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Wright Medical’s (NASDAQ:WMGI) decision to sell its hip and knee implant business to MicroPort Scientific (OTCPK:MCRPF) will net it $290m if the deal comes off, but could cause the movement of far greater sums in its implications for the wider ortho industry.

The deal could accelerate the formation of a market for cheaper, older hip and knee products – although older hip implants have attracted safety worries – thereby putting other ortho firms under pricing pressure. What remains of Wright would be more concentrated on its biologics, led by its recombinant bone graft Augment, but biologics are under much scrutiny, and FDA approval for Augment is still uncertain. Wright could find that it has escaped one troubled area only to focus on another.

The other interesting point about the cash transaction, expected to close this quarter or early in the fourth, is its price. Wright’s OrthoRecon hip and knee replacement business sold $269m in 2012, and demand for these implants is growing at 17% in China, the company says. But MicroPort – based in Hong Kong – picked it up for just 1.1x sales. All the stranger given that Wright claims that there were “several suitors” for the business.

Still, Wright has cited OrthoRecon's falling profitability, primarily driven by revenue declines, and this helps to explain the low sales multiple. Demand in China might be strong, but overall OrthoRecon product sales last year fell 11% compared with 2011. Wright's foot and ankle business, however, is on the up, increasing 14% in the same period. Perhaps the group was happy to see the back of OrthoRecon even at under $300m.

Parallel

Given the potential shakeup that MicroPort could bring to the hip and knee sector Wright might be well out of it. Derrick Sung, an analyst at Bernstein Research, has suggested that MicroPort could bring about a parallel market for these devices at cut-price rates, almost like the generic drug sector.

Wright was already pursuing this angle to a limited degree by starting to sell implants and instruments almost wholesale to hospitals more cheaply than the usual one-at-a-time model, under its Wright Direct initiative. MicroPort intends to continue this, Bob Palmisano, president and CEO of Wright Medical, said on a conference call.

Investors have always been concerned that a "generic" low-cost Chinese manufacturer could enter the US and disrupt market dynamics, Mr Sung wrote, adding that MicroPort's acquisition of Wright's ortho business could permit it to circumvent regulatory and sales/marketing barriers and challenge the incumbents.

Those incumbents – firms like Zimmer and Stryker – might react to the consequent pricing pressure by developing cheaper lines of their own, selling their older, simpler implants to compete in a value segment, Mr Sung said.

However, the ongoing train crash of Johnson & Johnson’s (NYSE:JNJ) now-withdrawn metal-on-metal hips could warn surgeons off older products, particularly in the US where the danger of litigation is ever-present (J&J’s hip problems worsen with US government probe, February 26, 2013).

Biologic

Overall, the success of Wright’s move hinges in large part on Augment. Mr. Palmisano said that once the graft was on sale in Europe and the US the company would grow by more than 20%.

Augment is an injectable formulation of recombinant platelet-derived growth factor (rhPDGF) in a collagen matrix, and is sold in Australia, New Zealand and Canada, where it is used to aid healing in hindfoot and ankle fusion surgeries. Wright acquired it when it bought its originator, BioMimetic, just seven months ago, and is convinced that US approval will arrive by January 2014 (BioMimetic buy could augment Wright’s orthopaedic offering, November 20, 2012).

But this is not necessarily so. Augment has already been turned down by the FDA once and with concerns growing around Medtronic’s Infuse – a different molecule for a different disorder, but a biologic bone graft and therefore perhaps similar enough – the FDA will not give Augment an easy ride.

Source: MicroPort's 'Wright Turn' Could Lead To Parallel Ortho Market