Aggressive strategy backfires for Baxano but works for its spinal rivals
Baxano Surgical’s bankruptcy filing last week highlights the difficulty for small companies of maintaining a presence in a rapidly consolidating field. Baxano had been formed through a merger of two spinal implant manufacturers in an effort to build the scale required to compete with the bigger players, by no means a foolish strategy in this sector.
But Baxano bit off more than it could chew, and as its products are now up for sale it seems yet more bulking up will now occur in the spinal space – the enormous growth forecasts analysts put on Baxano ought to mean that a sale goes ahead. Acquisitiveness is by no means the only growth strategy employed by spine implant companies, though, as the table below shows.
The company’s woes were compounded on Friday when it failed to secure judicial permission to tap a $250,000 loan from Hercules Technology Growth Capital to fund its operations while it searches for a buyer.
Hercules’ provision of debt financing has allowed it to cut in ahead of other creditors. As debtor in possession Hercules has seniority for repayment.
Growth through IPOs
Despite its chapter 11 filing, Baxano’s minimally invasive spinal surgery devices will remain on sale to surgeons and hospitals even as the company tries to offload the product lines via a court-supervised auction.
They include intervertebral fusion devices such as the AxiaLIF franchise for single and two-level lumbar fusion, predicted to grow at 10% a year to 2020, and the VEO lateral access and interbody fusion system, set to expand 26% annually, according to EvaluateMedTech’s consensus forecasts. The iO-Flex lumbar decompression system and Baxano’s facets business are seen growing even more rapidly, although these are relatively newly launched products.
|Baxano Surgical's spinal devices|
|Global sales ($m)|
|Lateral/VEO Lateral System||2.4||11.8||26%|
|Spinal devices total||18.6||58.6||18%|
Analysts have forecast double-digit annual growth rates for many of these products giving Baxano’s spinal products an overall CAGR of 18% to 2020, joint fastest in the spinal sector with LDR. But LDR, a maker of artificial discs and other fusion products, has responded to the consolidation in the orthopaedics sector by taking a very different corporate development path to Baxano.
LDR was one of two spinal device companies to go public in the last year or so, the other being K2M, and both have done well since. K2M has seen its shares rise 26% from its debut in May – but LDR has beaten it hollow, with an increase in its share price of 135% since its IPO in October 2013.
The 18% forecast growth in sales of LDR’s spinal products no doubt contributes to the success of its shares.
Elsewhere, though, others have made acquisitions to keep up with the Joneses, and unlike Baxano, done so successfully. Trauson is at the bottom of the table because its purchase by Stryker closed in 2013 (Trauson trousers $760m as Stryker strikes, January 18, 2013). As a trauma specialist, however, its spinal sales were never enormous, peaking at $12m in 2012.
Zimmer, however, will enjoy a hefty increase in spinal revenues after it adds Biomet’s implants, bone cements, pedicle screws and a whole range of other products to its portfolio when the acquisition closes next year. And it needs the infusion: its own spinal franchise is seen growing at just 0.2%.
Though Medtronic is the largest company in spine, its acquisition of Covidien will not add to its sales here; orthopaedics is one area in which there is no overlap between the two companies (FTC could put Medtronic-Covidien deal at risk from tax avoidance laws, August 11, 2014).
|Spinal companies: sales and growth|
|Worldwide sales of spinal devices ($m)|
|Johnson & Johnson||1,954||2,025||2,128||2,233||+2%|
The tendency towards amalgamation in medtech and specifically in the orthopaedic sector is so pronounced it is hardly surprising that a company would try, but fail, to keep pace. The near-inevitability of this happening is unlikely to comfort Baxano’s investors.