Orthovita, Teva in separate merger deals

Posted: May 17, 2011

Two local companies on Monday surged in the vortex of mergers in the pharmaceutical and medical-device industry - mergers being prompted in part by the worldwide discussion of health-care costs.

Medical-device manufacturer Orthovita Inc., of Malvern, was the latest small local company to be swallowed by a larger outfit. Stryker Corp. agreed to buy Orthovita for $316 million.

And Teva Pharmaceutical Industries Inc., which is based in Israel but has its North American headquarters in North Wales, said it would spend $460 million for a controlling share in a Japanese company in the hope of increasing its dominance in the generic-drug market.

Earlier in May, Teva announced it would acquire Frazer-based Cephalon Inc. for $6.8 billion.

In April, global health-care giant Johnson & Johnson said it agreed to buy West Chester-based medical-device-maker Synthes Inc. for $21.3 billion.

Global pharmaceutical and medical-device companies have been picking over the smaller companies in this region for decades. Recently, a mix of market forces has prompted more acquisitions than occurred during the depths of the recent recession.

Big companies are fretting about their own research pipelines, and health-care costs are a pressing concern for family and governmental budgets, but also for businesses, for-profit or not. Efficiency is a key for all.

"As hospitals and providers of health care get larger, they might want to deal with fewer and fewer vendors," said Raj Denhoy, an analyst with Jeffries & Co.

Bigger companies that can offer everything from sutures to surgical tools to pain pills might have an edge in that environment. Stryker, of Kalamazoo, Mich., is 323d on the Fortune 500 list.

"One of the relatively unusual things about Stryker is that it is growing in different areas," Denhoy said. "They can take the techniques they'll have in Orthovita and apply them across a broad range of systems. They have the footprint and scale to do it better than Orthovita did on its own."

In the all-cash offer, Stryker agreed to pay $3.85 per share for 79 million outstanding shares and assume $12 million in debt. Orthovita shares closed Monday at $3.83, up 40 percent from Friday's close.

Orthovita is referred to as an orthobiologic company within the pharmaceutical and medical-device world, meaning it produces compounds from a variety of natural sources. Orthovita makes bone grafts, bone augmentation materials, and a compound designed to reduce bleeding during surgery.

What about job losses among the 150 people in Malvern and an additional 100 worldwide?

"A lot of people around here have been asking that," Nancy Broadbent, Orthovita's senior vice president and chief financial officer, said Monday. "What's terrific is that Stryker does not have an orthobiologic unit, and it will establish a division right here in Malvern, so we don't expect any job losses."

None?

"Virtually none," Broadbent said.

Will you be hiring?

"We could be," Broadbent said, though she said she was unsure she would remain with the company.

Broadbent has lived in the Philadelphia area for 15 years, and she says she understands the angst of seeing a local company bought by a larger, out-of-town entity. Yet she called the purchase a good thing - and not just because, as a company officer, she stands to gain financially.

"We started from zero in the 1990s and built a company with $95 million to $100 million in sales," Broadbent said.

She argued that with Stryker's plans to make the Malvern facility a new division, the key issue - jobs - will matter more for local people than civic pride.

Cephalon (and perhaps local Teva) employees might be on edge about Teva's acquisition of Cephalon, but Cephalon would have lost more jobs had a rival bidder, Canada's Valeant Pharmaceuticals, won that tussle.

Also, Orthovita's portion of the health-care market has been hit harder than some by the recession. Many of Orthovita's products are used in spinal surgery. Just as with hip and knee replacements, patients have put off such operations when they lose or fear losing a job. Trauma surgery, for broken bones and life-threatening injuries, is often deemed more necessary and has not fallen off as much.

"For the shareholders, this is a tremendous premium from where the stock had been trading, which was $2 to $2.30 for most of the year," Broadbent said.

Teva bought Cephalon in part to diversify its business with branded pharmaceuticals because it is already the world leader in generic drugs, so it understands the pressure of pricing. Indeed, it tries to profit from that pressure.

On Monday, Teva agreed to pay $460 million to acquire 57 percent of Taiyo Pharmaceutical Industry Co. Ltd., the third-largest generic-drug manufacturer in Japan.

Taiyo is a private company. Teva chairman Shlomo Yanai said in a conference call with analysts that Teva had offered to buy the remaining shares in what would amount to a $1.3 billon purchase. Yanai said that the Japanese government hoped to increase the use of generic drugs in Japan from the current 23 percent to 30 percent by 2012 and that Teva could benefit.

Are more acquisitions to come?

"We can do more," Yanai said. "But it has to fit strategically."


Contact staff writer David Sell

at 215-854-4506 or dsell@phillynews.com.

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