A Medical Device Daily

Kyphon (Sunnyvale, California) yesterday said it has agreed to acquire InnoSpine (Los Altos Hills, California), a private company focused on developing a technology platform for the diagnosis and treatment of axial low back pain due to disc degeneration.

Terms call for an initial payment of about $2.5 million in cash to the shareholders of InnoSpine, plus the possibility of up to an additional $27.5 million in cash or stock, based on achievement of clinical and other milestones as well as royalties on future net sales.

Kyphon said it anticipates there will be a one-time charge related to in-process R&D affecting earnings per share for the period ending Dec. 31, 2005. The transaction is expected to close this month.

InnoSpine's initial technology was developed with the aim of improving the results available from existing discography techniques through a method known as functional anesthetic discography (FAD), which involves a single-use disposable with no capital equipment requirements.

In contrast to traditional discography, FAD is a minimally invasive procedure that utilizes a catheter-based system anchored in the disc space to deliver mild anesthetic to a candidate disc while the patient loads his or her spine in positions that cause pain. If the pain sensations from normal loading are relieved by anesthetic delivery to the degenerated disc, the disc can be identified for further treatment.

The FDA in April 2005 cleared InnoSpine's FAD devices to deliver local anesthetic, radiopaque contrast or saline solution to the intradiscal space. Based on the outcome and effects of the injected anesthetics, the FAD technology can be used to provide diagnostic information to the physician. Various existing codes can be used for facility and physician reimbursement, according to Kyphon.

Kyphon estimates that about 200,000 patients with persistent, severe axial back pain could be indicated for this procedure each year in the U.S., including the majority of patients undergoing spine fusion at one or more levels. "Improving disc disease diagnosis has increasingly become important to assure proper identification and therapy delivery," it said in a statement.

The company anticipates introducing FAD to orthopedic spine surgeons, neurosurgeons, interventional radiologists and interventional neuroradiologists in the U.S. in 2Q06 through its direct sales force.

Kyphon develops devices designed to restore spinal function using minimally invasive technologies. Its initial KyphX line of products is used in Balloon Kyphoplasty, a minimally invasive procedure to treat spinal fractures caused by osteoporosis or cancer.

In other dealmaking activity:

• Natus Medical (San Carlos, California) reported completing its purchase of Bio-logic Systems (Mundelein, Illinois) through the acquisition of all outstanding shares of Bio-logic common stock for $8.77 a share. In addition, for each share that was subject to a Bio-logic stock option, Natus paid an amount equal to the excess of $8.77 over the exercise price of the option.

"[T]he combination of Natus and Bio-logic will strengthen our position as a market leader in the development of products for the detection, treatment, monitoring and tracking of common disorders in newborns and children," said Jim Hawkins, president and CEO of Natus. "In addition, we will be supplementing our hearing screening business with the addition of Bio-logic's leading diagnostic hearing products. The acquisition will also open up new market opportunities for Natus in the areas of EEG monitoring for neurology and in the growing diagnostic sleep market."

Natus financed a portion of the purchase price through a new senior secured credit facility obtained through Wells Fargo Bank. The company said it expects to repay the loan prior to the end of its term. Natus also utilized about $12.8 million of Bio-logic's cash to fund the acquisition.

Natus makes products for the detection, treatment, monitoring and tracking of common disorders in newborns and children.

Bio-logic develops computer-based electrodiagnostic systems and related disposables for use by hospitals, clinics, school districts, universities and physicians. The systems conduct tests used to aid in the diagnosis of certain neurological disorders, brain disorders and tumors, and sensory disorders, including audiological and hearing screening and diagnosis.

In other dealmaking news:

• Diagnostic Ultrasound (DU; Bothell, Washington), a provider of hand-held ultrasound instruments, reported purchasing Saturn Biomedical Systems (Burnaby, British Columbia), a manufacturer of the GlideScope video laryngoscope.

Saturn's GlideScope assists with anesthesia intubations in surgery and in the emergency room, and designed to make the passage of a breathing tube into the airway during anesthesia safe, reliable and easy.

An estimated 40 to 50 million anesthesia procedures are administered each year in North America, and in up to 50% of cases it is necessary for anesthesia and emergency specialists to place an endotracheal tube to control respiration.

Privately held, DU specializes in application-specific ultrasound devices for the urology, acute care, primary care, and extended care markets.

DU recently reported received the first phase of a $34 million infusion of capital to fund growth initiatives.

• Specialty Coating Systems (SCS; Indianapolis) said it has been acquired by Bunker Hill Capital (Boston/San Diego). SCS, which will continue to do business as Specialty Coating Systems, develops specialized conformal coating technologies, operating 10 facilities throughout the Americas, Europe and Asia.

The company has been engineering and applying thin-film Parylene polymer coatings to critical components in the medical, electronics, automotive and military industries for nearly 35 years. Additionally, it manufacturers liquid spray, dip and spin coating systems, and ionic contamination test systems.

• LYNX Medical Systems (Bellevue, Washington), a provider of integrated healthcare documentation and revenue management solutions, reported being acquired by Francisco Partners (Menlo Park, California) and is the first acquisition in the healthcare arena for Francisco, a private equity firm.

Dr. Mason Smith, founder and CEO of LYNX, will continue to provide guidance as a member of the LYNX board and will chair the LYNX medical advisory board. Christy Martin, CFO and president of the LYNX Coding Division and Mike DeTolla, president of the LYNX Software Division will continue in their current roles.

• Gentiva Health Services (Melville, New York), a home health services provider, said it has agreed to acquire the Healthfield Group (Atlanta), a provider of home healthcare and hospice with about 130 locations primarily in eight southeastern states, for $454 million in cash and stock. The purchase price consists of shares of Gentiva common stock of about $55 million and about $399 million in cash, a portion of which will be used to refinance Healthfield's existing indebtedness. The transaction is expected to close sometime in 1Q06.

Healthfield operates offices in Alabama, Florida, Georgia, Michigan, North Carolina, South Carolina, Tennessee, Virginia and West Virginia. Healthfield also offers a range of durable medical and respiratory equipment, and infusion therapy services.