3 Orthopedic Acquisitions to Know

Orthopedic companies slowed their merger and acquisition (M&A) activity in 2020. Though, well-positioned companies made surprising expansions, strategic shifts and small purchases with potential for big impacts. By our count, 30 acquisitions or divestitures are expected to close in 2020, 9 fewer than in 2019. We highlight three recent transactions of particular interest due to their potential to shape the acquiring company’s portfolio.

Olympus Commits to Orthopedics with FH ORTHO Acquisition

Olympus acquired FH ORTHO as part of its plan to become a leading medical device company and expand its focus on minimally invasive surgery (MIS). Olympus noted that FH ORTHO allows the company to build its portfolio of products and patient-focused solutions used in MIS procedures in ligament repair, foot and ankle and trauma surgery.

In November 2019, Olympus unveiled a new corporate strategy that included aspirations to become a globally leading medtech company with an annual average growth rate of 5% to 6% over the long term.

The company’s medical division, primarily endoscopic equipment and devices for gastrointestinal, bronchial, urology and ENT purposes, made $6 billion for fiscal year 2020, which ended March 31. Medical accounts for 80% of Olympus’ total revenue.

While Olympus’ recent annual report and strategic plans mention nothing about expanding into orthopedics, the company competes in sports medicine with what is reportedly the first ultrasound device indicated for arthroscopic surgery. It notes that its main competitors in the minimally invasive surgical endoscope space are KARL STORZ, Stryker, Richard Wolf and Arthrex. Additionally, its joint venture with Olympus Terumo Biomaterials Corp. allows the company to distribute bone substitutes and high tibial osteotomy (HTO) plates and screws. The company declined to comment on the size of its orthopedic business.

When we asked what Olympus finds attractive about orthopedics, Toshi Okubo, Senior Vice President, Global New Business Development at Olympus said, “Further penetration of the orthopedic market is part of the Olympus effort to continue its growth as a leading global medtech company. This acquisition will help us to serve a broader range of patients, including those with musculoskeletal injuries or diseases that we have not previously addressed. We estimate that the market size of this segment of minimally invasive orthopedic surgery is $7.3 billion and CAGR is 5% to 10%.”

Olympus looked for a partner with a compatible portfolio and strong distribution in order to scale in orthopedic products and into broader geographic markets. “We found both in FH ORTHO,” Mr. Okubo said.

FH is represented in over 37 countries with joint replacement (shoulder, knee and ankle), ligament repair, biologics, foot/ankle and other trauma applications. (Its former spine business, now part of Spine Innovations, is not part of the acquisition.) FH is now a subsidiary of Olympus and will sell certain Olympus products through its distribution network while Olympus sells certain FH products in Japan.

“Business expansion will occur first in Europe, and we will develop a detailed plan for other global regions,” Mr. Okubo said. We estimate that FH’s revenue is around $80 million. The company has a diverse portfolio and, within the last year, announced the first U.S. clinical use of its EASYMOVE total ankle and launched total shoulder replacement software. Its reach across products and geographic regions make it an attractive acquisition target. Due to FH’s size, though, the purchase is unlikely to make a meaningful impact on Olympus’ medical business in the short term.

Smith+Nephew Fills Extremities Gap with Purchase of Integra’s Ortho Business

Smith+Nephew made three acquisitions in 2020 in efforts to diversify and boost its joint
replacement business. The largest and latest of those three was the purchase of Integra LifeSciences’ orthopedic business. Smith+Nephew scooped up the extremities portfolio for $240 million in cash. The acquisition allows Smith+Nephew to venture into total shoulder replacement and total ankle replacement, and deepen its trauma extremities lines.

In 2019, Smith+Nephew’s knee and hip replacement businesses brought $1.7 billion in revenue and its trauma business $434.1 million. Combined, the joint replacement and trauma segments accounted for 59% of the company’s $3.6 billion in total revenue.
For perspective, Integra’s orthopedic business secured $90 million in 2019 and experienced consecutive declines from 2017 to 2019.

The acquisition was attractive because Smith+Nephew receives a full extremities product line – shoulder, wrist, elbow, foot and ankle – an R&D pipeline that includes a next-generation shoulder replacement system expected for launch in 2022, a full commercial salesforce in the U.S. and distributors in Europe and other geographic regions.

Smith+Nephew’s leadership noted that they could significantly scale the portfolio through its more extensive sales operations and cross synergies with surgeons they call on for sports medicine, which, by revenue, is the company’s largest market segment.

“We’ve been looking at the market for some time. We always felt this would be very complementary to the portfolio,” said Smith+Nephew Chief Executive Officer Roland Diggelmann. “We feel very good about this acquisition, both strategically and in the current timeframe.”

