Published in Health Care
Stryker Corp. headquarters, Kalamazoo, Mich. Stryker Corp. headquarters, Kalamazoo, Mich. COURTESY PHOTO

Stryker M&A strategy focuses on tuck-in deals to maintain growth trajectory

BY Sunday, November 25, 2018 08:30pm

KALAMAZOO — Two deals that closed in recent weeks typify medical device firm Stryker Corp.’s acquisition strategy.

The Kalamazoo-based Stryker (NYSE: SYK) on Nov. 9 completed the $1.4 billion acquisition of Leesburg, Virginia-based K2M Group Holdings Inc., a maker of minimally invasive spinal devices. A little more than two weeks earlier, Stryker closed on a $230 million deal for Invuity Inc. (Nasdaq: IVTY), a San Francisco-based medical technology company that produces lighted and photonic surgical devices.

In both cases, the technology and product lineup of the acquired company fit into an existing core business unit and sales channel.

Those so-called “tuck-in” acquisitions are what CEO Kevin Lobo describes as a “sweet spot” of Stryker’s M&A strategy.

“We tend to look for great technologies that fit in our existing call points,” Lobo said during a presentation at Stryker’s recent annual gathering with brokerage analysts. “We’d love to bring technologies into existing sales forces. That has been a real key formula for success for Stryker for a long time.”

For example, Lobo noted that Invuity tucks into the sales force for Stryker’s instruments segment and has “very novel, very innovative” products where “we already have our sales force calling in that area.”

Meanwhile, K2M Holdings gives Stryker a “proven product portfolio” and “robust pipeline” for the company’s spine business, Lobo said.

“That’s going to take our spine business to a higher growth profile,” he said.

Since 2011, Stryker has completed nearly 30 acquisitions, primarily in core business segments or adjacent product categories, according to a presentation to analysts. From 2011 to 2017, the corporation put $8.6 billion toward M&A, which remains the top priority for capital deployment.

For 2018, Stryker is on track to deploy $2.5 billion in capital for acquisitions, CFO Glenn Boehnlein said at the Nov. 8 analyst presentation.

“This M&A strategy is one of the facets that really ensures that we’ll continue to be a high grower in med tech,” Boehnlein said.

Stryker so far this year has completed four acquisitions, including K2M Holdings and Invuity, and has a fifth pending, a deal for an undisclosed sum for SafeAir AG, a Swiss company that produces a medical device to clear smoke during procedures that involve cauterizing tissue.

Katherine Owen, vice president for strategy and investor relations at Stryker, told brokerage analysts in an October conference call to discuss third quarter results that recent deals have been “very consistent with what we’ve been doing” in M&A. Analysts should expect Stryker to continue that strategy, Owen said.

“The vast majority of the deals tend to be relatively small to midsize. They tend to be tuck-in to an existing sales and marketing infrastructure with the occasional larger bits that we have done,” she said. “And I think as you look forward, you should assume a very similar pattern.”

This past summer, Stryker was the subject of speculation about a possible major acquisition of rival Boston Scientific Corp., a deal that would have created a corporation with $21.5 billion in annual sales. The Wall Street Journal reported in June that Stryker made a takeover approach to Boston Scientific.

Two days after the report, Stryker issued a statement saying that it was “not in discussions with Boston Scientific Corporation regarding a potential acquisition.”

At this month’s analyst presentation, Lobo said Stryker has no need to make a major acquisition to achieve growth targets.

“May we do more deals that are more transformative? We may. We have absolutely no need to do so at the current time,” he said. “We don’t because we have an engine of growth that’s really humming.”

Stryker in October reported sales growth of nearly 8 percent for the third quarter to $3.24 billion. That compares to $3 billion in sales for the same period last year.

Net income increased nearly 36 percent to $590 million, or $1.55 per diluted share. Stryker made $434 million, or $1.34 per diluted share, in the third quarter of 2017.

Nine-month sales grew more than 9 percent to $9.8 billion with net income up 17 percent to $1.48 billion, or $3.90 per diluted share.

Stryker expects organic sales growth in the high end of the 7 percent to 7.5 percent range for all of 2018.

Over time, Stryker’s acquisitions contribute to organic growth, Lobo said. He cited as an example NOVADAQ Technologies Inc., a developer of fluorescence imaging technology that helps surgeons visualize blood flow in blood vessels and tissues. Stryker closed on the NOVADAQ Technologies acquisition in September 2017 for $674 million. The company is now part of Stryker’s endoscopy business within the MedSurg division.

Another past deal now driving sales growth is the 2013 acquisition of Ft. Lauderdale, Fla.-based Mako Surgical Corp. for $1.65 billion. Since fully launching a total knee replacement application in the spring of 2017, Stryker has installed nearly 600 of the Mako surgical robots globally and “is continuing to sell new robots with a healthy pipeline,” Owen said.

The number of acquisitions made over the years enabled Stryker to build “a really strong competence” in M&A, Lobo said.

“We know how to pick the right targets, we know how to pay the right prices, and we know how to integrate,” he said. “You only get good at deals if you do them often. The more you do, the better you get at things and the fact that we’ve been this active is great.”

Lobo acknowledged in the presentation to analysts that more players in the industry getting active in M&A could lead to “price wars” for acquisition targets. 

That’s why the company needs to maintain discipline as divisions scout the industry for prospective deals.

“We have discipline. We’re not afraid to walk away from a deal,” Lobo said. “You have to be disciplined. Once the price goes above a price that will be value-creating for the company, we’ll pause and we’ll let it go. Our divisions know if they come back with another deal, they can do another deal. They don’t miss their turn, so to speak.” 

Sidebar: 2018 Stryker Corp. deals

Here’s a look at the acquisitions Stryker Corp. has made in 2018:

SafeAir AG, Switzerland

  • Description: Produces a medical device to clear smoke during procedures that involve cauterizing tissue 
  • Deal close: Pending
  • Purchase price: Undisclosed

K2M Group Holdings Inc., Leesburg, Va.

  • Description: Maker of minimally invasive spinal devices
  • Deal close: Nov. 9
  • Purchase price: $1.4 billion

Invuity Inc., San Francisco, Calif. 

  • Description: Medical technology company that produces lighted and photonic surgical devices
  • Deal close: Oct. 23
  • Purchase price: $230 million

HyperBranch Medical Technology Inc., Durham, N.C.

  • Description: Developer of medical devices based on proprietary polymer and hydrogel sealants for trauma and surgical wounds
  • Deal close: Oct. 1
  • Purchase price: $220 million

Entellus Medical Inc., Plymouth, Minn.

  • Description: Producer of products for minimally invasive treatments for ear, nose and throat diseases
  • Deal close: Feb. 28
  • Purchase price: $697 million
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