Orthofix closes $105m Spinal Kinetics buyout, cuts earnings outlook

Orthofix (NSDQ:OFIX) said yesterday that it closed the $105 million buyout of Spinal Kinetics and its M6 cervical disc implant, but cut its earnings outlook for the rest of the year despite higher-than-expected first-quarter results.

The deal for Sunnyvale, Calif.-based Spinal Kinetics called for $45 million in up-front cash, plus another $65 million in milestones pegged to FDA approval of the M6 device and trailing twelve-month sales targets of $30 million and $50 million.

The M6 discs are designed to mimic natural disc anatomy with an artificial visco-elastic nucleus and fibrous annulus. The devices have CE Mark approval in the European Union since 2006; Spinal Kinetics has a bid in for pre-market approval from the FDA for the M6 cervical implant.

Lewisville, Texas-based Orthofix has said it expects the deal to add slightly to adjusted earnings per share within the first year of PMA approval for the M6-C device, boost the top line this year and raise its organic sales growth rate in 2019.

Orthofix also posted Q1 profits of $5.2 million, or 27¢ per share, on sales of $108.7 million for the three months ended March 31, swinging to black ink on sales growth of 5.8% compared with the same period last year.

Adjusted to exclude one-time items, earnings per share were 39¢, two pennies ahead of the consensus on Wall Street, where analysts were looking for revenues of $107.1 million.

“Overall, we had another solid quarter in both top and bottom line performance, including a 290-basis-point improvement in adjusted EBITDA margin and a 44% increase in adjusted earnings per share compared to the first quarter of 2017,” president & CEO Brad Mason said in prepared remarks. “Since announcing our agreement to acquire Spinal Kinetics, we have received very positive feedback from physicians and our sales force about the M6 artificial discs and the strategic value this brings to Orthofix, which further validates our enthusiasm for this transaction. This deal delivers upon our stated strategy of accelerating top-line growth through the acquisition of products, technologies and companies in our core businesses. The Spinal Kinetics M6 artificial discs enters Orthofix into a fast-growing market with a proven technology and further demonstrates our commitment to providing innovative spine treatment solutions to surgeons and patients.”

Orthofix also cut its earnings outlook for the rest of the year but raised its sop-line view, saying now expects to report adjusted EPS of $1.58 to 1.68 on sales of $458.0 million to 464.0 million; that compares with prior guidance for adjusted EPS of $1.76 to 1.84 this year on sales $450.0 million to $455.0 million.

First-quarter adjusted EPS are pegged at 35¢ to 37¢ on sales of $113.0 million to $115.0 million, Orthofix said.

In June 2014 Spinal Kinetics raised a $34 million funding round it planned to use to back the M6-C clinical trial and agreed to a global settlement of all patent litigation with Synthes and DePuy Synthes over the M6 device. In November 2013 a federal appeals court upheld the company’s win over Synthes, ruling that a pair of Spinal Kinetics intervertebral implants do not infringe a Synthes patent.

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