May 5, 2014
Zimmer Holdings announced plans recently to buy orthopaedic manufacturer Biomet Inc. News of the $13.35 billion sale quickly boosted Zimmer’s shares by more than 18 percent. Indiana-based Zimmer is currently the fourth largest orthopaedics seller. The sale, which is expected to be completed during the first quarter of 2015, will boost it to the No. 2 slot, ahead of Stryker and behind market leader Johnson & Johnson’s DePuy Orthopaedics.
Zimmer Chief Executive David Dvorak called Biomet “a perfect fit” during an April 24 call with financial analysts and investors, according to a Reuters report. The deal will double Zimmer’s spine and dental business, expand its portfolio of bone, knee and hip treatments, and introduce it to the growing sports medicine market.
Biomet Abandons Plans to Go Public
Meanwhile, the sale ended Biomet’s plans to hold an initial public offering. The company filed papers with the Securities and Exchange Commission in March to raise up to $100 million. Biomet became a private company in 2007 after the private equity arm of Goldman Sachs bought it for $11.3 billion.
The company told the SEC it would use part of the proceeds from the proposed IPO sale to cash out its private equity owners and reduce debt from the 2007 buyout. The move was not unusual. Biomet was among several health care companies that were bought out by private equity investors between 2006 and 2008. Most large companies that were taken over during the so-called “private equity boom” have already gone public.
The boards of both Zimmer and Biomet have already approved the merger. After it’s completed, Zimmer’s shareholders will own approximately 84 percent of the newly merged company. Biomet’s investors will hold the remaining ownership.
Biomet, a maker of knee, hip and other devices, is located near Zimmer in Warsaw, Indiana. Earlier this year it agreed to a $56 billion settlement of multidistrict litigation pending in the U.S. District Court for the Northern District of Indiana. The cases allege that Biomet’s M2a Magnum metal-on-metal hip implants are defective. The devices are linked to serious complications such as metallosis in surrounding tissue and early device failure.
Under the terms of the proposed settlement, eligible claimants will receive a base award of $200,000. Claimants wishing to participate in the settlement had until April 15 to file their complaints. The court appointed a lien resolution administrator to oversee the settlement and help resolve plaintiffs’ health insurance reimbursement claims.
Zimmer’s press release announcing the planned merger included the usual cautionary warnings about potential financial risks. Among the many uncertainties are product liability litigation losses. Both companies are involved in multidistrict litigation over alleged injuries from their medical devices. But so far, analysts haven’t indicated that the litigation will hamper the proposed deal.
Deal Part of Health Care ‘Megadeal’ Trend
April also saw news of other large-scale health care deals. Botox manufacturer Allergan Inc. received a $45 million hostile takeover bid from Valeant Pharmaceuticals. The unsolicited offer prompted it to explore options with other potential buyers.
Novartis and GlaxoSmithKline agreed to swap assets for more $20 billion. Novartis will pay up to $16 billion for GlaxoSmithKline’s cancer drug business, while GlaxoSmithKline will buy Novartis’s vaccine business for up to $7.1 billion. Novartis also plans to sell its flu vaccine business.
In the device industry, Johnson & Johnson reportedly offered over $11 billion for device maker Smith & Nephew. The company rejected an offer for the same amount by Johnson & Johnson in 2011. Smith & Nephew also rejected a merger bid from Biomet for over $25 billion that year.
Mergers can provide a way for companies to cut costs and save billions on research and development. But there is also a trend toward health care companies consolidating in response to the Affordable Care Act. The planned Zimmer-Biomet combination is part of that trend. According to The New York Times, the merger will help the companies absorb the excise tax on medical devices under the new health care law.
The deal between Zimmer and Biomet will be the largest in the medical device industry since Johnson & Johnson’s 2012 acquisition of Synthes Inc. for $21.3 billion. Regulators must still approve the merger.