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Investment Proposal

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Investment Proposal for to acquire Deal Team: Gerson R. Guzman Vassil Georgiev Ricardo Wilson Russell Workman Finance 751 Professor Vinay B. Nair Investment ... – PowerPoint PPT presentation

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Title: Investment Proposal


1
Investment Proposal for
to acquire
Deal Team Gerson R. Guzman Vassil
Georgiev Ricardo Wilson Russell Workman
Finance 751 Professor Vinay B. Nair
2
Investment Recommendation
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

Guzman Workman Georgiev Wilson
FNCE 751 Confidential Investment Memorandum
3
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.
U.S. Individuals with Atrial Fibrillation By Age
880,000
800,000
574,000
443,000
400,000
246,000
209,000
125,000
50,000
Source CryoCor with data provided by the
National Institute of Neurological Disorders and
Stroke and Go et. al., JAMA May 9, 2001
Guzman Workman Georgiev Wilson
FNCE 751 Confidential Investment Memorandum
4
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.
Procedure - Atrial Fibrillation CryoAblation
A.
B.
The CryoCor Cardiac Cryoablation catheter is
passed through the sheath across the inter-atrial
septum and into the left atrium.
The CryoCor sheath dilator is inserted at the
groin and advanced into the right atrium.
C.
D.
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.
Source CryoCor website.
Guzman Workman Georgiev Wilson
FNCE 751 Confidential Investment Memorandum
5
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
Weaknesses
  • Focus on cardiac arrhythmia market has allowed
    firm to develop RD 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 firms
    proprietary position
  • Firm holds 72 exclusively licensed patents and
    patent applications
  • Over 110 proprietary patent applications/disclosur
    es in the firms intellectual property portfolio
    that are in various stages of patent prosecution
  • 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

Guzman Workman Georgiev Wilson
FNCE 751 Confidential Investment Memorandum
6
SWOT Analysis
The firms ability to capture a significant share
of a 530M annual market depends on securing
regulatory approval and bringing the product to
market quickly.
Opportunities
Threats
  • 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.
  • 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

Guzman Workman Georgiev Wilson
FNCE 751 Confidential Investment Memorandum
7
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?
Guzman Workman Georgiev Wilson
FNCE 751 Confidential Investment Memorandum
8
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

Guzman Workman Georgiev Wilson
FNCE 751 Confidential Investment Memorandum
9
we decided to work out a Binary Option
Valuation model
Guzman Workman Georgiev Wilson
FNCE 751 Confidential Investment Memorandum
10
Market Based Valuation
Potential annual revenue was estimated based on
securing 50 of an annual 72M market.
Guzman Workman Georgiev Wilson
FNCE 751 Confidential Investment Memorandum
11
Valuation Summary
The 175M valuation, assuming all earnouts are
achieved, is in line with the various valuation
methodologies explored.
Guzman Workman Georgiev Wilson
FNCE 751 Confidential Investment Memorandum
12
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

Guzman Workman Georgiev Wilson
FNCE 751 Confidential Investment Memorandum
13
Conclusion
The proposed transaction is a strategic fit
merging CryoCors niche product development with
Boston Scientifics 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

Guzman Workman Georgiev Wilson
FNCE 751 Confidential Investment Memorandum
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