Medical Device Daily

Major orthopedics manufacturerBiomet (Warsaw, Indiana) reported late Monday that it has agreed to be acquired by a group of private investors for $10.9 billion.

The company’s buyers include Blackstone Group, Goldman Sachs Capital Partners, Kohlberg Kravis Roberts and the Texas Pacific Group.

Biomet said one of the company’s four founders, Dane Miller, who resigned as CEO in March, also could join in on the deal. Miller was one of four co-founders of Biomet and had been the company’s CEO since its formation in 1977.

The consortium offered $44 per share, 27% more than Biomet’s closing price on April 3, the last trading day before the merger talk began, Biomet said.

Biomet’s board voted in favor of the deal, which is subject to shareholder approval and antitrust clearance. The deal is expected to close by the end of October, after which the company’s stock would be delisted from the Nasdaq.

Other than keeping the company’s headquarters in Warsaw, Greg Sasso, senior VP of corporate communications for Biomet, said the investors have not indicated any plans for the company’s future.

“This private equity consortium has quite a bit of capital at their disposal, and I think they will be very good partners in helping us implement our five-year plan and helping us grow the business,” Sasso told Medical Device Daily.

“Going private would benefit Biomet from the standpoint that we can privately fix some of the problems we’ve had with our electrobiology subsidary,” said Sasso.

The deal effectively ended speculation concerning a merger, brewing since Biomet disclosed in April that it had hired Morgan Stanley to explore “strategic alternatives.”

The company’s big British rival Smith & Nephew (S&N; London) confirmed in November that it had held “very preliminary talks” about a possible merger with Biomet (Medical Device Daily, Nov. 3, 2006). Had the two companies sealed a combination, industry analysts said it would have represented the largest orthopedic transaction in history.

Raj Denhoy, an analyst who follows the orthopedics sector for Piper Jaffray (Minneapolis), told MDD that the $10.9 billion price tag on the deal indicates that the growth of the orthopedics market and the cash generated by these companies makes them attractive investments. Demographics alone make long-term prospects for the sector attractive, he said, given the nation’s obesity trend combined with an aging population.

“This transaction offers shareholders the ability to realize substantial value from their investments in Biomet and provides important benefits to our customers, team members and other stakeholders,” Daniel Hann, interim president/CEO of Biomet, said in a statement.

Biomet has about 6,300 employees total, including 1,350 workers in Indiana.

Biomet is one of three orthopedics companies based in Warsaw, about 40 miles west of Fort Wayne. DePuy Orthopaedics and Zimmer Holdings also have operations there.

“We will work in close partnership with Biomet’s excellent management while harnessing the extensive resources of our consortium, to build on Biomet’s long heritage of success,” the investor group said in a statement.

Orthopedic companies are counting on growth as the nation’s 76 million baby boomers reach the age when knees, hips and shoulders sometimes need replacing. At the other end of the age spectrum, younger adults often need frequent revisions.

Zimmer projects its 2007 sales to top $3.82 billion, an increase of about 10% over 2006.

Still, a lot remains to be seen regarding this rather large buyout, Denhoy said.

“It will be interesting to see how it eventually plays out, we’re not aware of plans the private investor group has for the company,” he said.

Biomet’s shares fell 41 cents, or 1%, to close at $41.59 in trading Monday on the Nasdaq Stock Market.

But Linda Varoli, VP of merger research with Wall Street Access (New York), told The Associated Press that the $10.9 billion purchase price — which will be paid with cash and loans — reflects the potential of the industry, which has been shaken in recent months by antitrust concerns.

“They wouldn’t be making the investment if they didn’t see some definite future growth in the company, and most likely in the industry in general,” Varoli said of the consortium.

In June, Biomet and three other orthopedics makers — DePuy, Zimmer, and Stryker (Kalamazoo, Michigan) — reported receiving subpoenas stemming from possible criminal violations in the manufacturing and sale of orthopedic implants (MDD, June 27-28, 2006). Those subpoenas followed a previous round in March when the same companies, plus S&N, received subpoenas requesting information concerning the relationship between the manufacturers and their physician clients.

Also Monday, Biomet said it would delay its second quarter earnings release and investor conference call, previously scheduled for today, due to developments related to the review of historical stock option practices.

An analyst’s report found that a substantial number of stock option grants made from 1996 to 2006 — issued on different dates than when they were granted to take advantage of a lower stock price — “were not well documented.”

The practice, known as “backdating,” is not illegal, but it must be properly accounted for.

“It also appears that some members of senior management were aware of this practice, though they may not have been aware of the accounting and legal ramifications of this practice,” according to Biomet.

The company said it has yet to determine the effect of the accounting errors on past financial results.

Preliminary results showed that sales increased 5% to $520.3 million for the quarter ended Nov. 30. Reconstructive device sales rose 9% worldwide to $368.1 million.

Though the $10.9 billion deal is significant, Biomet isn’t the only medical device company to be involved in a multi-billion-dollar consolidation this year. Boston Scientific struck a $27.2 billion deal in January to buy stent and pacemaker provider Guidant (Indianapolis), winning a bidding war with Johnson & Johnson (New Brunswick, New Jersey) (MDD, Jan. 26, 2006).