RTI Surgical to Pay $300 Million for Paradigm Spine

Alachua, Florida-based RTI Surgical, Inc. has entered into a definitive agreement to acquire New York-based Paradigm Spine, LLC, in a cash and stock transaction valued at up to $300 million.

The terms of the transaction call for RTI to pay $100 million in cash at closing, transfer 10,729,614 shares of RTI common stock to Paradigm’s lenders and equity owners, representing $50 million of value, and agree to potential future milestone payments which raise the full transaction value to a potential $300 million.

With this purchase, RTI acquires the coflex® Interlaminar Stabilization® device, which had received a premarket approval (PMA) from the FDA in October 2012, a PMA for the coflex disposable instrument kit in May 2018 and has been implanted in more than 160,000 patients to date.

The New RTI

This transaction, which is expected to close in the first quarter of 2019, brings an immediate boost to RTI’s annual sales of approximately $40 million but it also represents the continuation of CEO Camille Farhat’s ambitious, disciplined and innovative plan to revitalize the perennially underperforming RTI Surgical.

Farhat’s strategy leverages the spine and tissue aspects of its business to fuel its growth and differentiate from competition. One part of the business is focused on tissue and delivers moderate growth and predictable cash. RTI takes that cash and deploys it into high-growth spine investments. That cash on hand is what allows the company to be unique and bold in how it grows. Farhat has also set in motion a transformation within the company focused on reducing complexity, driving operational excellence and accelerating growth.

Before Farhat arrived, despite growing sales 128% in the prior 18 years, RTI’s market value had fallen 16%. In other words, lots of activity but no forward motion. Losing money in 10 of those 18 years—as RTI did—didn’t help.

Pre-Farhat, fastest growing income statement category was marketing, general and administrative expense, which rose 551% between 2000 and 2018.

Even more troubling, people left RTI to—it pains me to report this—form innovative allograft companies based on living cell allografts, nerve allografts or amniotic tissue allografts—which were worth a combined $2.9 billion earlier this year.

Something had to change.

The change agent RTI’s board hired was a former General Electric, Medtronic, Baxter and American Medical Systems executive named Camille Farhat.

Mr. Farhat came to RTI with no prior experience in either allograft or spinal implants—two industries beset with pricing pressures and stiff regulatory headwinds.

At the poker table of spine and allograft companies, Farhat was the fresh-faced kid with a fistful of dollars. The other players must have licked their chops.

Changing the Hand That’s Dealt

When we asked Farhat about the hand he’d been dealt, he said “This company has a lot of value. There is a lot of technology here. But there was also a lot of experimentation—a few chips here, a few chips there. That was an issue. We were subscale in many markets.”

So Farhat focused on RTI’s strengths and then reimagined the business model. “We needed to go back to our roots to go forward,” he said. “RTI is the company known for making allograft safe and we needed to rekindle that innovative spirit.”

It’s been almost two years. Under Farhat’s leadership, RTI’s stock is 45% more valuable today and, for the first nine months of 2018, RTI earned (adjusted for acquisitions and write-offs) $26 million—the strongest report in years.

Finally, in a sign that RTI did have underperforming technology, his R&D and product development team won the Orthopedics This Week Best Spine Technology Award for 2018 (TETRAfuse 3D Technology).

RTI Surgical is a different company now.

In Farhat’s view: “We feel that the way to win in spine is channel management, relevant and disciplined innovation and patient access. Our growth strategy is focused on investing in differentiated technologies and building scale. In 2018 alone, we’ve added SImmetry, Fortilink-TS and -L with TETRAfuse, ViBone and now coflex. We’re getting better at reimbursement, clinical evidence, demand generation.”

“We need patient intimacy. We need physician and customer intimacy. We need to get to the point where everyone knows the customer. Everyone knows exactly the issues, exactly what’s going on and that the winning spirit is very high.”

And that leads us to Farhat’s two acquisitions, both announced this year—Zyga Technology, Inc. and Paradigm Spine.

Zyga Technology, Inc.

Zyga was a small, Minnesota-based sacroiliac joint (SI) treatment company with a unique type of SI joint fusion product called SImmetry. RTI bought the company in January 2018.

The SI joint market is, essentially, an 850,000-patient injection market that evolves into a 20,000-patient procedure market. The growth potential for all players is phenomenal.

Much like market leader SI-BONE, Inc., Zyga was a clinical research and data centric company. RTI, building on that foundation, is advancing the 250-patient EvoluSIon study to evaluate the impact of SImmetry on SI joint function. It is also investing in patient access activities ranging from educating patients about their condition to supporting their connection to the appropriate surgeon.

Zyga also brought clear points of differentiation in the SI joint market. Explained Farhat: “We believe that because SImmetry promotes SI joint fusion through decortication and the addition of a biologic, it’s leading to improvements in pain, disability and opioid use in patients with SI joint dysfunction. If I went to the doctor and said, ‘let’s just focus on fixation’, the doctor will say ‘no, fixation alone is not enough.’ We believe the combination of a minimally invasive option that decorticates the bone is a strong differentiator.”

“Long term, no outcome, no income. The data shows SImmetry delivers outcomes.”

Paradigm’s coflex – Non-Fusion, Motion Preserving, Minimally Invasive

Eleven months after acquiring Zyga, RTI agreed to acquire Paradigm Spine.

