Warsaw, Ind.-based Orthopediatrics Corp. is scooping up Apifix Ltd., allowing it to gain the Minimally Invasive Deformity Correction (MID-C) system, which is used to treat adolescent idiopathic scoliosis. BTIG’s Ryan Zimmerman noted that the deal has a potential value of $67 million plus potential future revenue milestones. “The initial upfront payment has a ~$37 [million] value, composed of $2 million in cash and ~935k shares of common stock,” he added.

Privately held Apifix is based in Boston and Misgav, Israel, and is a portfolio company of the Trendlines Group Ltd. “We are especially pleased to make this announcement in the time of COVID-19 – and worldwide uncertainty, demonstrating our unwavering commitment to growing shareholder value through creating and building companies to improve the human condition," commented Todd Dollinger, Trendlines' chairman and CEO.

Orthopediatrics management expressed enthusiasm about the deal. “We believe that Apifix fills a major treatment gap that could potentially allow patients to avoid fusion surgery,” said Mark Throdahl, president and CEO of Orthopediatrics. “We estimate that non-fusion procedures will grow significantly as patients, their families, and surgeons recognize non-fusion’s benefits.”

The deal follows the June 2019 news that Orthopediatrics was buying McMinnville, Tenn.-based foot and ankle surgery company Vilex Inc. and its subsidiary Orthex LLC for a total of $60 million, consisting of $50 million in cash and $10 million in stock.

As a result of the Apifix acquisition, the company will be able to bring the MID-C system, which has the CE mark and is available in the U.S. through the FDA’s humanitarian device exemption pathway, to its portfolio. “While we do not know the exact pricing of the MID-C system, we do know that it is a high dollar value procedure and, similar to KIDS’ recent Orthex acquisition, this allows for higher productivity per set for the MID-C than other KIDS systems,” Zimmerman wrote.

Of note, Apifix’s offering involves a short procedure that allows a patient to return home after a couple of days. During a call on the deal, Throdahl highlighted other benefits of the product, such as a smaller incision size, less blood loss and faster recovery time. “Apifix then is a viable alternative to failed bracing and spinal fusion. And we expect that it will open up a new product category, increasing surgical options for both traditional bracing and fusion patients with single-curve AIS [adolescent idiopathic scoliosis] from 40 to 60 degrees,” he added.

M&A

In the wake of the COVID-19 pandemic, Zimmerman said M&A activity involving companies with strong balance sheets could pick up as asset values drop. “[A]nd following KIDS’ recent equity raise, we are not surprised to see the company acquire this unique asset that can provide high value per case and potentially higher marginal revenue growth.”

Throdahl reemphasized during the April 2 call that the company was focused on acquisitions as part of its growth initiatives, something discussed during its previous earnings call. “Even in these uncertain days, we are pleased to complete a major transaction with long-term impact,” he explained. “Apifix poses few integration issues for us, and we anticipate minimal complexity, maintaining its staff in Israel and Boston with no disruption or management diversion.”

He also noted that the entire Apifix team has joined his company, with CEO Paul Mraz taking a senior executive position in Orthopediatrics.

Rick Wise, an analyst with Stifel, asked whether the company is eyeing other opportunities, particularly as other parties could express interest in selling technologies. “There will be nothing we would do that would be of this scale that we have in discussion at the moment or anticipate,” Throdahl replied. “I think that there will continue, possibly, to be some much smaller tuck-in technology acquisitions, some of which may be so small that they are not materially significant.”

For his part, Drew Stafford with Piper Sandler followed up on Wise’s question, asking about the timing of this current buy. Throdahl responded that his company had followed Apifix for roughly three years, engaging in general discussions along the way. Serious discussions began last summer, he added.

“We have long identified that we needed to be the player in the non-fusion space, and we viewed Apifix as the vehicle to let us get there,” he continued. Considering the current situation with COVID-19, his company was able to reach an agreement with Apifix’s board to do the deal via common stock, given that Orthopediatrics wants to preserve cash.

Following the call, Zimmerman wrote another note in which he said his organization was “incrementally more comfortable with the price” of the deal, “given that future milestones can also be paid out through 75% stock, and on the product, as it serves a large TAM [total addressable market] and offers potential cross sell opportunities as a new entry point to potentially large accounts.”

Company growth

Financially, Orthopediatrics has been doing well. Indeed, during its March 5 fourth-quarter earnings call, Throdahl reported positive news, with trauma and deformity growing 34%, scoliosis jumping 21% and sports medicine/other rising 18%. The year also brought the acquisition of Orthex and its entry into external fixation, and Throdahl noted the buy expanded the addressable market by $200 million.

William Blair analyst Margaret Kaczor heralded the performance and rated the stock outperform. “Management provided full year 2020 guidance for sales growth of 22% to 24%, which largely bracketed our 23% growth expectation heading into the print.,” she added.

At the time, Wise asked about the company’s exposure in China and Asia-Pacific in light of COVID-19. CFO Fred Hite noted that the company does not sell products in China. “If we look around the supply chain, we have one very, very small supplier that we do get products from in China. They were on a two-week shutdown. That has been completed as of last week, and they are now shipping products again.” For that reason, the company predicted a minimal to zero impact.

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