realizing revenue synergies quickly and without the associated expense and risks of pursuing an independent strategy.

• Worldwide developer, manufacturer, and marketer of medical devices in various medical specialties

• Firm seeks to acquire companies that can be easily integrated into its global sales and distribution channels

• Capabilities, experience, and know-how to bring products to market quickly and realize revenue potential immediately

• Medical devices firm focused on developing technologies to treat cardiac arrhythmia

• Developing and testing CryoCor™ Cardiac Cryoablation System for the treatment of cardiac arrhythmia and atrial fibrillation

• Technology has inherent advantages over competing drug therapies and radiofrequency (RF) based technologies


Parkinson'sDisease

Epilepsy Alzheirmer'sDisease

AtrialFibrillation

Identifiable Market Opportunity

There are nearly 2.4 million Americans who suffer from atrial fibrillation, of which approximately 60% are within the age range of 65-84 years.

New Cases Per Year in the U.S.

50,000

125,000

400,000

800,000

Under 55 55-64 65-74 75-84 85+

209,000246,000

574,000

880,000

443,000

U.S. Individuals with Atrial FibrillationBy Age

Source: CryoCor with data provided by the National Institute of Neurological Disorders and Stroke and Go et. al., JAMA May 9, 2001

The CryoCor Solution


The CryoCor Cardiac Cryoablation System treats atrial flutter and atrial fibrillation through cryo-energy, or very low temperatures, to permanently interrupt the electrical signals that cause abnormal heart rate and/or rhythm within the heart.

The CryoCor sheath dilator is inserted at the groin and advanced into the right atrium.

The CryoCor Cardiac Cryoablation catheter is passed through the sheath across the inter-atrial septum and into the left atrium.

A.

After placement of a mapping catheter into each pulmonary vein to determine if the vein has electrical activity and therefore needing treatment, the cryoablation catheter tip is steered into one of the pulmonary veins. The pulmonary vein is electrically isolated from the left atrium and heart by freezing tissue at the tip of the cryoablation catheter.

This isolation is confirmed with the mapping catheter.

B.

C. D.

Procedure - Atrial Fibrillation CryoAblation

Source: CryoCor website.

SWOT Analysis


Although the Cryoabalation System is not currently FDA approved, the firm has a portfolio intellectual property that creates a significant barrier to entry.

Strengths• Focus on cardiac arrhythmia market has allowed

firm to develop R&D competencies to further its strategy as a solutions provider

• Suite of proprietary technologies in the design, function and performance of the CryoCor™ Cardiac Cryoablation System

• Intellectual property rights development provides a meaningful barrier to entry for potential competitors

• Attempts by other firms to develop competing solutions would likely infringe on the firm’s proprietary position

• Firm holds 72 exclusively licensed patents and patent applications

• Over 110 proprietary patent applications/disclosures in the firm’s intellectual property portfolio that are in various stages of patent prosecution

Weaknesses• Cryobalation System is not currently FDA

approved, although it is undergoing clinical trials throughout the United States

• If the firm is able to secure FDA approval for its Cryobalation System, it is unclear that it has in place the manufacturing and distribution capabilities to bring its product to market quickly

• Focus on research and development for this novel technology may mean that it does not have the necessary sales force to effectively push its product through doctors and hospitals once it secures regulatory approval

SWOT Analysis


The firm’s ability to capture a significant share of a $530M annual market depends on securing regulatory approval and bringing the product to market quickly.

Opportunities• Firm could be the first to market with a new

technology that addresses an identifiable market

• Potential to achieve a 50% market share of a market conservatively estimated to be $530 million per annum

• Management feels confident that cryoabalation has significant advantages over RF and other heat-based abalation technologies.

• Existing therapies and treatments for atrial fibrillation include arrhythmic drug therapy and the use of radiofrequency energy each with substantial drawbacks

• The clinical need for safe, effective treatment for atrial fibrillation is currently poorly met

• This opportunity does not include other clinical indications that could be addressed by cryoabalation and approved for marketing in the US after subsequent clinical trials.

