J&J and Synthes Boards Approve Merger

Johnson & Johnson (J&J) has finalized its blockbuster deal for orthopedic company Synthes Inc. for $21.3 billion in cash and stock. The deal is one of the biggest ever in the medical device industry.

New Brunswick, N.J.-based J&J offered 159 Swiss francs ($181.30) a share for Switzerland-based Synthes, which manufactures bone implants and surgical tools, and specializes in treatments for trauma. Both companies’ boards have unanimously approved the transaction, and a group of shareholders, led by Synthes founder and chairman, Hansjörg Wyss, and other directors, have said they will support the merger.

“It’s a pretty fair price,” Lisa Bedell Clive, an analyst at Sanford C. Bernstein in London told The New York Times. “For J&J, it’s a great deal. Trauma is one of the few medtech markets where they haven’t had a top-three business.”

J&J’s chief executive, William C. Weldon, said the merger would create the world’s most “innovative and comprehensive orthopedic business.” He also said it would help the company better serve patients and clinicians.

“Orthopedics is a large and growing $37 billion global market and represents an important growth driver for Johnson & Johnson,” Weldon noted.

The deal, which will be J&J’s largest ever, is expected to close in the first half of next year, pending the approval of regulators in the United States and Europe, as well as Synthes shareholders.

J&J’s DePuy Companies division is home of the healthcare giant’s orthopedic products.

With this acquisition, J&J will combine the second- and third-largest businesses for spine-related implants in the world, which could draw the attention of regulators and require a divestment.

“We don’t believe that there will be any required divestitures,” Alex Gorsky, vice chairman for J&J, said during an April 27 conference call with analysts, “but if there are, we don’t think they will materially impact the transaction.”

According to Rick Wise, medical device market analyst for Boston, Mass.-based Leerink Swann LLC, Synthes should help extend J&J’s reach within orthopedics from both a product offering and a geographic perspective—and there could be product and technology synergies that could reach more broadly across J&J’s portfolio of companies. Wise called the marriage “a strong strategic fit.”

“Synthes brings to J&J a market-leading position in trauma and craniomaxillofacial—two areas within ortho where J&J has minimal presence,” Wise wrote in an investor email. “The trauma segment is one of the last remaining, faster growth sub-segments within the ortho industry, and we estimate the trauma segment is growing at a high-single-digit rate versus approximately 1 percent growth for hips and knees.”

He also noted that Synthes brings a “highly complementary” spine business that could create a market-leading player behind Medtronic Inc., which has about a 50 percent overall spine market share. A more consolidated industry position in both the trauma and spine market could provide J&J/Synthes with additional leverage (e.g., pricing, bundling opportunities, stronger negotiating power with hospitals) and a strengthened overall orthopedic market position going forward.

Stryker Purchases Orthovita

Buying out the competition seems to be in vogue these days in the orthopedic industry. A mere three weeks after Johnson & Johnson purchased Swiss device manufacturer Synthes Inc. for $21.67 billion (one of the largest deals in history), Stryker Corp. followed suit with the $316 million acquisition of orthobiological developer Orthovita Inc.

Stryker executives announced the deal on May 16, saying the company has agreed to pay $3.85 per share for Orthovita, a 41 percent premium over the firm’s closing share price the previous trading day (May 13). The buyout price includes net debt of $12 million.

The boards of both companies have approved the deal, which also requires approval from the holders of at least half of Orthovita’s shares as well as clearance from antitrust regulators.
The holders of 14.5 percent of Orthovita shares also already have endorsed the deal. Stryker expects to close the deal by June 30.

Analysts believe the acquisition will help Stryker better compete against its larger rivals and further diversify its product base. Last fall, the Kalamazoo, Mich.-based orthopedic manufacturing giant purchased the neurovascular business of Boston Scientific Corp. for $1.5 billion, a move executives deemed both important and strategic as the company attempts to offset slowing hip and knee implant sales with products in potential growth markets. The neurovascular business acquisition gave Stryker a division that has generated operating margins of more than 30 percent for Boston Scientific.

Stryker’s strong cash position has enabled the firm to go on a virtual spending spree over the last 18 months, gobbling up the likes of the Sonopet Ultrasonic Aspirator from Mutoh Co. and Synergetics U.S.A. ($67 million); Gaymar Industries Inc., an Orchard Park, N.Y.-based developer of surface and pressure ulcer management devices ($150 million); and the Porex Surgical division of Aurora Capital Group, which develops porous polyethylene products for reconstructive surgery of the head and face (the terms were not disclosed).

