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Stryker's $2.8B Play To Tackle Hospital Acquired Conditions

Stryker is buying Sage Products, which makes a range of products meant to reduce hospital acquired conditions and hospital "never events" that are expensive to treat. 

Arundhati Parmar

Analysts are looking to Stryker to make more acquisitions in 2016 compared to last year, and the Kalamazoo, Michigan-based orthopedics company has started the show with a $2.78 billion acquistion.

On Monday, Stryker announced that it is buying Sage Products, a maker of hospital infection items for oral care, skin preparation and protection, patient cleaning and hygiene, turning and positioning devices and heel care boots, among other things. Sage's products can prevent hospital acquired conditions (HACs) like pneumonia, pressure ulcers and surgical site infections. In 2015, the company saw sales of $430 million, up 13% from the same period a year ago.

Stryker is using cash on hand to buy the company from Madison Dearborn Partners, a private equity firm, and the transaction will bring a future tax benefit that is expected to be more than $500 million. 

Unlike Stryker's combination with MAKO Surgical, the surgical robotics company, which required significant sales and manufacturing integration with Stryker, the Sage Products purchase will be a straight-forward acquisition, according to Joanne Wuensch, an analyst with BMO Capital Markets.

The move brings a complementary product set to Stryker's MedSurg business, which grew 3% in 2015 to $3.9 billion. But more strategically, it gives Stryker something to help hospitals attack an expensive and largely avoidable problem: hospitals acquired conditions (HACs).

"Specifically Sage's products are geared at reducing never events/infection prevention," wrote Richard Newitter, an analyst with Leerink Partners, in a research note Monday. "This is an area in which [Stryker] has been acquisitive historically -- albeit through smaller transactions (e.g., Ascent, Patient Safety acquisitions). But it's one that in our view is increasing becoming a greater focus for hospitals as institutions look to minimize avoidable (and burdensome) expenses associated with so called 'never events.' "

The estimated additional cost to treat a hospital acquired condition like surgical site infection is $21,000 per patient, according to the Agency for Healthcare Research and Quality.

The chief executive officer of Stryker stressed how important preventing infection is to the company.

"This acquisition aligns with Stryker's focus on offering products and services that support a mindset of prevention, specifically in the area of 'Never Events' such as hospital acquired infections," said Kevin Lobo, in a prepared statement. 

As hospitals have focussed on reducing the problem of hospital acquired conditions, those rates have been declining. The final estimates for 2013 show a 9% decline in the rate of HACs in 2013 from 2012, and a 17% decline to 121 from 145 HACs per 1,000 discharges, from 2010 to 2013, according to the Agency for Healthcare Research and Quality

While a strategic buy for Stryker, the price tag is hefty, coming in at six times Sage's 2015 sales, according to several analysts. But Stryker has more than enough cash for more deals. 

"... we do not believe it precludes other acquisitions given its balance sheet, ending 2015 with $4.1 billion in cash and marketable securities and [about] $4 billion debt on the balance sheet," Wuensch of BMO Capital Markets wrote. 

[Photo Credit: iStockPhoto.com user NicolasMe]

Arundhati Parmar is senior editor at MD+DI. Reach her at [email protected] and on Twitter @aparmarbb 

Read about the Biggest Medtech M&A Deals of 2015. And to understand industry trends, attend the MD&M West Conference, Feb. 9-11, at the Anaheim Convention Center, Anaheim, California.
 
 
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