Smith+Nephew plc has signed a definitive agreement to acquire the Extremity Orthopedics business of Integra Lifesciences Holdings Corp. for $240 million in cash. The deal, which is slated to close around the end of this year, gives the London-based company a catalog of devices, implants and instruments that generated $90 million in revenue in 2019.

The transaction includes the divestiture of Integra’s upper and lower extremity orthopedic products portfolio. Included are products for shoulder replacement, hand, wrist and elbow reconstruction and foot and ankle reconstruction. Smith+Nephew also will gain control of an R&D pipeline that includes a next-generation shoulder replacement system, which is on track for full commercial launch in 2022.

Smith+Nephew already offers a range of devices for the orthopedic extremities space, including in foot and ankle, but this deal would mark its entry into the shoulder replacement segment.

High-growth segment

The acquisition aligns with Smith+Nephew’s strategy to invest in high-growth segments. According to data cited by the company, the U.S. extremity orthopedics market is growing at 6% to 7% annually.

“Integra’s Extremity Orthopedics business is an established global player in the rapidly growing extremities segment, including total shoulder replacement, and has a well-regarded specialized sales channel and a strong pipeline of new products,” said Skip Kiil, president of global orthopedics at Smith+Nephew. “This strategic acquisition represents a significant opportunity to strengthen Smith+Nephew’s position in a high-value area and allows us to offer a leading extremities portfolio to customers.”

In addition to products and technology, the transaction includes a specialized sales force and distributors in the U.S., Canada and Europe. The Extremity Orthopedics business has locations Austin, Texas, and Lyon, France. The Austin facility includes surgeon training. On completion of the deal, about 300 employees will join Smith+Nephew.

Frees Integra to focus on regenerative medicine, other areas

“Smith+Nephew’s strong focus in orthopedics will enable the business to expand its reach and scale, while allowing the team to thrive in a new environment,” said Peter Arduini, Integra’s president and CEO. “This divestiture will increase our focus on Integra’s portfolio of market-leading products in neurosurgery, surgical instrumentation and regenerative medicine and move us closer to achieving our long-term growth and profitability targets.”

BTIG analyst Ryan Zimmerman viewed the divestiture as a smart move for Integra, which has its headquarters in Plainsboro Township, N.J.

“Investors have long questioned why IART continued to participate in the extremity orthopedics market given it was subscale and lacked navigation and pre-planning technology and as pure-play companies continued to iterate and take share,” he wrote in a Tuesday note.

“IART made efforts to enhance the portfolio with acquisitions and development agreements, but in removing this business, we think the OTT portfolio can get back to HSD growth driven by regenerative technologies where IART is a top five share company.”

The move is not a surprise, according to Wells Fargo’s Shagun Singh, who said Integra had been fielding questions on a possible sale of its Extremity Orthopedics business for some time.

“IART noted to us today that the divestiture is consistent with its view that it would look to sell any business where it cannot achieve scale or investments are high in order to sustain growth.”

As part of the deal, Integra will pay $41.5 million to the Consortium of Focused Orthopedists LLC relating to the development of shoulder arthroplasty products. As a result, Integra’s net proceeds will be about $200 million.

Integra said it does not expect the transaction to have a material impact on its 2020 financial results.

For Smith+Nephew, the acquisition is expected to deliver double-digit revenue growth and be slightly dilutive to trading profit in 2021 and 2022. The med tech anticipates a return on investment by the fifth year.

Broader focus on integrated solutions

Smith+Nephew has a history of accessing external innovations via M&A. In 2019, the company acquired Brainlab’s orthopedic joint reconstruction business, with the aim of developing new solutions for digital surgery. That same year, it purchased Atracys Sàrl, a Swiss developer of optical tracking technology.

During a virtual investor event earlier this month, Roland Diggelmann, Smith+Nephew’s CEO, emphasized that his organization is moving from a product company to an integrated health care solutions one, with increasing use of digital technology and smart navigation software.

That said, the newly acquired portfolio could face headwinds as the COVID-19 pandemic continues to have an impact on elective and nonessential procedures, which include many in orthopedics. Still, in its second-quarter earnings report, Integra highlighted orthopedics, which includes the upper and lower extremities line, as one of two segments that showed monthly sequential improvement in the period.

In the extremities segment, Smith+Nephew will compete with Depuy Synthes Inc., a Johnson & Johnson company, Zimmer Biomet Holdings Inc., Stryker Corp. and Wright Medical Group NV. Stryker inked a deal to acquire Amsterdam-based Wright Medical in November 2019 for $5.4 billion.

At close Tuesday, Smith+Nephew’s stock (NYSE:SNN) was up 0.47% to $38.34. Meanwhile, the news sent Integra shares (NASDAQ:IART) down 0.73% to $46.42.