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Will Zimmer Biomet's Spine Investment Live up to Its Potential?

Article-Will Zimmer Biomet's Spine Investment Live up to Its Potential?

Will Zimmer Biomet's Spine Investment Live up to Its Potential?
Zimmer Biomet expands its spine business with its purchase of LDR Holdings, a move that place it in the fast-growing cervical disc replacement segment. Can this rapid growth continue?

Zimmer Biomet is buying spine company LDR Holdings for approximately $1 billion and has high hopes for its future in the rapid growth area of cervical disc replacement (CDR). That's because LDR, which makes spinal surgery devices, sells the Mobi-C CDR device, the only device that has FDA approval for both one- and two-level treatment indications.

In addition to CDR, the transaction will also give Zimmer Biomet products for zero profile fusion, a wider spine portfolio, and a chance to increase penetration of LDR products. The combination should make Zimmer Biomet the fifth largest spine player in the world, according to a company presentation. Zimmer Biomet and LDR would have a 7% global market share in the roughly $10 billion spine industry, behind Medtronic (31% share), DePuy Synthes (16%), NuVasive (9%), and Stryker (8%). 

"This highly strategic and complementary transaction will enhance Zimmer Biomet's innovation leadership in musculoskeletal healthcare by adding a premier spine platform to our portfolio of solutions," David Dvorak, president and CEO of Zimmer Biomet, said in a Zimmer press release. "This combination is consistent with our goal of driving meaningful growth across all musculoskeletal markets with innovative products, technologies and services that enhance patient outcomes."

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The company does expect this purchase to accelerate its overall sales growth rate, and the Mobi-C artificial cervical disc CDR device seems to play a large part in that expectation. Management pointed out on a Tuesday morning call with investors that between 2013 and 2015, Mobi-C revenue grew at a 129% compound annual growth rate (CAGR), to just over $60 million in annual sales. Mobi-C has shown superiority to fusion for two-level procedures. "These excellent clinical outcomes coupled with market-leading ease of use are expected to drive further market penetration as a part of Zimmer Biomet's Spine portfolio," the company stated in its release.

But one analyst is more cautious on the CDR product's future growth. In a June 7 research note, Wells Fargo senior analyst Larry Biegelsen wrote that Mobi-C sales are growing at about 30% and that "we have been cautious on the near-term outlook of Mobi-C because the cervical disc market has not grown as quickly as many had expected largely due to reimbursement issues." LDR has been working to expand payer coverage for two-level CDR.

In the company release, Zimmer Biomet points to its size as a boon for CDR market growth. "The combination positions Zimmer Biomet to leverage its scale and resources to accelerate the development of the CDR market globally," the release stated.

Biegelsen added that competitor Medtronic's CDR product is anticipated to also gain an indication for two-level procedures. Medtronic's management has indicated they expect this approval to come in the current fiscal year, which started at the end of April. 

The MIVo (Minimal Implant Volume) products, used in lumbar and cervical fusions, is still LDR's largest product category, making up just over half of company sales in 2015.

The acquisition is expected to close in the third quarter of 2016. Zimmer Biomet is buying LDR for $37 cash per share, a deal funded by cash on hand and borrowing from the existing revolving credit facility. The company intends to issue $750 million in senior unsecured notes after the transaction closes. 

"We are delighted with this combination, which will further our commitment to improving spine care by providing greater access to our innovative product offerings for patients around the world, while offering our stockholders immediate cash value," said Christophe Lavigne, LDR cofounder, chairman, president, and CEO, in the press release.  

Zimmer Biomet's sales and earnings per share (EPS) guidance for 2016 remains unchanged for now, and the deal is anticipated to be neutral to adjusted diluted EPS in 2017 and accretive in the following years, according to the release. 


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