Fairness opinions › Medical Devices and Supplies › 2011

American Medical Systems acquired by Endo Pharmaceuticals: fairness opinion by J.P. Morgan

Announced April 11, 2011 · One-step merger · All cash · DEFM14A filed May 10, 2011

Medical Devices and Supplies Medical Devices

Enterprise value

$2.9B

EV / LTM EBITDA

15.2x

EBITDA $190M · 35% margin

EV / LTM revenue

5.35x

revenue $542M

DCF discount rate

10.0%–11.0%

Perpetuity growth

Deal terms

ConsiderationAll cash

Price per share$30.00

Premium34.3%

Premium basisclosing price of $22.33 on April 8, 2011, the last full trading day before announcement

StructureOne-step merger

Termination fee$90.0M

Reverse termination fee—

Go-shopNone

Outside date—

FilingDEFM14A · EDGAR index

Implied value per share by method vs. $30.00 offer

Selected companies — Firm Value / CY2011E Revenue (Street Case) $11.50 – $22.25

Selected companies — Firm Value / CY2011E EBITDA (Street Case) $20.50 – $25.75

Selected companies — Price / CY2011E Cash EPS (Street Case) $20.25 – $27.00

Selected companies — Firm Value / CY2011E Revenue (Management Case) $12.25 – $23.00

Selected companies — Firm Value / CY2011E EBITDA (Management Case) $21.50 – $27.00

Selected companies — Price / CY2011E Cash EPS (Management Case) $19.75 – $26.50

Precedent transactions — Firm Value / LTM Revenue $14.50 – $26.25

Precedent transactions — Firm Value / LTM EBITDA $21.25 – $31.00

Precedent transactions — Firm Value / NTM EBITDA (Management Case) $21.50 – $31.25

Discounted cash flow $25.00 – $30.75

Ranges as disclosed in the banker’s summary of analyses; the red line marks the per-share consideration.

Opinion of J.P. Morgan to the target board

Delivered April 10, 2011 · Fee $24.5M ($24.5M contingent on closing), $1.0M on delivery of the opinion

Discounted cash flow assumptions

Discount rate10.0%–11.0%

Basisweighted-average cost of capital of the Company, applied using mid-year convention

Terminal valuePerpetuity growth

Perpetuity growth2.5%–3.5%

Exit multiple—

Projection period2011E-2020E

Projections usedCompany management projections including the Financial Forecasts for 2011-2015

Implied value per share$25.00–$30.75

Unlevered free cash flows from April 8, 2011 through December 31, 2020; terminal value as of December 31, 2020; firm value adjusted for excess cash and total debt as of December 31, 2010.

Selected public companies (8)

Hologic, Inc. · Kinetic Concepts, Inc. · ResMed Inc. · Sirona Dental Systems, Inc. · Integra LifeSciences Holding Corporation · Align Technology, Inc. · Thoratec Corporation · NuVasive, Inc.

Multiple	Peer low	Peer median	Peer high	Range applied	Implied per share
Firm Value / CY2011E Revenue (Street Case)	2.0x	3.3x	3.6x	2.0x–3.6x	$11.50–$22.25
Firm Value / CY2011E EBITDA (Street Case)	7.6x	11.4x	12.8x	10.0x–12.8x	$20.50–$25.75
Price / CY2011E Cash EPS (Street Case)	12.2x	18.7x	23.6x	15.0x–20.0x	$20.25–$27.00
Firm Value / CY2011E Revenue (Management Case)	2.0x	3.3x	3.6x	2.0x–3.6x	$12.25–$23.00
Firm Value / CY2011E EBITDA (Management Case)	7.6x	11.4x	12.8x	10.0x–12.8x	$21.50–$27.00
Price / CY2011E Cash EPS (Management Case)	12.2x	18.7x	23.6x	15.0x–20.0x	$19.75–$26.50

Selected precedent transactions (13)

