Spine & Orthopedic Device Company M&A: 6 Key Trends


Paul TeitelbaumThe orthopedic and spine device field has exploded with merger and acquisition activity over the past few years, the most recent example being Zimmer's acquisition of Biomet. Private equity owned Biomet, a strong player in the orthopedics field, was searching for a buyer in 2013 but came up empty-handed; then the capital markets changed in early 2014, prompting the company to pursue an initial public offering as an alternative exit route.

Within a few months, however, Zimmer made an offer Biomet couldn't refuse. "I believe the Biomet executives filed for the IPO and left themselves open to the dual track process; they could choose between the best of both worlds, either doing an IPO or becoming acquired," says Paul Teitelbaum, managing director and medical device/healthcare IT M&A expert at Mesirow Financial's Investment Banking Group. "There have been other cases where companies were bought out after filing for an IPO. It does happen and the dual-track process is a frequent strategy."


Mr. Teitelbaum also says that based on the short time between IPO filing and acquisition announcement, the two companies likely had been speaking already for several months.


Biomet was purchased at about 4.3 to 4.4 times revenues which is a medium transaction value for orthopedics when counting all sizes of companies and deals — but Biomet was a huge company to acquire. Typically, big transactions have multiples on the lower end of the spectrum.


"If you look at how the public companies have been trading, Zimmer has been trading at close to four times," says Mr. Teitelbaum. "It's a robust valuation, but within the setting of our fairly robust current public market, valuations for companies being acquired, and the large amount of sales/marketing and G&A synergies these companies can achieve, this was a relatively reasonable transaction price with a lot of upside for Zimmer."


On the announcement of the acquisition, Zimmer's stock traded up 18 percent, which means that the market viewed the transaction as a winner for Zimmer and the valuation as reasonable. The acquisition broadens Zimmer's reach in the orthopedics market and strengthens its presence in the trauma and fixation space.


"The acquisition makes Zimmer a larger player, rivaling the size of Stryker," says Mr. Teitelbaum. "It certainly firmly entrenches Zimmer as one of the largest players in the market."


Here are five ways the Zimmer-Biomet transaction will impact the field:


1. Providers and insurance companies feel pressure to decrease the cost of care, and surgical implants are a huge contributor to the cost of orthopedic and spine procedures. The price for hip and knee implants is coming down, and consolidation can mitigate the pressure on pricing and reimbursement because there are fewer players in the market.


"This is a good thing for Zimmer and the medical device marketplace, especially on the larger end of the market," says Mr. Teitelbaum. "I think it will also be better for the midsized device that are a leader in a particular niche. Where it becomes challenging is for the smaller device companies developing new products because they're up against players who are so much larger."


With fewer companies in the market, prices will likely stabilize and orthopedic device companies will have more leverage over the purchasers of their products. "Even if you could maintain your prices with only two or three players in the field, and prices are stabilized, you still maintain a decent margin," says Mr. Teitelbaum. "However, the public is going to demand significant growth from these companies going forward, at least high single-digit top-line growth and double-digit earnings growth year-over-year. So where is the growth going to come from? Expanding into new, innovative areas in orthopedics."


2. Smaller device companies are frequently the engine for innovation as they are more nimble. Larger device companies are looking to expand their reach into new development areas and are keeping a close eye on the smaller companies and snatching them up once they have surpassed the point of technological risk or demonstrated an ability to achieve some market traction. Companies like Zimmer, Smith & Nephew and Synthes are likely to look to enter the extremities market more heavily because that's where the projected growth is over the next few years; the hips and knees markets are only expected to grow in the single-digits.


"Even in those newer growth areas where we see increased competition — lots of new companies are coming out with new foot and ankle devices — there has been some consolidation," says Mr. Teitelbaum. "There will be a falling out of winners and losers. The winners will get bought, like Wright Medical purchased Solana, a company which was not even the leader in the foot and ankle space, for $90 million, while other smaller, more nascent players won't quite make it."


