Alachua, Florida-based RTI Surgical, Inc. has entered into a definitive agreement to acquire New York-based Paradigm Spine, LLC, in a cash and stock transaction valued at up to $300 million.
The terms of the transaction call for RTI to pay $100 million in cash at closing, transfer 10,729,614 shares of RTI common stock to Paradigm’s lenders and equity owners, representing $50 million of value, and agree to potential future milestone payments which raise the full transaction value to a potential $300 million.
With this purchase, RTI acquires the coflex® Interlaminar Stabilization® device, which had received a premarket approval (PMA) from the FDA in October 2012, a PMA for the coflex disposable instrument kit in May 2018 and has been implanted in more than 160,000 patients to date.
The New RTI
This transaction, which is expected to close in the first quarter of 2019, brings an immediate boost to RTI’s annual sales of approximately $40 million but it also represents the continuation of CEO Camille Farhat’s ambitious, disciplined and innovative plan to revitalize the perennially underperforming RTI Surgical.
Farhat’s strategy leverages the spine and tissue aspects of its business to fuel its growth and differentiate from competition. One part of the business is focused on tissue and delivers moderate growth and predictable cash. RTI takes that cash and deploys it into high-growth spine investments. That cash on hand is what allows the company to be unique and bold in how it grows. Farhat has also set in motion a transformation within the company focused on reducing complexity, driving operational excellence and accelerating growth.
Before Farhat arrived, despite growing sales 128% in the prior 18 years, RTI’s market value had fallen 16%. In other words, lots of activity but no forward motion. Losing money in 10 of those 18 years—as RTI did—didn’t help.
Pre-Farhat, fastest growing income statement category was marketing, general and administrative expense, which rose 551% between 2000 and 2018.
Even more troubling, people left RTI to—it pains me to report this—form innovative allograft companies based on living cell allografts, nerve allografts or amniotic tissue allografts—which were worth a combined $2.9 billion earlier this year.
Something had to change.
The change agent RTI’s board hired was a former General Electric, Medtronic, Baxter and American Medical Systems executive named Camille Farhat.
Mr. Farhat came to RTI with no prior experience in either allograft or spinal implants—two industries beset with pricing pressures and stiff regulatory headwinds.
At the poker table of spine and allograft companies, Farhat was the fresh-faced kid with a fistful of dollars. The other players must have licked their chops.
Changing the Hand That’s Dealt
When we asked Farhat about the hand he’d been dealt, he said “This company has a lot of value. There is a lot of technology here. But there was also a lot of experimentation—a few chips here, a few chips there. That was an issue. We were subscale in many markets.”
So Farhat focused on RTI’s strengths and then reimagined the business model. “We needed to go back to our roots to go forward,” he said. “RTI is the company known for making allograft safe and we needed to rekindle that innovative spirit.”
It’s been almost two years. Under Farhat’s leadership, RTI’s stock is 45% more valuable today and, for the first nine months of 2018, RTI earned (adjusted for acquisitions and write-offs) $26 million—the strongest report in years.
Finally, in a sign that RTI did have underperforming technology, his R&D and product development team won the Orthopedics This Week Best Spine Technology Award for 2018 (TETRAfuse 3D Technology).
