More Qs Than As: Globus Medical and NuVasive Announce Merger

Big news in the spine industry. Globus Medical, Inc. based in Audubon, Pennsylvania, and NuVasive, Inc., a spine technology company based in San Diego, California, have announced plans to combine in a stock only transaction.

The merger will create the second largest spine company in the world with more than 5,000 employees and a presence in over 50 countries. According to the joint press release, the merger is expected to close sometime in the middle of 2023, “subject to the approval of both companies’ shareholders, regulatory approval, and other customary closing conditions.”

Globus Medical President and Chief Executive Officer Dan Scavilla explained: “This transaction reflects our mission to become the leading musculoskeletal technology company in the world by developing products that promote healing in patients with musculoskeletal disorders.”

Scavilla continued, “With NuVasive, we can help support more patients through leading innovation and expanding our commercial reach to provide superior service to our surgeon and hospital partners. We look forward to combining the NuVasive and Globus Medical teams to capitalize on the many opportunities to improve patient care and create sustainable shareholder value.”

Leadership Plans

Once the transaction closes, the company’s board of directors will have 11 members—8 from Globus Medical and 3 from NuVasive.

According to the official announcement, David Paul, founder and chairman of Globus will also assume that position of the combined companies. Globus’ current CEO Dan Scavilla will also be CEO of the combined companies as well as a member of the board. Keith Pfeil, chief financial officer of Globus Medical, will serve as chief financial officer of the combined company. Chris Barry, chief executive officer of NuVasive, will support integration planning of the combined company and then, well, likely move on to the next challenge.

Financial Outlook

Globus Medical, which was founded in 2003, has grown rapidly over the years and currently offers the entire range of spinal products and systems including a market leading robotics system. But Globus also has an extensive trauma line and clear aspirations to expand into every corner of the musculoskeletal industry. To put an even finer point on this, Globus already supplies: spine implants, orthopedic trauma products, an entire portfolio of biologics products, joint replacement solutions, and its suite of smart navigation and robotics assist systems brand named Excelsius™ Technology.

One of Wall Street’s leading analyst teams, the group at Wells Fargo led by Larry Biegelsen, wrote: “The company primarily competes in the ~$10 billion global spine market, where we estimate the company had ~10% market share at the end of 2022.”

For the full year of 2022, Globus Medical announced “preliminary 2022 net sales growth of 6.8% as reported, 8.2% constant currency, as compared to net sales of $958.1 million for the full year 2021.” Additionally, for the full year of 2023, Globus Medical expects “2023 net sales growth of 7%-8% constant currency, as compared to full year 2022.”

Since its founding in 1997, NuVasive has been on a mission to become “the #1 spine technology company in the world.” According to the company, its broad spine portfolio includes “surgical access instruments, spinal implants, fixation systems, biologics, software for surgical planning, navigation and imaging solutions, magnetically adjustable implant systems for spine and orthopedics, and intraoperative neuromonitoring technology and service offerings.”

For the full year of 2022, NuVasive announced “preliminary 2022 net sales growth of 5.5% as reported, 8.5% constant currency, as compared to net sales of $1,139.0 million for the full year 2021.” Additionally, for the full year of 2023, NuVasive expects “2023 net sales growth of 6%-8% constant currency, as compared to full year 2022.”

Terms of the Deal

The boards of directors of both companies unanimously approved the terms of the agreement which was a stock for stock deal. “NuVasive shareholders will receive 0.75 of a share of Globus Medical Class A common stock for each share of NuVasive common stock owned at the closing of the transaction. Based on this exchange ratio, the implied share price for NuVasive would be $57.72, an equity value of $3.1 billion, based on Globus Medical’s closing share price on February 8.”

Additionally, following the close of the transaction, “NuVasive shareholders will own approximately 28% of the combined company, and Globus Medical shareholders will own approximately 72%, on a fully diluted basis.”

Wells Fargo Insight

Wells Fargo equity analysts provided a research report on the proposed merger. The report, which was published a day after the deal was announced, stated,

“We are downgrading GMED [Globus Medical] to Equal Weight and lowering our price target to $67 from $82. We believe the deal will be challenging to integrate and will distract mgmt. [sic] for the foreseeable future.” The following four reasons were provided for the downgrade:

1. “Cultures of both companies are vastly different so integration will be especially challenging;
2. Prior spine deals have not created value;
3. We expect sales force and customer disruption; and
4. 2023 guidance was below expectations.”

According to the Wells Fargo team, “Spine deals have typically performed poorly due to post M&A sales force integration challenges and related sales channel disruptions.”

Two notable deals the analysts looked back on included Zimmer Biomet Holdings Inc.’s 2016 acquisition of LDR Holding Corporation and Johnson & Johnson’s 2012 acquisition of Synthes, Inc.

The analysts explained, “Compared to pre-close pro forma sales, on average, sales declined by 2.2% in year 1 and by year 5 sales had declined 9.3%. Applying this analysis to the GMED/NUVA [NuVasive] deal, on a pro-forma basis, we would expect sales could be down in 2024.”

Wells Fargo’s team also highlighted the challenges of integrating two different corporate cultures. “Integration will be key achieving financial targets. Although GMED and NUVA are taking necessary steps to minimize disruption, we estimate that the GMED/NUVA combination could have top-line dis-synergies of ~5% of the combined company’s sales in Year 1 (and improving thereafter) as a result of departing sales reps and/or distributors. GMED estimates ~$170 mil of cost synergies by Year 3, mostly in SG&A [selling, general and administrative expense] and some in COGS [cost of goods sold]. Based on these assumptions, we est ~19% EPS accretion by the end of 2024.”

The analysts added, “We expect that other Spine competitors—large and small—will likely benefit from this disruption in the market. By our analysis, NUVA’s market share is ~12% of the WW Spine market and GMED is ~10% and following the deal, GMED/NUVA will hold a combined ~22% share in the global spine market.”

NuVasive seemed to have a more optimistic take on the deal. In the press release, Barry commented, “Our combination with Globus Medical is transformative, joining two companies with highly complementary capabilities, geographic footprints and customer bases.”

Barry continued, “Together, we will be able to offer an exceptional portfolio of clinically proven solutions, supported by strong commercial and surgeon education teams. The new company will be well-positioned to deliver value creation for shareholders, further support our surgeon partners—and most importantly, change the lives of more patients.”

Lingering Questions

This news should not come as a surprise to OTW readers. We first reported on a possible acquisition of NuVasive by Globus Medical in 2021. For OTW’s coverage of the possible acquisition, see “Globus Medical in Discussions to Acquire NuVasive.”

So, while this may not come as a surprise, there do remain questions:

1. “Why now?” NuVasive’s equity is, literally, the least expensive spine stock (as measured by P/E, PEG and PSR) currently trading. Globus, by contrast, is the MOST expensive spine stock. One answer to the “Why now?” question is that Globus is buying NuVasive on the cheap. So, is this a strategic decision, or an opportunistic decision by Globus?
2. Given the wide valuation disparities between Globus’s equity and NuVasive’s equity (remember, this is a stock transaction) could it invite a competing bid—from other suppliers or, perhaps, private equity firms?
3. Finally, new name? We suspect the answer may be “No”. Given that Globus will own more than 70% of the combined company, the NuVasive brand may well be on its way to the history books.

Stay tuned, for sure.