Dive Brief:

• Wright Medical Group is set to buy orthopedic medical device company Cartiva for $435 million in cash. The deal is expected to close in the fourth quarter of 2018, according to the company.
• The acquisition will give Wright Medical ownership of a synthetic cartilage implant experiencing rapid revenue growth to treat arthritis.
• Wright Medical is paying a hefty premium to buy the company and is issuing stock to fund the acquisition, but still expects the deal to deliver an immediate boost to sales and earnings.

Dive Insight:

Cartiva has set about disrupting the arthritis market since winning premarket approval for its implant in 2016. The device is made of a biocompatible, low-friction organic polymer designed to mimic the function of cartilage. When implanted into the base of the big toe to replace damaged articular cartilage, the device provides a new, slippery surface in the joint to reduce pain and increase the range of motion.

Traditionally, patients suffering from arthritis of the big toe would undergo fusion, a procedure that welds two bones together to mitigate pain and strengthen the joint. Cartiva believes its implant is a better option for these patients. The Cartiva procedure, at only 35 minutes, is faster than fusion and is associated with shorter recovery times.

Cartiva has six-year outcomes results on 106 patients that suggests the procedure works well, too. The patients experienced significant, lasting reductions in pain and improvements in foot function. In an earlier two-year analysis, three quarters of patients who received the implant had improved motion, whereas people in a cohort who underwent fusion were unable to maintain their motion.

The device has some downsides. In one study, around 10% of participants required fusion because the implant failed to quell their pain. 

With those factors fueling 50% growth in sales of the implant, Wright Medical sees the device as a good fit for its foot and ankle business. The growth may have attracted other bidders, too, driving up the price Wright Medical had to pay.

“While Cartiva's current hyper top-line growth rate and favorable margin profile certainly are deserving, our understanding is that the transaction was competitive, suggesting [Wright Medical] stretched a bit to win the transaction,” Raj Denhoy, an equity analyst at Jefferies, wrote in a note to investors.

Wright Medical will need to maintain the device’s sales momentum to justify the premium it paid. The buyer has a 300-person foot and ankle sales organization in the U.S. and a global presence, theoretically equipping it to support further growth in its home territory and unlock the value of Cartiva’s clearances in international markets, which includes the European Union.

The deal has been approved by the boards of both Wright and Cartiva, as well as Cartiva stockholders, according to the announcement.