Kyphon Looks to Acquire St. Francis Medical Technologies

This month, Kyphon Inc. (Sunnyvale, CA) announced plans to acquire spinal device manufacturer St. Francis Medical Technologies Inc. (Alameda, CA) for approximately $525 million. The deal will include revenue-based contingent payments of up to $200 million.

A privately held company, St. Francis manufactures the X Stop, an FDA-approved interspinous process device for the treatment of lumbar spinal stenosis. The addition of the X Stop platform technology will broaden Kyphon's line of minimally invasive spine treatments, which includes its KyphX balloon kyphoplasty technologies for the repair of vertebral compression fractures. The company also recently launched its functional anesthetic diskography procedure for diagnosing the source of low back pain, a technology the company acquired through its $2.5 million purchase of InnoSpine earlier this year.

“Kyphon brings an established global sales presence and resources that we believe can more fully capture the opportunity within St. Francis's targeted markets,” said Richard Mott, president and chief executive officer of Kyphon. “Through St. Francis's interspinous process X Stop device, Kyphon gains a first-mover advantage in the less-invasive treatment of lumbar spinal stenosis, which is one of the fastest growing segments of the spine market. St. Francis established itself as a technology leader in this market when it was the first to receive FDA approval for treating lumbar spinal stenosis. We also believe that the merging of our two technology platforms with our combined expertise in developing minimally invasive spinal devices and procedures will benefit the flow of new products to our customers and their patients in the future.

“We have been impressed with the progress St. Francis has made over the past several years in developing its X Stop technology and with the strength and breadth of the associated intellectual property portfolio it built to protect its innovations,” Mott added.

“In building its balloon kyphoplasty franchise, Kyphon has established relationships with thousands of spine specialists through its large direct sales force and clinical education programs,” said Kevin Sidow, president and chief executive officer of St. Francis. “Kyphon is the ideal partner to maximize the potential of our X Stop system and accelerate adoption of this important technology.”

In discussing the market opportunity for St. Francis's X Stop technology, Kyphon cited recent market research that indicated there are approximately 1.4 million individuals in the United States with a primary or secondary diagnosis of lumbar spinal stenosis. “Approximately 500,000 of these patients are treated with conservative nonoperative therapies,” said Kyphon COO Arthur T. Taylor. “Approximately 140,000 additional patients in the United States undergo spinal surgery for lumbar spinal stenosis annually, typically a laminectomy. In addition, many sufferers do not seek treatment.

“The initial target market in the United States for the X Stop procedure consists of lumbar spinal stenosis sufferers age 50 and over with moderate symptoms, whose condition is not responding to conservative nonoperative therapies or who would otherwise receive a laminectomy,” Taylor added. “We estimate this initial target market consists of more than 200,000 procedures annually in the United States.” The company estimates that this translates into a U.S. market opportunity of more than $1 billion.

Kyphon's acquisition of St. Francis is still subject to regulatory review and closing conditions. Kyphon expects the deal to close during the first quarter of 2007.

According to Kyphon, St. Francis recorded sales of $36.5 million through the first nine months of 2006. Revenues for the quarter ended September 30 were approximately $17 million, or 46% of the year-to-date sales.

“Given that FDA approval for the X Stop system was only obtained in the fourth quarter of last year, this revenue growth performance is exceptional and reflects strong clinician adoption of the procedure,” said Maureen L. Lamb, Kyphon's vice president, CFO, and treasurer. “With the X Stop device in our product portfolio, we anticipate that our combined 2007 worldwide revenue will grow to approximately $560 million to $580 million.”

In 2005, Kyphon reported sales of $306.1 million—a 43% increase over 2004. This past November, Kyphon reported third-quarter sales of $102.7 million, an increase of 30% over the year-ago period. For the nine-month period, Kyphon reported sales of $295.2 million, an increase of 34% over the $220.3 million reported for the same period in 2005.

To read more about Kyphon's roots, recent growth, and plans for international expansion, look for the cover story interview with Kyphon cofounder, executive vice president, and chief science officer Karen D. Talmadge, PhD, in the November/December issue of MX: Business Strategies for Medical Technology Executives. The full text of the interview can be accessed via the MX Web site at www.devicelink.com/mx.

© 2006 Canon Communications LLC

Return to MX: Issues Update.