Stryker’s recent strategy of bolt-on deals to strengthen discrete areas of its business has taken a bit of a turn. Unlike the eight M&A deals it did last year, yesterday’s purchase of Novadaq Technologies for $701m takes it into a completely new area: surgical imaging.
This new capability is an imprecise match with Stryker’s existing technology. Novadaq sells fluorescence imaging systems, intended to allow surgeons to visualise a patient’s blood flow during open surgery – but not generally the type of procedures in which Stryker's core devices are used. Still, Stryker could sell these imaging technologies to the same hospitals already buying its orthopaedic implants and surgical instruments. But the deal was relatively expensive, at a 96% premium to Novadaq’s share price on Friday.
The $701m purchase price includes Novadaq’s $47m cash pile and means that the acquisition is the seventh-largest Stryker has ever done. The company has not said how it is going to finance the deal, but analysts from Oppenheimer assume that it will be at least part-funded with non-US cash; Novadaq is based in Mississauga, Canada.
Despite being loss-making, Novadaq saw its sales grow 25% year-on-year, reaching $80m in 2016. In January it forecast similar growth in the coming year, issuing 2017 sales guidance of $98-102m.
Novadaq’s fluorescence imaging technology can show surgeons the patient’s microvascular blood flow and tissue perfusion during cardiovascular, gastrointestinal, plastic, microsurgical and reconstructive procedures.
The Spy Elite system is used during open procedures, such as breast reconstruction, gastrointestinal and cardiothoracic surgery. The Spi-Phi system is a handheld version that looks a little like a barcode scanner, intended for use in the operating room or smaller spaces such as ambulatory surgical centres. Novadaq also sells Pinpoint, used in laparoscopic procedures, Luna, an angiography system, and two Dermacell products, off-the-shelf acellular skin grafts used during breast reconstruction.
Wells Fargo analysts say Stryker sees the advanced imaging market growing in the teens. They say that the Novadaq deal is similar to many of Stryker’s past acquisitions where the company has acquired a product line and dropped it into its existing commercial infrastructure.
But the move into reconstructive surgery, both in terms of imaging equipment and skin grafts, is new for Stryker. Its only imaging tech before this deal was endoscopy, a very different prospect.
And the company mainly plays in orthopaedic surgery – hips, knees, spine, trauma and extremities – not precisely the type of surgeries Novadaq’s tech is used for. Perhaps Stryker can reposition the visualisation tech for use with ortho procedures – or perhaps in future it might bolster its activities in cardiovascular or colorectal surgeries through other M&A deals.
For now it will simply start to sell its new products along with its current portfolio of devices to its existing hospital clients, and there are some cross-selling opportunities with Stryker’s MedSurg portfolio – instruments and patient management systems. Hospitals are still looking to limit their numbers of suppliers so there is no reason why this strategy ought not work.
There will also be savings to be made, with Stryker’s sales and marketing operation able to take over from Novadaq’s. The deal is expected to be dilutive to adjusted EPS in 2017, neutral in 2018, and accretive thereafter.
Stryker’s investors were not spooked by the impending dilution, and shares were unchanged yesterday. Investors have doubtless come to trust the company’s tuck-in strategy; despite eight acquisitions last year Stryker's stock has climbed steadily, and is up 61% since the beginning of 2016.