Analogic Sold to Altaris

Publication Date: 17/04/2018

Written by

Steve Holloway
  • The leadership of Analogic Corporation (NASDAQ: ALOG) announced it will be acquired by an affiliate of Altaris Capital Partners, LLC a private investment firm
  • The deal values Analogic’s business at $1.1B ($84.00 per share), a 12.5% discount on share value at close of business on day of announcement (10th April 2018)
  • A significant proportion of the Analogic business (30% in 2017) focuses on ultrasound supply direct to providers and its ultrasound OEM business; this unit was formed from the acquisitions of BK Ultrasound (in 1993), Ultrasonix ($83m, 2013) and PocketSonics (not fully disclosed, estimated at $11-14m, 2013)
  • The deal with Altaris is expected to close second half 2018

It was only last year that Analogic was celebrating 50 years as a significant player in the medical imaging supply chain, supporting the extensive growth of the X-ray, CT and MRI markets globally with innovative engineering and unique products. However, the last decade of its history has seen a tumultuous period for the firm with a now uncertain future under new private investment owners.

Here’s our view of the deal, the challenges of the past and what lies ahead:

Risk Baked into the Price

While the firm was quick to point out that the sale price was a significant improvement on the stock price the day it announced a strategic plan to sell the business (Jun 7th, 2016 – stock price closed at $67.45), the agreed price does appear to undervalue the firm, especially given 2017 revenues were $486.4 million, with over $170m in cash on the books.

However, these headline numbers tell little of a challenging period for the firm of late. Overall the firm’s stock has underperformed, falling well below peer and market indices performance over the last five years. Moreover, two other factors have been significant:

Risk exposure to a small base of large customers in medical imaging

The largest proportion of the Analogic business is driven by the Medical Imaging OEM products, which accounted for 56% of net revenues in 2017. However, over 60% of this business is dependent on only 10 customers, such is the consolidated nature of the advanced medical imaging market. Any disruption downstream in this chain (such as the acquisition of Toshiba Medical by Canon Inc.) can significantly impact revenues.

While not exclusively reported for healthcare only, the firm’s annual report clearly shows a slide in business with two of its largest OEM customers, resulting in a hit on net revenue (a 6% slip from 2015 to 2017). With little sign of new entrants pushing into its downstream segments at significant scale, this will certainly be a concern for the new owners looking ahead to the future.

Poor integration of acquisitions in ultrasound and failed point-of-care ventures

Perhaps more noticeable has been the relatively poor performance of the ultrasound business, a consequence of poor acquisition integration and a misguided market strategy.

The foundation of the ultrasound business, BK Medical, was a relatively solid performer (apart from well-publicised issues with accounting irregularities), having carved out a leadership position in speciality segments like surgical ultrasound. However, later additions Ultrasonix and PocketSonics, despite being well revered specialists, were not successfully integrated. This is especially evident when observing the longer-term trend in financials:

  • In 2012, ultrasound revenues for Analogic were reported at $151m, preacquisition of Ultrasonix and PocketSonics
  • The combined acquisition investment by Analogic for the two businesses was approximately $100m in 2013
  • In 2017, total ultrasound revenues for the Analogic business only accounted for $143m, approximately 5% lower than in 2012
  • The global ultrasound market has grown on average approximately 3-7% annually the same period

While the full extent of the problems faced by the business unit are unclear to outsiders, a few factors seem to have contributed most heavily to such poor performance.

Firstly, an inability to well integrate the Ultrasonix business with the legacy BK Medical business and limiting the impact of own market share cannibalisation (Ultrasonix competed with BK Medical in some sectors). The firm also continued to retain both brands and product platforms for too long, resulting in confusion for customers.

Secondly, the strategy around point-of-care markets failed. In anaesthesiology, an increasingly crowded market where Analogic had significant competition from much larger firms and lower-priced competitors, the business struggled to compete. It also invested in market entry to new or poorly established markets, such as the with SonicWindow product for dialysis point-of-care use and the Oncora veterinary ultrasound venture. Both had little relevance to their core market segments or customer base.

Combined, this resulted in declining revenues for the ultrasound business and the announcement of plans in 2017 to discontinue a significant proportion of the Ultrasonix portfolio and SonicWindow product, while also ceasing investment in the Oncura veterinary venture. Essentially, a vast proportion of their investment has been written off.

More Deals Ahead for Ultrasound?

The next steps for Analogic under new ownership at this stage are unclear. As is often the case with private investment though, a ruthless approach is to be expected.

While it has been underperforming for some time, the direct-to-consumer ultrasound business still holds significant market value, given the strong share, speciality and intellectual property of the firm in surgical and urology ultrasound. This could well be attractive to one of the leading ultrasound vendors, especially those looking to expand their clinical breadth into new areas, or incumbents looking to “lock out” competition. Given that the ultrasound market continues to look a safe growth prospect for the foreseeable future, a sale of the Analogic ultrasound business could offer a reasonable return on investment for Altaris in the short-term.

For the medical imaging OEM business, a quick sale is perhaps less likely, both due to a limited list of potential suitors and the fact the business is more closely linked with the Security and Detection business line. This suggests instead it will be more likely a target for aggressive restructuring of operations and manufacturing to drive improvements in efficiency, rather than a further break-up in the near future.

So, despite a longstanding and heralded legacy, the future of Analogic as we know it looks set to change.

About Signify Research

Signify Research is an independent supplier of market intelligence and consultancy to the global healthcare technology industry. Our major coverage areas are Healthcare IT, Medical Imaging and Digital Health. Our clients include technology vendors, healthcare providers and payers, management consultants and investors. Signify Research is headquartered in Cranfield, UK.

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