$408 Million
No. of Employees: 1,200

Kyphon, founded in 1994, has made significant strides in its 13-year history. The company, which develops and markets medical devices designed to restore and preserve spinal function and diagnose low back pain using minimally invasive technologies, kicked off 2007 with an impressive acquisition.

In January, the company closed the purchase of St. Francis Medical Technologies, Inc., a privately held, California-based company that manufactures the X-STOP Interspinous Process Decompression System, the first FDA-approved interspinous process device for treating lumbar spinal stenosis.

The transaction was expected to broaden the company’s portfolio of minimally invasive spine technology by adding the X-STOP to existing KyphX balloon kyphoplasty technologies for repairing vertebral compression fractures and the recently launched Functional Anaesthetic Discography procedure for diagnosing the source of low back pain.

Kyphon acquired 100% of the fully diluted equity of St. Francis for $525 million in cash and additional revenue-based contingent payments of up to $200 million payable in either cash or a combination of cash and stock.

The St. Francis acquisition built on a very successful fiscal 2006 for the company.

For the year ended Dec. 31, Kyphon reported net sales of $408 million, an increase of 33% compared to the $306 million reported for the same period in 2005. Net income for the year also increased 33% to $39.7 million, compared to net income of $29.8 million. Most of the company’s revenues were from domestic sales, but international markets showed significant growth. Net income from US sales was $324 million, and $83.7 million was the result of international operations, representing growth in those markets of 26% and 72%, respectively.

“Although our business in the US in the fourth quarter was impacted by the uncertainty and distraction created by Medtronic’s launch of its Arcuate XP product, we are pleased with our overall performance as our international business saw strong increased procedural penetration in virtually all of its markets,” said Richard Mott, president and CEO. “We achieved several milestones in 2006 that we believe will help us attain our growth objectives. Substantial progress was made in the clinical, regulatory and reimbursement environments, including the publication of the first multicenter, prospective, two-year follow-up data for balloon kyphoplasty, a positive recommendation from the UK’s National Institute for Clinical Excellence for the balloon kyphoplasty procedure, and the establishment of a Category 1 ICD-9 physician reimbursement procedure code specifically for kyphoplasty by the Centers for Medicare & Medicaid Services.”

In December 2006, Kyphon agreed to acquire the non-vertebroplasty, spine-related product assets and associated intellectual property rights of Disc-O-Tech Medical Technologies Ltd., a privately held Israeli company, for $100 million in cash as purchase consideration. The company also agreed to acquire all of Disc-O-Tech’s vertebroplasty assets and related intellectual property rights for a total of another $120 million, payable in three equal annual installments beginning January 2008. An additional $20 million in contingent payments also may be paid based on the development of further technologies.

The first transaction concerns the B-Twin Expandable Spinal System, which is an expandable interbody device for minimally invasive fusion in patients with degenerative disc disease in the lumbar and cervical spine that currently is CE marked in Europe but not approved for use in the United States. It also includes the SKy Bone Expander System, which is available only outside the United States for use in the treatment of vertebral compression fractures. The second transaction concerns Disc-O-Tech’s Confidence Cement System.

The first quarter of 2007 (ended March 31) continued Kyphon’s strong performance. Worldwide net sales reached $128 million (a 40% increase), which includes $18 million of X-STOP product sales. US revenue increased 34% to $101 million, while total international revenues increased 70% to $27 million. Revenue from Kyphon’s spinal motion preservation and disc disease diagnosis and therapies businesses, which includes the X-STOP IPD, Aperius Percutaneous Lumbar Interspinous Decompression and Functional Anaesthetic Discography technologies, was $14.3 million in the United States and $4.2 million in international markets.

The company reported that its core spinal fracture management and repair business revenue grew 20% to $110 million.

Despite the sales surge, Kyphon still reported a net loss of $22 million compared to net income of $8.5 million for the same period a year ago. The reported loss per share includes $40.5 million pre-tax and $31.9 million after-tax, in-process research and development charges and acquisition-related expenses related to the St. Francis acquisition.

In the first quarter, the health insurance company Aetna, Inc. published national coverage for kyphoplasty, which the company hopes will generate more sales. The company also launched its Aperius PercLID system for the treatment of mild to moderate lumber spinal stenosis (LSS) in select European markets. The device, which received the CE Mark in October 2006, is a percutaneous solution used to treat LSS.

For the complete fiscal year, the company expects net sales to increase 40% to 43%, reaching $570 million to $585 million.