Zimmer Biomet makes $1B buy of LDR to expand underdeveloped spine biz

Zimmer CEO David Dvorak

Wall Street knew that Zimmer Biomet ($ZBH) would have almost $5 billion in cash to spend over the next few years. And it expected the orthopedics company to plow much of that cash into M&A. Now, Zimmer has taken a step toward that with a purchase of spinal surgery player LDR Holding ($LDRH) for about $1 billion.

This is another sizable acquisition--despite the fact that the $13.4 billion acquisition of Biomet that created the current company closed almost precisely a year ago. So, Zimmer Biomet must be optimistic that it has largely wrapped up and is ready to move on from the Biomet integration.

"This highly strategic and complementary transaction will enhance Zimmer Biomet's innovation leadership in musculoskeletal healthcare by adding a premier spine platform to our portfolio of solutions," said Zimmer Biomet President and CEO David Dvorak in a statement. "This combination is consistent with our goal of driving meaningful growth across all musculoskeletal markets with innovative products, technologies and services that enhance patient outcomes."

LDR markets Mobi-C CDR, which is the first and only device FDA-approved to treat both one- and two-level adjacent damaged cervical discs. In clinical testing, Mobi-C has demonstrated superiority to spinal fusion, an increasingly controversial technique, for two-level procedures, Zimmer said. It also sells its MIVo product portfolio to support lumbar and cervical fusion procedures.

Mobi-C cervical disc--Courtesy of LDR

Zimmer noted that cervical disc replacement is one of the fastest growing businesses in the spine industry.

The company reiterated its 2016 revenue growth guidance as 2% to 3% but said it would update those figures at the time the transaction closes, which is expected in the third quarter. Spine is one of Zimmer Biomet's smaller and poorer performing businesses--with a $141 million in net sales, which is a 1% pro forma decrease in constant currency. Its sales are largely dominated by its hip and knee businesses.

From this relatively meager existing business, Zimmer Biomet expects that the LDR purchase will catapult it to a top spot in the $10 billion spine market--which is led by Medtronic ($MDT), Johnson & Johnson's ($JNJ), DePuy Synthes and Stryker ($SYK).

Zimmer expects to be able to leverage its existing hip and knee position to expand into U.S. and major international spine markets. It expects that the addition of a spine portfolio will put it in a better position to compete for large hospital vendor contracts--which are becoming increasingly common as hospitals look to consolidate costs.

LDR will be combined with the existing Spine & CMF group. It will be led by Adam Johnson, who is the Zimmer Biomet Group President, Spine, CMF and Thoracic and Dental.

Zimmer is paying $37 per share for LDR, representing a steep 64% premium on the company's share price the day prior to the deal announcement. It will finance the purchase using cash on hand and a revolving credit facility. On the close of the deal, it will issue $750 million in senior unsecured notes to repay the credit facility to continue its ongoing moves to deleverage.

- here is the announcement