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$325 million for disc arthroplasty, again. BY EDITOR, MAY 12, 2003

This week the DePuy division of Johnson and Johnson reached an agreement to purchase the Link Spine Group of Bramford, CT, a unit of the Waldemar LINK GmbH company, Hamburg, Germany for $325 million plus future payments. Link Spine Group's sole product is the SB Charite Artificial Disc.

The Charite was designed at the Berlin Charite Hospital in the early 1980's and further refined in the late 1980's by Waldemar LINK. The device replaces degenerative lumbar discs and relieves pain while maintaining the joint's mobility. Over 5,000 patients have had the LINK' SB Charite implanted. Seventeen patients have had the implant for 10 years or more with excellent results. LINK is currently conducting a prospectively randomized clinical trial at 15 centers in the United States. We estimate that sufficient data for a PMA submission is 9-12 months away with FDA approval two years later.

Last February, Synthes-Stratec paid $350 million for Spine Solutions and their disc arthroplasty system, ProDisc. Again, FDA approval is years away. Minimal sales, significant clinical trial expenses. Worth $325-350 million?

What are these presumably savvy, practical buyers buying? Market share in a market that won't be a reality for 3, 4 - maybe 6 years? We believe the following summarizes the basic thinking of these buyers:

• Disc arthroplasty is to spinal fusion what hip and knee arthroplasty was to hip and knee fusion. Namely, a game changing technology that will, at a minimum, expand the continuum of care for back pain and, at a maximum, supplant significant chunks of the current spinal fusion market.
• The market to surgically relive back pain is very large - but immature. We estimate it is currently generating $2 billion in annual sales. Last year nearly one million patients were surgically treated in the U.S. for back pain. That's up from 516,000 just five years ago. We estimate by 2012 the numbers of patients seeking some form of surgical intervention will have doubled to over 2 million in just the U.S. Interestingly, even at that growth rate, the percentage of patients with back pain seeking surgical intervention will have only risen to 8% in ten years.
• Disc arthroplasty preserves joint motion and is therefore a "more natural" repair than fusion. (Sorta, kinda true, we think.)
• By 2007, at least five and potentially nine disc arthroplasty systems will have FDA approval and be vying for surgeon attention. We estimate these systems will be priced at $3,000 per level and address the needs of 5-20% of the available market. These devices have been for sale for several years in Europe and they amount to less than 5% of the market. We estimate, by 2007, the potential U.S. market will be between $210 million and $840 million.
• Gross margins are high for these products. Assuming DePuy and its spine subsidiary, Acromed (currently #2 in the spinal implant industry), are able to capture 20% of the available 2007 market, the annual contribution to operating earnings could well be $25-80 million for an 8-34% annual return (not discounted).
• Perhaps of even more importance, Medtronic and Synthes (#1 and #3 in spine) have their own disc arthroplasty systems in Europe and in U.S. trials - MDT, in fact, has 3). If DePuy did not have a system, they'd risk losing overall market share. On that basis, the cost of NOT having a disc arthroplasty system was likely higher than the price paid.

One major disc arthroplasty company remains standing and independent. RayMedica. The manufacturer of the most benign of all the disc systems - a little intervertebral pillow called the PDN. Also with the best Owestry pain scores...this is the sleeper whose system may become the one to beat by 2007. Guess who the shareholder's are? Medtronic and Stephens, Inc. (the same investor group whose name adorns that gem of a spine research center in Little Rock, Arkansas).