Vice President: Daniel Dutch
Analysts: Aaron Cohen, Joshua Green, Gal Gazit, Adam El Jazouli
Acquirer: Olympus Medical Systems Corp
Acquiree: Taewoong Medical Co. Ltd
Deal Size: $370m
Olympus Medical Corporation is a global leader in the design and manufacture of innovative medical technologies. They offer a broad range of products, including endoscopes, surgical instruments, and imaging systems, which are used in diagnosis, treatment, and management of a variety of medical conditions. With over 100 years of experience, Olympus has established a reputation for quality and reliability, providing healthcare professionals with cutting-edge tools to improve patient outcomes. The company's commitment to research and development has led to numerous ground-breaking technologies, such as the world's first 4K surgical imaging system.
Similar to Olympus, Taewoong Medical Corporation is a leading manufacturer of endoscopic devices for various medical applications. Established in 1991, the South Korean company has expanded its reach to over 70 countries worldwide. Taewoong Medical's products include stents, endoscopic accessories, and endoscopic ultrasound needles.
Deal Summary and Structure
On the 30th of June 2023, Olympus medical systems, a worldwide healthcare technology firm, expects to complete the acquisition of Korean medical devices firm Taewoong Medical (1). Both Olympus and Taewoong are technology-based healthcare firms that aim to provide therapeutic and diagnostic technologies with the goal of improving international patient care with minimal invasivity. As Taewoong specialise in the production of GI stents, this acquisition will aid Olympus in expanding and bolstering their GI endotherapy portfolio capabilities. This has been confirmed by the global head of Olympus therapeutic solutions Gabriela Kaynor, as she has stated: “Olympus’ Endotherapy Division is committed to providing a full portfolio of clinically differentiated technologies aimed at treating patients who suffer from GI disease, and with the acquisition of Taewoong Medical, this further demonstrates our commitment to this critical segment of our business”.
During Olympus’ most recent fiscal year (ending on March 31st, 2022) they generated a revenue of 257.6 billion yen (roughly $2 billion). Their acquisition of Taewoong isn’t their first in recent years, as Olympus acquired Veran Medical technologies for $340 million, to begin producing its first single-use bronchoscopes. Olympus continue to grow and have obtained a 40% market share within the industrial endoscopes sector and is undoubtedly a world-leading manufacturer of biological microscopes. With 50 million colonoscopies performed worldwide and having treated approximately 100 diseases or conditions, Olympus have been awarded 291 awards since 1966 and from 2012-2022, have been awarded as one of the top 100 most innovative companies in the world, and as they continue to strive for excellence, they aim to become a net zero CO2 emissions firm by 2030 (21). As for Taewoong, thanks to outstanding innovation from their small yet ingenious R&D team, they have been able to produce exceptional endoscopic devices for gastrointestinal procedures, in particular, their metallic GI stents, which can be used to open up a biliary tract, colon, oesophagus or duodenum that had been narrowed due to several conditions in one's digestive system and/or cancer, whilst minimising invasiveness.
The deal will be in the region of $370 million (2) , $255.5 million which will be paid at closing, with the other $114.5 million dependent upon the completion of future milestones (all to be paid in cash), as Olympus aims to grow in the gastrointestinal market and offer a broader portfolio of products. This figure constitutes a large premium over Taewoongs yearly earnings, that being $49.8 million and $9.9 million (2021) in annual sales and operating income respectively. Taewoong’s portfolio will be housed within Olympus’ therapeutic solutions segment once the transaction is complete.
The global medical device testing services market size was valued at USD 7.5 billion in 2021, and it is anticipated to exhibit a compound annual growth rate (CAGR) of 9.0% throughout the forecast period (5). The COVID-19 pandemic has accelerated the demand for testing services worldwide in the short term. The market is primarily driven by the growing impact of strict government regulations, resulting in the increasing demand for the verification and validation of medical devices. The rise in small medical device firms without in-house expertise is also accelerating market expansion. Technology advancements like wearable and artificial intelligence (AI), along with a focus on real-time patient monitoring, have created a complex ecosystem for medical devices. To receive marketing authorization, these devices must go through methodical testing in a hurry. The need for medical device testing services to be outsourced is expected to increase because conducting these tests in-house takes a lot of time, cost, and labour.