Smith+Nephew’s entrance into extremities joint replacement isn’t a surprise. High growth in the extremities market has led companies of all sizes to enter or expand in the space. For example, Smith+Nephew’s knee and hip replacement portfolios combined saw +2.5% growth in 2019. Mr. Diggelman said he expects the new joint replacement portfolio to deliver double-digit growth. Smith+Nephew likely thought it needed to act soon with Stryker’s acquisition of Wright Medical, and next-tier players like DJO and Medacta boosting their extremities lines through new product launches and acquisitions themselves. Stryker divested its STAR total ankle to DJO to satisfy regulators’ competitive concerns over the Stryker/Wright Medical deal.

Overall, the acquisition should be promising for Smith+Nephew. The company gets access to a new market and next-generation systems without a large, time-consuming
integration. Plus, the acquisition complements its recent ramped-up focus on ASC/outpatient settings. Earlier this year, Smith+Nephew acquired MiJourney and Rapid Recovery Pathways. The technologies are pivotal to Smith+Nephew’s ARIA patient care delivery platform.

Surgalign’s Transformative Year Ends with Enabling Technology Acquisition

In 2020, RTI Surgical divested its OEM business to become a pure play spine company and renamed itself Surgalign. Within months of finalizing its refocus on spine, the company diversified its portfolio
with the acquisition of Holosurgical, a Chicago company focused on developing an augmented reality and artificial intelligence (ARAI) platform.

The transaction was valued at $125 million, including $42 million in cash and shares at closing plus potential future milestone payments. Surgalign nets the ARAI platform and
the experts behind it. Christian Luciano, Ph.D., joined the company as leader of its digital R&D initiatives, and spine surgeon Kris Siemionow, M.D., Ph.D., joined Surgalign as Chief Medical Officer.

Holosurgical was founded in 2015 and is developing and preparing for regulatory submission for the ARAI platform, which is believed to be the world’s first technology designed to automatically segment, identify and recognize patient anatomy for autonomously assisting the surgeon throughout the case. The technology includes a surgical workstation, technician workstation, augmented reality headset and navigation tracking. In 2019, we heard Dr. Siemionow compare current robotic and navigation technology on the market to using a map to get from point A to point B. ARAI, he said, is like a driverless car.

“We are very excited about bringing the innovative surgical platform and world-class team from Holosurgical into our organization,” said Terry Rich, President and Chief Executive Officer of Surgalign. “A foundational thesis at Surgalign is that digital surgery will enable the next wave of innovation in spine surgery. We wanted to find a partner who was developing truly novel digital technologies that could transform the way spine surgery is performed and support clinical research to demonstrate improved patient outcomes. We believe that with Holosurgical’s ARAI platform in combination with our ongoing research and development efforts, we will have positioned ourselves as a leading digital surgical company in spine.”

Surgalign is a top 10 spine company, with segment revenue of $119 million in 2019. It’s become increasingly clear that mid-tier spine companies believe they need digital surgery tools to compete in the space. Comparable sized companies include ATEC and its SafeOp Neural Informatix System and SeaSpine, which inked a co-marketing agreement with 7D Surgical and its Machine-vision Image Guidance System.

The largest companies in the market that have developed robotic systems and other enabling technologies have proven that these technologies are revenue generators through capital sales, implant pull-through and service contracts.

While ARAI still needs regulatory clearance, Surgalign’s acquisition should result in revenue gains and differentiation in the market.

Additional Orthopedic M&A We’re Watching

There are several M&A deals worth following as we enter 2021.

Stryker’s acquisition of Wright Medical, which was announced in early November 2019, closed in November 2020. Stryker gains an extensive extremities portfolio that will catapult it from the sixth largest player to the largest player in joint extremities replacement. The deal will also cement Stryker’s position as the second largest orthopedic company by revenue. Why watch? The deal is the largest integration we’ve
seen in some years, and naturally brings complexities to Stryker’s business amidst its response to COVID.

Colson Medical announced that it would merge two of its well-established companies – Acumed and OsteoMed – over the next year. The combined businesses primarily cover trauma and sports medicine with an emphasis on extremities in these markets. Colson noted that both brands would be maintained, and the merge will allow the company to leverage investments in systems and processes and create business continuity with manufacturing and inventory. The integrated company could become a greater force in the trauma segment, for which we estimate they hold about 5% market share combined. It will be interesting to watch how the companies handle product overlap and turn their synergies into greater revenue opportunities.

Medtronic closed its acquisition of Medicrea in November, a move that will boost its integrated procedure solutions for planning and delivery. Medtronic gains the UNiD ASI (Adaptive Spine Intelligence) platform, which includes personalized implants, AI-driven planning and prediction capabilities for individualized patient care. The acquisition also comes with 30+ spinal implants.

At the onslaught of COVID-19 in 1Q20, we expected consolidation to slow for the year. We maintained that small companies remain the innovation engines in orthopedics, and large and medium-sized companies would seek to acquire novel implants and software companies to expand their portfolios quickly through these smaller acquisitions. This largely played out in 2020 and, we expect it to continue in the first half of 2021.

Carolyn LaWell is ORTHOWORLD’s Chief Content Officer.