Integra Lifesciences Holdings Corp. is not only buying Derma Sciences Inc. for about $204 million but also taking on contingent liabilities related to the latter's July 2016 acquisition of Biod LLC that could total "around $56 million," said Integra's chief financial officer (CFO) Glenn Coleman. The amount "breaks down to around $30 million for regulatory" milestone payments and the rest connected to meeting sales goals, he said.
Plainsboro, N.J.-based Integra is paying $7 per share for Derma, of Princeton, N.J., and bringing aboard an amniotic tissue-based platform to bolster its own regenerative-medicine approach. Integra is also forking over $32 per share for Derma's outstanding shares of series A convertible preferred stock and $48 each for series B convertible preferred stock. For Derma, the purchase price amounts to a 40 percent premium to Tuesday's market close and a 45 percent premium to the 30-day volume-weighted average price.
In late 2015, Derma bailed out of drug development to put its energy into wound care devices after a committee monitoring the phase III trial of its diabetic foot ulcer (DFU) drug, aclerastide (DSC127), recommended stopping trial enrollment based on futility. Derma quit developing the drug for scar reduction and radiation dermatitis as well, and spent $2 million winding down the program. The two studies, expected to enroll a total 1,055 participants, were evaluating aclerastide 0.03 percent against a topical vehicle and against a standard-of-care hydrogel dressing. (See BioWorld Today, Nov. 13, 2015.)
Peter Arduini, president and CEO of Integra, said during a conference call with investors that "we've obviously known the Derma team and this business for some time, and their corporate offices are literally a mile away from where we are." One of the "key areas that we've always talked about" where Derma's offerings would fit nicely involves the Omnigraft dermal regeneration matrix, for which Integra won FDA approval a year ago.
Intended for DFUs, the matrix is made of silicone, cow collagen, and shark cartilage, which doctors place over the ulcer to provide an environment for new skin and tissue to build up, healing the wound. Integra "feels very confident over the long run" about Omnigraft, he said.
Derma, focused on advanced wound and burn care, has been moving along products derived from placental/birth tissues for use in a broad range of applications, including the treatment of complex chronic wounds, acute wounds, and localized areas of injury or inflammation, as well as filling soft tissue defects or voids. The firm markets TCC-EZ, a total-contact casting system for DFUs. Derma's Medihoney line consists of honey-based dressings for wounds and burns, its Xtrasorb is designed for management of wound exudate, and its Bioguard for barrier protection against microbes and other contaminants.
The amniotic piece of the Derma business that fueled Integra's interest came to the company in January 2014, when Derma licensed two of Cordova, Tenn.-based Biod's products: Amnioexcel, an amniotic extracellular membrane product that provides a sterile, room-temperature stable, resorbable tissue allograft derived from human amnion, thus a natural scaffold for tissue repair and regeneration; and Amniomatrix, a cryopreserved allograft derived from human placental tissues that is used as a wound covering in the treatment of localized tissue defects, which Derma sells to wound care centers for treatment of chronic or non-healing wounds.
CROSS-TRAINING NO PROBLEM
Later, the full acquisition of Biod carried an immediate transaction value of $21.3 million and a potential total worth of $77.8 million, including an up-front payment of cash and common stock of $21.3 million, as well as potential regulatory milestone payments, as noted by Integra CFO Coleman, estimated at up to $30, with earn-outs based on sales growth of up to $26.5 million.
In a report, Wells Fargo analyst Larry Biegelsen called the Derma buy "relatively inexpensive" for Integra. RBC Capital Markets' Glenn Novarro noted that management expects the deal to turn accretive in 2018 and "achieve the company's return on invested capital hurdle by the end of year three."
Also Wednesday, Integra disclosed preliminary fourth-quarter and fiscal-year 2016 results, providing financial guidance for 2017.
Fourth-quarter revenue is expected to reach $256 million, $6 million less than Wells Fargo's estimate and $7 million less than consensus.
The organic growth rate of 7 percent missed Integra's implied rate of 8.5 percent, Biegelsen pointed out, and Integra forecast fiscal-year 2016 revenue of $992 million: an organic growth of 9 percent, at the lower end of the company's guidance.
Despite the revenue miss, Integra said fourth-quarter earnings per share should be within the previously guessed range of 50-53 cents. Revenue in 2017 is expected to reach $1.05-$1.07 billion, with an organic growth of 7.0-8.5 percent, "which at the midpoint is higher than our forecast of 7.5 percent," Biegelsen said.
On the conference call, BofA Merrill Lynch analyst Travis Steed wanted details about integrating the sales forces between the two companies with regard to Integra's Omnigraft and the PriMatrix dermal repair scaffold (for diabetic, venous and pressure ulcers, as well as various types of wounds) and Derma's product line.
"The team that we have, they sell against amniotic [products] every day," Arduini said. "When you sell against something you understand the pros and cons of it. To actually ramp up and train your team when you bring one of those products into the bag, we think, is reasonably straightforward," and cross-training ought to go smoothly.
"We have spent a good chunk of time talking about how you would cross-position and position Omnigraft vs. Primatrix, and we think a third product has been part of our strategy, [so] the positioning shouldn't take a significant amount of time. When you think about the Total Contact Cast and Medihoney, they all take a reasonable period of time and we think it's probably worth a quarter's worth of training and integration to be able to start seeing some of the benefits of being able to cross-sell through that," he said.
Derma (NASDAQ:DSCI) closed Wednesday at $6.95, up $1.95, or 39 percent, and Integra (NASDAQ:IART) ended $43.35, down $1.55.