“We consider this deal [Orthovita] a good fit for Stryker and believe the company should be able to drive a turnaround in Orthovita’s performance over the next 12 to 24 months,” Jeff Johnson, an analyst with Robert W. Baird & Co., told Reuters.

Bill Plavonic, life sciences analyst with Canaccord Genuity, echoed that sentiment.”We believe Stryker could double Orthovita’s current revenues in three to five years given the strength of its distribution. In addition, Orthovita’s gross margins in the mid-to-60 percent range are in line with Stryker’s,” Plavonic said in an investor email.

Stryker executives agree.

“We believe the collective talent of our sizable sales forces across multiple franchises positions us to build on Orthovita’s success and accelerate sales growth,” Stryker Chairman, President and CEO Stephen P. MacMillan said. “With this acquisition we are expanding our orthobiologics product portfolio and strengthening our competitive position in key segments of the spine, orthopaedics and biosurgery markets.”

Orthovita’s products include Vitoss bone grafts and Cortoss bone augmentation material as well as Vitagel, which is designed to reduce bleeding. Last year, the company generated $95 million in sales.

“This transaction is a great event for our shareholders, customers and employees,” Orthovita President and CEO Antony Koblish said. “This transaction allows us to combine our portfolio of orthobiologic and biosurgery products as well as our proprietary biomaterials pipeline with Stryker’s sales and marketing teams. We look forwardto an exciting future with a great partner.”

Fired Smith & Nephew Employees Fight Back

Some of the nine Smith & Nephew employees who were fired and accused of misuse of intellectual property are filing counter-complaints against the orthopedic giant.

David T. Mehl, Luke Gibson, Megan Rumery, Andrew J. Wald, Ashley M. Denken, Carey L. Bryant, Kaleigh Ross, Patrick Conway and Bonnie Walker allegedly attempted to use insider knowledge to form their own company. They all are being sued by Smith & Nephew for at least $56 million over breach of contract, misappropriation of trade secrets, civil conspiracy and other allegations related to Visionaire, a knee replacement instrument. Smith & Nephew also has filed a temporary restraining order against the group.

In court documents, Smith & Nephew claims that “Mehl stated Smith & Nephew wanted to keep the Visionaire group as a case processing group, learn what the group knew, and then outsource all of the Visionaire processing, essentially leaving the group without a purpose.”

“We have taken this legal action in order to prevent further attempts to steal intellectual property and to ensure they cannot use Smith & Nephew’s confidential information for personal benefit,” a statement issued by the company said.

Walker is one of the former employees who has filed a counter-complaint, claiming she was wrongly accused. She argues that Smith & Nephew has committed libel by publishing written accusatory statements about her. The counterclaim also states that Smith & Nephew owes her money“pursuant to her employment contract,” though no sum is specified.

A March 8 email from Walker stated, “We can now communicate in ways other than whispering or texting.” The email advises recipients to update their resumes and draft resignation letters.

Wald and Denken also have filed counterclaims, arguing they did not participate in the alleged acts. Wald further asserts that Smith & Nephew “converted” funds from his bank account and has not paid him additional money he is owed. Denken filed an affidavit in which she said, “I have not engaged in the conduct in which Smith & Nephew has accused me. I have not misappropriated or disseminated any trade secrets belonging to Smith & Nephew.”

Smith & Nephew’s corporate headquarters are in London, England. The former employees were based at the company’s orthopedic facility in Memphis, Tenn.

Biomet Gets 510(k) Clearance for Hip Replacement Device

A new hip replacement device from Biomet Inc. received 510(k) clearance from the U.S. Food and Drug Administration.

The Active Articulation E1 dual mobility hip system utilizes a small femoral head that articulates with polyethylene. When triggered, the large polyethylene bearing acts as a large head bearing that articulates within a metal cup. The system will compete against hip replacement devices from Stryker Corp. and Zimmer Holdings Inc.

“The [system] provides an excellent combination of wear resistance and implant stability,” John Serbousek, Biomet U.S. orthopedics division president, said in prepared remarks.

Biomet, based in Warsaw, Ind., reported losses of $11.6 million on sales of $678 million in the third fiscal quarter of 2011, ended Feb. 28. The loss compares with losses of $3.1 million on sales of $668.8 million in the same period of fiscal 2010.

Wright Medical Accused of Breaching Agreement

The federal prosecutor for New Jersey has accused Wright Medical Technology Inc. of breaking a deferred prosecution agreement (DPA) drafted last year to settle charges relating to an illegal kickbacks scheme.

In October 2010, Wright agreed to pay approximately $8 million to resolve accusations that the Arlington, Tenn.-based company orchestrated a kickbacks scheme to increase sales of its hip and knee implants. Authorities with the U.S. Attorney’s Office for the District of New Jersey accused Wright of using consulting services with physicians to deliver kickbacks.

