Natus Medical Incorporated (NASD: BABY) is a member of the Mirador Tri-Valley Index (MTVX) and a company that we believe has a number of desirable characteristics.
Founded 1987, BABY provides neurologic and infant diagnostic and monitoring devices to medical care practitioners worldwide. Its solutions are used to screen, diagnose, treat, and monitor various conditions relating to newborn care, hearing impairment, neurological dysfunction, epilepsy, sleep disorders, neuromuscular diseases, as well as balance and mobility disorders.
The Tri-Valley Connection
Having a presence in the Bay Area where scientific resources and medtech opportunities are abundant plays well for R&D. Natus has locations worldwide, from Illinois to Argentina, but their headquarters has always been in Pleasanton. BABY employs over 1,100 people, many of whom work out of the company's Pleasanton location.
Earlier this week, Natus Medical Incorporated announced that it will acquire certain neurosurgery business assets from Integra LifeSciences Holdings Corporation for approximately $47.5MM. Integra is seeking to acquire Codman Neurosurgery (a division of Johnson & Johnson), and is divesting of a number assets as a condition for regulatory approval. The assets Natus will acquire include the global Camino intercranial pressure monitoring business (which includesthe division's manufacturing facility in San Diego) as well as US rights to a number of key products, including Integra's fixed pressure shunts and Codman's dual graft implants, as well as various catheters and collection systems. Together, these assets generated a combined $50 million in 2016. The all-cash transaction is expected to close in October 2017 and is contingent upon Integra's acquisition of Codman Neurosurgery.
The acquisition is an entrypoint for Natus, an industry leader in neurodiagnostics, into the adjacent neurosurgery market, with an estimated market size of roughly $2BN, according to company filings. The deal represents 1x product revenue, an attractive multiple in the current market (Natus, Integra, and Johnson & Johnson each trade at well over 2x the deal multiple). Given the complexity of a dual-transaction, Integra appears to have placed a premium on speed and execution, and in a recent healthcare conference, Integra CEO Peter Arduini cited BABY's ability to move quickly as an important factor in choosing a buyer. BABY's proven acquisition history, along with its strong balance sheet (over $80MM cash as of 6/30/2017) make it an attractive partner.
Although Natus hasn't released updated guidance reflecting the new business unit, CEO Jim Hawkins expects the acquisition to be immediately accretive to earnings with similar operating margins as Natus. This suggests that the additional $50MM of revenue should translate into an additional $6MM of GAAP EBITDA, further de-risking our thesis around valuation and forward revenue. We look forward to following Natus' expansion into neurosurgery, and are optimistic about the opportunities ahead.
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