3. Beyond entering into the fast-growing markets today, orthopedic device companies are now going to need to increasingly target specialists who haven't traditionally been considered "orthopedists." For example, thousands of podiatrists are now performing foot surgeries and are increasingly viable customers and Mr. Teitelbaum believes that a few of the large companies such as Synthes and Smith & Nephew will need to start addressing those other new specialists as they build their portfolio of devices. Device company representatives visiting their orthopedic surgeons could easily stick around the operating room a little while longer to meet with the podiatrists as well if they have foot and ankle products to show them.


"There are other specialties that will gain increasing access to the operative procedures and they use the same OR suites at the hospitals as the orthopedic surgeons," says Mr. Teitelbaum. "The bigger players, after this wave of consolidation, will be able to hit more markets than they did in the past."


Other opportunities include looking into biologics as frequently an adjunct, or possibly an alternative, to metal or bone implants, as well as drugs or device/drug combinations to prevent infection or enhance bone growth in repaired areas. "There are micro- and nanotechnology advances allowing surgeons to do smaller and less invasive procedures, and physicians will need new techniques for accessing the surgical site," says Mr. Teitelbaum. "Who knows, maybe further down the road, some companies might get even look at non-invasive technologies, such as ultrasound or other targeted energies to perform certain procedures."


4. More consolidation in the field is quite likely over the next few years. Mid-sized companies such as Wright Medical, if its valuation ever becomes more reasonable, and Orthofix, now that it has been addressing its debt issues, DJO Global and Arthrex are among targets for future acquisition. Then, big companies will continue look for smaller acquisitions, such as Stryker's acquisition of Memomental, Wright's acquisition of Solana, Tornier's acquisition of Orthohelix, Integra's acquisition of Ascension Orthopedics, and Zimmer's acquisition of Knee Creations, to continue growth.


"The smaller acquisitions will happen since the big companies will need to make sure they are participating in the new growth areas," says Mr. Teitelbaum. "We are in the first wave of big acquisitions. I think we'll see one or two more of this type of transaction, followed by a wave of small acquisitions as companies look for innovative growth areas. For the next three years, you are going to see an increased number of small to mid-sized acquisitions in niche areas."


5. Most of the real innovation will likely come from small companies, much like what's happening in the cardiovascular, respiratory and other spaces. Big companies may come out with products that have relatively marginal improvements, additional features, infection prevention or less costly materials, but the true game-changers will still come from the small companies.


"The first total disc replacement came from the acquisition of a smaller company," says Mr. Teitelbaum. "There are still major new innovations being dreamed up, but it will continue to be initiated by small company and then bigger companies will be interested if the device is proven clinically."  As we've seen in the pharmaceutical industry, the large companies realize that frequently they can expand their portfolio of products more effectively by acquiring technology than by relying on their own R&D departments to develop in-house.


6. Contract manufacturers are feeling the pressure from big mergers to figure out how they can compete for fewer customers in the orthopedic device space. As a result, we have already begun to see consolidation among contract manufacturers as well.


"I've received calls from buyers about valuation thoughts and methodologies for contract manufacturing organizations, asking about reasonable multiples and what buyers should look for in their valuation and diligence process," says Mr. Teitelbaum. "There are hundreds of small and mid-sized companies in that space, so many of them have revenue concentration issues — relying one sometimes one or a small handful of device OEMs for the bulk of their revenues. In many cases, they may have to exit in two steps — first merge with others of similar size to reduce their revenue concentration and increase their sales/marketing leverage, and then they will be in a better spot to be acquired by one of the large consolidators in the CMO space."


More Articles on Devices:
$73.9B by 2018: 5 Key Observations on U.S. Implantable Device Market
5 Thoughts on Growth Strategy in the Complex Spine Market: K2M CEO Eric Major
Medtronic 4Q Revenue Down 2%: 5 Key Points

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