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Teleflex seeks more medical device acquisitions to boost R&D

Teleflex Inc., a former industrial conglomerate, is expanding its role in the medical device industry with strategic acquisitions.

Teleflex started out as a manufacturer of multistrand helical cable used on Spitfire planes in World War II, but the company became a pure-play medical device entity around 2011. After Teleflex shed its non-medical assets, the company acquired LMA International in 2012, Vidacare in 2013 and, most recently, Vascular Solutions in 2017. Those deals added products centered on anesthesia and emergency care, as well as bone-accessing devices and catheters.

"The medical device space is really built on a combination of both internally developed products and then also doing M&A to bolster your portfolio, and I think Teleflex is no different," Jake Elguicze, the company's vice president of investor relations and treasurer, told S&P Global Market Intelligence. "We tend to try to do acquisitions within our existing call points and strategic business units."

Teleflex will continue to do deals of similar size to LMA International, bought for $276 million, and Vascular Solutions, bought for $1 billion, according to Elguicze.

Teleflex repaid $90 million of bank debt during the second quarter, which resulted in a reduction of gross leverage to 3.3x, Thomas Powell, CFO and executive vice president, said on the company's earnings call Aug. 3.

The company prioritizes keeping gross leverage levels around the 3x gross mark, but, for the right acquisition, Teleflex would be willing to take those leverage levels to about 3.5x, if not slightly higher, as long as there was a path back down to the 3x mark, Elguicze said.

Growth rates

Leerink analyst Richard Newitter has a "market perform" rating for the company after second quarter results, saying Leerink would like to see Teleflex deliver sales growth nearer to other suppliers, such as C. R. Bard Inc., which reported a 5% increase in second-quarter sales. Teleflex's second-half growth acceleration in China and expectations for core volume acceleration above the 1.4% delivered in the first half are in line with the company achieving guidance, Newitter said in an Aug. 3 note.

Although the company's days as a Spitfire supplier are in the past, the U.S. Army is involved in developing RePlas, a product Teleflex acquired via Vascular Solutions, Elguicze said. RePlas is freeze-dried plasma, and the product is undergoing an Army-funded U.S. Food and Drug Administration clinical trial.

There are a French company and a German company that already produce freeze-dried plasma, but neither of those firms has a U.S. 510(k), or premarket notification, clearance or are undergoing clinical trials for the products, Liam Kelly, president and COO, said on the call.

RePlas differs from these products not because it is freeze-dried, but because of its delivery. Most similar products today are in glass jars, such as those featured on the popular television program "M*A*S*H," Kelly said, whereas RePlas is in a compressible bag.

"The double valve on our bag is where the IP lies, and we have really strong IP around that," Kelly said on the call, referring to intellectual property.

Military interest

The military is likely very interested in the product because of its compact size, which is easy for soldiers and medics to carry, and it can be immediately activated in a battlefield situation by injecting saline into the packaging, Elguicze said.

Fresh frozen plasma normally requires 45 minutes to thaw in a 37 degrees Celsius water bath, according to the National Center for Biotechnology Information.

The phase 1 24-patient study began in May and is expected to end in 2018. A second clinical trial that is expected to end in 2019 will also be conducted. The company's goal is to commercialize RePlas in 2020.

Vascular Solutions had estimated RePlas to be a $100 million market over time, and Teleflex, which owns all commercialization rights, maintains that estimate, according to Kelly.

In surgical devices, Teleflex has the second-generation Percuvance percutaneous surgical system that received U.S. FDA clearance and European CE mark approval in 2016.

"We would estimate that this could be a $300 million to $400 million market opportunity over time," Elguicze said.

The system is used in minimally invasive surgeries and eliminates the need for multiple trocars, or medical devices that create a portal in the abdomen for the use of surgical instruments.

Percuvance has a 2.9 mm shaft with a needle tip that enters directly into the abdomen and is brought out through an existing trocar in the belly button. The surgical system has a variety of tool tips for cutting, grasping and retracting that can be exchanged when the device's tip is outside of the skin.

Teleflex had a voluntary recall of the Percuvance percutaneous surgical system in the second quarter this year, but the company has since brought a replacement product into the market. The recall will not materially impact performance in 2017, according to Kelly.