Wright Medical (NSDQ:WMGI) today dropped a couple of bombshells on the orthopedics market, announcing an inversion deal to pay $3.3 billion for Dutch rival Tornier (NSDQ:TRNX) in a stock-for-stock deal and revealing an approvable letter from the FDA for its Augment bone graft.
The Tornier acquisition will see Wright reincorporate in Holland, but base its lower extremities and biologics business in its Memphis home base. The upper extremities business will be based at Tornier’s Bloomington, Minn., facility with its engineering in Warsaw, Ind., according to a press release.
Wright said the deal is structured so that each WMGI share will be exchanged for 1.0309 TRNX shares, leaving Wright shareholders with about 52% ownership of the combined company. Memphis-based Wright pegged the deal’s value at about $3.3 billion, saying it represents a 28% premium on Tornier’s Oct. 24 closing price.
Wright Medical Group N.V. will be led by Wright president & CEO Robert Palmisano, who will have the same role at the combined company. Tornier president & CEO David Mowry will become executive vice president & COO, according to a regulatory filing.
"This combination will create the premier extremities-biologics company with a broad global reach. Together, we will have 1 of the most comprehensive upper and lower extremity product portfolios in the market, extending our leadership position and further accelerating our growth opportunities and path to profitability, all of which we believe will generate long-term value for our shareholders. In addition, this will provide our employees with opportunities for career growth and development as part of a much larger, dynamic organization," Palmisano said in prepared remarks.
"Wright shares Tornier’s commitment to serving extremities specialists and building the leading global business in this market. Both companies have built a deep and loyal customer base and have highly complementary product portfolios, positioning the combined entity to deliver meaningful value to our shareholders. We believe that partnered together, Wright and Tornier will become the fastest-growing company in the extremities-biologics industry," Mowry added.
FDA to OK Augment
In separate release, Wright said the FDA’s approvable letter for the Augment bone morphogenetic protein product, after years of regulatory wrangling, "indicates that FDA determined Augment bone graft to be safe and effective as an alternative to autograft for ankle and/or hindfoot fusion indications." Wright must still satisfy the FDA’s concerns about its manufacturing process for Augment, saying the combination of recombinant human platelet-derived growth factor and beta-tricalcium phosphate "is approvable subject to customary preapproval facilities inspections."
The FDA issued a non-approvable letter for Augment back in August 2013, citing the low-risk patient population in a clinical trial backing the U.S. approval application. Wright appealed and won a date with an FDA dispute resolution panel, but remained pessimistic that the hearing would go its way. But the federal watchdog agency last March allowed Wright to submit more data on Augment, instead of holding the resolution panel, and said it would make a decision within 6 months. Memphis-based Wright said at the time that the additional data involved analyses of radiographic images taken pre- and post-operatively during clinical studies of the Augment product.
"Today’s positive news on the approvability of Augment bone graft is a major milestone that paves the way for commercialization in the U.S. and further underscores our strength in biologics. Augment will provide clear benefits to patients and physicians and is expected to be a significant catalyst and meaningful new future growth driver for our business. We will work swiftly to address the inspection requirements set forth in the approvable letter and expect our U.S. foot and ankle commercial team to be ready to launch immediately upon final approval," president & CEO Robert Palmisano said in prepared remarks. "The success can be attributed to everyone involved in the clinical trial, especially the study investigators and coordinators; our Augment R&D, regulatory and clinical teams; our partners and suppliers; and most importantly, the patients who participated in the first prospective, randomized study comparing Augment bone graft to autograft."
Palmisano had said in February that the medical device maker was not optimistic that the resolution panel would recommend a reversal of course. Wright bought BioMimetic Therapeutics, which developed the Augment product in Franklin, Tenn., for $190 million in cash and another $190 million is possible milestones in November 2012. In August 2013, the FDA said Wright would need to run a new clinical trial on high-risk patients to win its favor for Augment. Last November the federal watchdog agency granted Wright’s request for the dispute resolution panel. Wright has no plans to run another clinical trial for Augment and would move quickly to scale back the Augment business (except for a small but fast-growing operation in Australia) if the panel doesn’t go its way, Palmisano said in February.
Lowered top-line outlook
Wright also said its 3rd-quarter sales grew 23.7% to $71.3 million for the 3 months ended Sept. 30, compared with Q3 2013. Palmisano cited softer-than-expected results for Wright’s core U.S foot and ankle business and its international business.
"The rate of progress in our U.S. business is slower than we originally anticipated, and we have already taken steps to improve our sales execution by increasing focus on our core product categories. Additionally, we anticipate a more meaningful contribution in the coming quarters from sales reps and products acquired earlier this year. In our international business, demand remains strong but product mix has fluctuated, which has made supply planning challenging. Late in the quarter, we were unable to fill some international distributor orders, which resulted in unanticipated backorders and a revenue shortfall. In addition, currency rates moved negatively during the quarter. Accordingly, we are updating our revenue guidance for the year to account for these developments as well as any potential distraction related to today’s announcement regarding our transaction with Tornier," Palmisano said in a statement. "We saw improved momentum in the U.S. exiting the 3rd quarter and believe we have all the necessary ingredients for success. Our core sales drivers remain in place, including continued gains in U.S. foot and ankle sales force productivity and positive contribution from additional sales reps, acquired products and new product launches, in particular our Infinity total ankle replacement system. The U.S. foot & ankle market is still strong, and we are confident we have the right products and strategy to achieve our growth goals. Our focus going forward will be on improving our execution to realize our full potential."
Wright said it now expects to report revenues of $298 million to $302 million, down from prior guidance for sales of $308 million to $312 million. The company is slated to report its full 3rd-quarter earnings Nov. 5.