Baxter Spends Big on ApaTech to Join Orthobiologics Fray

Baxter International Inc. brought its full and considerable weight to bear to the orthobiologics market by paying handsomely for Apatech Inc., a privately held start-up with a silicate substituted calcium phosphate synthetic bone graft material.

Baxter International Inc. brought its full and considerable weight to bear to the orthobiologics market by paying handsomely for ApaTech Ltd., a privately held start-up with a silicate substituted calcium phosphate synthetic bone graft material. [See Deal] Baxter paid $240 million up front for the right to take on Medtronic PLC, Orthovita Inc. and other companies selling bone graft materials to the spinal market. Ultimately, Baxter will likely pay more than five times the company's 2009 revenue of $60 million, having agreed to kick in an additional $90 million if the bone graft products hit sales milestones.

The acquisition gives Baxter immediate entry into the orthobiologics market, an area it's been circling slowly for the past five years after it first entered into a research and development program with Kuros Biosurgery AG. [See Deal] Through that agreement, Baxter is matching its own Tisseel sealant with Kuros' biologics and fibrin-based binding technology. ( See "Market in Focus: Surgical Sealants and Glues," Medtech Insight , June 1, 2009 (Also see "Market in Focus: Surgical Sealants and Glues" - Medtech Insight, 1 Jun, 2009.).) The combination is expected to yield products that attach growth factors and other bioactive agents to fibrin, thereby enhancing the regeneration of bone and soft tissue. Baxter expects the partnership to bear fruit, but executives simply couldn't wait, having identified regenerative medicine as a potential growth engine to help drive the bioscience business, which is Baxter's largest. "[Regenerative medicine] has been a double-digit grower for us as we look forward into long-range plans there," CFO Rob Davis told attendees at this year's JP Morgan conference. "We'll continue to grow in the 13% to 15% range. This is a very high-margin business for us, one of the higher-margin businesses in the company and it's one where we are making a lot of investments, whether it be through business development or through our own internal pipeline, to continue to enhance and grow this." Baxter sells the majority of surgical sealants and glues in the US, according to our Medtech Insight report, " US Markets for Current and Emerging Would Closure Technologies," published in April 2009.

Davis, speaking at the RBC Capital Markets Healthcare Conference last month, said the ApaTech acquisition delivered both short-term and long-term benefits to the company's growth in biologics. First, "it allows us access into a channel where we really have not promoted our products," Davis says. Second, Baxter intends to combine ApaTech's synthetic bone graft material with future potential products resting in Baxter's research and development pipelines. "So it plays both near-term to help accelerate our business and long-term to really match up well with our pipeline so there's more to come on that."

Baxter's existing regenerative medicine products, including surgical sealants Coseal and Floseal, already are selling well and could be bundled with ApaTech's Actifuse to sell more deeply into orthopedic surgeries. A Baxter spokesman says the company will retain ApaTech's current distributor network as well as Baxter's specialty sales teams. ApaTech has been selling Actifuse in the US and Europe. Baxter put the market for synthetic bone growth substitutes at $150 million in 2009. The market is expected to double in the next five years.

Baxter's bioscience division is its largest, with sales in 2008 of $5.3 billion. Company executives project the business will grow 7% to 9% on a compounded average basis in coming years. It's comprised of five franchises: recombinants, plasma proteins, antibody therapy, vaccines and regenerative medicine. Davis, speaking at JP Morgan, said the biosurgery business is just beginning to grow in international markets, where Baxter does more than half of its business overall. "BioSurgery is one of those areas where, as countries start to really move up the curve on their spending on health care, this is one of the areas, one of the last areas, they move to," he said. Baxter is now beginning to see growth in Asia Pacific, Latin America and Eastern Europe.

Last year, Baxter added to its bioscience offerings through a distribution deal with Takeda Pharmaceuticals International GMBH to market that company's TachoSil hemostasis patch exclusively in the US. [See Deal] Baxter has rights to sell the product in the US through 2022, during which time Nycomed will be responsible for manufacturing. It's marketed internationally but still awaits FDA approval. Baxter also previously licensed its Gelfoam surgical hemostasis kit developed by Pfizer.

In the case of ApaTech, Baxter opted to buy instead of rent. It's unclear if ApaTech drew any other bidders to force Baxter into making an acquisition. Stryker Corp. is rumored to have been interested, but this couldn't be confirmed. Stryker declined to comment, as did Nigel Pitchford, a founding investor in ApaTech. Pitchford, now a partner at Encore Ventures, initially invested in the company in 2001 while he was at 3i plc. 3i led two follow-up rounds in the company in 2004 and 2008, supplying the company with a total of £32.5 ($48.4) million. Pitchford says the company has drawn a steady stream of interested suitors over the past few years. "We could have sold it back in 2007 or 2008" just as the company started selling Actifuse , Pitchford says. "But we felt we did a good job on building management, good sound management, and we had a good product. We had a lot of surgeons using the product and liking it."

Pitchford said one of his 3i partners, a former Baxter employee, helped put the two companies in touch. Pitchford said Baxter showed strong interest in regenerative medicine, but he felt a partnership was more likely than an outright acquisition. "They did enough work with the technology to see how it would fit in the business and how it would be able to leverage the technology across a couple of different development-stage products that have on line," Pitchford said. Pitchford said ApaTech investors had no designs on selling the company, so they didn't use an auction or broker to facilitate a deal.

The acquisition would have presented a nice exit for 3i, but the firm sold off its venture assets last year after deciding to abandon venture capital investing. 3i last fall sold its portfolio for £130 million ($195 million) to Encore Ventures, an affiliate of DFJ Esprit with capital from institutional investors Coller Capital and Harbourvest Partners. Baxter's full payout for ApaTech, £220 million, minus the £32 million invested, would return more than half that amount. Encore Venture owned close to 40% of the company. HealthCor Partners held roughly 20% with second round investor MTI Partners holding just under 10%.

--Tom Salemi