EU Firm Pays $490 Million for 60% of RTI Surgical

In what ranks as one of the most surprising strategic moves since either Stryker’s purchase of Mako Surgical for $1.65 billion in 2013 or the 1988 merger of Danek with Sofamor, Montagu Private Equity LLP, the $6 billion European based private equity firm (formerly HSBC), signed a definitive agreement to purchase RTI Surgical Holdings, Inc.’s OEM (primarily tissue, biologic and hardware) business for $490 million.

The day before this transaction was announced, all of RTI, the entire company, was being priced by Wall Street’s traders at about $200 million.

On the conference call with investors and analysts, while RTI CEO Camille Farhat calmly described the transaction, the analysts, who were still trying to wrap their heads around the announcement, struggled to think of cogent questions to ask.

Had they looked into Camille Farhat’s history at GE, Baxter and American Medical Systems they might have seen clues as to what he is capable of accomplishing.

Why This Is the Ideal Transaction for RTI (also, Montagu)

RTI has long been in a difficult strategic box. The company’s origins are in the allograft business. RTI showed early growth momentum, expanding from allograft into xenograft and biologics. But tissue is not as profitable nor innovative as the spinal implant business. Therefore, under its previous CEO, Brian Hutchison, RTI acquired Pioneer Surgical and added spine hardware to its line of tissue and biologic products.

Unfortunately, the spinal implant market hit a deflationary cycle shortly after RTI bought Pioneer. Even today, the business of selling spinal implants remains a low growth, declining profit margin activity, in general (there are sectors that defy the overall industry profile). By 2015, RTI’s attempts at growth lacked successful execution. It had expanded into several specialty areas but lacked the scale and focus in any one area to effectively compete. The OEM [original equipment manufacturer] business was declining, and the spine business was lacking productive innovation.

Hutchison’s successor, Camille Farhat, recognized the business needed greater focus. He committed to returning OEM to growth and building up spine. Farhat was well-aware that growing spine by even a modest rate of 5% meant taking share from someone. Compounding that problem is the fact that RTI’s OEM business is highly dependent on other spinal implant suppliers most notably Medtronic Spine.

Any RTI initiatives in the spine hardware business could stimulate a reaction from its OEM customers.

As Farhat noted to OTW, “Growing spine is a delicate task.”

Farhat’s strategy, therefore, has been to seek out highly differentiated niche spine products which could deliver revenue growth and better than average gross profit margins and build scale to increase relevance among hospital and health system contracts. RTI’s spine business has tripled in size in the past five years moving into the top 10 of domestic spine companies. All while staying out of, for example, Medtronic’s way.

Separating RTI’s spine business from its OEM business, especially in exchange for $490 million, deftly opens up the entire range of spine technology to RTI.

Post transaction, RTI will have between $175 and $200 million cash in the bank and no debt.

Who Is the Buyer?

Montagu, the buyer of RTI’s OEM business is the former HSBC Private Equity firm. Based in London, this 52-year-old firm has about $6 billion under management and it has bought into more than 400 businesses. Its primary focus is on management buyouts of companies that operate in stable markets. Typically, Montagu looks for deals in the €100 million to €1 billion range. In RTI’s OEM business, Montagu found a business that offered differentiated products and unique design, R&D and manufacturing capabilities to such strong companies as Medtronic Spine and several other Blue Chip medical device companies that would otherwise be badly missed.

As Farhat noted on his call with analysts, under his watch, RTI’s OEM business has signed long-term stable supply contracts with 70% of its industry partners. Furthermore, OEM’s operating profit margins met Montagu’s internal return on investment criteria at, yes, the $490 million purchase price.

Boy, did Wall Street ever misprice RTI’s value!

RTI’s Post-Transaction Future

Once this transaction has officially closed, as he has done several times in his career, Farhat is looking at all his options. Including something that worked for him in his past assignments at GE, Baxter and Medtronic—find growth and exceptional profit margins in mature markets by expanding customer options.

In Farhat’s view, RTI will succeed best by bringing differentiated spine products, supported by clinical data, to physicians while also building focused distribution channels that support product portfolio pull-through.

Farhat is also thinking carefully about the demand side of the equation. “Creating demand in this market is a game-changer. We want to train doctors on new therapies and products. We want to increase RTI’s value to the surgeon.”

Is Past Prologue?

It is worth remembering that Camille Farhat is a Medtronic alumnus. He joined Medtronic in 2003 as global general manager of its urology and gastroenterology divisions which had been formed through multiple, disparate acquisitions.

One of Farhat’s first initiatives at Medtronic was to, in effect, repurpose and commercialize Medtronic’s implantable pacemaker technology to the urology and gastroenterology markets.

“Market receptivity was tremendous and the business experienced rapid growth as a result. It gave us the leverage we needed to then branch into the obesity space and create new category leadership opportunities for Medtronic.”

