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DANEK'S $218 MIL. SOFAMOR BUY WILL PROVIDE 50-REP EUROPEAN SALES FORCE

This article was originally published in The Gray Sheet

Executive Summary

DANEK'S $218 MIL. SOFAMOR BUY WILL PROVIDE 50-REP EUROPEAN SALES FORCE and an established network of overseas distributors for the company's spinal implant products. Danek Group and Sofamor, both manufacturers of spinal implants, will merge under a definitive agreement announced March 29; the new firm will be called Sofamor/Danek Group. The terms of the pact call for Danek to issue approximately 7.9 mil. shares of its stock to shareholders of Rang-du-Fliers, France-based Sofamor. Danek stock closed at $27.62 on March 26, the last business day before the deal was announced. In addition to its 40 to 50 European sales representatives, Sofamor uses distributors to market its products in some European markets and in the Pacific Rim. Sofamor provides "an extensive sales and marketing network in France, Hong Kong, Italy, Germany, Spain and Japan," Danek President and Chief Executive Officer Ron Pickard noted in a press release announcing the agreement. He added that "over 65%" (approximately $29.9 mil.) of Sofamor's 1992 $45.5 mil. in sales were in countries outside the U.S. Sofamor earned $7.5 mil. during the year. Pickard commented that the agreement will "significantly increase our international presence" and "provides the international infrastructure to launch new products abroad without U.S. regulatory delays." Danek began developing a distribution network overseas in early 1992 and currently has several contracts. Danek will honor those agreements until they expire. The firm estimates that 8-9% of its fiscal year 1992 (year ended Dec. 31) sales of approximately $75.5 mil were from markets outside the United States. Danek earned $13.1 mil. during the year. Currently, Sofamor markets its products in the U.S. through an agreement with Stuart Surgical Supply. The company will honor the contract through 1996, Danek says. Marketing will then be taken over by Danek, which currently uses over 100 independent commissioned sales reps to sell its products in the U.S. Sofamor adds two spinal fusion systems -- the CD System and the CCD System -- to Danek's product line. The CD implant system is marketed in the U.S., while the CCD system currently is awaiting 510(k) clearance. Danek's core products are the TSRH and TSRH II lines of hooks and rods used to provide spinal support. Among several Danek spinal implant products that recently have received 510(k) clearance from FDA are the Dyna-Lok system of bone plates, bolts and screws, and the Paragon rod and hook system ("The Gray Sheet" Jan. 18, p. 13). Following the merger, Sofamor will operate as a subsidiary of the Sofamor/Danek Group. Danek Group currently is the holding company for two subsidiaries -- Danek Manufacturing of Warsaw, Indiana, its manufacturing arm, and Danek Medical, which performs marketing and distribution functions. Danek manufacturing and Danek Medical will continue as separate subsidiaries of the Sofamor/Danek Group. The merged company will be based in Memphis, Danek Group's current home. Danek says the two firms have made no decisions on the future of Sofamor facilities. Pickard will serve as Sofamor/Danek's president and chief executive officer, and Sofamor founder Yves Cotrel and Chief Executive Officer Phillipe Cotrel will be members of its board of directors, according to Danek. Danek, which currently has long and short term debt of approximately $2.7 mil., will add another $9 mil. in debt through the acquisition. The firm says it "will incur a material, one-time charge to earnings related to transaction costs and other costs associated with the integration of certain of the respective companies' operations." The completion of the agreement is subject to approval from shareholders and the Securities and Exchange Commission.

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