The spine and orthopedic device markets have seen almost everything during the first six months of 2014: huge company merger/acquisition deals, initial public offerings and announcements that even some of the smaller players in the markets are going global. And by many accounts, the second half of the year will be no different.
Frost & Sullivan's research estimates the 2014 global orthopedic implant market will reach $34.9 billion at a 2.8 percent compound annual growth rate. A few of the biggest company highlights since January include:
• Zimmer and Biomet agreed to merge in a deal worth $13.4 billion
• Smith & Nephew completed a $1.5 billion acquisition of ArthroCare
• K2M filed an initial public offering that raised approximately $120 million
• Amedica filed an initial public offering of 3.5 million shares at $5.75 per share
• LDR initiated a follow-on public offering in April to raise $25 million after going public in September 2013
• Life Spine entered the Chinese market
• Medtronic acquired Covidien for $42.9 billion
"We are in the first wave of big acquisitions," says Paul Teitelbaum, managing director and medical device/healthcare IT M&A expert at Mesirow Financial's Investment Banking Group. "I think we'll see one or two more of this type of transaction, followed by a wave of smaller 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."
Consolidation trends
Mid-sized companies such as Wright Medical, if its valuation becomes more reasonable, and Orthofix — now that it has been addressing its debt issues, DJO Global and Arthrex are among targets for future acquisition. Smith & Nephew has also been a target for several months, attracting suitors like Stryker and Medtronic earlier this year. 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.
Just months before Zimmer acquired Biomet, Biomet announced an initial public offering. It wasn't first case of a company being bought out after filing an IPO, and Biomet was purchased at about 4.3 times to 4.4 times revenues, making it a medium transaction value for orthopedics. Mr. Teitelbaum says big transactions typically have multiples on the lower end of the spectrum.
"Competition just got tougher as Zimmer will effectively surpass Stryker to attain the number two spot in orthopedic sales and is now in prime position to compete with market leader Johnson & Johnson," says Frost & Sullivan Advanced Medical Technologies Research Analyst Tara Shelton. "With the deal not closing until early 2015, the effect has yet to be seen in regards to future employment, commodity pricing and innovation."
After the acquisition, Zimmer's stock traded up 18 percent, and the transaction broadens Zimmer's reach into 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."
Zimmer released 2014 first quarter net earnings of $221.5 million, up over the same period last year. The company updated its earning guidance in light of the Biomet transaction, and now expects full-year 2014 diluted earnings per share at $4.90 to $5.10. However, the bigger question is what impact the acquisition will have on providers as consolidation reaches its zenith over the next few years.
"The effect this acquisition will have on hospitals is unclear, but the concern shared by many is product pricing," says Ms. Shelton. "Hospitals have been pushing for lower priced products to combat rising insurance and patient costs. This could be achieved through a 'repless' sales models or utilizing smaller manufacturers state-side or overseas. Future growth depends on companies having broad portfolios that can sustain the slow markets and ability to create new opportunities in emerging markets."
Going global
The Deliotte 2014 Global healthcare market report also places special emphasis on emerging markets to offset slow growth in established markets. The Affordable Care Act implementation in the United States will create more consolidation and pressure to contain costs. The European health systems are also hampered by the residual impact of a recent recession. However, emerging markets such as China, India, Indonesia, Russia and Mexico are more promising.
The fastest growing markets are also overseas, and we can expect new opportunities in Middle Eastern and African countries where the population is growing fast and governments are working to expand access to healthcare. Average annual growth for healthcare spending in these markets is:
• Latin America: 6.8 percent
• Middle East: 10 percent
• Africa: 10 percent
• India: 17 percent
• China: 14 percent
"The concept of globalization — thinking globally but acting locally — will move to the forefront in 2014 and beyond. In the face of change and innovation, the ability to reach into global jurisdictions to learn and mitigate the risk of local change will be invaluable. Conversely, trying to apply global solutions to local markets without factoring in local dynamics could be disastrous," states the Deloitte report.
One company that has long understood the global concept is K2M, which had a presence in international markets long before their IPO. As a company focused on the niche complex spine market, K2M was able to take advantage of the close complex spine specialist network to learn about the variations and intricacies of each market; surgeon preferences in Germany and the United Kingdom are different from those in the United States, which differ still from spine surgeons in Italy, Spain and Australia.
"We want to make sure we are meeting the needs of local surgeons as well as the global demand for next generation products," says K2M CEO Eric Major. Around 50 percent of the company's unit sales come from outside of the United States, and the company built an infrastructure for international growth in the future. "We have digested the pricing difference in gross margins for our products because so many of them are sold internationally."
Amedica also cites growing demand in a niche market for the need to expand and further develop global presence. In the company's first quarter 2014 financial report, CEO Eric Olson said, "The company is focused on driving the technology forward for rapid adoption, to the ultimate benefit of patients worldwide. We have made significant progress on this front over the past year, which is reflected in the 41 percent increase in silicon nitride product revenue."
IPO onslaught
There are several reasons companies decide to go public, and many have found the sweet spot this year. "In addition to the fact that we have raised the capital to allow us to deliver the 14 percent to 16 percent growth on an annual basis and move the company forward to profitability, the IPO will allow K2M to compete head-to-head with other public companies," says Mr. Major. "It speaks volumes to the hospital C-suite executives to show K2M takes business seriously and we are here to stay."
LDR has been present in the artificial disc space for years, and new successes poise the company for continued growth after going public last year. While the company has a variety of products, its most recent accomplishment is becoming the first company to obtain FDA clearance for both one-level and two-level cervical disc replacement for the Mobi-C. Several studies were presented at the International Society for the Advancement of Spine Surgery annual meeting showing disc replacement's benefits over fusion.
For example, a study from the FDA IDE Mobi-C clinical trial followed patients for 38 months and statistically validated the disc. At one level, the Mobi-C overall success rate was 69.5 percent at 48 months, versus ACDF at 58.7 percent. For two-level procedures, Mobi-C had a 66 percent success rate at 48 months, compared to 36 percent for two-level ACDF.
"The Mobi-C IDE two-level data, including proof of 48-month statistical superiority in terms of the primary study outcome, is one of the most exciting developments in spine surgery in recent years. We feel that the growing body of long-term evidence on Mobi-C including what was presented at the ISASS annual meeting, further supports the role that this technology has in providing patients with a treatment alternative to fusion," said LDR President and CEO Christophe Lavigne in a company news release.
Reimbursement historically has been an issue for disc replacement; many insurance companies considered the procedure experimental. However, more companies are onboard for disc replacement procedures than ever before, and in March the American Medical Association CPT Editorial Panel accepted the addition of Category I code 22858X as an add-on code to support two-level cervical disc replacement beginning next year.
There is one spine-focused company early to the IPO game; NuVasive celebrated its 10th year as a publicly-traded company in May by ringing the NASDAQ bell. "We are very excited to commemorate this milestone for NuVasive," said Alex Lukianov, chairman and CEO. "In our first decade as a publicly traded company, we pioneered the lateral approach to spine fusion surgery, developing an idea as a start-up company into a procedurally integrated platform that has transformed major spine surgery into minimally invasive surgery. In 10 years, we also launched more than 90 products, establishing a comprehensive spine portfolio that can achieve better patient outcomes, surgical reproducibility and significant cost savings."
NuVasive is the fourth-largest player in the $8.7 billion global spine market and aims to become a $1 billion start-up in the future.
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