Two billion-dollar deals in a day – Medtech Mergermania 2016 appears to be on. Stryker had been expected to use its $4bn-plus cash pile to buy, but those hoping for an orthopaedics tie-up with Smith & Nephew were disappointed.
Instead the company has decided to bolster its MedSurg division with the acquisition of Sage Products for $2.8bn. This unit accounted for just under 40% of Stryker’s total revenue last year, but with the addition of Sage’s $430m 2015 revenues it will take over from the Reconstructive segment – its orthopaedic implants – to become Stryker’s largest division (see table). Stryker is no longer mainly an orthopaedics company.
Sage makes devices for use in the ICU, including products to help wash patients and systems to help nurses turn them in bed. According to analysts at BMO Capital Markets, the private Illinois-based group is market leader in all of the segments it serves. Its four divisions are infection prevention, basin elimination, skin injury prevention and healthcare worker injury prevention.
|Stryker changes focus|
|Global sales ($m)|
|Segment||2013||%||2014||%||2015||%||2015 plus Sage||%|
|Neurotechnology and Spine||1,658||18%||1,741||18%||1,828||18%||1,828||18%|
|Total company revenues||9,021||100%||9,675||100%||9,938||100%||10,385||100%|
While many people were expecting more consolidation in the orthopaedics industry – Ernst & Young experts told EP Vantage exactly this in October – Stryker’s decision to bulk up its hospital products is by no means a foolish one.
Hospital budgets have shrunk over the years and buyers are increasingly motivated not just by low prices but by the cost savings products can offer. Sage’s cleaning technologies are designed to mitigate or eliminate hospital-acquired infections such as MRSA that can vastly increase the cost of patient care. Some insurers, including the CMS, refuse to cover what they consider preventable complications.
The deal is expensive at 6.4x sales. But Sage is growing fast; its 2015 sales of $430m were up 13% from the previous year, Stryker said. Despite Stryker’s recent focus on expanding its sales in non-US and emerging markets it has opted to buy a company that makes 95% of its money in the US.
Stryker will finance the purchase of Sage from the private equity concern Madison Dearborn Partners with a mix of cash and debt. The transaction will come with a $500m tax benefit for Stryker, though BMO analysts wrote that in 2016 its tax rate was now expected to be 18.0-18.5%, versus 17.0-17.5%, given that most of Sage’s sales are US-generated.
The company says the transaction will be accretive by 5¢ – increasing its 2016 EPS guidance to $5.55-5.75 – and will add to cash flows over the next 15 years.
Stryker ended 2015 with $4.1bn in cash and marketable securities and $4bn debt, and as acquiring is a key part of its corporate plans more deals should be expected. The sectors it might target are less predictable.
So after folding Sage’s products into its MedSurg division – it has not explicitly said it would do this but there is nowhere else sensible to put them – Stryker will predominantly be a hospital products company.
Unless that longed-for Smith & Nephew acquisition materialises, of course.