Staff Writer

Amsterdam-based Wright Medical Group NV agreed to acquire Cartiva Inc., a private orthopedic company that focuses on treatment of osteoarthritis of the great toe.

As part of the agreement, Wright will acquire 100 percent of Alpharetta, Ga.-based Cartiva's outstanding equity on a fully diluted basis for $435 million in cash.

Cartiva's lead product is the Synthetic Cartilage Implant (SCI) for treating arthritis at the base of the great toe. Cartiva reported receiving a green light from the FDA in July 2016 after an advisory panel meeting a few months prior. (See BioWorld MedTech, April 21, 2016, and July 7, 2016.) The company also has scored approvals in Canada, EU, Brazil, Chile and Australia.

The SCI is composed of an organic polymer-based material consisting of 40 percent polyvinyl alcohol and saline (0.9 percent). The water content is similar to surrounding healthy cartilage. Further, the material can resist compression and shear, according to the company. The Cartiva SCI device is an alternative to fusion, with damaged cartilage being replaced with a small implant that aims to give pain relief and improve function and motion.

Timothy Patrick, Cartiva's president and CEO, said he looked forward to his company joining Wright. "We believe that Wright, with its 300-plus direct foot and ankle sales organization in the U.S. and its large international organization, as well as its expertise in medical education and product development, is the ideal partner to realize the full potential of our SCI technology," he added.

Robert Palmisano, Wright's president and CEO, spoke highly of Cartiva and its technology. "Supported by compelling clinical performance and the only product of its kind backed by Level I clinical evidence, Cartiva is experiencing rapid commercial adoption and is well positioned for future growth as it addresses large markets with significant unmet needs," he said. Palmisano added that the technology should prove a perfect fit for Wright's lower extremities business.

In addition, Wright reported the commencement of a registered underwritten public offering of $440 million of its ordinary shares, with J.P. Morgan acting as sole underwriter for the offering, presumably to help raise some cash for the acquisition.

Outlook

At the same time it reported the buy, Wright raised its sales outlook for the year to about $812 million to $822 million, up from between $808 million and $820 million. In addition, the company expects to update its guidance for full-year 2018 non-GAAP adjusted EBITDA from continuing operations during its third-quarter earnings call, scheduled for Nov. 7.

Stifel analysts saw great promise with the deal and Wright's outlook. "Importantly, we view today's share weakness (-4.2 percent vs. S&P500: +0.60 percent) as largely a function of a transient near-term equity financing overhang and is not representative of WMGI's clearly accelerating sales growth and margin outlook. We increase our 2018-22E sales projections to reflect above expectation 2018 trends, but do not yet include Cartiva contribution until deal close anticipated later this year," they wrote. The company's stock (NASDAQ:WMGI) previously had closed at $27.97, but was down to $26.79 as of end-of-day Monday.

During a call on the acquisition, Joanne Wuensch of Bmo Capital Markets noted that two weeks ago, during the company's Aug. 8 earnings call, Wright also had raised guidance. She asked what made the company so confident as to raise it again so quickly. Palmisano acknowledged that raising guidance midway through the quarter was unusual, but the company wanted to show that the transaction was not coming as a result of any issues related to its existing business. "[W]e thought it was important that everyone understand that our underlying business is very good, and this is just going to make it better. So that's why we did it now," he added.

Stifel analysts also pointed out that as a result of this buy, Wright owns two of the entire orthopedic industry's four, PMA-approved products, "further differentiating the company from peers."

Hot product

Palmisano also said on the call that once the buy closes, Cartiva's offering "will be the most profitable product in our company and one of the fastest growing." He also highlighted the ease of integration. "I think that we have a large direct sales force that this will be easily integrated into," Palmisano responded when asked by Matthew O'Brien of Piper Jaffray about the overlap between the two companies. "We have seen Cartiva product in the marketplace for a while now. They've done very well."

He further explained that there are areas of the country that Cartiva's distributor sales force does not cover, but where Wright has direct coverage. "[T]here are many physicians who are using this product [who] are not currently customers of Wright," he added. "[A]s soon as this deal closes, I think that we could be off and running in conjunction with the current Cartiva sales force."

Ambulatory surgery, additional indications

Richard Newitter of Leerink Partners LLC asked about how the product would fit within the context of an ongoing shift toward ambulatory surgery. Palmisano noted that the SCI procedure typically is done in an outpatient setting. "I think that we have been pretty successful so far this year in advancing our businesses in ASCs [ambulatory surgery centers], this should help." He also highlighted that the procedure is much faster than fusion – 35 minutes vs. almost one hour.

For his part, Raj Denhoy of Jefferies LLC asked about potential additional indications for the product beyond the big toe. "There is currently an IDE for expansion into the thumb, same type of thing with arthritis," Palmisano said. "And I think that IDE was approved sometime in '17. The PMA – we're not sure whether this is a PMA or PMA supplement – that's under negotiation with the FDA. But we really haven't built in anything for that in the outlook that we have given you in terms of revenue."

In March, Cartiva reported that the first U.S. patient had been treated in its GRIP 2 study, which was evaluating the safety and effectiveness of SCI in the treatment of first carpometacarpal joint osteoarthritis at the base of the thumb.

Full-year 2018 Cartiva revenues are estimated to be about $35 million, according to Wright, representing about 50 percent growth over 2017. The transaction has been unanimously approved by the boards of both companies and is expected to wrap up in the fourth quarter of the year, subject to the satisfaction of customary closing conditions.

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