Date	Target	Acquirer	Multiple
2010-10	Boston Scientific Neurovascular	Stryker Corporation	—
2009-01	Advanced Medical Optics, Inc.	Abbott Laboratories	—
2008-12	Mentor Corporation	Johnson & Johnson	—
2008-07	Vital Signs, Inc.	General Electric Company	—
2007-12	Respironics, Inc.	Koninklijke Philips Electronics N.V.	—
2007-07	DJ Orthopedics	The Blackstone Group L.P.	—
2007-07	Arrow International, Inc.	Teleflex Incorporated	—
2007-05	Bausch & Lomb, Inc.	Warburg Pincus LLC	—
2007-05	VIASYS Healthcare Inc.	Cardinal Health, Inc.	—
2007-03	Plus Orthopedics Holding AG	Smith & Nephew PLC	—
2006-04	Sybron Dental Specialties, Inc.	Danaher Corporation	—
2005-03	CTI Molecular Imaging, Inc.	Siemens AG	—
2004-12	SOLA International Inc.	Carl Zeiss AG / EQT	—

Multiple	Low	Median	High	Range applied	Implied per share
Firm Value / LTM Revenue	1.6x	3.0x	4.5x	2.5x–4.5x	$14.50–$26.25
Firm Value / LTM EBITDA	10.8x	14.3x	18.7x	11.0x–16.5x	$21.25–$31.00
Firm Value / NTM EBITDA (Management Case)	9.6x	12.4x	14.9x	10.0x–15.0x	$21.50–$31.25

Other analyses

Analysis	Summary	Implied per share
Historical Share Price Analysis	Reviewed price performance of AMS common stock for various periods ended April 8, 2011 versus S&P 500 and a composite index of the selected companies. Noted $30.00 represented premiums of 34.3% to the April 8, 2011 close of $22.33, 39.9% to the 30-trading-day average, 46.1% to the one-year average, and 24.4% to the 52-week high closing price. J.P. Morgan noted historical stock trading and analyst price targets are not valuation methodologies and were presented for informational purposes only.	—

Transaction fee of 0.86% of aggregate consideration, approximately $24.5 million, payable upon completion of the merger, of which $1.0 million was earned upon delivery of the opinion. J.P. Morgan had prior banking relationships with both AMS and Endo, including Endo's 2010 notes offering and credit facilities.

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Management projections

AMS management prepared "Financial Forecasts" in February 2011 covering fiscal years 2011-2015, approved by the board and provided to Endo, J.P. Morgan and (in summary form) Bidder A. Total revenue was projected to grow from $586.9 million in 2011 to $907.4 million in 2015, with income from operations rising from $173.0 million to $270.3 million, net income from $90.6 million to $174.1 million, and fully diluted EPS from $1.13 to $1.85. J.P. Morgan's DCF extended management projections through 2020; its public trading multiples analysis used both a "Street Case" (Wall Street estimates) and the "Management Case."

Process notes

Single fairness opinion from J.P. Morgan to the AMS board (oral April 10, 2011, confirmed in writing same date). J.P. Morgan disclosed significant prior and concurrent relationships with acquirer Endo (bookrunner on Endo's 2010 senior notes and credit facilities) and was subsequently engaged as lead arranger on AMS's new $250 million revolving credit facility after the opinion was delivered. The process involved a competing bidder referred to as "Bidder A." Termination fee of $90 million payable to Endo in specified circumstances, including a superior proposal termination with a five-day match right.

Other Medical Devices and Supplies fairness opinions

Synthes / Johnson & Johnson 2011 · 9.6x EV/EBITDA
SonoSite / FUJIFILM Holdings 2011 · 21.1x EV/EBITDA
Synovis Life Technologies / Baxter International 2011 · 17.1x EV/EBITDA
American Medical Alert / Tunstall Healthcare Group 2011 · 8.5x EV/EBITDA
Kinetic Concepts / Apax Partners, CPPIB and PSP Investments 2011 · 9.7x EV/EBITDA
Orthovita / StrykerCorp. 2011 · 18.1x EV/EBITDA

All Medical Devices and Supplies opinions → · J.P. Morgan opinions