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Wednesday, Sep 28, 2022

Potential Acquisition of NuVasive Draws Analyst Skepticism

A recent report stated that Smith & Nephew Plc has held talks to buy San Diego spine surgery company NuVasive. But analysts largely said the deal doesn’t make sense for the British firm.

The Financial Times on Feb. 8 reported the potential $3 billion transaction, citing people with direct knowledge of the discussions, who cautioned the talks could fall apart.

“When push comes to shove with respect to this potential transaction, we do not believe it will occur,” Piper Jaffray analysts, led by Matt O’Brien, said in a research note.

A major player in knee and hip replacement, Smith & Nephew has signaled it wants to swallow up complementary companies. But O’Brien said low growth in spine surgery makes the market less attractive than areas like trauma surgery.

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“And second, the orthopedic landscape is littered with failed spine deals, such as Medtronic’s purchase of Kyphon,” O’Brien said.

NuVasive has a $2.54 billion market cap. It trains spine surgeons in advanced procedures, and makes an array of spine surgery instruments. The company did not return a request to comment.

J.P. Morgan analyst David Adlington didn’t see much in the way of synergies. He said the companies share little overlap in sales forces, and consequently, trimming NuVasive’s sales team would hurt revenue.

He added it would be difficult to boost NuVasive’s already high gross margin – a company’s sales revenue minus its cost of goods sold.

In preliminary January results, NuVasive reported $1.1 billion in 2018 revenue, or 5 percent organic growth compared to the prior year. J.P. Morgan forecast 4 percent revenue growth in the near to mid-term, which Adlington said doesn’t mesh with Smith & Nephew’s desire to buy up fast-expanding companies.

“There is limited product differentiation, outcomes data is scant and push-back by payers has impacted procedure volumes,” Adlington said. “As a result, spine market growth has stalled to low-single digit in recent years. We do not expect this to change materially.”

Because NuVasive has a new CEO, analysts also said the timing of the deal would be strange. Christopher Barry, who previously led medtech giant Medtronic’s second-largest business unit as president of surgical innovations, took over in November.

When Barry came on board, analysts said he looks to bring a fresh viewpoint to a company that’s made impressive strategic moves but fumbled on execution. Prior CEO Gregory Lucier remained as company chairman.

Some analysts saw the rationale behind the would-be deal.

Jonathan Demchick with Morgan Stanley said that addressing Smith & Nephew’s underperforming divisions should take priority over a large transaction. But he said buying NuVasive would provide “defensible returns,” particularly because NuVasive costs could be cut.

“A NuVasive deal could potentially improve Smith & Nephew’s mid-term organic growth mix, and disruption to the sales force and wider organization would likely be limited. Net-net, we suspect the investment community would support the strategic rationale of the potential deal,” Demchick said.

He said for the transaction to happen, Smith & Nephew would likely need to pay a 30 percent to 40 percent premium on NuVasive’s pre-rumor share price, suggesting a $65 to $70 takeover price.

The Financial Times article triggered an increase in NuVasive’s stock, while Smith & Nephew’s shares fell.


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