Zimmer Biomet shows some backbone with $1bn LDR buy

Demand for cervical disc replacement is growing fast, but even so Zimmer Biomet’s willingness to spend $1bn on the unprofitable LDR – more than six times the company’s 2015 sales and a 64% premium to its share price – looks generous.

And considering the difficulty Zimmer had integrating the devices it acquired in its previous, much smaller, purchase of a spinal specialist, this seems to be a pretty brave move (see table below). Diversifying a portfolio is often a good idea, but Zimmer Biomet will have to do better than it did back in 2008 with its deal for Abbott Spine.

Zimmer forked out $360m for Abbott’s spine unit, which at the time had sales of $109m; Zimmer’s own spine business made nearly $200m. The deal was a scale play rather than an attempt to obtain promising, differentiated devices, and the two groups’ product lines had a large amount of overlap.

In the years afterwards Zimmer’s spinal sales slid, declining every year between 2009 and 2012. Eventually Zimmer Biomet had to close Abbott Spine’s Austin, Texas facility, moving some staff to its base in Minnesota in 2013 but incurring job losses. Ominously, LDR is also headquartered in Austin, as well as in Troyes, France.

Model

There is a model for a better deal in the spinal sector, though, and this one comes from the other half of Zimmer Biomet. In 2013 Biomet bought Lanx, a private company that specialised in minimally invasive spinal fusion products. At the time Biomet got less than 10% of its revenue from spinal devices and there was much less overlap.

Promisingly, the LDR deal seems like it might follow this model rather than the Abbott Spine misfire, being more to do with innovative tech rather than an attempt to expand as a company.

LDR’s flagship device is the Mobi-C spinal implant, a prosthetic cervical disc which unusually has been granted two separate FDA premarket approvals. It was approved in August 2013 to replace the cartilage between adjacent vertebrae – so-called one-level use – and two weeks later got the nod for two-level use, where two Mobi-Cs are used either side of a single vertebra. It is the only device approved for both one and two-level use in the US.

That said, the deal will certainly boost Zimmer Biomet’s slice of the market. The company is currently forecast to be the sixth-largest player in spinal devices by 2022 sales, EvaluateMedTech’s consensus forecasts show, but the addition of LDR will buoy it to third, with revenues from these products of over $1.1bn.

LDR says Mobi-C has a 30-40% share of the worldwide cervical disc-replacement market. This is one of the fastest-growing segments of the $10bn spine market, of which Zimmer Biomet has a 5% share and LDR 2%.

Around 234,000 one and two-level cervical fusion procedures are performed in the US each year, and between 30% and 50% of these are candidates for cervical disc replacement, according to Needham analysts, putting the potential annual US market at $500-800m.

So there is room for growth. Clearly following the $13bn merger of Zimmer and Biomet the group has little immediate need for greater scale. Maybe a more tech-focused deal will pay off, even at this price.

To contact the writer of this story email Elizabeth Cairns in London at [email protected] or follow @LizEPVantage on Twitter