Wright Medical to Acquire Cartiva Inc.

Wright Medical Group N.V. today announced it has entered into a definitive agreement to acquire Cartiva, Inc., a private orthopedic medical device company focused on the treatment of osteoarthritis of the great toe. The transaction will add a differentiated PMA-approved technology for a high-volume foot and ankle procedure and further accelerates growth opportunities in Wright’s global Extremities business. 
 
Under the terms of the agreement with Cartiva, Wright will acquire 100 percent of Cartiva’s outstanding equity on a fully diluted basis for a total price of $435 million in cash.
 
Cartiva’s lead product, a Synthetic Cartilage Implant (SCI) for treating arthritis at the base of the great toe, received U.S. Premarket Approval (PMA) in July 2016. The SCI is composed of a biocompatible, durable, low-friction organic polymer that functions similarly to natural cartilage and can be implanted in about 35 minutes. Unlike fusion, Cartiva reduces joint pain without sacrificing the foot’s natural movement and retains mobility and range of motion. Due to a less restrictive rehabilitation protocol, Cartiva patients typically return to function and activities of daily living faster than patients who undergo a fusion procedure. Additional regulatory approvals have been obtained in Canada, EU, Brazil, Chile, and Australia.
 
Wright expects full-year 2018 Cartiva revenues to be approximately $35 million, which represents approximately 50 percent growth over 2017, with gross margins and adjusted EBITDA margins accretive to Wright. 
 
Robert Palmisano, Wright’s president and chief executive officer, commented, “We are delighted to add Cartiva’s technology, including its Synthetic Cartilage Implant, the first and only PMA product for the treatment of great toe osteoarthritis, to our market-leading lower extremities portfolio. Supported by compelling clinical performance and the only product of its kind backed by Level I clinical evidence, Cartiva is experiencing rapid commercial adoption and is well positioned for future growth as it addresses large markets with significant unmet needs. We believe this technology is a perfect fit for our Lower Extremities business and adds a differentiated product that addresses a common condition that is treated by most foot and ankle surgeons and has strong patient demand.” 
 
Palmisano continued, “In addition to the excellent strategic fit, the transaction is financially compelling, as the combination of high gross margins, very low instrument and inventory investment and limited infrastructure to be integrated, make the transaction attractive from a projected return on investment standpoint. We also expect the combination to be approximately 100 basis points accretive to our pro forma revenue growth rate and approximately 100 basis points accretive to adjusted EBITDA margins in 2019. Our core foot and ankle business has continued to gain momentum throughout the third quarter, and we expect this acquisition to further accelerate our growth prospects in this part of our business.”
 
Timothy Patrick, Cartiva’s president and chief executive officer added, “We are delighted to have found an excellent strategic buyer in Wright, a company that shares our commitment to technological leadership and that is a leader in foot and ankle with a demonstrated track record of commercializing breakthrough technologies. We believe that Wright, with its 300-plus direct foot and ankle sales organization in the U.S. and its large international organization, as well as its expertise in medical education and product development, is the ideal partner to realize the full potential of our SCI technology. We look forward to an exciting future as part of Wright Medical.”
 
For more information on this transaction, please refer to the investor presentation filed as an exhibit to the company’s Current Report on Form 8-K filed today with the U.S. Securities and Exchange Commission (SEC).
 
Financing
The company anticipates funding the purchase price through the sale of equity securities at some time prior to closing of the Cartiva transaction. The Cartiva transaction is expected to close in the fourth quarter of 2018. The Cartiva acquisition agreement does not contain a financing contingency. This press release is not an offer to sell or a solicitation of offers to buy any securities. Any financing will be conducted pursuant to separate offering materials.
Approvals and Timing
 
The transaction has been unanimously approved by the Boards of Directors of Wright and Cartiva, and by the requisite vote of the Cartiva stockholders.
 
The transaction is expected to close in the fourth quarter of 2018, subject to the satisfaction of customary closing conditions, including Hart Scott Rodino clearance. 
 
Wright Raises Full-Year 2018 Net Sales Guidance Based on Strong Third Quarter Performance to Date
Based on the strong performance of the business in the third quarter to date, Wright today raised and narrowed its full-year 2018 net sales guidance, excluding the impact of the Cartiva acquisition to approximately $812 million to $822 million, from its previous guidance of approximately $808 million to $820 million. Wright expects to update its guidance for full-year 2018 non-GAAP adjusted EBITDA from continuing operations on its third quarter 2018 earnings call, which is currently scheduled for November 7, 2018.
 
Wright will provide updated full-year 2018 guidance, including the impact of the Cartiva acquisition, following the closing of the transaction. Assuming a close of the transaction in 2018, Wright anticipates the acquisition to increase 2019 net sales by approximately $47 million and non-GAAP adjusted EBITDA from continuing operations by approximately $20 million, which the company anticipates will be approximately 100 basis points accretive to the company’s pro forma net sales growth rate (on a constant currency basis) and approximately 100 basis points accretive to non-GAAP adjusted EBITDA margin from continuing operations.
 
The company’s existing targets for non-GAAP adjusted EBITDA from continuing operations and non-GAAP adjusted EBITDA margin from continuing operations are measured by adding back to net loss from continuing operations projected charges for interest, income taxes, depreciation and amortization expenses, non-cash share-based compensation expense and non-operating income and expense. Additionally, the company’s existing targets for non-GAAP adjusted EBITDA from continuing operations and non-GAAP adjusted EBITDA margin from continuing operations exclude possible future acquisitions; other material future business developments; and due diligence, transaction and transition costs associated with acquisitions and divestitures. 
 
With respect to the company’s 2018 financial guidance regarding non-GAAP adjusted EBITDA from continuing operations and non-GAAP adjusted EBITDA margin from continuing operations, the company cannot provide a quantitative reconciliation to the most directly comparable GAAP measures without unreasonable effort due to its inability to make accurate projections and estimates related to certain information needed to calculate some of the adjustments as described below in the “Non-GAAP Financial Measures” section of this release, including the foreign currency fluctuations and market-driven fair value adjustments to CVRs and derivatives. The differences between these non-GAAP financial measures and the most directly comparable GAAP measure are described below qualitatively.
 
The company’s anticipated ranges for net sales, pro forma net sales growth rate, non-GAAP adjusted EBITDA from continuing operations, and non-GAAP adjusted EBITDA margin from continuing operations are forward-looking statements, as are any other statements that anticipate or aspire to future events or performance. They are subject to various risks and uncertainties that could cause the company’s actual results to differ materially from the anticipated targets. The anticipated targets are not predictions of the company’s actual performance.