Stryker's M&A strategy for the next five years: Where is spine headed?

Written by Laura Dyrda | November 30, 2018 | Print  |

Stryker made significant inroads into the spine market by acquiring K2M for $1.4 billion in late August. Since then, the company has focused on the integration and its growth strategy for the coming years, even as the spine market seems to flatten out.

Medtronic CEO Omar Ishrak said in the company's second quarter fiscal year 2019 financial report conference call that the spine market has stabilized. Stryker has also reported stagnant spine sales growth, and in some cases decline, for its spine business over recent quarters.

"Spine is challenged in the core spine area. We're seeing some stabilization there although pricing pressure remains pretty high," said Stryker Vice President of Strategy and Investor Relations Katherine Owen during an interview at the ISI HealthCONx Conference in Boston, held Nov. 28. Her quotes were transcribed by Seeking Alpha. "Our spine business, that's been seeing very good growth, but it's more on the core spine business that has been challenged. Obviously we've made the pending acquisition of K2M. So, I think we'll be in a much better position from a competitive standpoint."

While K2M's core spine business has been down, Medtronic reported core spine growth. The interviewer asked Ms. Owen how much of that difference in core spine performance was a market dynamic for Stryker as opposed to other companies. There are more than 600 spine companies in the market, which drives pricing pressure, especially on the commoditized products.

"I think the market overall feels stable, but it'd be way too premature to say we're going in. I think too there's some kind of acceleration in spine, but it is the largest segment of orthopedics. There is a tremendous unmet need for patients and real opportunity for innovation," she said.

The K2M acquisition will refresh Stryker's core spine offerings with a longer product cycle, and Stryker reported double-digit growth with its 3D printed technologies. "But [with the acquisition] we'll get that immediate refresh and we also get a much stronger presence in deformity, which really drives a lot of the surgeon key opinion leaders and decision making," said Ms. Owen. "It's a very nice complement to our portfolio, and it gives us great leadership. We're bringing in Eric Major as CEO and he's going to run our spine business for us. So I think we'll be well-positioned there, but we're not making any assumptions that we're in the beginning of an accelerating spine market."

Ms. Owen said while the company has received some pushback against the K2M acquisition, it was less than the company experienced when acquiring Mako Surgical. She expects next year Stryker will focus on integration, and then the company expects to see acceleration in the spine space to drive the business above its overall organic growth.

"The next five years is going to look very similar to the M&A of the past five years," said Ms. Owen. "Each of our divisions has dedicated ED people, looking at targets. If you look at the deals we've done over the last 10 to 12 years, the vast majority are relatively small midsized tuck-in deals." More recently, the company has had big deals exceeding $1 billion to $2 billion of Sage, Physio and K2M. Will there be more in the future?

"I would assume over the next five years, there will be some of those, whether or not we ever do anything transformative, it would have to be incredibly financially compelling and incredibly strategically compelling," said Ms. Owen.

The company has been committed to acquiring knowledge on 3D printing, with a dedicated printing facility in Iowa that it adds printers to on a near monthly basis. But, it won't necessarily drive growth in Stryker's knee and spine implants business. "I don't know when we'll get to a lot of R&D being used and focused on 3D printed products," she said. "It will never be the entire portfolio; it's always going to be those products that you can't manufacture any other way."

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