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Will Bigger Be Better for Spine?

Original image courtesy of Andrii Yalanskyi / Alamy Stock Photo, modified by MD+DI Business man holds two pieces of puzzle blocks with the names of two spine companies that plan to merge (Orthofix and SeaSpine)
History says no, but analyst says a merger of equals solves key problems for Orthofix and SeaSpine.

Two manufactures in the spine market added some excitement to this year's North American Spine Society (NASS) meeting, which kicks off today in Chicago.

Lewisville, TX-based Orthofix and Carlsbad, CA-based SeaSpine announced plans to combine in an all-stock merger of equals. The new company, which is expected to be named prior to the transaction closing, would have revenues of roughly $693 million. The company will be headquartered in Lewisville, TX and management expects it to achieve $1 billion in revenue by the end of 2025.

"History tells us that bigger isn't always better in spine," Ryan Zimmerman, a medtech analyst at BTIG, wrote in a report noting his initial thoughts about the proposed merger. "The field is littered with transactions that have not gone as well as hoped for, but we believe this merger solves a few immediate problems for both companies."

For Orthofix, the merger improves the caliber and quality of its spinal implant, biologics, and enabling tech portfolio with SeaSpine's products, Zimmerman noted.

"Years of underinvestment in [Orthofix's] legacy spine business have aged the spinal implant portfolio (exclusive of M6-C)," the analyst wrote.

For SeaSpine, the merger provides access to cash without the need to raise additional capital, which Zimmerman said was the immediate overhang in shares, despite strong and durable top-line growth. He also noted that reduced cash burn for SeaSpine will allow further investment in its product portfolio to further enable product development.

During a conference call to discuss the proposed merger, analysts raised concerns about the integration risk to both companies' existing distribution channels.

"While management tried to assuage investor concerns on this topic, immediate investor questions and some other spine executives calling us lead us to think that competitors will try and maximize on any disruption that this transaction leads to," Zimmerman said in a follow-up note. 

SeaSpine acquired 7D Surgical last year in a cash and stock deal valued at $110 million. That deal added 7D's advanced machine-vision registration algorithms for surgical workflow and patient care to SeaSpine's arsenal.

The combined company’s differentiated technologies will include: the M6-C artificial cervical disc, a next-generation artificial disc replacement alternative to spinal fusion; the Flash Navigation System with 7D Technology, an image guidance system that uses a camera-based technology and machine-vision algorithms; the Fitbone platform, which includes the intermedullary limb lengthening system (currently available), the Fitspine scoliosis solution (under development); and a comprehensive offering of advanced interbody devices featuring WaveForm 3D and NanoMetalene with Reef Topography technologies.

“This transaction brings together two complementary organizations to create an industry leader with the immediate financial strength to self-fund investments that deliver both growth and better patient outcomes," said Keith Valentine, SeaSpine's president and CEO. "We are excited about the value we can create for the combined company’s shareholders, the new opportunities opened for employees, and our ability to now provide surgeons and hospital partners a complete procedural solution using cutting-edge technology at every level.”

The combination is expected to generate at least $40 million in annualized cost savings not including stock-based compensation within three years following the close of the transaction in the first quarter of 2023. Cost savings will be primarily from reductions in redundant overhead and public company costs as well as supply chain efficiencies. Working capital and capital expenditure efficiencies are expected to be driven through economies of scale via higher spinal implant set utilization.

“This transaction significantly advances our mission to deliver innovative, quality-driven solutions that make us a partner of choice for surgeons in their work to improve patient mobility,” said Jon Serbousek, president and CEO at Orthofix. “The combined company’s broad portfolio of technology, expanded commercial capabilities, and ability to make greater investments in innovative solutions provide a clear roadmap for sustainable, top-tier growth and increased competitiveness across a broad spectrum of products and services. We look forward to capitalizing on this merger’s tremendous value creation opportunities.”

Serbousek will serve as executive chairman of the new company's board, and Valentine will serve as president, CEO and a member of the board. The remainder of the combined company’s board and leadership team is expected to be named prior to closing and should include people from both Orthofix and SeaSpine.

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