Stryker Corp. is making another big buy, this time picking up Wright Medical Group NV, of Amsterdam, for a total enterprise value of about $5.4 billion. The deal is expected to close in the second half of 2020, and its value exceeds Stryker's previous large deal – that of Leesburg, Va.-based K2m Group Holdings Inc. in 2018 for $1.4 billion.
The deal comes in as one of the top of 2019 so far, surpassed by 3M Co.'s October buy of Acelity Inc. for $6.725 billion, first unveiled in May. (See BioWorld MedTech, May 3, 2019.) It does come ahead of Boston Scientific Corp.'s acquisition of BTG plc for $4.3 billion, wrapped up in August, and is just shy of Ethicon Inc.'s pickup of Auris Health Inc. for $5.75 billion in April.
For its part, Stryker was excited about the deal. "This acquisition enhances our global market position in trauma and extremities, providing significant opportunities to advance innovation, improve outcomes and reach more patients," said Kevin Lobo, Stryker's chairman and CEO.
During a call on the acquisition, Lobo noted that the company has built up its M&A capability over the years. "We expect to continue to pursue deals going forward that are consistent with our history of mostly top-end transactions," he added.
Whether that will require Stryker to divest assets is unclear, with Bank of America analyst Bob Hopkins trying to gain some insight into that question. Katherine Owen, Stryker's vice president of strategy and investor relations, replied that it was "premature" to provide any color on that question. "We obviously did extensive due diligence and got very comfortable with what the combined entity would look like," she added.
I heard a rumor
There had been rumors of a Wright takeover in the past few days, with a report from Bloomberg naming three potential suitors: Stryker, Johnson & Johnson and Smith + Nephew plc (SNN). Wells Fargo's Larry Biegelsen saw the latter as a logical choice, as it did not have a big presence in the upper or lower extremities market.
"SNN is, however, going through a CEO transition, and it is unclear if the new CEO would want to take on a major acquisition this early in his tenure," Biegelsen wrote.
On Oct. 21, Smith + Nephew said that then-CEO Namal Nawana was stepping down as of Oct. 31, to pursue other opportunities outside U.K. Roland Diggelmann has stepped in as CEO.
With Stryker (SYK) coming out on top, Biegelsen said Wright (WMGI) gives the company a boost in the upper extremities/shoulder market – something that was a gap in the Kalamazoo, Mich.-based firm's orthopedic portfolio.
"In lower extremities, WMGI provides SYK with a leading total ankle replacement (TAR) franchise[;] however, we believe SYK will likely be forced to divest its STAR ankle to avoid antitrust issues as WMGI has about 70% share of the TAR market," Biegelsen added.
During a call on the transaction, Stifel analyst Rick Wise speculated that it was not a competitive process, so there was no go-shop period. Katherine Owen, Stryker's vice president of strategy and investor relations, said the company was not going to comment specifically on that. "There is a breakup fee payable to us in case another competitor comes in," she added.
Bigger than a tuck-in
News of the buy comes two weeks after Stryker reported that it had completed the smaller acquisition of Mobius Imaging LLC, which focuses on point-of-care imaging technology, and its sister company, Gys Tech LLC.
So, given the company's tendency to go for tuck-ins, it appears at least one analyst was surprised by this latest buy. Ryan Zimmerman, of BTIG, called the buy "somewhat out of step with Stryker's typical acquisition strategy," pointing to its routinely "stated and executed a strategy of tuck-in acquisitions of a size that is smaller." For that reason, management may need to persuade investors of the acquisition's merits, especially in light of issues with the K2m integration, he noted.
During the recent earnings call, Glenn Boehnlein, Stryker's vice president and CFO, spoke about the integration, highlighting that certain aspects were progressing well. However, others were running behind. "Related to our sales force integration efforts, we are not ramping as quickly as expected as cross-selling, scaling of rep hires and full inventory availability is taking longer than we expected," he explained.
Against this backdrop, Robbie Marcus from J.P. Morgan asked about the company's M&A strategy moving forward, given the size of deal. Lobo noted the company still has the ability to do tuck-ins.
The buy also is giving Stryker the Augment and Cartiva biologic products. As Biegelsen noted Sunday, the Centers for Medicare and Medicaid Services approved Augment for a transitional pass through payment in the outpatient setting after market close Nov. 1. The supplemental reimbursement goes into effect Jan. 1, 2020.
Wright won the U.S. FDA's nod for the Augment injectable bone graft in the summer of 2018. (See BioWorld MedTech, June 14, 2018.) It is a combination product, consisting of recombinant human platelet derived growth factor and a blend of type I collagen and beta tri-calcium phosphate. It provides an alternative to autograft for use in hindfoot and ankle fusion.
During its second-quarter earnings call in August, Bob Palmisano, Wright's president and CEO, heralded the company's biologics performance in the U.S., with 70% growth for the quarter. Augment led adoption, but growth for the division was below expectations.
Morgan Stanley's David Lewis asked about Wright's recent struggles related to Cartiva. Spencer Stiles, Stryker's group president of orthopedics & spine, noted that Cartiva is a wonderful product. "[W]e believe in the long-term clinical viability of Cartiva and remain excited about that technology."
During its second-quarter earnings call, Palmisano said Cartiva had done well in the company's direct sales territories "However, both in total and for Cartiva specifically, the second quarter fell short of our expectations," he admitted.
The company saw quarterly Cartiva sales of about $8 million, negatively affected by a big drop in legacy Cartiva distributor territories, "which declined 40% year-over-year and had sales significantly lower than [first-quarter] levels," he noted.
Cartiva came up during the Wells Fargo Healthcare Conference in September. In a note covering the event, Biegelsen said Palmisano emphasized that Cartiva was clinically sound. Further, the company had conducted a study before buying Cartiva with 200 clinicians, 100 of whom had used Cartiva.
"The same study was conducted again in July 2019," Biegelsen wrote. "Both times, the study yielded similar results with 90% of doctors who used Cartiva noting that they would use it equally or more in their practice and 70% of those who did not use Cartiva noting that they would like to use it."