Stryker goes to extrem(iti)es in $4B Wright Medical takeout
- In by far its largest acquisition announced this year, Stryker plans to integrate Wright Medical into its orthopedics business for $30.75 per share, representing a total equity value of about $4 billion, or $5.4 billion including convertible notes.
- CEO Kevin Lobo told investors Monday that Stryker had been looking at Wright Medical “for a long time,” with hopes the deal will bolster Stryker’s position in the fast-growing trauma and extremities markets.
- The deal is expected to close in the second half of 2020 and will not affect 2019 or 2020 full-year earnings, management said. Some analysts expect the combined foot and ankle business to draw antitrust concerns from regulators.
Stryker is set to integrate a company that lost more than 20% of its stock value since its second quarter earnings report in August. Investor uncertainty appeared to stem from disruptive sales force attrition in Wright’s lower extremities business coupled with declining sales of its synthetic cartilage treatment for arthritic toes, which it acquired in its $435 million deal for Cartiva last year.
Still, Stifel analysts said Monday that Stryker’s offer “makes sense for all parties involved” and called Wright’s offerings “arguably the broadest and deepest global extremities portfolio,” noting surgical repair of upper and lower extremities are among the fastest growing medtech end markets. In its presentation to investors following the announcement, Stryker pegged a collective 8% compound annual growth rate for the upper extremities, lower extremities and extremity biologic segments in orthopedics where Wright plays.
Wright Medical is expected to generate $900 million in revenues this year. Stryker said it assumes cost savings of up to $125 million in the first three years after closing.
The announcement Monday morning put an end to weekend speculation stoked by a Bloomberg report saying Wright Medical was exploring a sale. Analysts had pegged Medtronic, Smith & Nephew and Johnson & Johnson as other possible buyers. Executives declined to comment on whether Wright’s sale was a competitive process.
Needham analyst Mike Matson, writing before the deal broke, pegged Smith & Nephew as the most logical acquirer and noted potential antitrust issues in the foot and ankle sectors with a Stryker-Wright union.
RBC Capital Markets analysts shared those foot and ankle antitrust concerns, expecting the combined company to give Stryker “the clear #1 market share position” in that market, ahead of Johnson & Johnson, and require it to unload its STAR total ankle replacement business.
And RBC was skeptical of the deal’s merits.
“We are surprised by the WMGI deal and believe that SYK had better uses of cash,” analysts wrote, also noting a slower-than-expected integration of K2M brings up “questions on whether SYK can integrate the WMGI business without unexpected surprises.”
Stryker’s Katherine Owen, vice president of investor relations, confirmed to analysts on a conference call the anticipated closure in the third quarter of next year factors in expected Federal Trade Commission review. Owen said it is premature to comment on potential divestitures or products that may be discontinued as a result of the combination.
Stryker appears most bullish about how Wright could bolster its upper extremities business in particular, citing its highly specialized sales force, CEO Kevin Lobo indicated on the call with investors. Lobo said Stryker had “been looking at Wright Medical for a long time.”
Lobo said Stryker has not been as strong in upper extremities with its shoulder products only sold in the U.S. The path to “category leadership” was not as fast without adding Wright, Lobo said. Those comments follow Lobo noting last week that Stryker’s shoulder business lacks “much of a dedicated sales force.”
Interest in that market stems in part from a tripling in the annual number of shoulder arthroplasty procedures during the last decade “due to favorable demographics, expanding indications, and improved outcomes,” Stryker said in its presentation.
Spine and shoulder remain the next two expansion targets for the Mako robotic surgery platform, Lobo said.
The deal dwarfs many of Stryker’s other significant acquisitions, including the $1.4 billion takeout of K2M in 2018 and the $1.65 billion purchase of Mako Surgical in 2013. Stryker management said the deal is being financed through available cash and new debt. In the near-term, Lobo said Stryker still has the capacity to do some tuck-in acquisitions.
Shares in Wright Medical were up about 30% Monday, while Stryker’s stock was down more than 4%.
Wright Medical is set to present third quarter earnings Wednesday, Nov. 6.