FTC probes Wright, Tornier merger again, may push deal close into the second half

Wright Medical Group ($WMGI) had expected to complete its acquisition of Tornier ($TRNX) during the first half of this year. But now that is a "best case scenario," according to a statement from the company. The Federal Trade Commission (FTC) has extended the waiting period until the deal close in order to give Tornier time to deal with the agency's concerns about its lower extremity products.

Once Tornier addresses undisclosed FTC concerns about its lower extremity product lines, the agency has 30 days to sign off on the deal. Lower extremity revenues were about $21 million during the period ended Sept. 30, with the U.S. accounting for about $15.9 million of that, the company said in a statement.

Still, Wright said it expects that any changes would not undermine the fundamental rationale for the deal and that it expected it would close.

Wright CEO Robert Palmisano

"We just received the second request and are evaluating our options. We will continue to work cooperatively with the FTC to resolve this as quickly as possible," Wright President and CEO Robert Palmisano said in a statement. "Whatever the final resolution, we do not expect it to have a material impact on the strategic rationale or economics of the proposed merger, and we remain firmly committed to the transaction."

Leerink Partners analyst Richard Newitter believes the FTC could be requesting that Tornier divest its ankle business, which he noted has a comparable amount of revenue. "A divestiture-less deal would be preferred, but we knew it was a possibility and $15-20M is about what we would have expected to be 'under the FTC microscope," he concluded.

The acquisition of Tornier by Wright is one of the first to close since the U.S. Federal Trade Commission tightened its rules to crack down on so-called tax inversion deals, of which this is one. These deals relocate some or all of corporate business to a tax favorable country in order to reap the taxation benefits.

In this deal, Memphis, TN-based Wright intends to combine with the Netherlands-based Tornier to reincorporate in the latter location. The U.S. headquarters for the lower extremity and biologics businesses would be in Memphis.

Medtronic's ($MDT) acquisition of Covidien ($COV), which closed last month, similarly faced a second round of FTC scrutiny and required asset divestiture. Tornier disclosed previously on Dec. 30 that it had voluntarily withdrawn and refiled its Hart-Scott-Rodino notification and report form relating to the FTC in order to give the agency additional time to review the transaction.

In addition to the deal update, Wright also provided information on the ongoing regulatory process for its Augment Bone Graft. It said one of its vendors had received a Form 483 after an FDA inspection that "cited several observations." Wright said the vendor had already submitted a full response to the agency that the company believes "will satisfactorily address the FDA's observations."

Wright said it expected a final FDA approval for Augment during the first half, but not the first quarter as had been previously anticipated. In late October, the company got an approvable letter for Augment as an alternative to autograft for ankle and/or hindfoot fusion indications. The approval was pending facility inspections.

Leerink's Newitter sees the deal and the regulatory delays as incremental negatives; he lowered his price target to $31 to $35 on the news. Wright fell 3% to about $24 in early trading on the news.

- here is the release

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