Is a $450 Million Bet on a Niche Medical Segment Worth It? Boston Scientific's Strategic Acquisition of AcoTec Highlights Value in Peripheral DCB Leadership

Earlier this week, medical device giant Boston Scientific launched a tender offer to acquire up to 65% of the majority shares of Hong Kong Stock 18A company Acotec at a price of HK$20 per share, with an estimated transaction amount of approximately US$523 million.

Compared to Boston Scientific's numerous acquisitions in recent years, the Acotec project may not be large, but it is certainly eye-catching — it has shattered the industry’s common perceptions about related fields.

First, there is a 32% acquisition premium. Acotec went public on the Hong Kong Stock Exchange in September 2021, just in time for a bear market in pharmaceuticals and medical devices. After its IPO, the company's stock price continued to decline along with the industry until it turned a profit in this year's half-year report, which brought some improvement. Now, Boston Scientific's offer of 20 yuan per share directly surpasses Acotec's best performance in the secondary market, representing a 102% premium over the closing price on the day the "letter of intent" for the transaction negotiations was confirmed.

Secondly, this is the only acquisition by a multinational company targeting a Chinese listed company in the past five years. Despite the explosive growth of pharmaceutical and device projects in both primary and secondary markets, investment and mergers and acquisitions have been scarce and limited to transactions between domestic companies. Amidst homogenized competition, foreign enterprises are more inclined towards partnerships rather than acquisitions to avoid operational risks.

Numerous "unconventional" operations have drawn widespread attention from industry insiders. What can Boston Scientific gain from acotec in the cold pharmaceuticals and medical devices sector of 2022? And how can acotec manage to thrive against the market trend?

At its inception in 2008, Acotec primarily focused on the research and development of cardiac radiofrequency ablation catheters. It wasn't until 2011, when Jing Li and Silvio Rudolf Schaffner, both from Invatec, acquired the company that the newly reborn Acotec embarked on its journey into peripheral interventions.

At the time of the acquisition, peripheral interventions had yet to "come to the forefront" both in China and globally. Under Li Jing's leadership, acotec was the first to break into this rarely explored field, starting from scratch to develop peripheral drug-coated balloons (DCB). In 2016, acotec launched AcoArt Orchid® & Dhalia, China’s first peripheral DCB product, ending the long-standing reliance on imported peripheral vascular intervention treatments in the Chinese market.

Subsequently, Acotec continued to focus on peripheral drug-coated balloons (DCB), and its second DCB product, AcoArt TulipTM & Litos, was designated as a "Breakthrough Device" by the FDA in 2019. It received approval from the National Medical Products Administration (NMPA) in December 2020, becoming the world's first and only DCB product for below-the-knee (BTK) treatment to be approved by regulatory authorities based on the results of a multicenter randomized controlled clinical trial.

DCB relies on a balloon to effectively carry and transport drugs into the body. Therefore, for the balloon platform itself, the more complete the model specifications, the wider the compatibility with guide wires, and the better the balloon performance, the stronger its ability to pass through lesions. Accordingly, during vascular expansion, the less damage caused to blood vessels.

Currently, acotec has the best guidewire compatibility and balloon performance in BUK. Taking drug transfer efficiency as an example, acotec uses lipophilic magnesium stearate combined with lipophilic paclitaxel, bound to the balloon platform, which belongs to the third-generation coating technology. This can effectively prevent drug loss caused by delivery, transfer, and blood flushing. Clinical data shows that the drug transfer efficiency of multinational companies is about 20%, while acotec can reach 30%.

At the same time, in order to break through the independent production of medical polymer materials, acotec acquired Weitai Medical and established a polymer materials center in Shenzhen to support the innovation of its balloon catheter products. By building its own polymer materials research and development center, it has broken the dependence on the original single "imported raw materials + domestic production" R&D and production model, enabling faster product iteration.

With the first-mover and technological advantages of its two DCB products, as well as the supply chain advantage brought by the advanced polymer center, acotec has quickly established a strong foothold in the peripheral DCB niche market. Statistics show that acotec's DCB products are available in over 800 vascular intervention centers and more than 90 hospitals capable of performing peripheral vascular interventions in China, capturing 86.9% of this market share (2020 data).

Although Boston Scientific has a similar product, Ranger OTW, overseas, it has only obtained FDA and CE certifications so far, while the NMPA in China is still in the clinical trial stage. Therefore, facing the near-monopoly market share of Acotec and challenges from competitors like Shanghai MicroPort Endovascular MedTech and Zonare Medical Systems, instead of continuing to struggle in this difficult situation, it might be more cost-effective to directly acquire a leader in the niche market.

Therefore, at the partial tender offer meeting of Acotec and Boston Scientific on December 13, Boston Scientific's management spoke about the value of this former competitor in terms of "strong complementarity."

Market Space Revisited. In terms of clinical acceptance, peripheral drug-coated balloons surpassed stents to become the first-line therapy in 2018, three years after their launch in the United States. By contrast, China is currently in its infancy, with low penetration but experiencing rapid growth.