An internal investigation Wright conducted in conjunction with an outside counsel found “credible evidence of serious wrongdoing.” The day after this claim, law enforcement officials accused Wright of “knowingly and willfully” committing at least two breaches of material provisions of the DPA.

Company executives doubt any action will be taken against the firm until corporate attorneys craft a defense. Wright was given three weeks to mount a case.

If the government successfully proves that a breach occurred, Wright potentially could be excluded from federal health programs (one of the more harsh penalties). Such a punishment would particularly be damaging because joint replacement patients often are older and covered by Medicare. The government also could impose fines, prosecute Wright, and extend the DPA up to six months (the agreement currently expires at the end of September, after one year).

“They have a whole host of things they can do, including nothing,” David Stevens, Wright’s interim chief executive, said of the government’s potential course of action.

Three Doctors Reprimanded for Spine Study Payments

Three orthopedic surgeons have been reprimanded by the New Jersey Board of Medical Examiners for allegedly failing to disclose their financial interests in clinical studies of Synthes’ ProDisc spinal device.

Richard Balderston, Thomas Errico and Jeffrey Goldstein received payments related to the studies, but did not report those payments to their respective academic/healthcare institutions, the Medical Examiners Board charged.

Balderston served as clinical investigator of the ProDisc at the University of Pennsylvania in Philadelphia, Pa.; Goldstein and Errico both were involved in clinical studies of the device at New York University Medical Center and Hospital for Joint Disease in New York, N.Y.

Upon renewing their medical licenses, Goldstein and Errico both answered “no” when asked whether they had received financial payments exceeding $10,000 from medical device manufacturers. Prosecutors, however, claim otherwise and ordered the pair to pay civil fines.

“The undisclosed conflicts of interest on the part of these doctors undercut public trust in the medical profession,” New Jersey Attorney General Paula Dow said.

“I agree and support the need for proper disclosure to patients and institutions with regard to financial conflicts of interest,” Errico said. In an e-mailed statement to Reuters, Errico said he disclosed his financial interest in the ProDisc study to the U.S. Food and Drug Administration in 2005. Any inconsistencies, he explained, are the result of clerical errors.

The board fined Errico $60,000 in civil penalties and $17,500 in restitution. Goldstein was ordered to pay $30,000 in civil rights penalties and $10,000 in restitution. The surgeons also were required to complete a medical ethics course.

FDA Requests Post-Market Data for Metal-on-Metal Hip Implants

The U.S. Food and Drug Administration (FDA) is requesting post-market studies of metal-on-metal hip implant patients from 21 device makers, including Johnson & Johnson, Biomet Inc., Stryker Corp. and Zimmer Holdings, among others.

The future of metal-on-metal implants was debated at the annual meeting of the American Academy of Orthopaedic Surgeons (AAOS) in February. At the time, the FDA said it was “actively working in several areas to further assess the safety and effectiveness” of the devices. It also was recommended that surgeons avoid all-metal implants in patients with afflictions such as suppressed immune systems or known metal sensitivity. The FDA further encouraged patients with all-metal hips to immediately inform their surgeons about new or significantly worsening pain, swelling, numbness or walking issues.

“The priority of an orthopaedic surgeon is a patient’s safety and postoperative quality of life,” AAOS President Daniel J. Berry, M.D., said. “The AAOS is supportive of ongoing clinical research to determine how devices perform.”

To help the FDA expand its review, thecompanies must submit a research protocol that addresses safety issues related to the devices, including higher-than-expected rates of replacement surgery, increased risk of tissue necrosis surrounding the implants and increased levels of metals, particularly cobalt and chromium, in the bloodstream.

The request comes nine months after J&J subsidiary DePuy Orthopedics Inc. voluntarily recalled its ASR XL Acetabular System due to an unusually high rate of repeat procedures.

It still is unclear how the latest request will affect existing criticism of the FDA’s 510(k) approval process.

Currently, the FDA requires manufacturers to disclose the wear particle size, shape distribution and concentration development during biomechanical testing. Manufacturers must demonstrate that the particles produced are not of bioactive size range and are of low concentration.

FDA spokeswoman Karen Riley said in an email that the federal agency “is aware of the public health questions regarding the safety of metal-on-metal total hip replacement systems…there is not enough scientific data to specify the concentration of metal ions in a patient’s body necessary to produce adverse systemic effects.”

The FDA also said a decision on the “proper classification of metal-on-metal hip systems is forthcoming but unrelated to the post-market surveillance order.”