Farhat then moved to Baxter International to lead their Global Infusion Systems division under a consent decree and subsequently led Baxter Pharmaceuticals & Technologies during the Heparin supply chain crisis. He then became CEO of American Medical Systems and led the company through its mesh challenges and sold the men’s health division to Boston Scientific in 2015.

How Camille Farhat Is Transforming RTI

When he arrived at RTI in 2017 Farhat found a company with significant untapped potential. As he commented to OTW in 2018, “There is a lot of technology here. My goal is to build a growing and sustainably profitable business that will treat more patients, create growth opportunities for employees and value for investors.”

Farhat’s three transformation objectives, which he has accomplished, were to:

1. Reduce complexity
2. Drive operational excellence
3. Accelerate growth.

Easier said than done. Farhat focused on returning RTI to its roots (from the days when Jamie Groomes started the company) with, as Farhat describes it, “patient and customer intimacy, relevant and disciplined innovation, and a strong collaborative winning spirit.”

Beginning in 2020, the team at RTI Surgical expects to bring to market at least 10 new spine products during each of the next two years. That represents a significant acceleration of organic new product innovation from past years.

Transforming RTI with Scale and Differentiation

Farhat’s first significant strategic move when he joined RTI three years ago was to divest RTI’s cardiothoracic business to A&E Medical, which helped strengthen RTI’s balance sheet so it could acquire a small, Minnesota-based spine company named Zyga Technology in January 2018.

Zyga brought RTI into the SI joint [sacroiliac] market, which is based largely on the 850,000-patient market in the U.S. who are getting injections and who then, eventually, require surgery. But, with Zyga, Farhat found a company with a clear point of clinically relevant and documented differentiation.

Zyga’s SImmetry system is the only minimally invasive procedure that accomplishes SI joint fusion through decortication, adhering to the fundamentals of arthrodesis.

As Farhat told OTW shortly after the acquisition, “With SImmetry, we’re aiming to help patients get back to their normal, active and pain-free lives. We’re not about simply treating a symptom.” They have the data to prove it. The latest interim data from RTI’s EVoluSIon study indicates 73% of 148 patients at 12 months show evidence of fusion, 71% had a reduction in pain from baseline and 60% were opioid-free.

After Zyga, RTI gave everyone a glimpse of the scope of intellectual property in RTI when it expanded its Fortilink product line with the TETRAfuse 3D Technology. TETRAfuse, which won the OTW Best Technology in Spine Award in 2018, is a 3D-printed polymer-based interbody implant with a nanorough surface which demonstrated in pre-clinical studies better trabecular bone ingrowth than PEEK and titanium-coated PEEK.

coflex

Then, in 2019, RTI completed the purchase of Paradigm Spine and its FDA-approved (PMA) coflex® Interlaminar Stabilization® device. At the time of purchase, coflex had been implanted in more than 160,000 patients. Literally, there is no other spinal implant product on the market like coflex.

coflex is a non-fusion, motion preserving, minimally invasive treatment for one or two level lumbar spinal stenosis. It came to RTI with 12-year level 1 clinical study follow-up and TWO PMA approvals.

It also had 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).

V-Bros Are Major Shareholders of RTI Surgical

RTI’s purchase of Paradigm Spine was a cash and stock transaction. Paradigm was founded by the Viscogliosi Brothers, 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.

As a result of the Paradigm transaction, the VBs became major RTI major shareholders.

In our opinion, that was also one of the most important assets Farhat acquired in the Paradigm deal.

A New Chapter for RTI Surgical Begins

We asked Farhat, now that his board of directors has agreed to this definitive agreement to sell the OEM business to Montagu, where this transaction places him on his journey to meet his long-term goals for RTI.

In 2018, he explained to OTW his long-term strategy for the company. “We feel that the way to win in Spine is through channel management, relevant and disciplined innovation and patient access. In doing so, we intend to get better at reimbursement, clinical evidence, and demand generation.”

“At RTI we’re going to prove our competence in things that enable our strategy.”

“Our strategy is to continue to have an economically viable and sustainably growing business, that generates more than 20% EBITDA, and our goal is 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.”

And how, we asked, does this sale affect those goals?

Without hesitation, he told OTW that it significantly accelerated his progress.

Moving forward, RTI is all in on spine and poised for accelerated growth. After closure of the transaction, anticipated in the first half of 2020, RTI will be a global, pure-play spine company with the ability to stand out in meaningful ways. It has a differentiated portfolio, growing distribution channels and product pipeline anticipated to begin materializing this year. Most notably, it has enough cash to continue with a sustainable growth strategy of building a differentiated and fully scaled portfolio.

Farhat added “We have great opportunities in front of us for accelerating RTI’s growth in spine.”