Acotec once disclosed in its 2021 prospectus: the number of drug-coated balloon surgeries for treating below-the-knee arterial disease is expected to reach 25,000 cases by 2024, maintaining a compound annual growth rate of 23.9%, and reaching 154,000 cases by 2030. Currently, there are nearly 20 drug-coated balloons that have not yet been included in centralized procurement, with a unit price of approximately 20,000 to 30,000 yuan, equivalent to the cost of 20 to 30 stents. Based on this data and Acotec's market share in 2020, it is estimated that as indications gradually expand, Acotec could achieve revenue exceeding 540 million yuan by 2024.

The financial data in recent years can provide evidence for the development potential of Acotec. From 2019 to 2021, Acotec achieved revenues of 124.9 million yuan, 194.0 million yuan, and 303.8 million yuan respectively, with corresponding growth rates of 55.29% and 56.62%, showing a clear trend of exceeding expectations.

In the first half of 2022, despite the impact of the COVID-19 pandemic, Acotec still achieved a revenue of 175 million yuan, representing a year-on-year increase of 25.06% compared to the same period in 2021. More importantly, the company reported a profit of 31.096 million yuan in the first half of the year, becoming one of the first innovative enterprises under Hong Kong Stock Exchange's Chapter 18A to turn a profit.

For Boston Scientific, the acquisition of acotec can quickly and effectively complete the treatment solutions for lower extremity arterial diseases in peripheral interventions within China, and expand along the DCB pathway to cover more disease types, ultimately achieving the update and iteration of the peripheral intervention product system.

Moreover, compared to the current high market capitalization of Cardialink and NeuroVasc, even with a 30% premium added, Acotec's price-to-sales ratio remains at a relatively low level. Regardless of its future indication layout in nephrology, neurology, and andrology, merely maintaining its BTK market share and continuing to penetrate further, Acotec is capable of generating a consistently substantial cash flow for Boston Scientific.

On the other side of the negotiating table, Acotec is also a winner.

Compared with its peers, Acotec is at a certain disadvantage in terms of sales personnel and distributors. According to the 2020 data from its peer, Endovastec, the company has a distribution network consisting of 71 sales personnel and 130 distributors, while Acotec only has 46 sales personnel and 27 distributors.

In terms of R&D, as competitors' DBC products have been successively approved, acotec not only needs to accelerate the penetration of the BTK market but also fully advance the access of other DBC indications, aiming to build equivalent advantages in new fields as quickly as possible.

Boston Scientific is undoubtedly able to provide both types of support simultaneously.

2019 data shows that Boston Scientific, Medtronic, and Bard collectively hold 90% of the market share in China's peripheral arterial intervention market. VCBeat speculates that acotec might be able to quickly establish itself by leveraging Boston Scientific’s sales network without significantly expanding its own sales team.

On the other hand, Boston Scientific's peripheral intervention product line includes ischemic stroke treatment, lower extremity arterial disease treatment, venous & thrombotic disease treatment, embolization interventional treatment, and hemodialysis access management, which theoretically can provide technical guidance in R&D and experience support in clinical trials for acotec’s indication expansion. This will help both parties to revolutionize the peripheral intervention market.

Another key point mentioned at the partial tender offer meeting is the cooperation in the Chinese market and overseas market.

In recent years, Boston Scientific has carried out global layouts in the peripheral field, successively acquiring Bayer's interventional department, British medical device company BTG, and Obsidio, a U.S.-based preclinical-stage medical material developer. Obsidio, acquired in August this year, is similar to Acotec. It has developed Gel Embolic Material (GEM) technology for the embolization of peripheral vascular system vessels, making it a leader in a niche field supported by innovative technology.

Since the two parties have not completed the final equity settlement, it is still uncertain whether Acotec's technology can be integrated into Boston Scientific's peripheral intervention solutions for emerging countries. However, Boston Scientific’s management has clearly stated that in the international market, they will emphasize the synergy of both rather than merely as technical support.

Back in China, Boston Scientific and Acotec have repeatedly emphasized: After the deal, Acotec will remain unchanged as the main body of the listed company, the management team will remain unchanged, and independent operation will remain unchanged. In the future, Boston Scientific will not continue to acquire the remaining shares of Acotec, and the two parties will maintain a cooperative relationship.

In summary, Acotec has also gained substantial benefits from this deal. While securing operational rights, the company receives extensive support from industry-leading enterprises. In the coming years, Acotec will not only accelerate its growth but also drive more innovation.

For innovative pharmaceutical and medical device companies, only a very small number of people can independently write epics, while the best destination for the vast majority is to become the "close partner" of the industry leader.

But in the current cold spell, leading companies are no longer paying for innovation just to meet the needs of their layout. As the financing concept of "good concept + good team + good market" gradually becomes ineffective, companies need to consider not only the feasible R&D logic of innovation but also present a convincing report card of practical achievements to investors.

Therefore, the acquisition of Acotec by Boston Scientific, while not unprecedented, is also difficult to replicate on a large scale.

For most 18A companies and even startups, homogeneous competition and a lack of focused extensive layout have consumed too many resources. The diversified layout formed to avoid risks has instead become a heavy burden under the condition of lacking cash flow.

At this point, it may be a bit too late to turn back. But the rise and fall of the pioneers can perhaps offer some insights for the next wave of innovators:

In an age of limited resources, a stubborn all-in approach may be more likely to reach the other shore than widespread trial and error.