While Zyga addresses the niche SI joint market, Paradigm Spine and its landmark coflex product address the very large, 1.6 million patient lumbar spinal stenosis market. Conservatively, that’s a $3.3 billion global market.

coflex is a non-fusion, motion preserving, minimally invasive treatment for one or two level lumbar spinal stenosis.

As with Zyga, Farhat homed in on coflex’s clinical data. coflex comes to RTI with 12-year level 1 clinical study follow-up(!). It comes with TWO PMA approvals. It comes with an immense library of level 1 clinical study data from the top centers in both the United States and Europe. It comes with more than 160,000 implant cases.

Finally, coflex® comes to RTI with a Centers for Medicare and Medicaid Services (CMS) reimbursement code and positive coverage recommendations from the two largest spine surgeon societies in North America—The North American Spine Society (NASS) and The International Society for the Advancement of Spine Surgery (ISASS).

How did he snare this de-risked asset from under the noses of the other strategic investors in spine?

The guys at the poker table must be scratching their heads.

Farhat is understandably excited about his acquisition: It fits his niche strategy, he has limited direct competition from the big spine companies, it gives him a wealth of strong clinical data and, over time, it will fuel exceptional revenue and earnings growth at RTI.

V-Bros to Become Major Shareholders of RTI Surgical

Paradigm Spine is a company founded by the Viscogliosi Brothers (VB), a New York-based family investment firm that focuses exclusively on developing musculoskeletal technologies and companies. The company is run by three brothers, Anthony, Marc and John.

By any measure, the V-Bros firm has been the single most impactful firm on the modern musculoskeletal industry. The companies and technologies they nurtured and fought for pioneered the spine motion preservation, ankle arthroplasty, knee subchondroplasty and minimally invasive non-fusion lumbar stenosis industries among others. In the process, these brothers have generated more than $3 billion in financial return for their investment partners and themselves.

Paradigm Spine’s coflex is a typical VB project. Difficult. More than a decade’s worth of effort required. Expensive. And level 1 clinical study centric.

Explained V-Bros partner Anthony Viscogliosi to OTW; “Viscogliosi brothers believe very strongly in the potential for the coflex technology to transform patient care in the field of spinal stenosis. We have invested a tremendous amount of time and capital in developing the technology to be supported by long term clinical data that demonstrates safety and efficacy and superiority to the standard of care in spinal stenosis surgery today. That standard of care is either the alternative of decompression alone or fusion. Importantly the technology has demonstrated superior outcomes on a long-term basis versus fusion and decompression alone.”

When we asked Tony why he decided to entrust Paradigm to RTI, he said this:

“During the course of this transaction we learned a great deal about the business strategy of RTI and really felt confident that they can build on the Paradigm foundation in a very substantial manner. And we felt that Paradigm packaged with RTI’s portfolio would have the greatest impact and ability to produce revenue growth and gross margin contribution.”

RTI has a strong established spine portfolio and continues to augment that with the addition of novel therapies, like SImmetry and coflex, that benefit from a shared focus on demand generation, clinical data and expanding insurance coverage.

“We believe that RTI is extremely undervalued on a relative basis. Therefore, we want to own as much of the company as shareholders as we can. We understand what coflex can do. And we understand the importance of focus of long-term clinical superiority and the value of the differentiation of a PMA technology.”

“It was a de-risking strategy to us. We both bring something to the table that neither party had. They bring a bigger distribution platform—but not too big to not pay attention. And because of the PMA, because of its revenue, because of the transformation underway in payor reimbursement, because of long-term clinical evidence and because of the established base of 160,000 implants benefitting patients, we believe RTI’s distribution platform can significantly accelerate Paradigm’s growth and profitability.”

Further, Farhat has proven experience in other industries taking a novel therapy from treatment of choice to standard of care. This, combined with the scale of RTI’s network and the market opportunity in lumbar spinal stenosis (LSS), it’s clear RTI will give coflex the attention it deserves in driving growth and enhanced market adoption.

When we asked about taking so much of the transaction’s value in both RTI common stock and milestone payments, Tony explained:

“With the stock at the price that it’s at today, we felt this was the best way for us to maximize our value as shareholders of Paradigm Spine. It was because of the long-term support of our equity and debt partners that we were able to create a very successful Paradigm business and financial dynamic. Specifically, HealthCor LP is a great institutional capital partner for us as were the individual investors who joined with us in the early days and who joined with us to grow this business.”

“We really are grateful to our debt and equity partners for working together to create such a great opportunity for the shareholders and employees.”

“So, for all these reasons I’d rather be a shareholder in RTI than have cash. I think our value is going to grow.”

RTI’s Future

Farhat’s goals for RTI, in his own words, are…“to continue to have an economically viable and sustainably growing business, that generates more than 20% EBITDA, and by 2022 to have treated 1 million patients and generate $500 million in sales. In my mind, it is clear what we need to do to reach those goals.”

Camille Farhat’s goals may be ambitious, but more importantly, he is making disciplined, strategic moves, including partnering with the V-Bros and acquiring fast growing, innovative companies like Paradigm and Zyga to transform RTI into one of the most interesting emerging growth companies in orthopedics today.