Ellipse Technologies, Inc., one of the leading young spine technology companies, has agreed to be bought by NuVasive, Inc. for $380 million which includes about $30 million in milestone payments.
Ellipse, whose MAGEC technology was the highest scoring new spine technology award winner in 2011, was founded in 2005 and had recorded sales of approximately $40 million in 2015, which was 54% higher than the $26 million posted in 2014.
Ellipse’s products are marketed and sold in the U.S. and 29 other countries. Revenues outside of the U.S. represented approximately 37% of revenues for 2015. For 2016, Ellipse’s management expects that revenues can reach approximately $60 million on a pro forma basis.
MAGEC
Invented by Scott Pool, Arvin Chang and Blair Walker and engineered by the three inventors and Peter Tran, MAGEC revolutionized the treatment of early onset scoliosis in children.
Before MAGEC, children with significant spinal deformity caused by early onset scoliosis were treated with “growing rods” which were implanted and then surgically lengthened approximately every six months in order to match the child’s growth and to maintain proper spine alignment.
Children had to endure multiple surgeries which, of course, created serious risk of complications to say nothing of the trauma, pain and cost. Some children underwent as many as 15 surgeries over the course of their treatment.
MAGEC changed that. With MAGEC, the child whose spine is being corrected lies awake on an examining table, not a surgical table, for rod lengthening. The device that activates the self-lengthening rod, the ERC, is placed on the child’s back, and within a few minutes, the MAGEC rod stretches out gently.
If the child ever feels discomfort, the doctor can shorten the MAGEC rod until the discomfort disappears. The doctor can confirm specific distraction length with X-ray images.
Using MAGEC is easy, comfortable and fast. Because of MAGEC, spine surgeons were able to distract the rods much more often, for example every month, and thereby curve correct in synch with how the specific child grows.
The MAGEC system is comprised of a titanium alloy rod which the surgeon implants (like any other rod) in pediatric scoliosis patients to correct spinal curvature. The rod itself has two ends that are attached by the surgeon to the vertebrae with either hooks or pedicle screws. The inventors built into the MAGEC rod a cylindrical, radially poled internal magnet which drives a lead screw that moves the two ends apart when the internal magnet is non-invasively rotated by use of the MAGEC External Remote Controller. The MAGEC rod may be lengthened or shortened. A magnetic retaining plate embedded in the outer housing of the MAGEC rod assures the surgeon that the desired distraction length will stay in place even during severe patient movement.
Top Scoring OTW Spine Technology Award Winner
In 2011 Ellipse submitted MAGEC to the august panel of leading spine surgeons for consideration as the leading new spine technology for that year. These top surgeons gave MAGEC the highest number of points that year.
The “Best New Spine Technology Award” is sponsored by Orthopedics This Week and all submissions are judged according to the following criteria:
- Be creative and innovative.
- Have long-term significance to the problem of treating the diseases of the spine. Does this technology have staying power?
- Solve a clinical problem. To what extent does this technology solve a current clinical problem or problem that is inadequately solved today?
- Does it have the potential to improve standard of care?
- Is it cost effective?
- I would use it?
And when these top surgeons assigned a point value to each of these questions, Ellipse’s MAGEC was the top vote getter of 2011.
Adds a $1.2 Billion Market to NuVasive’s Portfolio
Ellipse is about to become part of NuVasive. In NuVasive’s hands, MAGEC’s potential to reduce the number of surgeries, reduce complications and improve outcomes for young patients with early onset scoliosis is very large. According to Ellipse’s management, the global addressable market opportunity for Ellipse’s currently commercialized products was approximately $1.2 billion as of the end of 2014 based on data from Life Science Intelligence, Inc. In addition, Ellipse’s product candidates that leverage the MAGEC technology platform addressed a significant global opportunity of more than 690, 000 annual procedures based on this data.
