Globus Medical’s planned purchase of San Diego-based spine company NuVasive opened to a chilly reception from investors, reflecting the challenges of past orthopedics acquisitions.
The companies said on Feb. 9 they expect the transaction to close in mid-2023, with Globus buying a 72% stake in NuVasive in an all-stock deal valued at $3.1 billion. The move values NuVasive’s shares at a 26% premium to their closing price on Feb. 8.
“Spine mergers historically have tended to be messy and often involve more disruption than parties originally anticipate. It's possible ‘this time will be different,’ but we are not ready to make that call…” Truist analyst Richard Newitter wrote in a research note.
In an investor call on Feb. 9, Globus’ leadership tried to alleviate concerns based on past orthopedics mergers, saying the two companies have little overlap. Still, Globus’ share price has decreased by more than 20% since it announced the merger last Thursday.
One of the reasons why merging spine companies is difficult is because of their distribution channels, Newitter said in a phone interview. With a mix of indirect and direct sales organizations, the combined company will have to pick what to keep.
“In the process of making those changes, you’re going to ultimately have disruption,” Newitter said.
There’s also the possibility that sales representatives could leave due to uncertainty about their role in the combined company.
“There’s definitely a bad taste in a lot of people’s mouths from spine deals,” BTIG analyst Ryan Zimmerman said in an interview, noting that as companies cut costs, sometimes sales reps leave. And since medical device firms offer relatively similar spinal products, doctors can switch from one company’s screw system to another.
“There are a lot of relationships driven by reps. Physicians use products driven by reps. They can move around, go to another company,” Zimmerman said.
Differences in corporate culture can also impede a smooth transition, say analysts.
“Given the stark difference in cultures (GMED is a disciplined engineering company while NUVA is a marketing company), we believe there could be meaningful culture clash,” Needham analyst David Saxon wrote in a research note. “While this is admittedly hard to quantify, we'd point to Zimmer's acquisition of Biomet and Boston Scientific's acquisition of Guidant as examples of divergent cultures impacting the success of a deal,” he added.
Antitrust
Yet another hurdle for the acquisition is a potential antitrust review. Although Globus Chairman and founder David Paul said the company didn’t see any “anti-competitive” issues in the merger, it’s still a possibility given that the combined firm would have the second-largest market share in spinal surgery products.
“I think the regulators will still have to look at it, only because the numbers three and five players become the number two,” said BTIG’s Zimmerman.
Most of the products the companies offer, including surgical robots and cervical discs, have other competitors, meaning customers won’t only be left with one option if the firms combine, he added.
Needham’s Saxon does not expect an antitrust challenge, given the precedent set when Zimmer acquired Biomet, giving it a 35% market share in joint reconstruction, larger than the mid-teens share that a Globus-NuVasive combination would hold in spine. There’s still a risk that the deal could take longer to close than mid-2023, he wrote. Past deals in orthopedics have taken longer to close: Stryker’s acquisition of Wright Medical took one year, and Zimmer’s merger with Biomet took 13 months, Zimmerman wrote.
Why now?
Given these challenges, why try to acquire NuVasive now?
“A lot of people are asking that question, including us,” Newitter said. “I think they saw an opportunity, potentially an opportunity at the right price for NuVasive. …Globus is clearly indicating they need scale to succeed and execute on their strategy going forward.”
“I didn’t think this would happen,” Zimmerman added. “They're so different in terms of their DNA. But here we are.”
The biggest risk to the deal closing at this point is if a competing offer for NuVasive comes through at a higher valuation, Newitter wrote.
“However, we don't see any obvious strategic acquirers at the moment, nor a big appetite to do scale spine acquisitions,” he added.
It’s unlikely that competitors Johnson & Johnson or Medtronic would buy NuVasive, and if they try, they would be less likely to pass regulatory scrutiny, Zimmerman said.
The acquisition still needs to be approved by shareholders of both companies. But even if Globus investors don’t approve of the deal, there’s “little chance” that they would successfully vote against the transaction, as the company’s founder and chairman owns all of Globus’ class B shares, which have 10 times the voting power of class A shares, Zimmerman wrote.
“It's certainly possible that NUVA shareholders could vote against the transaction, but we believe this is in NUVA's best interest despite the challenges it will create for the combined company,” he added.
