Medtronic Does A Strange Deal

Medtronic (NYSE: MDT) has made some curious moves of late, the most recent of which was the announcement a few days ago that it was buying Osteotech (Nasdaq: OSTE) for $6.50/share in cash ($123 million total).

Like the earlier acquisition of ATS Medical (Nasdaq: ATSI), this is a scratch-and-dent purchase that seems to play to the idea that Medtronic's superior marketing can do more with some interesting-but-not-game-changing technology than these small-caps could.

In the case of Medtronic and Osteotech, Medtronic is buying a small orthobiologics company that has a decent, albeit not exciting, business in demineralized bone matrix products. In simple terms, these are grafts that can be used in procedures like spinal fusion or trauma repair to basically fill a space where bone is supposed to be, with the hope and expectation that bone will then grow into the graft.

In addition to DBM, Osteotech has newer products like MagniFuse, an active biological material taken from allograft but with more human growth factors in it - in other words, allograft bone material with a better likelihood of promoting that bone in-growth. OSTE also has Plexur - a moldable cortical bone and resorbable polymer product.

None of this is going to really shake up business at Medtronic, which already has a sizable orthobiologics business. In addition to InFuse, which is basically a graft laced with recombinant human growth factors that stimulate bone growth, the company is working on getting approval for Amplify. This product (Amplify) is quite similar to InFuse, but carries a higher concentration of the protein ( rhBMP-2) that stimulates bone growth. Unfortunately for Medtronic, though, the clinical results from Amplify have been mixed and a recent FDA panel voted to approve it by the narrowest of margins (6-5).

In any case, Osteotech could be seen as an attempt by Medtronic to back-fill its portfolio and give doctors a more complete suite of biologic options when doing spinal procedures. Plus, I suppose it is at least possible that OSTE has some technology and IP of its own that Medtronic may find useful. After all, if MagniFuse and Plexur were relatively successful new introductions for OSTE, I have to think that Medtronic (and its larger sales support structure) could do even more with it.

For Medtronic investors, this is a yawner. This stock looked cheap before, and it still looks cheap now. I do wonder, though, why the company is now focusing on the small-cap med-tech scrap heap instead of seeking out novel ideas and new technologies.

For Osteotech shareholders, this is the end of a tough road - the $6.50 sales price is the best level this stock has seen in quite a while, and the reality is that Osteotech was going nowhere fast on its own.