How K2M will fit into Stryker's business model — will it affect long term financial targets?

Written by Laura Dyrda | September 07, 2018 | Print  | Email

Stryker signed an agreement to acquire K2M last week, a fast-growing spine device company focusing on minimally invasive solutions for complex spinal surgery on Aug. 30 for $1.4 billion.

At the 2018 Wells Fargo Securities Healthcare Conference on Sept. 6, Katherine Owens addressed the acquisition and discussed whether the move indicates a change in the company's sales strategy and financial targets.

"We are incredibly excited about [the acquisition] because as strong as momentum is across Stryker, spine has been a strategic gap for us and this clearly puts us on a path to category leadership with a really innovative portfolio of products," she said. The company plans to give formal guidance on the acquisition during the fourth quarter earnings call next year, but she reiterated Stryker is still committed to its long term financial targets, including:

• To deliver a minimum of 30 to 50 basis points of operating margin expansion
• Hit 9 percent or better earnings growth

"Inclusive of this acquisition, we are still on track to deliver that," she said.

The Washington Business Journal examined the transaction and outlined what it could do for K2M, as well as why Stryker decided to make the deal. Here are five things to know from the report:

1. In recent years, Stryker's spine business has underperformed, with revenue growth of around 1 percent from 2015 to 2017, while other aspects of the company have reported top-line growth. Internal efforts to grow through research and development as well as smaller tuck-in acquisitions did not turn around performance.

2. The acquisition gives Stryker more scale and additional innovation in the complex spine segment, which includes procedures performed by high-volume surgeons that generate significant revenue, according to the report.

3. Stryker could decide to invest more in K2M's research and development, moving its investigational projects forward.

4. Among its recent developments, K2M has 3-D printed spinal implants. The company began using 3-D printed technology to manufacture implants in 2016 and has been on the forefront of that trend. Since then, the company has reported five to eight new spine implants per year, according to the report.

5. For the first half of2018, K2M reported $141.5 million in revenue, an 11 percent increase from the previous year after bringing in new surgeons to use their products in the U.S., Australia and Japan.

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