Full article reprinted from Start-Up - August 2008
Warburg Pincus joined with two executives who built Cytyc into a leading women's health care company. Find out how together, they hope to identify a new venture for the pair to lead with the private equity firm's support.
Full article reprinted from Start-Up - August 2008
Warburg Pincus Teams with Cytyc Duo
Medical devices—and pharmaceuticals for that matter—offer very few certainties for success. The regulation risks, the demand for capital, and the uncertainty over new technologies give investors and executives little comfort. All that being said, it's difficult to see how Constitution Medical Investors Inc. isn't going to work. The Boston-based effort marries the Grand Canyon-deep pockets of Warburg Pincus LLC with the storybook credentials of Patrick Sullivan and Daniel Levangie, the executives who oversaw Cytyc Corp.'s rise from a shaky diagnostics business to a medical device powerhouse.
Together, the private equity firm and seasoned executives will seek out a new company for the pair to operate, while Warburg Pincus, which closed on a $15 billion private equity fund earlier this year, supplies the bulk of the capital.
The arrangement is a bit unusual. To be sure, the practice of private equity or venture investors establishing ties to executives with whom they've shared success isn't rare, but this is the first time Warburg Pincus is working with this pair. (See "Institutional Innovation in Devices," START-UP, June 2008.) Managing director Elizabeth Weatherman says she came to know Levangie when he accepted the role of independent director for her portfolio company, ev3 Inc. "I've admired their work from afar for quite a while," Weatherman says. "The Cytyc story was quite impressive and the culmination was extremely successful with the acquisition involving Hologic." Weatherman says one of her companies, American Medical Systems Holdings Inc., often competed with Cytyc to find suitable companies to acquire. "It's a small world we live in. They had some skeptics. I may have been one of them but the way they built that business and value for Cytyc is very impressive."
Weatherman says the partnership could go in many directions. Together, Constitution and Warburg will pursue the opportunity to acquire companies in any number of specialties and businesses. The one exception will be women's health, as the two former Cytyc executives will be limited by a non-compete agreement.
Cytyc's high profile success over the past five years makes it easy to forget its earlier troubles. The same company that sold to Hologic Inc. for $6.5 billion last year was nearly torpedoed by complaints over its clinical trials a decade ago. The company responded to those complaints by tossing out its initial 510(k) application and redoing its clinical trials. The company successfully received a PMA for its ThinPrep diagnostic for cervical cancer. Furthermore, it got the FDA to agree that the new diagnostic was significantly better than the Pap smear, the gold standard diagnostic at the time. (See "Dx Start-Ups: Separating the Wheat From the Chaff," START-UP, November 1997 .)
Patrick Sullivan led Cytyc's charge, taking over for the company's co-founder and chief executive Stanley Lapidus and putting the company on track financially and operationally at a time when diagnostic companies weren't popular with investors. Cytyc's challenges didn't end with the FDA approval. It then struggled to obtain reimbursement coverage from payors, but eventually won the day, growing from a single-test company into a women's health powerhouse. In fact, both Cytyc and Hologic had become beacons of hope for medical device investors, who were eager to find mid-sized device companies with acquisitive appetites. Since 2001 Cytyc itself had spent more than $1.1 billion acquiring companies, closing on deals for Adeza Biomedical Corp., Novacept Inc., Pro-Duct Health Inc., and Proxima Therapeutics Inc.
Upon leaving the combined company, the pair received offers from several private equity interests, according to Levangie, who previously served as Cytyc's executive vice president and president of its surgical products division. He also sits on Hologic's board. They also drew interest from corporate recruiters representing companies seeking new leadership. Constitution straddles both private equity and operational aspirations, giving the pair the vehicle to find the next company they would like to lead. Warburg Pincus will provide some of the costs associated with researching interesting fields and industries and vetting individual companies. "Or we may find something that we can build together," Weatherman says. "One of the things so impressive about them is they started with almost nothing. They had a technology that had a lot of issues that they had to resolve, and it was not clear that they could resolve them. Once they did they quickly got a significant business off the ground in an area that was quite contrarian at the time."
Weatherman says Warburg Pincus has had some success partnering with managers or management teams. "We don't have a specific cookie cutter model where we have to work with a management team in one way or another," she says. Weatherman says Warburg had a similar arrangement with Russell Olsen, who previously had been president of Straumann North America for two years and held senior management positions at several companies including Bristol-Myers Squibb, Smith & Nephew, and Empi. Olsen was charged with finding an opportunity in the dental market. His efforts led to the founding of Keystone Dental Inc. in 2006, a regenerative materials company manufacturing bone grafts used in dental surgeries.
The power of Warburg Pincus' support became evident when the firm took dental implant competitor Lifecore Biomedical Inc. private. Warburg Pincus paid $17 per share for 13.5 million shares in the company, a 26% premium over the trading price. The total cost of the transaction was $230 million. Lifecore reported $70 million in annual revenue at the time. Warburg Pincus merged Lifecore's dental business into Keystone. Lifecore remains a private company manufacturing medical grade hyaluronan (also known as hyaluronic acid or sodium hyaluronate), with a broad range of medical applications including ophthalmology and orthopedics.
Tom Salemi
Companies mentioned in this article:
American Medical Systems Holdings Inc.
Hologic Inc.
Cytyc Corp.
Adeza Biomedical Corp.
Novacept Inc.
Proxima Therapeutics Inc.
Lifecore Biomedical Inc.
Tenet Healthcare Corp.
American Medical Holdings Inc.
ev3 Inc.
Related Articles:
Jun-01-2008: Institutional Innovation in Devices (Start-Up)
Jul-01-2007: Cytyc Together with Hologic: There's a Certain Logic (IN VIVO)
Dec-01-2002: Cytyc's Second Child: Dressed Alike, But Very Different (IN VIVO)
Feb-01-2001: Cytyc and Digene Strike a Deal (IN VIVO)
Jan-01-2000: Cytyc’s Breakout Year (IN VIVO)
Nov-01-1997: Dx Start-Ups: Separating the Wheat From the Chaff (Start-Up)
START-UP: No publication reviews leading edge companies and technology better than START-UP. Each issue of START-UP profiles the most important new product companies, identifies the hottest technology areas, reviews funds flowing into private companies and investment trends, and reports on university tech transfer licensing. Industries covered: pharmaceuticals, biotechnology, medical equipment & devices, and in vitro diagnostics.