Ongoing technological development in the medical industry is also likely to have a positive impact on the demand for testing services during the forecast period. Advancements in the development and standardization of novel in-vitro test methods, particularly for sensitization, cytotoxicity, and irritation, are also likely to propel market growth. These are some of the most basic tests required for all medical devices. The demand for medical device testing rose significantly in response to COVID-19. However, the vast majority of medical equipment being tested is personal protective equipment (PPE) because there are not enough medical devices available. Testing of PPE includes confirming their reusability, even with regard to single-use masks. Most face masks were designed to be single-use items before the pandemic began. Many manufacturers are working on ways to test these masks for multiple uses, but their global scarcity is forcing them to do so. Fitment checks, original filtration specifications compliance checks, and sterilization checks are all part of the test.
Medical device regulations vary by country, and each manufacturer is required to abide by them when promoting its goods there. For instance, the U.S. adheres to FDA regulations, Canada demands Health Canada registration, Europe takes into account CE approval, and India demands CDSCO approval. Consequently, it is difficult to introduce a product on a global scale because of the disparate regulations in various nations.
Companies are increasingly focusing on specific areas due to the high competition in the market. For instance, TÜV SÜD announced in 2021 that it would attend MedTech LIVE to demonstrate its capacity as a one-stop shop for medical device testing. In order to improve their product portfolio and gain a competitive edge, market players are also actively involved in a variety of strategic initiatives, such as the introduction of new services, collaborations, partnerships, mergers & acquisitions, and geographic expansion.
The healthcare industry has witnessed several mergers and acquisitions (M&A) in recent years. Some of the notable deals in the industry include the merger of CVS Health and Aetna, the acquisition of Celgene by Bristol-Myers Squibb, and the merger of Cigna and Express Scripts. In the global medical devices market, some of the recent deals include the acquisition of NxThera by Boston Scientific Corporation, the acquisition of Mazor Robotics by Medtronic, and the acquisition of Invuity by Stryker Corporation.
Source: Statista (25)
Deal Rationale and Synergies
The acquisition of Taewoong Medical by Olympus is expected to result in significant revenue synergies. This is because it provides Olympus with access to a wide range of high-quality GI stents, which will immediately enhance its already robust offering of GI devices. This will enable Olympus to offer a comprehensive range of solutions to its customers, thereby increasing its market share and revenue.
The acquisition will also enable Olympus to realize cost synergies through the integration of Taewoong Medical's operations with its own. By leveraging its global reach and infrastructure, Olympus can optimize Taewoong Medical's supply chain, manufacturing, and distribution operations, thereby reducing costs and improving efficiency.
The acquisition of Taewoong Medical by Olympus is a strategic move for both the buyer and the seller. From the perspective of Olympus, the addition of Taewoong Medical's portfolio of GI metal stents aligns with their medical business strategy of targeting GI as one of its key disease states. This acquisition will enable Olympus to become a comprehensive solutions provider in the GI market, contributing to improved patient outcomes and elevating the standard of care. It also demonstrates Olympus’ commitment to providing a full portfolio of clinically differentiated technologies aimed at treating patients who suffer from GI disease (6). By acquiring Taewoong Medical, Olympus can expand its product and technology strengths through synergies with the products and technologies of acquired companies, ensuring that they capture maximum value through these integrations.
On the other hand, Taewoong Medical is a leading manufacturer of GI stents with a wide range of highquality stents realized through its unique design and technology capabilities. The company has a robust market presence in Korea, Japan, and Europe, and exports to 86 countries worldwide. Joining forces with Olympus will enable Taewoong Medical to focus its capabilities to provide medical professionals and patients with superior products and services through continuous investment in R&D and manufacturing technology. This acquisition provides Taewoong Medical with the resources and support to expand its reach and further enhance its product offerings.
Deal Valuation and Key Financials
Olympus Corp Financial Analysis
Olympus Medical is the 20th largest MedTech Firm in the world alongside being the largest within the Asian – Pacific Region, operating and headquartered in Japan it is publicly listed on the Japanese stock exchange (8).
Taewoong Medical Financial Analysis
The South Korean Firm Taewoong Medical operates in the niche market of the design, production and manufacturing of Gastro-Intestinal Stents, the company is yet to go private and its ownership structure still reflectors that of its early days when it was founded in 1992 by Kyong Min Shin who has retained and 81% of all shares and is still the acting CEO. If the deal goes ahead, targeted to be completed on June 30th, 2023, Olympus will purchase all 177,918 shares outright in cash (9).