NuVasive Chairman and Chief Executive Officer Gregory T. Lucier had this to say about the purchase:
“Ellipse’s revolutionary technology, which has been enthusiastically received by surgeons, has the potential to become the standard of care for spine and orthopedic patients. It is in NuVasive’s sweet-spot of game-changing innovation, bolstering our leadership in spine and providing new growth opportunities in the U.S. and around the world. NuVasive remains committed to adult deformity through our Integrated Global Alignment (iGA™) platform, and the acquisition of Ellipse will aggressively insert NuVasive into early onset and idiopathic scoliosis, an important and attractive part of the spinal deformity market for NuVasive where we have tremendous opportunities for accelerated growth. Additionally, this investment expands NuVasive’s footprint into new niche markets with highly differentiated technology that—when coupled with our market-making expertise—will be strategically applied in other spine and orthopedic applications, including degenerative spine disease, trauma and knee osteoarthritis. Ellipse’s robust product pipeline also enhances internal development and licensing opportunities for NuVasive, including areas where we look to assemble with our iGA™ and neuromonitoring expertise. We are very excited to welcome Ellipse’s talented team to NuVasive and look forward to realizing the many operational and financial benefits this transaction creates.”
Edmund J. Roschak, president and chief executive officer of Ellipse Technologies, said, “Ellipse has made enormous strides since our founding ten years ago. Joining forces with NuVasive not only validates the promise of our technology, but provides us with the scale and resources necessary to realize our full potential, to the benefit of our surgeon customers and their patients, faster than we could achieve on our own. Additionally, NuVasive’s longstanding commitment to developing market-leading, less invasive technological solutions represents a tremendous cultural fit. Innovation, a passion for excellence and improved clinical outcomes have all been hallmarks of Ellipse, and ones that I know will continue as part of NuVasive. We look forward to joining with NuVasive to continue to help improve patient lives.”
Wall Street’s Reaction
Joanne Wuensch with BMO Capital Markets wrote: “True to its word, the “new” NuVasive management team put its cash to work and announced the acquisition of Ellipse Technologies, a private Aliso Viejo, CA company focused on complex skeletal deformity For NUVA, 1) it accelerates revenue growth; 2) expands its geographic footprint (~37% of Ellipse’s revenue was generated outside the U.S. in 2015); and 3) broadens its product portfolio, building on its efforts in adult deformity with its Integrated Global Alignment (iGA), moving down the spectrum into early onset and idiopathic adolescent scoliosis, and expanding into niche orthopaedic markets (e.g., trauma and knee osteoarthritis). While an expensive acquisition, it does make strategic sense. Further, as we have written, NuVasive is ‘growing up’ transitioning to a spine solutions company from a spine product company.”
Craig Bijou of Wells Fargo wrote: “We view the deal as slightly expensive at about 6.3x next twelve month sales, however, NUVA expects the deal to be accretive to its top-line growth and EPS starting in 2016. Ellipse markets two magnetically adjustable implant systems for spinal deformity (MAGEC) and leg lengthening (PRECICE) which generated about $40MM (+54%) in sales in 2015. Surgeon feedback on both MAGEC and PRECICE has been extremely positive. We believe the Ellipse deal will enhance NUVA’s growing presence in the $2B spinal deformity market and provide the company with a growth opportunity in the orthopedic limb lengthening market.”
William Plovanic of Cannacord Genuity wrote: “We believe the acquisition fits into NuVasive’s portfolio of innovative spinal procedure solutions while also leveraging NuVasive’s large sales distribution. Additionally Ellipse’s international presence adds to NuVasive’s growing focus on international revenue growth. Lastly, we note the added benefit of minimal CAPX and a solid gross margin, which will provide strong FCF for NuVasive on the incremental revenues. Net, net we view the acquisition positively given 1) it brings a novel technology to the NuVasive bag; 2) it is accretive quickly; and 3) it should provide solid FCF almost immediately.”
The transaction is expected to close by the end of February 2016, subject to customary closing conditions and regulatory approvals. NuVasive expects to fund the acquisition with existing cash on hand.
After the closing of the transaction, NuVasive plans to maintain a Design Center of Excellence in Aliso Viejo, California, where Ellipse is headquartered. Mr. Roschak will join NuVasive as a member of the NuVasive executive leadership team reporting directly to Mr. Lucier.
Goldman, Sachs & Co. served as exclusive financial advisor to NuVasive and DLA Piper served as its legal counsel. Piper Jaffray is exclusive financial advisor to Ellipse and Latham & Watkins is its legal counsel.
