Medical Device Daily Associate Managing Editor

In a bid to dramatically expand its already potent minimally invasive spine product arsenal, Kyphon (Sunnyvale, California) yesterday reported that it will acquire privately held St. Francis Medical Technologies (Alameda, California) in a transaction valued at $525 million in upfront cash payable upon closing, plus additional revenue-based contingent payments of up to $200 million, payable in either cash or a cash/stock combination.

St. Francis is the maker of the X Stop Interspinous Process Decompression (IPD) system, the first FDA-approved — in November 2005 — interspinous process device for treating lumbar spinal stenosis. The X Stop has been available in Europe and Japan since 2001. More than 15,000 X Stop devices have been sold worldwide, the companies said.

Kyphon noted that the transaction broadens its focus in minimally invasive surgery (MIS) for the spine by adding the X Stop platform to its existing KyphX balloon kyphoplasty technologies for repairing vertebral compression fractures and its recently launched Functional Anaesthetic Discography procedure for diagnosing the source of low back pain.

“This acquisition directly supports our stated strategy of bringing minimally invasive spine therapies to our markets and adds an innovative new product platform to benefit the large number of patients suffering from lumbar spinal stenosis,” said Richard Mott, president/CEO of Kyphon during a conference call. “It gives us a new platform for future revenue and earnings growth in one of the fastest-growing segments of the spine industry.”

Mott noted that the X-Stop “fills a gap in the continuum of care,” between conservative therapies, such as analgesics and injections, and invasive surgery with a laminectomy. Laminectomy, a lumbar decompression surgery, is a more invasive procedure to widen the spinal canal and relieve pressure on the spinal cord or nerve. It involves removing part of the spine to relieve the pain associated with the spinal stenosis.

The less-invasive X Stop procedure can be performed under local anesthesia, taking less than an hour. Since the device is not fixed to any bony structures, the procedure does not result in fusion and is completely reversible, thus allowing for future therapeutic alternatives, if needed.

The company said its initial target market is the 200,000 patients who undergo a laminectomy each year, translating to a $1 billion market opportunity.

The company anticipates closing of the deal in 1Q07. Upon closing, Kyphon said it expects to incur an estimated one-time, pre-tax charge of about $35 million to $50 million for in-process R&D.

In 2008 and thereafter, Kyphon said it anticipates the transaction will be significantly accretive to earnings per share, and it expects the companies’ combined revenues for 2007 to be between $560 million and $580 million.

“Both Kyphon and St. Francis share a common commitment to technological innovation through minimally invasive products and procedures to address debilitating spinal diseases,” said Kevin Sidow, president/CEO of St. Francis. “In building its balloon kyphoplasty franchise, Kyphon has established relationships with thousands of spine specialists through its large direct sales force and clinical education programs. Kyphon is the ideal partner to maximize the potential of our X Stop system and accelerate adoption of this important technology.”

Analysts said the acquisition provides Kyphon with a much-needed revenue driver as the market for its balloon kyphoplasty treatment matures and competitors such as device heavyweights Medtronic (Minneapolis) and Abbott Laboratories enter the arena.

“It adds a new and perhaps as valuable a franchise as the company’s original kyphoplasty offering,” Piper Jaffray analyst Raj Denhoy said in a note to clients.

“Strategically, the deal provides Kyphon with a product that is unique and minimally invasive and would fill the hole in its product portfolio between kyphoplasty and nucleous replacement,” a product in the pipeline for 2009, said Wachovia Capital Markets analyst Michael Matson.

Looking to the future Mott said he sees a “merging of clinical specialties around minimally invasive spine procedures, and I think [both companies products] are all fitting within that window of minimally invasive spinal therapy. I think the channel is perfectly designed to incorporate both products.”

In connection with the transaction, Banc of America Securities is acting as financial advisor, and Latham & Watkins is legal counsel, to Kyphon. J.P. Morgan Securities is acting as financial advisor, and Wilson Sonsini Goodrich & Rosati is legal counsel, to St. Francis.

In other dealmaking activity:

• Lusora Healthcare Systems (San Francisco), a wireless personal and home health security company, reported that it has completed its merger transaction with Lusora (Austin, Texas).

The series of transactions leading to the closing was finalized on Nov. 30. In the merger, the company issued 30,075,000 shares of its common stock in exchange for all of the issued and outstanding common stock of Lusora.

• Tenet Healthcare (Santa Barbara, California) reported that a company subsidiary has completed the previously disclosed sale of Hollywood Medical Center (Hollywood, Florida), a 324-bed hospital, to the South Broward Hospital District. Pre-tax proceeds from the sale are about $32 million, which will be used for general corporate purposes.

With the announcement, Tenet has completed the sale of five of 13 hospitals the company had previously announced for sale.

Tenet, through its subsidiaries, owns and operates acute care hospitals and related health care services.