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CEO to depart by end of 2018

By Omar Ford

Staff Writer

Smith & Nephew plc. is ending 2017 by closing its acquisition of Rotation Medical Inc. for $125 million in cash, plus an additional $85 million in potential milestone payments. The London-based company first revealed it would pick up the bioinductive implant-maker back in October in a deal that would be neutral for earnings in 2018 and boost them in 2019. (See BioWorld MedTech, Oct. 24, 2017.)

Rotation Medical has developed an implant that helps tendons heal by inducing growth of new tendon-like tissue, offering the potential to prevent tear progression and reduce the incidence of re-tears. Plymouth, Minn.-based Rotation Medical received FDA clearance for its technology in 2014.

The implant is collagen-based – derived from bovine Achilles tendon – and about the size of a postage stamp; it comes as part of the Rotation Medical System, which also includes disposable instruments to conduct the procedure. The implant gradually absorbs within six months, leaving a layer of new tendon-like tissue. It is deployed arthroscopically.

There are more than 650,000 rotator cuff procedures taking place annually in the U.S., growing at a rate of 5 percent to 6 percent per annum, making the market ripe for penetration.

In clinical studies, the company said the bioinductive implant has demonstrated the ability to improve tendon healing by inducing growth of new tendon-like issue, resulting in thicker tendons and replacement of tissue defects as well as improving clinical scores over time and with a high percentage 92 percent of patients expressing their satisfaction post treatment.

"With its small sales force, Rotation Medical achieved revenue of more $11 million in the first nine months of 2017," said Olivier Bohuon, S&N's CEO, during a November earnings call. "For in completion, we expect further rapid growth as well rollout the product across our large Sports Medicine first focusing on the U.S. where the product has FDA approval."

Rotation Medical was founded in 2009 and raised roughly $56 million in venture capital, according to SEC filings. That figure means investors will get more than a two times return, with the potential for almost a four times return depending on milestone payments. Its venture capital backers include New Enterprise Associates, Life Sciences Partners and Pappas Ventures.

Rotation is the second exit this year by a Pappas portfolio company. Earlier this year, portfolio company Colucid Pharmaceuticals Inc. was acquired by Indianapolis-based Eli Lilly and Co. for nearly $1 billion.

Changing tides

The close of the Rotation Medical acquisition comes on the heels of strong 3Q17 earnings and S&N's CEO Olivier Bohuon announcing he would retire from the company by the end of 2018.

S&N brought in about $1.1 million in earnings for 3Q17 up about 3 percent on both a reported and underlying basis.

"Although S&N has solidified its position as a niche competitor with the addition of various technologies, we still think the firm will ultimately succumb to the need for portfolio breadth and scale in order to remain viable," said Debbie Wang, an analyst with Morningstar.

Bohuon made the announcement in October and has held a leadership position in S&N since 2011 after stints at a number of pharmaceuticals groups including Glaxosmithkline plc. In February 2016, the company reported he had been diagnosed with a "highly treatable" form of cancer.

The company is currently searching for a successor.

Bohuon leaving could put S&N in a position to be acquired by a larger orthopedics player. For years there has been speculation on whether or not a large player would swoop in and pick up the company.

"The planned retirement of current CEO Olivier Bohuon, who has long resisted relinquishing S&N's independence, at the end of next year creates a window of opportunity for a larger company to acquire S&N," Wang said. "We still think Stryker would be a good match, as S&N's advanced wound care, sports medicine, arthroscopy and shoulder portfolios would complement Stryker's current lineup."

Published  December 7, 2017

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