Orthofix
(Nasdaq: OFIX)
today announced a slew of executive changes after terminating its CEO, CFO and chief legal officer with cause.
Shares of OFIX sank nearly 25% at $14.06 apiece in midday trading today. MassDevice’s MedTech 100 Index — which includes stocks of the world’s largest medical device companies — fell nearly 1%.
The Lewisville, Texas-based company’s board’s independent directors came to a unanimous decision to terminate the executives. Keith Valentine, John Bostjancic and Patrick Keran now depart those respective roles. The board also requested that Valentine resign from his position on the board. It plans to immediately begin a search for permanent successors.
Orthofix’s decision to terminate the executives followed an investigation conducted by independent outside legal counsel. Orthofix’s independent directors directed and oversaw the investigation. As a result, the board determined that each of the executives engaged in “repeated inappropriate and offensive conduct.” The conduct violated multiple code of conduct requirements and “was inconsistent with the company’s values and culture.”
The company says the matters are unrelated to and do not impact its strategy, results of operations or previously filed financial statements.
Catherine Burzik, chair of Orthofix’s board, is now interim CEO. The board chose Geoffrey Gillespie, VP and corporate controller, as interim CFO. Puja Leekha, SVP and chief ethics and compliance officer, now moves into the position of interim chief legal officer.
“Orthofix’s core values are built around fostering, cultivating and preserving a culture that is respectful, and we do not condone harassing or inappropriate conduct or statements of any kind,” Burzik said. “We require all employees – and especially our leaders – to behave in accordance with the company’s values. The board did not make these decisions lightly. We believe they are necessary to ensure our employees, investors, customers, and other stakeholders have confidence in the company’s leaders.”
More on the Orthofix changes and the analysts’ reaction
Burzik noted that, with the company’s massive merger with SeaSpine earlier this year, Orthofix has a “broad team” with a “solid understanding” of the combined company. She expressed confidence in the road ahead.
“Sales momentum and progress on integration initiatives demonstrate the strength of our differentiated spine and orthopedics solutions, and the caliber of our business unit leaders and teams that know how to execute,” she said. “Our expanded portfolio is driving cross-selling opportunities, making us a stronger partner to distributors and the surgeons who rely on our technology for the patients they treat.”
However, analysts don’t share the optimism to that extent. BTIG’s Ryan Zimmerman and Iseult McMahon downgraded Orthofix to “Neutral.”
“There is a lot to unpack here, but [Orthofix] surprised investors this morning with a sudden leadership change,” they wrote. “Management of the company was terminated with cause, including the CEO, CFO, and GC. Interim management was appointed effective immediately. We spoke with board members and interim management of the company, and while they highlighted that this was confined to personal matters (and code of conduct) and not specific to company financials, it’s hard to separate the public-facing management that investors knew well and the potential impact to the business.”
They added that the termination of Valentine — a “well-known entity” in the market — worries them in terms of business fallout. Interim management declined to reiterate guidance, but the analysts say it throws further risk into a successful merger. Zimmerman and McMahon said it “sadly gives more ammunition to the adage that ‘spine mergers are largely unsuccessful.'”
“While shares are down ~20% on the news and were already reflecting a meaningful discount prior to this, we think shares are unlikely to recover until new permanent leadership is put in place (likely in early 2024),” the analysts said.
A counterargument?
The analysts also noted the possibility of buying shares at a weak point, riding out disruptions and waiting for new leadership to clean up. They even cited a previous financial restatement period at Orthofix that led to a return for investors.
However, Zimmerman and McMahon see this as a “big IF and not necessarily a WHEN.” They saw the merger as an opportunity to utilize SeaSpine’s ability to innovate, replenishing the product pipeline. Capitalizing on Orthofix’s cashflow generation from legacy businesses constituted a big part of the deal.
The merger moved Orthofix up six spots in Medical Design & Outsourcing and MassDevice‘s Medtech Big 100 report that ranks the world’s 100 largest medical device companies. The company has achieved double-digit growth in its bone growth therapies franchise so far this year.
“The collective value proposition of this is what drove our prior view, but with a lack of permanent leadership and the increased risk to the company coming from this update, we worry that competition will use this to win share away from Orthofix as well as talent from inside the combined company,” the analysts concluded.
