Investment Proposal

1
Investment Proposal for
to acquire
Deal Team Gerson R. Guzman Vassil
Georgiev Ricardo Wilson Russell Workman
Finance 751 Professor Vinay B. Nair
2
Investment Recommendation
Boston Scientific provides CryoCor with the most
dependable and tested means of realizing revenue
synergies quickly and without the associated
expense and risks of pursuing an independent
strategy.

• Worldwide developer, manufacturer, and marketer
  of medical devices in various medical specialties
• Firm seeks to acquire companies that can be
  easily integrated into its global sales and
  distribution channels
• Capabilities, experience, and know-how to bring
  products to market quickly and realize revenue
  potential immediately

• Medical devices firm focused on developing
  technologies to treat cardiac arrhythmia
• Developing and testing CryoCor Cardiac
  Cryoablation System for the treatment of cardiac
  arrhythmia and atrial fibrillation
• Technology has inherent advantages over competing
  drug therapies and radiofrequency (RF) based
  technologies

Guzman Workman Georgiev Wilson
FNCE 751 Confidential Investment Memorandum
3
Identifiable Market Opportunity
There are nearly 2.4 million Americans who suffer
from atrial fibrillation, of which approximately
60 are within the age range of 65-84 years.
New Cases Per Year in the U.S.
U.S. Individuals with Atrial Fibrillation By Age
880,000
800,000
574,000
443,000
400,000
246,000
209,000
125,000
50,000
Source CryoCor with data provided by the
National Institute of Neurological Disorders and
Stroke and Go et. al., JAMA May 9, 2001
Guzman Workman Georgiev Wilson
FNCE 751 Confidential Investment Memorandum
4
The CryoCor Solution
The CryoCor Cardiac Cryoablation System treats
atrial flutter and atrial fibrillation through
cryo-energy, or very low temperatures, to
permanently interrupt the electrical signals that
cause abnormal heart rate and/or rhythm within
the heart.
Procedure - Atrial Fibrillation CryoAblation
A.
B.
The CryoCor Cardiac Cryoablation catheter is
passed through the sheath across the inter-atrial
septum and into the left atrium.
The CryoCor sheath dilator is inserted at the
groin and advanced into the right atrium.
C.
D.
After placement of a mapping catheter into each
pulmonary vein to determine if the vein has
electrical activity and therefore needing
treatment, the cryoablation catheter tip is
steered into one of the pulmonary veins. The
pulmonary vein is electrically isolated from the
left atrium and heart by freezing tissue at the
tip of the cryoablation catheter.
This isolation is confirmed with the mapping
catheter.
Source CryoCor website.
Guzman Workman Georgiev Wilson
FNCE 751 Confidential Investment Memorandum
5
SWOT Analysis
Although the Cryoabalation System is not
currently FDA approved, the firm has a portfolio
intellectual property that creates a significant
barrier to entry.
Strengths
Weaknesses

• Focus on cardiac arrhythmia market has allowed
  firm to develop RD competencies to further its
  strategy as a solutions provider
• Suite of proprietary technologies in the design,
  function and performance of the CryoCor Cardiac
  Cryoablation System
• Intellectual property rights development provides
  a meaningful barrier to entry for potential
  competitors
• Attempts by other firms to develop competing
  solutions would likely infringe on the firms
  proprietary position
• Firm holds 72 exclusively licensed patents and
  patent applications
• Over 110 proprietary patent applications/disclosur
  es in the firms intellectual property portfolio
  that are in various stages of patent prosecution

• Cryobalation System is not currently FDA
  approved, although it is undergoing clinical
  trials throughout the United States
• If the firm is able to secure FDA approval for
  its Cryobalation System, it is unclear that it
  has in place the manufacturing and distribution
  capabilities to bring its product to market
  quickly
• Focus on research and development for this novel
  technology may mean that it does not have the
  necessary sales force to effectively push its
  product through doctors and hospitals once it
  secures regulatory approval

Guzman Workman Georgiev Wilson
FNCE 751 Confidential Investment Memorandum
6
SWOT Analysis
The firms ability to capture a significant share
of a 530M annual market depends on securing
regulatory approval and bringing the product to
market quickly.
Opportunities
Threats

• Firm could be the first to market with a new
  technology that addresses an identifiable market
• Potential to achieve a 50 market share of a
  market conservatively estimated to be 530
  million per annum
• Management feels confident that cryoabalation has
  significant advantages over RF and other
  heat-based abalation technologies.
• Existing therapies and treatments for atrial
  fibrillation include arrhythmic drug therapy and
  the use of radiofrequency energy each with
  substantial drawbacks
• The clinical need for safe, effective treatment
  for atrial fibrillation is currently poorly met
• This opportunity does not include other clinical
  indications that could be addressed by
  cryoabalation and approved for marketing in the
  US after subsequent clinical trials.

