Dive Brief:

• OrthoPediatrics sold some of the assets it acquired in last year's takeover of foot and ankle surgery company Vilex, the pediatric device specialist said Monday.

• The divestiture sees OrthoPediatrics sell the adult piece of the Vilex business to Squadron Capital for $25 million, enabling it to reduce its debt in preparation for more acquisitions.

• Squadron Capital, which loaned OrthoPediatrics $30 million to buy Vilex, is now developing a commercial strategy to grow the acquired adult business.

Dive Insight:

OrthoPediatrics struck a $60 million deal to buy Vilex in June and immediately outlined plans to sell some of the acquired assets. Vilex makes products for use in foot and ankle surgeries involving adults and children. OrthoPediatrics is focused squarely on pediatric orthopedics, leading it to seek a buyer for the adult part of the business.

Squadron, which owns around one-third of the shares in OrthoPediatrics, has emerged as the buyer of the adult business. The $25 million deal enables OrthoPediatrics to wipe out most of the $30 million loan Squadron provided to fund the takeover of Vilex last year.

Analysts at Needham said the divestiture of the Vilex assets was "no surprise," reflecting the fact that OrthoPediatrics said it planned to complete the deal by the end of 2019 throughout the second half of last year.  

OrthoPediatrics exits the back-to-back acquisition and divestiture with Vilex's pediatric assets and a balance sheet that supports further deals. Talking to investors in November, CFO Fred Hite described reducing debt through the sale of the Vilex adult business as the first step in setting OrthoPediatrics up to strike larger deals. Hite said Squadron will quickly provide additional short-term debt if needed. 

OrthoPediatrics may turn to Squadron for debt if it decides to pursue some of the larger deals it is looking into, which CEO Mark Throdahl called "very significant acquisitions" in November. Landing a large target could enable OrthoPediatrics to continue on the upward trajectory it has been on since listing its stock on Nasdaq in 2017.

Throdahl and Hite want to sustain the current 20%-plus growth rate for the foreseeable future. The next test of OrthoPediatrics' success against that objective could come as soon as next week, when the Needham analysts think the company may pre-announce its fourth quarter sales.

"We expect [OrthoPediatrics] to beat consensus revenue and EPS in 4Q19. While [OrthoPediatrics'] organic revenue growth accelerated to 26% in 3Q19 from 20% in 1H19, consensus implies just 20% growth in 4Q19 despite an easier comp (the comp is 25% in 4Q19 vs. 28% in 3Q19) which leads us to believe that the consensus estimate is conservative," the analysts wrote.