Dive Brief:
- Bioventus has found a path forward for its stalled takeover of CartiHeal, agreeing to a staggered payment plan that analysts at J.P. Morgan called an “expensive resolution” to the impasse.
- Originally, Bioventus planned to fund the $315 million takeover of the joint repair company with a bond offering. However, that plan collapsed because of “unfavorable market conditions.” The deal is now back on after CartiHeal agreed to accept deferred payment across five tranches.
- With the deferred payments subject to interest and Bioventus expanding its term load to fund the deal, the J.P. Morgan analysts see the agreement as an expensive solution that could still be viewed favorably. Craig-Hallum analysts called the deal a neutral to positive outcome.
Dive Insight:
Bioventus secured an option to buy CartiHeal in 2020 as part of its $15 million equity investment in the Israel-based developer of Agili-C, a biodegradable, coral-derived implant for treating bone and cartilage defects of the knee joint. FDA granted premarket approval to the device in March 2021. Six months later, North Carolina-based Bioventus deposited $50 million toward a potential purchase of CartiHeal after seeing clinical data on Agili-C.
In April, Bioventus exercised its option to buy CartiHeal, agreeing to pay $315 million to close the deal. A $415 million debt offering was then proposed, only to be quickly abandoned. Bioventus’ share price fell in the wake of the news, amid investor concerns it would sell stock or sign an unfavorable debt deal to fund the takeover.
This week, Bioventus revealed it has found a way to avoid both of those scenarios. Having deposited the $50 million last year, Bioventus owes $265 million. The company will pay $50 million upfront and split the remaining $215 million across five payments from 2023 to 2027, thereby freeing it from the need to raise a large sum to fund the deal. Craig-Hallum analysts see merit to the deal structure.
“We think this resolution is a net neutral to positive outcome for [Bioventus] shareholders,” the analysts wrote in a note to investors. “The true positive of the renegotiated deal is seller-financing to make terms backend-loaded and with rates much more favorable than the market. This precludes [Bioventus] from going back to the market for unfavorable debt terms or permanent equity dilution.”
J.P. Morgan calls it an “expensive solution,” pointing to the $8 million in fees Bioventus is paying for CartiHeal, the 8% interest rate on the deferred payments, the need to expand an existing term-loan agreement and the lowering of a milestone threshold. Bioventus will pay $135 million if trailing twelve-month sales exceed $75 million. Originally, sales would have needed to top $100 million to trigger the milestone.
In return for the outlay, Bioventus will secure ownership of an implant that is designed to make it easier, faster and more cost-effective to regenerate cartilage and subchondral bone. Bioventus predicts the U.S. opportunity for the device will grow from $110 million today to almost $200 million by 2026. Use cases in other joints could open up markets valued collectively at more than $1 billion.
As Bioventus tries to grow sales, it will go up against Vericel’s MACI, an autologous cellular scaffold for the treatment of symptomatic cartilage defects of the knee. The Craig-Hallum analysts think Agili-C has an edge over the competition.
“Cartilage defects remain undertreated, and current standard of care [for] microfracturing leaves much to be desired from an outcome perspective,” the analysts wrote. “While Vericel’s MACI has made headway in penetrating this need, we think adoption has been impaired by the need for two procedures and long turnaround times required to utilize the MACI product, as well as 6-9-month rehab period post-op before returning to recreational activities.”
