Wright Medical Group NV has substantially upped its ante on the extremities market with its plan to acquire Tornier NV for $3.3 billion.

The merger agreement builds on Wright's decision to sell off its OrthoRecon business in 2013 to focus on the extremities space. Both Wright and Tornier have been rumored as possible acquisition targets within the orthopedics industry since Wright sold of OrthoRecon, and as the extremities market has grown in prominence as a faster growing alternative to hips and knees. (See Also see "M&A Ahead: Ten Potential Medtech Takeover Targets" - Medtech Insight, 28 August, 2014..)

The all-stock transaction with a combined equity value of approximately $3.3 billion will create a device and biologics company focused on orthopedic extremities surgery. [See Deal]

Tornier offers a range of products for surgery on the shoulder, elbow, wrist, hand, ankle and foot, including joint replacement, trauma, sports medicine, and biologic products, plus joint replacement products for the hip and knee in certain international markets. Wright’s products include biologics and devices for both upper extremity and foot and ankle surgery.

“Traditionally, Wright has relied on its leadership in lower extremities whereas Tornier has relied on its leadership in upper extremities,” Wright CEO Robert Palmisano explained during an Oct. 27 conference call. “It is clear that together, we will better position to increase our focus on the vast needs of surgeon specialists.

The companies combined annual revenues this year are around $600 million, with about 62 percent coming from the U.S. and 38 percent from international markets international. Based on the second-quarter results from both companies, approximately 40 percent of revenues come from lower extremity devices, 38 percent from the upper extremity and 12 percent from sports medicine and biologics products. Large joints will represent approximately 9 percent of the combined company’s business, according to Wright.

Palmisano added that the combined R&D teams and complimentary sales and marketing divisions will “drive greater growth” in the global extremities market, currently worth about $8 billion and growing 8 to 10 percent annually. Palmisano forecast that revenues for the combined business will approach 20 percent in three years or four years. “This is something that neither company could do on its own,” he said.

Also, Palmisano predicted the cost-synergies of the deal will be $40 to $45 million, realized over the first three years following the merger, resulting from public company expenses, eliminating overlapping support and systems functions, plus vendor consolidation.

“As a standalone business, Tornier has a vision of becoming the number one extremities company in the world,” Tornier CEO David Mowry added. “This strategic combination significantly accelerates the path to this goal.”

The deal validates observers’ expectations that the extremities market will continue to grow rapidly. It follows by four months Stryker's announcement that is acquiring extremities specialist Small Bone Innovations for $375 million. Other large orthopedic device firms, including Zimmer and Johnson & Johnson have extremity devices, including ankle and shoulder systems, their portfolios. Other smaller firms with extremity offerings include Integra LifeSciences Holdings Corp., Arthrex Inc., Exactech Inc. and Orthofix International NV.

Another Inversion

The companies expect the deal to be complete in the first half of 2015. During the transition period, “business continuity and a seamless customer experience are top priorities, and we are highly focused on ensuring that no business momentum is lost during the transaction and integration period,” Palmisano said.

Under the terms of the deal, Wright’s current shareholders will own 52 percent of the new Wright Medical Group and Tornier’s shareholders will own the rest. The agreed- upon stock exchange ratio gives Tornier shareholders a 28 percent premium over Tornier’s closing share price on October 24, 2014, the last trading day before the deal was completed.

Wells Fargo analyst Larry Biegelsen writes in an Oct. 28 note, “This valuation is reasonable given that [other high-growth medtech stocks are] trading at a median multiple of 4.3x on 2015 sales. Our initial analysis of the combined company also supports that implied transaction price.”

The deal is the latest medtech merger announced in 2014 that will allow a U.S. company to redomicile in Europe to take advantage of more favorable tax rates. (See [A#01140929006].) The new combined company will be based at Wright’s current headquarters in Memphis, Tennessee but officially incorporated in the Netherlands, where Tornier is currently incorporated and headquartered. Wright CFO Lance Berry said on the conference call, “The Netherlands domicile is the best choice for the combined company providing flexibility and potential long-term tax rate benefits. However, please note that in the near time tax rate benefits, if any, are minimal.”

Plans For Growth

Palmisano will continue as CEO, while Mowry will become executive vice president and chief operating officer of the combined company. The new board will have five members from each company’s current boards, the firms announced.

Palmisano described several ongoing initiatives to improve the company’s bottom line. He said that Wright’s third quarter earnings and revenue, to be announced Nov. 5, did not the company’s targets for several reasons.

“The rate of progress in our U.S. business is slower than we originally anticipated, and we have taken steps to improve our sales execution by increasing focus on our core product categories [and] more meaningful contribution in the coming quarters from sales reps and products acquired earlier this year,” Palmisano said. He also cited supply planning challenges in the international business and currency rate fluctuations for the “softer than anticipated results in our core U.S. foot and ankle business and in our international business.”

Meanwhile, Tornier has been growing rapidly as the global extremities business is booming. During the call, Mowry announced that, in the third quarter 2014, Tornier’s revenues increased 14 percent over the third quarter of 2013, driven by over 20 percent growth in both the shoulder and ankle arthritis product categories.

Augment Gets Approvable Letter

Announced separately on the same day, Wright received an approvable letter from the FDA for its Augment bone graft as an alternative to autograft for ankle and/or hindfoot fusion surgeries, indicating Wright’s PMA for Augment will be approved subject to FDA facilities inspections. “Augment is expected to be a significant catalyst, a meaningful new future growth driver for our business,” Palmisano said.

FDA rejected Augment in 2013, and Wright was set to take it to FDA’s dispute resolution process, before FDA decided to accept an amended PMA with more radiographic imaging data in March 2013. (See Also see "FDA To Accept Wright’s PMA Amendment For Augment Bone Graft" - Medtech Insight, 11 March, 2014..)

Wright Moves More To Extremes With Tornier Purchase Agreement

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