(9), (10), (11), (12), (13)
Compared to other MedTech companies: (all publicly listed) (14), (15)
There are concerns over the price tag that Olympus has agreed to purchase, it could be seen to an overvaluation of the company (16). From the data we can see that the industry average EV/EBITDA ratio is somewhere between 21x – 24x, comparing this to that of Taewoong Medical it is almost 1.5x times the industry average although there is a bit of leeway given depreciation and amortization have been deducted from the available figure. A high EV/EBITDA ratio is often a sign of a company’s stock being overvalued, if we compare this to the value of the share capital this argument is made even stronger. If we were to conclude that the share capital should be the real enterprise value Olympus will be set to pay a premium $292.62m USD, over 3.7 times the share capital! Although this is a bad estimate for the actual Enterprise Value of Taewoong it provides a good picture towards the disparity between the share capital and agreed purchase price.
However, if we look through other statistics, we find that this is a perfectly justified premium to pay. A large consideration must be Taewoong Medicals high revenue earnings in FY2022, bringing in $54m USD. This figure cannot be taken as a one off as in FY2021 Taewoong Medical earnt another $50m USD and can be taken as a sign as a sign as a fundamentally well run and succeeding company. Evidently Olympus are optimistic about potential of this firm forecasting an increase in revenue by 16% in FY2023 to a total of $63m USD. Despite the strong performances from Taewoong Medical in recent years, there is certainly more to the why this premium is so high that just strong revenue figures (16).
The most interesting aspect to this deal is the delayed payment structure, despite presenting headlines as ‘$370 million cash’, only $225m will be paid on the completion date in late June. The final payment worth around 30% of the deal is not only set to be completed on a later date but instead is stringent on the achievement of “future milestones” that haven’t been specified yet in any public press releases made by the Olympus corporation. This aspect of the deal has large significance to the premium that they paid.
Taking a brief look at the trends of EBIT growth there lacks a distinct pattern however if we investigate possible causes through simply looking at world events, we find the losses in FY2020 are down to the pandemic and the rapid growth is down to the recovery from the pandemic leaving FY2022 as our closest estimate to a ‘normal’ year that we are likely to encounter this year. However, comparing this to Olympus 2023 forecast there is a significant difference. 9% growth is extremely impressive in itself; however Olympus expects operating profit to grow 35% percent this year! This wildly optimistic approach to the future success of the acquisition requires questions towards how realistic these ‘future milestones’ that have been set really are (17).
Through analysis of our EV/EBIT figures if Olympus is only set to pay the first set of instalments, our ratio would fall right into around that of the industry average but if the performance of the firm goes as well as it has been projected, we will find that the EV/EBIT ratio will fall right in line with the industry average once again (13). Likely this is a key aspect to why Olympus appears to have paid such a significant premium, which from further inspection isn’t as large and depending on the agreed targets is completely justified and in line with what is expected (18).
Apollo Endosurgery acquired by Boston Scientific
On the 20th of November 2022 we saw an extremely similar deal announced except this was from two western firms. Boston Scientific, an American MedTech firm with its hand in a multitude of areas just like Olympus was looking to expand its Endo-surgery devices product portfolio and targeted the purchase of Apollo Endosurgery for an agreed price of 10 USD a share, totalling to roughly 615m USD. Apollo Endosurgery specialise in the offering new innovative solutions to closing gastrointestinal defects, particularly their devices that are used in endoluminal surgery (ELS.) Boston Scientific is more interested in the potential of what Apollo Endosurgery has to offer opposed to value that they add in the present (19). In fact, Apollo Endosurgery haven’t been profitable from in the last 4 years. Boston Scientific is enthusiastic about the ability to enter the endobariatric market, which is poised to grow at a CAGR of 5.7% through 2022- 2027. Comparing our key financial figures such as net income to that of our focused deal, it appears Olympus has done extremely well to acquire Taewoong Medical as unlike Boston Scientific they have been able to successfully add value to their large corporation whilst still adding huge potential to their product portfolio.
