Eye care specialist Cooper Companies (NYSE: COO ) is getting into the med-tech merger game and not just as a "me too" player. The company's acquisition of Sauflon Pharmaceuticals carries a steep price at nearly six times forward revenue, but the company is filling out its silicone hydrogel product line and advancing its position in this market by years. Although I continue to believe that Cooper would be well-served to either grow its ob/gyn and fertility businesses or divest them, it's hard to argue with a company generating double-digit growth and double-digit returns on capital.
Cooper announced after the close on Monday that it had reached an agreement to acquire Sauflon Pharmaceuticals, a British soft contact lens manufacturer. Sauflon is a small player on the overall global stage, with less than 2% contact lens market share, but the company has a particularly strong position in silicon hydrogel (or SiH) lenses, with a full line of SiH dailies including spheres, torics, and multifocals.
Cooper is paying a steep price for Sauflon – paying 5.7x the forecast $210 million in revenue for Sauflon for the year ending October 31, 2014. This is not an unreasonable premium for growth med-tech, as deals can routinely go off at 6x to 8x revenue, and Sauflon is looking for 22% yoy growth for fiscal 2014.
Cooper will largely fund the transaction with debt, and its current $1 billion credit facility carries a rate of LIBOR plus 0-75bps. Management will likely look to transfer some of this to term debt, but overall interest costs will be quite low. Management's comments don't suggest that cost synergy efforts are an immediate priority, but I would expect opportunities to trim duplicate back-office expenses as well perhaps as some overlapping manufacturing, marketing, and R&D costs.
What Cooper gets from this
In buying Sauflon, Cooper is giving its SiH business a real shot in the arm. Cooper has a history of doing well in complex areas like torics and multifocals, but the company was slow to get on board with SiH and has been playing catch up in this premium category (which can carry premiums of 20% or more).
Sauflon's Clariti line of daily SiH lenses is expected to grow 43% to $85 million this fiscal year, and the combination will push Cooper into the number two slot in Europe's soft contact lens market with about 30% share (behind Novartis's Alcon at 35% and ahead of Johnson & Johnson at 26% and Valeant's Bausch & Lomb at 8%). Globally Cooper will still be number three with about 20% share, behind Johnson & Johnson's 43% share, Novartis/Alcon's 24% share, and Valeant/B&L's 9%.
Importantly, Sauflon gives Cooper a full line of SiH dailies, including spheres, torics, and multifocals. On its own, it was going to take Cooper a few years to get there and while the Clariti line got FDA approval in 2013, the company has only launched on a limited basis in the U.S. Sauflon's Clariti line does not mean that Cooper is abandoning its MyDay line; Cooper will go forward with Clariti as the mass-market line and MyDay as a premium product.
SiH lenses still look like a growth opportunity. Leaving aside the revenue benefit from a more complete product line, Cooper is also looking at a U.S. market where SiH penetration it about half that of Europe or Japan. It may be hasty to assume that the U.S. market will quickly move to parity, the incremental growth potential is still meaningful for Cooper.
The bottom line
I continue to believe that there are opportunities for Cooper to grow its ob/gyn and fertility businesses; this segment saw 9% revenue growth in the fiscal second quarter with high teens growth in fertility, and I believe the company still lacks optimal scale for this market. Be that as it may, I have no major quibbles with the Sauflon deal as it quickly fills gaps in Cooper's product portfolio and augments the fastest-growing part of the vision care business (SiH sales were up 20% in the second quarter for Cooper).
Cooper doesn't leap out as a cheap stock, but I do not believe the shares are expensive. If Sauflon can help facilitate the company's progress toward 9% annual revenue growth and free cash flow margins in the low to mid 20%'s, the shares are still undervalued.
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