Farhat quickly realized the way to grow in a highly crowded spinal market is through a focus on differentiation and scale. So, Farhat’s first strategic move was to buy a small, Minnesota-based spine company named Zyga Technology, Inc. which had developed a unique surgical solution for SI joint pain. It was the only minimally invasive procedure that fostered SI joint fusion through decortication. In short, a highly differentiated product.
That purchase put RTI into a market where approximately 850,000 patients in the U.S. were in severe pain, but less than 20,000 were being treated surgically. RTI was now a player in a phenomenal growth market that presented no issues with RTI’s key customer, Medtronic Spine.
With it came a wealth of clinical data.
Then Farhat acquired Paradigm Spine. Paradigm was the company that had brought coflex—another MIS treatment, this time spinal stenosis—another massive market—to U.S. surgeons.
coflex also came with a wealth of clinical data—and importantly, a rare FDA approval.
coflex, which had been implanted in more than 10,000 patients in Europe prior to entering the USA, had an FDA approved level one clinical study, beat fusion as a treatment for patients with moderate to severe lumbar stenosis (up to grade I spondylolisthesis) at 21 clinical study sites around the United States at the 3 month, 6 month, 12 month, 24 month and, over a five-year follow-up period.
Just let that sink in for a minute. Better than fusion. At the five-year mark.
Two years after taking RTI’s reins, Farhat had converted 50% of his spinal implant sales into an 80% gross margin business with these highly differentiated products. As an added benefit, the purchases expanded international sales which now comprise fully 20% of Surgalign sales.
Selling OEM for $440 million, Cash
Buying Zyga and Paradigm required some fairly sophisticated financing legerdemain. As 2019 drew to a close, Farhat and his CFO, Jonathan Singer, had put $174 million in debt and $66 million in preferred stock sales on the balance sheet. Equity, incidentally, was just $35 million.
Importantly, however, RTI’s rate of profitability and cash generation was rising.
Investors were impressed with Farhat’s deft moves but still discounted RTIX’s value because of that strategic box.
On January 13, 2020 that changed.
That was the day RTI Surgical agreed to sell its OEM business to the Montagu Private Equity firm for $490 million. The price would later be adjusted downward to $440 million to account for the COVID-19 effect.
The sale closed on July 20, 2020.
The original RTI tissue processor and OEM business is now owned by Montagu. The RTI spine business is renamed Surgalign (NASDAQ: SRGA) and has no long term debt, no preferred stock, a big bank account, a new CEO (industry veteran Terry Rich) and an intriguing future.
What’s next?
Farhat told OTW, “I would be really surprised if Surgalign, even with COVID-19, didn’t launch over a dozen new products in 2020 and I would probably venture to say the same in 2021.”
Furthermore, says Farhat, the focus of Surgalign will be an extension of his growth through differentiation mantra. “You grow with differentiation. It could be smaller acquisitions that add up to something significant. It could be way beyond just the implant itself and thinking broader across the procedure by asking what can we do to improve the procedure so that we can impact outcome.”
“Whether you believe in evolution or whether you believe in creation, the spine is made to provide stability and mobility, not to be fused. What else can you do to improve the outcome for these patients and try to bring them back as close as you can to normal?”
“We have to keep thinking disruptively and push the standard of care. Surgalign is well-positioned with incredible talent, experienced leadership, a strong balance sheet and a deep pipeline to deliver growth and innovation.
“If you’re just a pedicle screw company, you’re screwed.”
Indeed.
