Industry Trend Analysis - RTI Surgical Will Aim To Penetrate Sacroiliac Joint Fusion Market - 29 JAN 2018

BMI View: The acquisition of Zyga Technology will provide RTI Surgical with a highly effective minimally invasive procedure that has strong growth prospects in the sacroiliac joint fusion market. The deal aligns with the strategic expansion of the company's Spine segment, a primary driver of revenue. RTI Surgical is likely to increase its R&D activity and undertake targeted M&A deals to further grow the Spine segment.

RTI Surgical has signed an agreement to acquire Zyga Technology, a spine-focused medical device company that develops and produces minimally invasive devices to treat conditions of the lumbar spine. The company's primary product is the SImmetry sacroiliac joint fusion system, a minimally invasive procedure intended for conditions including sacroiliac joint disruptions and degenerative sacroiliitis. The SImmetry system is known for its ability to create sacroiliac joint arthrodesis, including decortication, bone grafting and fixation with a threaded implant.

Closing of the transaction is subject to filing with the state of Delaware. Upon closing, RTI Surgical will fund the acquisition through a combination of cash and borrowing under its existing credit facility. The financial terms of the transaction were not disclosed.

Strong Prospects For SImmetry In SIJF Market

RTI Surgical will gain a highly effective minimally invasive device that has strong growth prospects in the sacroiliac joint fusion (SIJF) market. According to the company, the sacroiliac joint fusion (SIJF) market has recorded a compound annual growth rate (CAGR) in excess of 20% in recent years and the US market is estimated be worth approximately USD100mn. Although, the SIJF market represents a relatively small proportion of the overall US orthopaedics market, which was valued at approximately USD17.6bn in 2017.

By 2024, the SIJF market in the US is expected to exceed USD200mn, driven primarily by an increase in procedure volumes and adoption by new surgeons. Additionally, clinical evidence demonstrates that SIJF is an effective procedure. The UK National Institute for Health and Care Excellence (NICE) state that current evidence on the safety and efficacy of minimally invasive sacroiliac joint fusion surgery for chronic sacroiliac pain is adequate to support the use of the procedure.

As part of RTI Surgical, Zyga will aim to capitalise on strong growth in the market, increase procedure volumes and drive adoption. Zyga Technology is a small company with approximately 30 employees but will be able to leverage RTI Surgical's larger sales force to boost its overall revenue.

Spine-Focused Expansion Strategy

The deal aligns with RTI Surgical's Spine-focused expansion strategy and the segment will continue to be a primary driver of revenue. The company's strategy is focused on investing in niche, high growth product categories leveraging its core competency in the spine market. The acquisition of Zyga Technologies will provide it with access to a high growth procedure and its addition to the Spine portfolio is likely to accelerate growth.

RTI Surgical entered the spine market after it acquired Pioneer Surgical in 2013 and Spine is its fastest growing business. In addition, the segment is the largest source of direct revenue, accounting for 46% of the total.

Spine Most Important Source Of Direct Revenue
RTI Surgical Revenue By Segment (USDmn) and (%), FY17 (First Nine Months)
Note: Data does not include Commercial and Other revenue which amounted to USD84.1mn. Source: RTI Surgical, BMI

In Q317, RTI Surgical recorded revenue of USD66.7mn, a 0.2% increase y-o-y. Q317 revenues were driven by growth in Spine, Commercial and International, offset by a USD1.6mn reduction resulting from the divestment of the Cardiothoracic business in Q217. For the first 9 months of 2017, RTI Surgical's total revenue amounts to USD208.7mn, while net income totalled USD13.9mn.

Growth Driven By Spine
RTI Surgical Total Revenue And Net Income (USDmn), FY12-Q317
Source: Bloomberg, BMI

RTI Surgical Outperforming Wider industry

2017 was a strong year for RTI Surgical and this is reflected in its share price performance. The company's share price significantly outperformed the wider S&P 500 Health Care Equipment Sub Industry Index in H117, but has performed less well in H217. Investor sentiment has been driven by improved earnings, which have partly been supported by cost saving programmes related to tissue sourcing.

Strong Increase In FY17
Normalised Equity Performance RTI Surgical/S&P 500 Health Care Equipment Sub Industry Index, 2017-2018
Source: Bloomberg, BMI