Dive Brief:

• Globus Medical has approached NuVasive about a takeover that would bring together two challengers for the spine market, according to reports by Bloomberg and Reuters.
• NuVasive has struggled in the pandemic, with persistent headwinds ensuring its share price is yet to get close to the level it hit in February 2020. Globus, in contrast, recovered quickly from the crisis and by August was "considering other ways to grow the business through acquisitions." NuVasive declined to comment on the rumored talks.
• Buying NuVasive in a cash-and-stock deal could strengthen Globus' hand as it goes up against companies such as Johnson & Johnson, Medtronic and Zimmer Biomet. However, analysts at J.P. Morgan cautioned that earlier orthopaedic takeovers struggled to generate returns. Truist Securities and Piper Sandler analysts wrote the deal is unlikely.

Dive Insight:

The J.P.Morgan analysts see "significant challenges" to the potential acquisition of NuVasive because of the nature of the spine market. Globus will need to weigh whether the potential dis-synergies offset the chance to cut costs.

"It's worth reiterating that 'one + one' rarely gets to 'two' on the top line, with significant portfolio overlap often coupled with overlapping customers and salesforces. The flip side of this does come on the cost-front, as eliminating this overlap can often lead to meaningful synergy capture even as the top line suffers in this highly rep-intensive business model," the analysts wrote in a note to investors.

The analysts cited J&J's takeover of Synthes in 2012, Zimmer's buyouts of Biomet and LDR in 2015 and 2016, respectively, and Stryker's 2018 acquisition of K2M as examples of how hard it is to make spine deals work. As the analysts see things, J&J "failed to stem share loss" while Zimmer is suffering "continued declines several years out still" and Stryker had a tough first year despite its integration expertise.

However, could a Globus-NuVasive merger buck the trend? J.P. Morgan analysts highlighted NuVasive's differentiated technologies, such as its X360 anterior procedural solutions, as examples of how it may bring value to Globus. Yet, the analysts also see "significant overlap in the core implant portfolio as well as on the navigation and robotics sides."

Globus cited its ExcelsiusGPS robot as the driver of the growth of its enabling technology unit, which posted a 124% jump in sales in the third quarter. NuVasive has its own Pulse robotic system.

While J&J has multiple robotic systems, the J.P.Morgan analysts have doubts about whether "it makes sense for Globus to support a platform that overlaps so much with its existing one."

Truist analysts also see the deal as unlikely given that large integrations can be messy.

"While we see NuVasive possessing valuable assets, Globus has demonstrated it can successfully grow and gain share organically, and we think an integration of that size could distract from that growth formula," the analysts wrote.

Investors appear to share some of the concerns. Shares in Globus fell 4% in the wake of the reports, shaving a little off the top of its $7 billion-plus market cap. NuVasive's stock went in the opposite direction, rising 5% to push its market cap up above $3 billion.