The US politicians who put anti-inversion rules in place a month ago must be wondering why they bothered. Wright Medical’s $3.3bn acquisition of the Dutch orthopaedics company Tornier comes just two weeks after Steris arranged to invert into the UK’s Synergy Health (Synergy buy shows Steris keeping faith with inversions, October 14, 2014).
Wright has clearly not been put off by the legal situation when it comes to tax, and it seems equally sanguine regarding antitrust rules. Moreover the companies’ product lines are extremely similar (see table). An FTC investigation, as triggered by both the Medtronic-Covidien and Zimmer-Biomet deals, seems inevitable, and with the ortho sector in particular going through an extreme period of consolidation, it is almost a wonder that Wright thinks it can get this deal done.
Unlike many of this year’s medtech megadeals, this transaction is very nearly a merger of equals. The share-exchange deal, set to close in the first half of next year, will see Wright’s shareholders holding 52% of the combined company.
The price is a 28% premium to Tornier’s share price before the deal; Nasdaq-listed Tornier is up 17% in early trading today to $28.17.
The company will redomicile from the US, with its corporate tax rate of 40%, to the Netherlands, where companies are taxed at 25%. Presumably this is still worthwhile even though the US government has moved the inversion goalposts (New US anti-inversion rules spark investor flight, September 23, 2014).
Consensus forecasts from EvaluateMedTech show that in 2020 the combined Wright and Tornier will be the seventh-largest company in the orthopaedics sector, with worldwide sales of $1.15bn. The merged Zimmer and Biomet will be the second largest, unless further megamergers take place – and the way this industry has been going this cannot be ruled out.
|Top orthopaedics companies in 2020|
|Total sales ($bn)||Market rank|
|Johnson & Johnson||8.95||11.34||1||1|
|Smith & Nephew||2.00||2.58||6||6|
|Wright Medical Group||0.47||0.60||10||-|
EvaluateMedTech’s Merge Companies tool highlights exactly how similar these two companies are. Both produce upper and lower extremity implants, though sales of Tornier’s hand and wrist devices are an order of magnitude greater than Wright’s, and in foot and ankle products the situation is reversed.
On a conference call the company said that after the deal closed in the first half of 2015 there would be three separate units: upper, lower and biologicals. The lower extremity side has some overlap, Wright management said, and there will be some “dissynergies” – presumably meaning that there will be too many products or costs in the same areas.
Interestingly Wright will obtain an interest in large joint products – largely hip and knee replacement devices – a year after closing the sale of its large joint business to MicroPort Scientific (MicroPort’s Wright turn could lead to parallel ortho market, June 21, 2013).
|Wright vs Tornier|
|WW annual sales ($m)|
|Segment||EvaluateMedTech device classification||2014||2016||2018||2020||CAGR|
|Wright Medical||Hip products*||Hip replacement||3||-||-||-||-|
|Wright Medical||Knee products*||Knee replacement||3||-||-||-||-|
|Wright Medical||Other OrthoRecon*||Joint reconstruction (unspecified)||0||-||-||-||-|
|Wright Medical||Foot/ankle||Extremity implants||207||292||375||459||+17%|
|Wright Medical||Upper extremity||Extremity implants||27||32||36||40||+7%|
|Wright Medical||Other extremities||Extremity implants||10||10||11||12||+7%|
|Wright Medical||Biologic products||Orthobiologics - total market||65||73||81||88||+6%|
|Total company sales||309||407||503||600||+14%|
|Tornier||Large joints & others||Joint reconstruction (unspecified)||57||58||60||61||+2%|
|Tornier||Upper extremity joints & trauma||Extremity implants||203||242||282||322||+8%|
|Tornier||Other lower extremity joints & trauma||Extremity implants||20||33||58||82||+19%|
|Tornier||Sports medicine & biologics||Orthopedics (unspecified)||14||16||17||18||+3%|
|Total company sales||335||398||473||547||+8%|
|*Sold to MicroPort Scientific in early 2014. Source: EvaluateMedTech|
The other area in which both have an interest is biologicals: bone grafts in Wright’s case, while Tornier has a reconstructive tissue matrix to aid wound healing and bioresorbable screws for fixing implants in place.
And it is here that Wright has a second piece of good – well, good-ish – news. Its bone graft Augment, which has been back and forth to the FDA several times over the years, has finally received an approvable letter. If Wright can reassure the agency about manufacturing Augment could reach the US quite soon – the company hinted on the call that approval could come in the first half of 2015.
The US market for Augment could reach $300m, according to Wright, but it should be remembered that the clinical data have failed to wow the FDA in the past (FDA rejection of Augment graft improves future for smaller companies, August 12, 2013).
The 10th multibillion-dollar merger in the medtech field to be announced this year has been launched in defiance of anti-inversion laws and appears little short of a challenge to the competition authorities. 2014 has been an astonishing year for consolidation in the device field, and, in terms of the deals they are doing, companies seem to be getting bolder.