Orthopedic devices giant Stryker Corp (SYK) has recently completed its acquisition of medical devices major Boston Scientific’s (BSX) neurovascular unit for $1.5 billion in cash. The companies forged a definitive agreement on October 28, 2010.
Stryker has paid $1.45 billion to Boston Scientific on the transaction closure including roughly $1.38 billion in upfront payment and a milestone payment of $50 million associated with the commercialization of a device for treating stroke. Moreover, it will pay an additional milestone amount of $50 million on the transfer of some neurovascular unit-related manufacturing facilities.
Boston Scientific stated that it expects after-tax proceeds of roughly $1.2 billion from the sale of the neurovascular business and will register a pre-tax gain of more than $500 million associated with the transaction in first-quarter 2011. However, the divestiture is expected to reduce its 2011 earnings per share by about 4 to 6 cents.
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.
The acquisition bodes well for Stryker’s business model. The neurovascular division complements 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 positions 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. The company 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.
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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