Fairness opinions › Medical Devices and Supplies › 2018

Invuity acquired by StrykerCorp.: fairness opinion by Moelis & Company

Announced September 10, 2018 · Tender offer · All cash · SC 14D9 filed September 24, 2018

Medical Devices and Supplies Medical Devices

Enterprise value

$190M

EV / LTM EBITDA

—

EBITDA $-24.0M · -52% margin

EV / LTM revenue

4.12x

revenue $46.0M

DCF discount rate

13.0%–17.5%

Exit multiple

Deal terms

ConsiderationAll cash

Price per share$7.40

Premium—

Premium basis—

StructureTender offer

Termination fee$5.9M

Reverse termination fee—

Go-shopNone

Outside date—

FilingSC 14D9 · EDGAR index

Implied value per share by method vs. $7.40 offer

Selected companies — TEV / 2018E Revenue $2.35 – $5.90

Selected companies — TEV / 2019E Revenue $2.55 – $7.15

Precedent transactions — TV / LTM Revenue $3.65 – $7.55

Discounted cash flow $4.80 – $7.05

52-week trading range (informational) $2.35 – $9.55

Analyst price targets (informational) $5.00 – $8.00

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

Opinion of Moelis & Company to the target board

Delivered September 10, 2018 · Fee $4.6M ($3.5M contingent on closing), $1.1M on delivery of the opinion

Discounted cash flow assumptions

Discount rate13.0%–17.5%

BasisEstimated range of Invuity's WACC, derived cost of equity using selected range of betas and debt to total capitalization ratios informed by selected publicly traded companies and Invuity's own statistics as of September 7, 2018, plus a size premium

Terminal valueExit multiple

Perpetuity growth—

Exit multiple11.0x–13.0x NTM EBITDA applied to estimated terminal year 2024 EBITDA of $25 million

Projection periodJuly-December 2018 through CY2023 (terminal year 2024)

Projections usedInvuity management forecasts

Implied value per share$4.80–$7.05

Present values as of June 30, 2018; stock-based compensation treated as a cash expense; included tax benefits of Invuity's net operating losses. Terminal multiple range developed from 6-month, 1-year, 2-year, 5-year and 10-year average NTM EBITDA multiples for EBITDA-positive selected companies (14.7x/14.4x/14.0x/11.3x/10.9x) and other surgical companies (14.6x/13.4x/12.8x/12.0x/12.2x).

Selected public companies (10)

K2M Group Holdings, Inc. · AngioDynamics, Inc. · Sientra, Inc. · LeMaitre Vascular, Inc. · RTI Surgical, Inc. · Endologix, Inc. · SeaSpine Holdings Corporation · Alphatec Holdings, Inc. · Misonix, Inc. · ConforMIS, Inc.

Multiple	Peer low	Peer median	Peer high	Range applied	Implied per share
TEV / 2018E Revenue	0.7x	2.6x	10.6x	1.5x–3.5x	$2.35–$5.90
TEV / 2019E Revenue	0.7x	2.7x	7.5x	1.3x–3.3x	$2.55–$7.15

Selected precedent transactions (17)

Date	Target	Acquirer	Multiple
2018-07	Bovie Medical Corporation (Electrosurgical & Cauteries business & Bovie brand)	Symmetry Surgical Inc.	3.4x TV / LTM Revenue
2018-03	Cogentix Medical, Inc.	Laborie Medical Technologies Canada ULC	3.9x TV / LTM Revenue
2017-12	Entellus Medical, Inc.	Stryker Corporation	7.4x TV / LTM Revenue
2017-10	VEXIM	Stryker Corporation	8.0x TV / LTM Revenue
2017-10	Exactech, Inc.	TPG Capital	2.8x TV / LTM Revenue
2017-06	NOVADAQ Technologies Inc.	Stryker Corporation	7.7x TV / LTM Revenue
2017-02	DePuy Synthes, Inc. (Codman Neurosurgery)	Integra LifeSciences Holdings Corporation	2.8x TV / LTM Revenue
2016-09	EndoChoice Holdings, Inc.	Boston Scientific Corporation	2.6x TV / LTM Revenue
2016-05	Smith & Nephew's gynecology business	Medtronic Public Limited Company	6.3x TV / LTM Revenue
2016-05	Galil Medical Inc.	BTG plc	3.8x TV / LTM Revenue
2016-05	Symmetry Surgical Inc.	RoundTable Healthcare Partners IV, L.P.	1.5x TV / LTM Revenue
2016-03	Medi-Globe Corporation	Duke Street Capital	1.2x TV / LTM Revenue
2015-11	SurgiQuest, Inc.	CONMED Corporation	6.0x TV / LTM Revenue
2015-09	Synergetics USA, Inc.	Valeant Pharmaceuticals International	2.2x TV / LTM Revenue
2015-06	Lumenis Ltd.	XIO Group	1.6x TV / LTM Revenue
2014-07	NeuroTherm, Inc.	St. Jude Medical, Inc.	4.0x TV / LTM Revenue
2013-12	Patient Safety Technologies, Inc.	Stryker Corporation	4.5x TV / LTM Revenue

