Medical Device Daily

Kyphon (Sunnyvale, California) has signed two definitive agreements to acquire all of the spine-related product assets and associated intellectual property rights of Disc-O-Tech Medical Technologies (Herzliya, Israel), and its U.S. subsidiary Disc Orthopaedic Technologies (Monroe Township, New Jersey) – a company Kyphon sued last year for patent infringement. Subject to governmental regulatory review in the U.S. and other customary closing conditions, Kyphon anticipates closing on both transactions in 2007.

Kyphon will pay Disc-O-Tech $60 million upon execution of the agreements and another $40 million upon the earlier of either closing of the agreement concerning acquisition of the B- Twin and SKy bone assets or Feb. 1. A total of another $120 million in three equal annual installments will be paid beginning in January 2008 for Disc-O-Tech’s Confidence system assets under the second agreement. An additional $20 million in contingent payments may also be paid based on the development of further technologies. Kyphon said it would finance the upfront payments with cash on hand and an established escrow and the future payments from operating cash flow.

Disc-O-Tech’s portfolio includes several products and associated intellectual property rights for performing minimally invasive spine procedures. The first transaction concerns the B-Twin Expandable Spinal System, which is an expandable interbody device for minimally invasive fusion in patients with degenerative disc disease in the lumbar and cervical spine and which is CE marked in Europe but not approved for use in the U.S., and the SKy bone expander system, which is available only outside the U.S. for use in the treatment of vertebral compression fractures (VCFs).

The second transaction concerns Disc-O-Tech’s Confidence cement system and should enable Kyphon to offer to its customers in the U.S. and abroad another VCF treatment option depending on a patient’s individual needs and a clinician’s goals for his or her patients, Kyphon said. The agreements are intended to extend Kyphon’s minimally invasive spine franchise for the treatment of VCFs and to diagnose the source of low back pain.

In April 2005 Kyphon reported filing a suit against Disc-O-Tech alleging, among other things, that by importing and promoting its SKy bone expander system for use in kyphoplasty procedures, Disc-O-Tech was infringing on at least four of Kyphon’s U.S. patents (Medical Device Daily, April 6, 2005). Two months later, the U.S. Court for the District of Delaware entered a permanent injunction against Disc-O-Tech barring the company from further importing or selling its SKy bone expander in the U.S. (MDD, June 24, 2005).

“Our agreement with Disc-O-Tech represents another step to build upon our leadership position in brining innovative, less-invasive therapies to the spine community,” said Richard Mott, president/CEO of Kyphon, during a conference call on the deal on Thursday.

The deal would bring a third long-term growth platform in minimally-invasive fusion to Kyphon’s existing compression-fracture repair and management business, Mott said.

“We believe the potential market opportunity for a less-invasive spinal infusion technology is very substantial,” Mott said.

Raj Denhoy, an analyst with Piper Jaffray (Minneapolis) asked Kyphon officials during the conference call to elaborate on what their thinking was behind the acquisitions.

“I hate to ask such a basic question but it is a bit surprising to see Kyphon who has been, as you guys know, from day one talking about the benefits of balloon-based approaches, or Kyphoplasty, acquiring a vertibrolplasty company,” Denhoy said.

Art Taylor, chief operating officer for Kyphon, responded by saying that the VSF market offers a large opportunity.

“There’s still plenty of room for penetration to add the VCF option,” Taylor said, adding that the acquisition allows Kyphon to “essentially expand treatment options to be able to offer them to existing [customers] who want alternatives for their patients based on fusion morphologies or individual patient needs.”

“Disc-O-Tech’s innovative B-Twin Expandable Spinal System and related intellectual property assets will permit Kyphon to further serve the fast- growing industry segment focused on minimally invasive treatment of degenerative disc disease,” Mott said in a statement. “Subject to receipt of appropriate regulatory clearances, the acquired VCF products also promise to expand our capabilities to offer clinicians a broad suite of fracture management and repair options both in our established markets as well as providing opportunities to access more cost-sensitive emerging markets. With these asset acquisitions, coupled with the recently reported definitive agreement to acquire St. Francis Medical Technologies [Alameda, California] and the X-Stop interspinous process decompression system, we have established two new platforms for continued growth in minimally invasive spinal therapies while bolstering our core VCF fixation franchise.”

Earlier this month Kyphon reported its plans to acquire privately held St. Francis Medical Technologies in a transaction valued at $525 million in upfront cash, plus additional revenue-based contingent payments of up to $200 million, payable in either cash or a cash/stock combination (MDD, Dec. 5, 2006).

Kyphon expects to incur an estimated pre-tax charge of approximately $30 to $40 million for in-process research and development (IPR&D) in 2007 associated with the agreements.

Kyphon develops medical devices designed to restore spinal function and diagnose low back pain using minimally invasive technologies.

In other dealmaking news:

• Johnson & Johnson (J&J; New Brunswick, New Jersey) reported the closing of its acquisition of Pfizer Consumer Healthcare for $16.6 billion in cash.

The company’s portfolio will now feature products such as Listerine oral care products, the Nicorette line of smoking cessation treatments, and Sudafed cold, flu and allergy products, in addition to its own products.

The transaction is projected to reduce 2006 earnings per share by $.02, which will be partially offset by a gain related to the recently enacted Tax Relief and Health Care Act of 2006. In addition, the company will record in the fourth quarter 2006 an estimated one-time after-tax in-process research and development charge of roughly $175 million to $250 million related to the acquisition. J&J makes healthcare products and provides related services for the consumer, pharmaceutical, and medical devices and diagnostics markets.

• Psychiatric Solutions (PSI; Franklin, Tennessee) said it has signed a definitive merger agreement to acquire Horizon Health Corporation in a $426-million transaction, consisting of cash of $20 per share totaling $321 million and the assumption of Horizon Health’s outstanding debt. Horizon Health produced revenues of $275 million for its 2006 fiscal year, which ended Aug. 31, primarily through the operation of inpatient behavioral health facilities. PSI has received a commitment from Citigroup Global Markets and Merrill Lynch & Co. regarding the financing of the acquisition price. PSI expects the transaction to be accretive to its earnings per diluted share for the 12 months following the completion of the transaction by an amount in a range of 17 cents to 20 cents. PSI intends to revise its established 2007 guidance for earnings per diluted share of $1.42 to $1.46 to reflect the impact of this transaction closer to the effective date of the transaction.

PSI offers an extensive continuum of behavioral health programs to critically ill children, adolescents and adults through its operation of 74 owned or leased freestanding psychiatric inpatient facilities with about 8,000 beds in 29 states, Puerto Rico and the U.S. Virgin Islands. PSI also manages freestanding psychiatric inpatient facilities for government agencies and psychiatric inpatient units within medical/surgical hospitals owned by others.

• National HealthCare (NHC; Murfreesboro, Tennessee) and National Health Realty (NHR), a real estate investment trust which NHC spun off in 1997, has entered into an agreement and plan of merger.

Each NHR common share not owned by NHC will be converted into one share of NHC Series A Convertible Preferred Stock plus $9 cash, and NHR shareholders will receive a special dividend for the period from Jan. 1 until closing consistent with NHR’s past practice. Each share of the preferred stock will be entitled to annual preferred dividends of 80 cents per share and will have a liquidation preference of $15.75 per share. The preferred stock, which will be listed on the American Stock Exchange, will be convertible at any time at the option of the shareholder into NHC common stock at a conversion price of $65.07. Each share of the preferred stock will be convertible into 0.24204 of a share of NHC common stock.