Will Stryker Make a Move for Smith & Nephew? 5 Key Thoughts

Spinal Tech

Stryker shares reached a 52-week high last Friday fueling some talk about potential acquisitions in the future, according to a Zack's report.

The shares reached $86.93 at mid-day last Friday, closing at $86.08, with a one-year return of 35.1 percent and year-to-date return of 15.8 percent, according to the report. The company was rumored to have interest in acquiring device company Smith & Nephew, but backed down when Medtronic expressed interest in early June; Medtronic's interest was short lived, however, as Medtronic announced plans to acquire Smith & Nephew's competitor, Covidien, a few days later.


Where does that leave Stryker? Here are five things to know about the company:


1. Much of Stryker's recent growth has come through acquisitions. Last year, the company acquired MAKO Surgical, which includes the Robotic Arm Interactive Orthopedic System. Then this year, Stryker acquired Patient Safety Technologies and Pivot Medical to strengthen its existing sports medicine portfolio. The company's knee business grew 1.1 percent in the first quarter, hips grew 3.1 percent and trauma and extremities grew 8.4 percent.


"We are in the first wave of big acquisitions," says Paul Teitelbaum, managing director and medical device/healthcare IT M&A expert at Mesirow Financial's Investment Banking Group, in a report. "For the next three years, you are going to see an increased number of small- to mid-sized acquisitions in niche areas."


2. One of Stryker's fastest-growing divisions is endoscopy and operating room equipment product portfolio, which was strengthened in April when the company acquired Berchtold. Stryker's many acquisitions over the past year keep the company competitive, but they haven't pulled away from the pack just yet. Johnson & Johnson — with the DePuy Synthes business — is a strong player in the market and competitor Zimmer recently acquired Biomet.


"Competition just got tougher as Zimmer will effectively surpass Stryker to attain the number two spot in orthopedic sales and is now in prime position to compete with market leader Johnson & Johnson," says Frost & Sullivan Advanced Medical Technologies Research Analyst Tara Shelton in a report. "With the deal not closing until early 2015, the effect has yet to be seen in regards to future employment, commodity pricing and innovation."


Could Zimmer's activity drive Stryker to act on Smith & Nephew? Only time will tell, but President and CEO Kevin Lobo was unprepared to act in early June; when questioned about whether the company would commit to an offer in light of Medtronic's interest, Coutts reported Stryker was "forced to rule itself out in a statement to the U.K. Takeover Panel."


3. If Stryker does acquire Smith & Nephew, the transaction would bolster Stryker's position in the knee replacement market and open growth in the wound care management business. Smith & Nephew's market cap is around $16 billion, as the company generates around $4.4 billion in annual revenue. Smith & Nephew shares jumped 12 percent after Bloomberg reported Medtronic was interested; Stryker's shares went up slightly at that time as well.


The acquisition would also allow Stryker to move its legal headquarters to the United Kingdom, where Smith & Nephew is based. Medtronic recently announced it would move headquarters overseas to Ireland, where recent acquisition Covidien is based. Moving overseas could impact the device company's tax rate, which could be a driver in the acquisition, according to Edison Investment Research Analyst Mick Cooper.


4. Stryker expects to report adjusted EPS at $2.75 to $4.90. The Zacks Census Estimate is at $4.81. Stryker carries a Zacks Rank #3 (Hold), according to the report. Stryker reported net earnings of $70 million during the first quarter of 2013, significantly down from the same period last year when net earnings were $304 million. However, gross profit was up slightly for the first quarter, at $1.53 billion.


On June 23, Stryker stock price opened at $85.07 after closing at $85.26 the day before. The company's current revenue per employee is $365,440.


5. For the rest of the year, Stryker expects organic revenue growth at 4.5 percent to 6 percent. The company expects an unfavorable foreign exchange rate to impact net sales by less than 1 percent, and feels the company's growth is key to success in the future. The spine business net sales reached $420 million, an increase over the same period last year. The growth was attributed to increased unit volume and changes in product mix, as well as the company's acquisitions.


"The strength of our diversified model was once again demonstrated in the first quarter with solid growth of 5 percent," said President and CEO Kevin Lobo in a news release. "Our continued investments in internal innovation, coupled with our recent acquisitions, position us well to meet our customers' every needs."


More Articles on Orthopedic Devices:
The Volatile Spine Device Market: Mergers, IPOs & International Growth
39 Spine, Orthopedic Devices Receive FDA 510(k) Clearance in May
Medacta USA Opens New Headquarters in Chicago: 5 Key Takeaways

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