• The major threats to CryoCor arise from
  alternative treatments for cardiac arrhythmia
• Competitive nature of this market lends credence
  to the belief that competing firms may improve
  the ability of current options to treat atrial
  fibrillation. In particular, there is a threat
  that the efficacy of drug therapy may improve. RF
  energy ablation platforms may be developed to
  treat complex arrhythmias
• Possibility that the product may fail to meet FDA
  requirements and rejected as a viable treatment
• Even if not completely rejected, any
  complications during the process may require
  further development and extend the time necessary
  to bring the product to market
• A firm with an inferior product, but with the
  manufacturing and sales capabilities to
  distribute the product could gain a leadership
  position in the market

Guzman Workman Georgiev Wilson
FNCE 751 Confidential Investment Memorandum
7
Valuation of CryoCor
Value of CryoCor to BS Intrinsic Company Value
Value of Synergies Adjustment for
Control Adjustment for Liquidity Yes, but
How do you value a company with no sales, which
has been losing value?
Guzman Workman Georgiev Wilson
FNCE 751 Confidential Investment Memorandum
8
We considered traditional valuation methods

• But, with lack of sales and very negative
  historic EBITDA, Net Income and free cash flows
• Trading Comps and DCF by themselves gave
  extremely volatile and thus meaningless results
• Comparable Transactions
• Selection Criteria
• Proximity to current date
• Ownership structure of the seller
• Underlying technology
• Firms would be considered direct competitors for
  the same market, using a different technology
• Caveat No available financial data at
  acquisition, especially revenues

Guzman Workman Georgiev Wilson
FNCE 751 Confidential Investment Memorandum
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we decided to work out a Binary Option
Valuation model
Guzman Workman Georgiev Wilson
FNCE 751 Confidential Investment Memorandum
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Market Based Valuation
Potential annual revenue was estimated based on
securing 50 of an annual 72M market.
Guzman Workman Georgiev Wilson
FNCE 751 Confidential Investment Memorandum
11
Valuation Summary
The 175M valuation, assuming all earnouts are
achieved, is in line with the various valuation
methodologies explored.
Guzman Workman Georgiev Wilson
FNCE 751 Confidential Investment Memorandum
12
Deal Structure
The deal structure is driven by a risk mitigation
and the alignment of incentives.

• Financed by cash generated from free cash flow
  (1.5 billion in 2004)
• Initial payment of 20 million to fund product
  development and clinical trials
• Cash is preferred payment of seller due to ready
  availability
• Exclusive right to purchase 100 of equity
  expiring in April 2007 for 140 million
• Provides growth capital while limiting downside
  risk of failure
• Earn Out for Management
• Additional cash payments of 10 million payable
  to management after meeting earn-out conditions
• Related to meeting milestones for scaled-up
  production of existing product, clinical data
  generation for follow on products
• Gives management an incentive to remain in place
  and focused on creating future value

Guzman Workman Georgiev Wilson
FNCE 751 Confidential Investment Memorandum
13
Conclusion
The proposed transaction is a strategic fit
merging CryoCors niche product development with
Boston Scientifics sales and marketing
capabilities resulting in a combination that
creates value for both acquirer and target.

• CryoCor
• Applying B.S.s vast sales and marketing
  resources to the product launch will increase
  both the speed and depth of market penetration
• Their plan to IPO will cause them greater cost to
  develop and train a sales and marketing
  capability
• Even if developed, much less effective capability
  than that of BS
• Boston Scientific
• Differentiated product that solves a compelling
  clinical need in financially attractive market
• Strong IP protection
• Deal Structure addresses the interests of both
  sides
• High valuation for target if successful
• Limits the downside risk to the acquirer

Guzman Workman Georgiev Wilson
FNCE 751 Confidential Investment Memorandum