Threats• The major threats to CryoCor arise from

alternative treatments for cardiac arrhythmia

• Competitive nature of this market lends credence to the belief that competing firms may improve the ability of current options to treat atrial fibrillation. In particular, there is a threat that the efficacy of drug therapy may improve. RF energy ablation platforms may be developed to treat complex arrhythmias

• Possibility that the product may fail to meet FDA requirements and rejected as a viable treatment

• Even if not completely rejected, any complications during the process may require further development and extend the time necessary to bring the product to market

• A firm with an inferior product, but with the manufacturing and sales capabilities to distribute the product could gain a leadership position in the market

Valuation of CryoCor


Value of CryoCor to BS = Intrinsic Company Value + Value of Synergies + + Adjustment for Control + Adjustment for Liquidity

Yes, but …

How do you value a company with no sales, which has been losing value?

We considered traditional valuation methods …


• But, with lack of sales and very negative historic EBITDA, Net Income and free cash flows …… Trading Comps and DCF by themselves gave extremely volatile and thus meaningless results

Comparable Transactions

• Selection Criteria:– Proximity to current date– Ownership structure of the seller– Underlying technology– Firms would be considered direct competitors for the same market, using a different

technology

• Caveat: No available financial data at acquisition, especially revenues

Target Acquiror Date Puchase Price ($M)

Epicor Medical St. Jude Medical Aug-05 200

ProRhythm St. Jude Medical Dec-04 150

Average 175

… we decided to work out a Binary Option Valuation model


Market Based Valuation


Potential annual revenue was estimated based on securing 50% of an annual $72M market.

Sales Model

Annual population affected by AF through 2015 800,000 Percentage treatable via ablation x 60%Adressable US Population through 2015 480,000

Avergae Selling Price of Catheters/Disposable Items x $150Market Size 72,000,000$ Penetration x 50%

Annual Revenue 36,000,000$

Valuation

Annual Estimated Revenue 36,000,000$

Trading Comps Median Revenue Multiple 4.37x

Implied Valuation 157,320,000$

Valuation Summary


The $175M valuation, assuming all earnouts are achieved, is in line with the various valuation methodologies explored.

Valuation of CryoCor

$-

$50.0

$100.0

$150.0

$200.0

$250.0

Trading Comps St. Jude Acquisition of EpicorMedical

St. Jude Acquisition of ProRhythm

mill

ion

2007 Upside Valuation for Option $175M

Deal Structure


The deal structure is driven by a risk mitigation and the alignment of incentives.

• Financed by cash generated from free cash flow ($1.5 billion in 2004)–Initial payment of $20 million to fund product development and clinical trials–Cash is preferred payment of seller due to ready availability–Exclusive right to purchase 100% of equity expiring in April 2007 for $140 million–Provides growth capital while limiting downside risk of failure

• Earn Out for Management –Additional cash payments of $10 million payable to management after meeting earn-out

conditions–Related to meeting milestones for scaled-up production of existing product, clinical data

generation for follow on products–Gives management an incentive to remain in place and focused on creating future value

Conclusion


The proposed transaction is a strategic fit merging CryoCor’s niche product development with Boston Scientific’s sales and marketing capabilities resulting in a combination that creates value for both acquirer and target.

• CryoCor−Applying B.S.’s vast sales and marketing resources to the product launch will

increase both the speed and depth of market penetration−Their plan to IPO will cause them greater cost to develop and train a sales and

marketing capability−Even if developed, much less effective capability than that of BS

• Boston Scientific−Differentiated product that solves a compelling clinical need in financially

attractive market−Strong IP protection

• Deal Structure addresses the interests of both sides–High valuation for target if successful–Limits the downside risk to the acquirer

deal team: gerson r. guzman vassil georgiev ricardo wilson russell workman finance 751 professor...

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