Orthofix International N.V. (NASDAQ:OFIX) recently inked a definitive agreement to buy Spinal Kinetics Inc. The buyout is in line with the company’s aim to strengthen foothold in the $5.4-billion U.S. spine hardware market.
Spinal Kinetics is a privately-held developer and manufacturer of artificial cervical and lumbar discs.
Post the completion of the deal, Orthofix will expand its Spine Fixation portfolio through the addition of Spinal Kinetics’ CE Marked M6 artificial discs. Notably, the M6 artificial disc is capable of mirroring the natural motion of the spine and is, therefore, preferred by many surgeons.
However, the M6 artificial discs are yet to receive FDA approvals. Notably, Spinal Kinetics has already filed for a Pre-Market Approval (PMA) with the FDA for treating single level cervical degenerative disc disease (DDD) using the M6-C cervical disc.
Financial Details
On fulfillment of certain customary conditions, the deal is expected to be closed in second-quarter 2018. Per the terms of the agreement, Orthofix is liable to pay $45 million in cash closing consideration along with certain contingent milestone payments. In this regard, the company will pay up to $60 million to Spinal Kinetics on achieving targets like FDA approval for the M6-C cervical disc along with reaching $30 million and $50 million of trailing 12-month sales targets.
Moreover, the buyout is likely to contribute to the top line in 2018. For 2019, the company projects organic revenue growth rate to rise, courtesy of the deal. Further, within 12 months of the PMA approval receipt in the United States, Orthofix expects the acquisition to be accretive to the adjusted earnings per share and EBITDA.
Spine Fixation SBU at a Glance
Orthofix’s Spine Fixation strategic business unit (SBU) manufactures and distributes a wide range of implant products used in surgical procedures. The company continues to witness impressive top-line contributions from the unit. In the last quarter, the segment saw 13.5% (up 13.2% at constant exchange rate) growth over the year-ago quarter. This uptick can be attributed to new product launches and the adopted strategic initiatives.
In February 2018, Orthofix announced the 510(k) clearance receipt and the limited launch of the FORZA XP Expandable Spacer System in the United States. Continuing with these developments, the company is satisfied with the progress in IDE clinical trials focused on using pulse electromagnetic field technology for treating osteoarthritis of the knee and lowering repair failures after rotator cuff surgery.
Market Potential
Per a report by P&S Market research, the global artificial disc market revenues are estimated to reach $3.3 billion by 2024. Rising instances of DDD, improving technology, higher awareness about treatment procedures followed by increased healthcare spending and aging population are expected to stimulate demand in the market.
Furthermore, Orthofix expects a double-digit growth in the global artificial disc market in the upcoming. Thus, the latest development has come at the opportune time for the company to cash in on the bountiful opportunities in the high-potential niche market.
Price Performance
Over the past three months, Orthofix’s shares have outperformed the industry it belongs to. The stock has gained 8.9% compared with the industry’s 5.2% rise.
Zacks Rank & Key Picks
Orthofix carries a Zacks Rank #3 (Hold).
A few other better-ranked stocks in the broader medical sector are Bio-Rad Laboratories (NYSE:BIO) , athenahealth, Inc. (NASDAQ:ATHN) and PerkinElmer (NYSE:PKI) .
Bio-Rad Laboratories sports a Zacks Rank of 1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here. The company has a long-term expected earnings growth rate of 20%.
athenahealth is a Zacks #1 Ranked player. The company has a long-term expected earnings growth rate of 21.5%.
PerkinElmer has a long-term expected earnings growth rate of 12.3%. The stock carries a Zacks Rank #2 (Buy).
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