There are several risks associated with the acquisition of Taewoong Medical by Olympus. One potential risk is the integration of two different corporate cultures, which may lead to conflicts and delays in realizing expected synergies. Another risk is the potential for regulatory hurdles, as the acquisition may face scrutiny from antitrust regulators. Additionally, there may be challenges in integrating Taewoong Medical's operations with Olympus' existing business operations, which may result in disruptions to operations and the loss of key talent. Furthermore, there is a risk associated with the performance of Taewoong Medical's business after the acquisition. If Taewoong Medical's products fail to meet the required standards or if its sales decline, it could negatively impact the financial performance of Olympus. To mitigate these risks, Olympus will need to carefully manage the integration process and ensure that the two companies work collaboratively to achieve their common goals.
Moreover, much of the reasoning behind this transaction is based on anticipated future innovation. However, R&D is inherently uncertain; there is no guarantee that increased support and funding will result in the desired results (20). One reason for this is their dependence on key personnel. Innovation in small companies like Taewoong (which has less than 300 employees (15)) tends to rely on just a few individuals. These biotech engineers are where the true value of the company comes from, as they’re the ones responsible for driving the technological innovation and developing the stents from which the cash flow comes from. Microsoft wouldn’t have grown into what it is today if it wasn’t for the computer genius of Bill Gates and Paul Allen. The same way Taewoong wouldn’t be where it is today if it wasn’t for the genius of its R&D team. If any of these lead developers were to leave the company, Taewoong would lose its key asset and with it much of its value to Olympus.
Integrating with an R&D-focused company can also be a challenge. Taewoong is likely to have its own unique culture. Being a small tight-knit company, it might struggle to move over to working with a much bigger corporation like Olympus. If they disturb the innovative environment which Taewoong have been able to foster, it could result in a cultural clash. During the transition period, Olympus' management team must be wary of exerting too much control if they want to receive the full value of their investment (21). It is also critical to consider the market's overall risks. Macroeconomic uncertainty persists following the Covid19 pandemic, which was exacerbated by the Russia-Ukraine conflict. In addition to the intense competition in the biotechnology sector.
The Niti-S Hot SPAXUS™, Taewoong's flagship product (22), is one of many products affected by the global metal shortage. It must be made of a nickel-titanium alloy called nitinol in order to be both durable and flexible. Unfortunately, nickel is one of the five metals in which Russia has a sizable market share (9%) (18). This means that as long as sanctions against Russia remain in place, the price of nickel will rise. This could make scaling up Taewoong's production more expensive for Olympus, dampening any revenue synergies that could have been expected. Taewoong is not the only cutting-edge manufacturer of gastrointestinal stem cells. Many other comparable businesses are vying for the same clients. Boston Scientific, an American business that specialises in gastrointestinal stems, is a particular source of worry. They also just bought a South Korean R&D-focused company (23). With the development of their "Evolution" biliary stent system, which uses "over-the-wire" technology to be more accurate than other stents on the market (24), Boston Scientific has been very successful in fostering innovation. Taewoong will need to continue their successful developments if they wish to maintain their market share in the future.
This transaction is fairly typical in the biotech industry, with big corporations such as Olympus constantly acquiring smaller R&D-focused firms like Taewoong Medical. It is one of the best examples of how M&A can produce value for all parties, whether it be the acquirer, acquiree or even consumers. Revenue and cost synergies that will arise from the amplified product diversity will boost shareholder profits, whilst adding value in the form of innovative treatments in the GI market. Concurrently, increased R&D funding and the resulting innovations in gastrointestinal stents will improve the lives of patients all over the world. However, this is dependent on the management of both companies after the acquisition takes place. It is their responsibility to ensure seamless integration and preparation for the potential macroeconomic instability that lies ahead.
Note: The opinions expressed in the reports are those of the members of the Junior IB team and are not affiliated with any university or institution. The financial recommendations provided are for educational purposes only and the Junior IB team takes no responsibility for any losses that may occur from implementing any ideas presented in the reports. The Junior IB team is not authorized to provide investment advice. The information, opinions, and estimates presented in the reports reflect the Junior IB team's judgment at the time of publication and are subject to change without notice. The price, value, and income of any securities or financial instruments mentioned in the reports may fluctuate. The Junior IB team has no business relationship with any of the companies mentioned in the reports and does not receive any compensation for their inclusion.
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