Medtronic is taking a plunge into M&A waters during the COVID-19 pandemic to sharpen its spine offerings.
The Dublin-based company has signed an agreement to acquire Medicrea, a manufacturer of custom spine implants, for about €7.00 per share, a premium of 22% over the closing price of shares on July 14. The deal is expected to close at the end of this year.
Lyon France-based company’s product portfolio includes the Medicrea UNiD Adaptive Spine Intelligence (ASI), which is designed to support surgeon workflow in pre-operative planning and create personalized implant solutions for surgery.
The Medicrea solution is powered by predictive modeling and sophisticated algorithms that measure and digitally reconstruct the spine to its optimal profile.
Jacob Paul, SVP, President, Cranial and Spinal Technologies for Medtronic, said the development of the UNiD ASI system is what really attracted the company to Medicrea.
“A couple of years ago [Medicrea] moved into artificial intelligence and data science,” Paul told MD+DI. “This fits in very well with where we are going as a company. We’re transforming from an implant company to a procedural solution company. We’re uniquely positioned to do that because we have the broadest portfolio of enabling technologies used in a procedure that [includes] navigation, 3-D interoperative imaging, and robotics.”
Mike Matson, an analyst with Needham & Company, spoke favorably about the deal and noted it was a positive for Medtronic.
“We believe that Medicrea's technology is complementary to Medtronic's imaging, navigation, and robotics offering and its Surgical Synergy strategy of bundling its capital equipment with its implants,” Matson wrote in a research note. “While this is a smaller transaction, we believe that Medicrea's platform complements Medtronic’s enabling technology capabilities and we reiterate our buy rating.”
The transaction is expected to be immaterial to Medtronic’s adjusted earnings per share in the first two fiscal years before turning accretive in fiscal year 2023. In addition, it is expected to meet Medtronic's long-term financial metrics for acquisitions.
“[This acquisition] transforms the spine surgery in ways that nobody else can,” Paul said. “It drives efficiency because it takes so much … of the workload and stress off the surgeon. This allows us to capitalize on strategic opportunities at a time when our competitors are on the defensive and it truly allows us to differentiate ourselves in ways our competitors can’t.”
M&A Only a Matter of Time for Medtronic
Medtronic dipping its toes into the M&A waters shouldn’t come as a surprise. In May, during an earnings call, Medtronic’s incoming CEO Geoff Martha hinted the company could be involved in acquisitions in the near future.
Martha said that he is partial to tuck-in acquisitions that are more meaningful and can affect the company's long-term growth rate.
During the May earnings call, an analyst pointed out that Medtronic had the best balance sheet that it's had in about five years and that asset prices were down 20% across the board.
“I think it is a good time to do M&A, as you mentioned, asset prices are down," Martha said, according to a transcript of the call from Seeking Alpha. "It doesn't mean that we lower our standards.”
Orthopedics and Medtronic's Position in Spine in the Age of COVID-19
Companies that specialize in orthopedic procedures have been on a rollercoaster ride since the pandemic struck. Custom orthopedics Conformis’s trajectory is a prime example.
In March, the firm was faced with the tough decision of furloughing one-third of its workforce. However, trajectory changed when it received $4.7 million under the paycheck protection program offered by the U.S. Small Business Administration.
Canaccord Genuity recently released the latest survey of surgeons that showed a "sharp bounce-back" in orthopedic surgery volumes. However, the survey also raises concerns about sustainability, as COVID-19 rages on.
Before the pandemic struck, Medtronic said its spine business was growing. Even after the pandemic hit, the company is still showing a significant amount of strength.
The Medicrea deal could only enhance the medtech titan’s prowess in spine.
During Goldman Sachs 41st Annual Global Healthcare Conference, Medtronic’s CEO Martha spoke about the company’s progress in spine during the pandemic.
“…Our spine business continues to build momentum just in general with robotics and everything,” Martha said according to a Seeking Alpha transcript of the conference. “… Things continue to do better than what we had thought.”