Physio-Control Breaks Away From Medtronic, Via $487M Acquisition by Bain Capital

11/17/11Follow @xconomy

One of the venerable names of the Seattle life sciences cluster, Physio-Control, is going to stand on its own two legs once again with the help of some old friends from Bain Capital.

Minneapolis-based Medtronic (NYSE: MDT) is announcing today an agreement to sell 100 percent of its ownership in Redmond, WA-based Physio-Control, the maker of heart defibrillators, to Bain Capital for $487 million in cash. Physio division president Brian Webster will be the CEO of the new privately held company, and Bain intends to keep the local management team in place, Webster says. Physio currently has about 1,000 employees worldwide, with 650 at its Redmond headquarters. It plans to add workers around the world once the deal is complete, Webster says, although he didn’t say how many. The transaction is expected to close in the next 90 days.

“It’s a great opportunity to be a private company, a standalone company, and invest in our growth,” Webster says. “When you’re a company in the public eye, you have a short-term focus, a quarterly results focus. One of the great opportunities with private ownership is you can take a longer-term view. That’s what we’re looking forward to.”

Physio-Control, founded in 1955, has a storied history as a pioneer in the field of defibrillators, which can shock hearts back into a normal rhythm for people in the midst of cardiac arrest. Medtronic, the world’s largest medical device company, acquired Physio in 1998 for $538 million and sought to sell it off as far back as 2006. That plan had to be put on hold the next year when the FDA said it discovered quality control problems with Physio-Control devices—a problem that was serious enough to halt defibrillator sales in 2007. The quality control issues weren’t fully resolved until February 2010, and after one more year of operations to get back on its feet, Medtronic put Physio back on the block this February.

Brian Webster, president of Physio-Control

While Physio is known mainly as a defibrillator company and gets the vast majority of its revenues from these devices, it has been positioning itself over the past couple of years as a more diversified maker of products for emergency medicine. Since Physio was freed up to resume unrestricted defibrillator sales, it has branched out by acquiring a cardio-pulmonary resuscitation technology from Jolife, striking a partnership with San Diego-based Benechill to develop a therapeutic hypothermia device to buy time for patients in emergencies, and by working on technologies to deliver patient data from remote locations to hospitals.

Those are the kind of innovative development efforts, Webster says, that the new Physio will seek to build on.

“It’s wonderful to have Physio back as a Seattle company as opposed to a small division of a very large international company based in Minneapolis,” says Kirby Cramer, a local medical device investor and former chairman of Bothell, WA-based SonoSite. “The company has been strapped for research funding the past few years as they worked through the issues with the FDA. It’s my understanding they have a clean slate now, and can go back to doing what they do best, which is to develop new products.”

Cramer, who has no business relationship with Physio, added that he “can’t think of a better buyer than Bain.”

Bain, the $66 billion private equity firm co-founded by presidential candidate Mitt Romney, has a history with Physio-Control. Bain acquired Physio from Eli Lilly in 1994 for undisclosed sum, although speculation was that it paid $200 million to $300 million at the time. One year later, Physio-Control went public. By 1998, Bain cashed in, selling Physio to Medtronic for $538 million.

Webster, who has more than 20 years of experience at Physio, remembers what it was like under Bain ownership before. And he sounds like he’s looking forward to it again.

“We have a high degree of respect for the Bain Capital team, and are thrilled about having them as our new owners,” Webster says. “Some of the things you get out of an ownership change is more focus. We were a small piece of a large company, and by definition, you don’t get that kind of focus. You’ll see a company focused on growth. I expect we’ll be more aggressive in the marketplace, we’ll be nimble, quick, and you’ll see a stream of medical devices innovations.”

While being more aggressive, Physio-Control does have some work to do in tightening up its financial statements. The company generated almost $430 million in revenue last year as part of Medtronic, and it does expect to increase that number in 2011, Webster says. Physio-Control is profitable, he says, but it doesn’t disclose its actual net income. Cramer said the company will be in better shape once it increases its gross profit margins by 10 to 15 percentage points.

The $487 million purchase price being announced today might sound low for a company with almost $430 million in annual revenues, but as Webster joked “the Bain guys feel like it’s a pretty big check.” Uncertainty in the economy, and a general down market for acquisition premiums put downward pressure on the purchase price, Webster says.

Locally, Physio-Control has a long history as a company that has collaborated with the Seattle Fire Department’s Medic One program, the Seattle and King County Emergency Medical Services, the University of Washington Medical Center, and other partners. Those relationships will continue, and Physio is looking forward to “strengthening our footprint as a local employer,” Webster says.

At some point in the future, Cramer says it could be possible for Physio-Control to go public again. But that’s not the first thing on Webster’s mind today.

“We are excited about the opportunity to be a privately held, standalone Physio-Control,” Webster says. “We are looking forward to the future.”

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