Multiple	Low	Median	High	Range applied	Implied per share
TV / LTM Revenue	1.2x	3.8x	8.0x	2.5x–5.0x	$3.65–$7.55

Other analyses

Analysis	Summary	Implied per share
52-week trading range (informational)	Historical closing trading prices for Shares during the 52-week period ended September 7, 2018 ranged from $2.35 to $9.55 per share.	$2.35–$9.55
Analyst price targets (informational)	One-year forward stock price targets in recently published Wall Street research analysts' reports ranged from approximately $5.00 to $8.00 per share.	$5.00–$8.00

Engagement letter dated August 1, 2018; approximately $4.6 million aggregate fee, approximately $1.1 million payable upon delivery of the opinion regardless of conclusion, remainder contingent upon consummation of the Merger.

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Management projections

Projection year	Year 1	Year 2	Year 3	Year 4	Year 5	CAGR
Revenue	$59.0M	$75.0M	$92.0M	$111M	$131M	22.1%
Revenue growth	28.3%	27.1%	22.7%	20.7%	18.0%
EBITDA	$-5.0M	$5.0M	$10.0M	$14.0M	$20.0M	—
EBITDA growth	—	—	100.0%	40.0%	42.9%
EBITDA margin	-8%	7%	11%	13%	15%
Implied EV / EBITDA	—	37.9x	19.0x	13.5x	9.5x

Year-1 growth is against LTM at announcement ($46.0M revenue, $-24.0M EBITDA); later years are year over year.

Moelis used financial forecasts provided by Invuity management covering July-December 2018 through calendar year 2023, with a terminal year 2024. Management projected negative EBITDA for 2018 and 2019, and terminal year 2024 EBITDA of $25 million on a 17% EBITDA margin. LTM revenue as of June 30, 2018 was $41 million; management's implied TEV/revenue multiples were 3.4x 2018E and 2.6x 2019E (versus 3.4x/2.8x on street estimates).

Process notes

Single financial advisor (Moelis) to the Invuity board; no special committee. Offer price rose from $7.35 to $7.40 during negotiations in exchange for exclusivity; the Board sought a low termination fee ($5.9 million) and a post-signing go-shop/market check, though the filing's disclosed terms describe only a no-solicitation with superior-proposal termination right. Referred to as 'Iron' (project codename) in the comparable companies table. Moelis excluded EBITDA multiples because Invuity's projected EBITDA was negative in 2018-2019. K2M Group Holdings metrics used unaffected price prior to its own Stryker deal announcement (August 30, 2018). Net debt of $10.7 million used in per-share derivations. Moelis reported no compensation from Stryker from August 1, 2015 to August 1, 2018.

Other Medical Devices and Supplies fairness opinions

K2M Group Holdings / StrykerCorp. 2018 · 92.0x EV/EBITDA
Cogentix Medical / Laborie 2018 · 101.9x EV/EBITDA
Analogic / Altaris 2018 · 13.8x EV/EBITDA
Wright Medical Group / StrykerCorp. 2019 · 14.6x EV/EBITDA
CAS Medical Systems / Edwards Lifesciences 2019
Osiris Therapeutics / Smith & Nephew 2019 · 28.8x EV/EBITDA

All Medical Devices and Supplies opinions → · Moelis & Company opinions