Orthopedic devices giant Stryker Corp (SYK) has forged a definitive agreement to acquire medical devices major Boston Scientific’s (BSX) Neurovascular unit for $1.5 billion in cash.
The Deal
Under the deal terms, Stryker will pay $1.4 billion to Boston Scientific on the closure of the transaction. Moreover, it will pay an additional milestone amount of $100 million on commercialization of a device for treating stroke and the transfer of some Neurovascular unit-related manufacturing facilities to Stryker.
Subject to regulatory clearances and customary closing conditions, the acquisition is expected to close in fourth-quarter 2010. Barclays Capital, a unit of Barclays plc (BCS), is acting as the financial advisor to Stryker on the deal.
The Rationale
Pressed by its slowing core stents and ICD businesses, Boston Scientifichas undertaken a series of management changes and restructuring initiatives. The company plans to expand its footprint in the emerging markets by reinvesting the savings from restructuring efforts into customer-focused and development-oriented areas to boost future growth.
The neurovascular division, which is struggling with depressed sales, is one of the two non-core businesses, which Boston Scientific is divesting as part of its ongoing aggressive restructuring initiatives. The company is also looking to jettison its pain management devices business (also known as the Neuromodulation unit) which also may come with a big price tag.
The Neuromodulation unit makes spinal-cord stimulators to treat severe pain of the lower back and leg and had earned revenues of $285 million in 2009. Besides Stryker, Johnson & Johnson (JNJ) and Abbott Labs (ABT) are the other potential suitors for the division.
Boston Scientific stated that it expects after-tax proceeds of $1.2 billion from the sale of the Neurovascular business and will use half of the amount on acquisitions and the remainder to retire debt. The divestiture is expected to reduce its 2011 earnings per share by about 4 to 6 cents.
Attractive Growth Prospect
The Neurovascular unit, which Boston Scientific obtained through its acquisition of Target Therapeutics in 1997, offers devices such as detachable coils, stents and microcatheters to treat cerebrovascular diseases including aneurysms. It has a strong foothold in the treatment market for stroke, the third most common cause of death in the U.S.
Boston Scientific’s Neurovascular division is a leader in the roughly $900 million global neurovascular market with annual sales of $348 million. The neurovascular products market, which is growing roughly 9-10% annually, is one of the rapidly growing sectors in the medical technology space.
Opportunity to Diversify
The deal bodes well for Stryker’s business model. The Neurovascular division will complement its neurosurgery products range. Moreover, the acquisition provides an opportunity to diversify into a fast-growing therapy market as the company contends with a sluggish orthopedic business accompanied by price and procedure volume headwinds.
The replacement hips and knees markets continue to be affected by the lingering economic softness and the near-term outlook for procedure volume growth is bleak. Stryker’s spine business, in particular, is worst hit by the price/volume slowdown.
The acquisition will position Stryker as the leading player in the neurovascular market. Backed by a strong neurovascular products portfolio and pending launch of a slew of next generation products, the addition of the Neurovascular unit is expected to be a major boost to Stryker’s revenues starting 2012.
Upon completion of the transaction, Boston Scientific’s incumbent Neurovascular president Mark Paul will head the Stryker Neurovascular business. Stryker expects the acquisition to be earnings-neutral to modestly accretive to its 2011 earnings excluding acquisition and integration-related charges.
Neutral on Stryker
Stryker remains well positioned for growth across its Orthopedic and MedSurg divisions driven by new product launches, acquisitions and an improving hospital capital spending backdrop, which has rebounded from a slowdown at the height of the recession. The company’s MedSurg division is benefiting from the synergies from the acquisition of Ascent Healthcare Solutions, a market leader in the reprocessing and remanufacturing of medical devices.
However, Stryker faces pricing and volume pressure on its hip, knee and spine products and a soft reconstructive implant market, which could potentially dent future earnings.The general sluggishness in the orthopedic market represents a key concern. Our long-term Neutral recommendation on Stryker is supported by a short-term Zacks #3 Rank (Hold).
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