Stryker's $375 million purchase of Small Bone Innovations contradicts the belief that following the Medtronic-Covidien deal, large device companies aren't going to be looking for smaller, tuck-in acquisitions.
It’s a small acquisition helping Stryker access the high-growth ankle market, wrote Richard Newitter, an analyst with healthcare investment bank Leerink Partners, in a note to investors Monday.
After the mega deal marrying Medtronic and Covidien was announced earlier two weeks ago, several analysts felt that small, tuck-in deals would be less important as companies sought larger deals to effectively contend with the ramifications of the Affordable Care Act.
This is how Newitter’s colleague Danielle Antalffy viewed the medtech M&A sector after Medtronic’s bold acquisition of Covidien was announced:
With this acquisition now underway, mid-cap companies that were previously considered consolidators may have to revisit their M&A strategy and consider larger transactions in order to compete more effectively. As well, the same mid-cap companies could also now be in play as assets for a larger acquirer as consolidation moves toward increased scale. While we think small-cap acquisitions are still in the cards over time, for now they may take a backseat as larger megadeals are announced for strategic reasons beyond growth (i.e., tax inversion, freeing OUS cash).
Another analyst echoed Antalffy’s thoughts:
“While the sector will move higher on the prospects of further M&A, we believe the recent [Zimmer-Biomet] announcement and now the [Medtronic- Covidien] announcement, suggests that the larger-cap companies are now thinking about bigger deals, and not tuck-ins,” wrote Glenn Novarro, in a research note following the announcement from Medtronic. “In our opinion, this means small-cap medtech companies in cardio, spine, and extremities may no longer be targets over the near to intermediate term.”
The Stryker acquisition of Small Bone Innovations appears to be directly contradicting this thesis.
The deal is miniscule - $375 million compared with the gargantuan price tag Medtronic will pay - $42.9 billion or even the $13.35 billion Zimmer intends to pay to buy Biomet.
Yet, the rationale for the deal seems to be pretty solid. Small Bone Innovations brings a total ankle replacement product to Stryker, something it did not have previously, Newitter wrote.
“We believe the transaction represents a logical move to expand the company's portfolio in one of its fastest growing franchises (foot & ankle) and perhaps most importantly gives SYK a product to tap into the underpenetrated and rapidly growing total ankle replacement (TAR) market, an ~$100M WW market opportunity that is growing in the mid-to high-teens,” he said in his research note.
Small Bone Innovations also makes finger, wrist, and elbow products and total sales were $48 million in 2013, according to a Stryker press release. That meams Stryker is paying a 7.8 times 2013 sales to buy Small Bone Innovations.
Not all agreed that tuck-in acquisitions would take a hiatus as larger deals flood the market following Medtronic’s purchase of Covidien more than two weeks ago.
“I don’t think the level of tuck-in acquisitions is going to change,” said Robert “If I were the small guy and I saw half a dozen potential acquirers a year ago and there’s only four now and the number is only going to get smaller, I think I’d want to negotiate sooner than later.
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