Wright Medical Deal Chances Enhanced After Mako: Real M&A

Wright Medical Group Inc. (WMGI)’s chances of becoming the next target in orthopedic surgery may be increasing after Mako Surgical Corp. (MAKO) last week received one of the industry’s fattest takeover premiums.

Wright, a $1.2 billion maker of ankle replacements as well as implants to fix hammertoe, a deformity of the toe joint, is a prime acquisition target because of its growth prospects, Summer Street Research Partners said. Wright’s sales are projected to top $600 million by 2017, up more than 150 percent from this year, according to analysts’ estimates compiled by Bloomberg.

Stryker Corp. (SYK) last week offered Mako, which pioneered the use of robot-assisted surgery in orthopedics, a price that’s 89 percent more than the stock’s 20-day average, the second-highest premium ever paid for a medical-products deal larger than $500 million, data compiled by Bloomberg show. To capitalize on technological advancements in orthopedic surgery and help restart growth, other large device makers such as Zimmer Holdings Inc. (ZMH) and Johnson & Johnson (JNJ) also may be looking at acquisitions, Piper Jaffray Cos. said.

“The appetite is out there,” Matt Miksic, a New York-based analyst at Piper Jaffray, said in a phone interview. “From the target side, there are some in the growthier, more attractive medical-device markets. Wright Medical is one.”

Julie Tracy, a spokeswoman for Arlington, Tennessee-based Wright, declined to comment on whether the company has been approached by suitors or is weighing a sale.

Big Premium

Representatives for Warsaw, Indiana-based Zimmer and J&J in New Brunswick, New Jersey, declined to comment on their interest in acquiring orthopedic-device makers.

Stryker agreed to pay $30 a share for Mako, which had an average price of $15.90 in the 20 days leading up to the Sept. 25 deal announcement. It’s the industry’s biggest premium since J&J offered breast-implant maker Mentor Corp. a record 101 percent in 2008, data compiled by Bloomberg show.

The transaction values Mako at $1.35 billion after accounting for its net cash. At about 12 times its sales for the past year, that’s almost triple the industry’s median takeover multiple, the data show.

While Wright’s enterprise value of 4.5 times next year’s estimated sales is the highest among its orthopedic device peers, it’s still a fraction of what Stryker is paying for Mako, the data show. Wright jumped 1.9 percent the day of the deal, and the stock is up 26 percent this year.

Today, Wright fell 0.1 percent to $26.39 at 9:59 a.m. New York time.

Growing Market

The market for orthopedic extremity devices, in which Wright operates, will grow by more than 6 percent a year to about $5.3 billion by 2021, according to Toronto-based Millennium Research Group Inc., which studies the medical-technology industry.

“Demographic factors -- such as the aging U.S. population, the expanding active population, and the increasing incidence of obesity, osteoarthritis, and osteoporosis -- will drive the number of people that will require treatment with orthopedic extremity devices,” a Millennium Research report published in June said.

Analysts on average project that Wright’s revenue will be about $638 million in 2017, up from the $239 million forecast for this year, estimates compiled by Bloomberg show.

“The potential for many years of solid double-digit topline growth differentiates Wright from its orthopedic peers and makes it a prime acquisition target,” Mark Landy, a Boston-based analyst at Summer Street Research, wrote in a Sept. 25 report.

Takeover Appeal

Wright’s $290 million sale of its hip and knee reconstruction business this year adds to its takeover appeal, according to Brean Capital LLC’s Jason Wittes.

The divestiture “made it a really attractive pure play in foot and ankle,” the New York-based analyst said in a phone interview. “It’s a very well-positioned, fully-developed business in foot and ankle, which is at this point the fastest-growing market in orthopedics.”

Even so, Wright may not fetch as rich of a price as Mako did, Wittes said.

The valuation Stryker offered Mako shareholders “was surprising,” he said. “Stryker is paying a lot for it. I wouldn’t initially expect others to get taken out at such high premiums.”

Wright’s Chief Executive Officer Robert Palmisano has a history of selling companies. He was at the helm of medical-device maker Ev3 Inc. when Covidien Plc acquired it for $2.5 billion in 2010, and ran Summit Autonomous Inc. until Alcon Laboratories Inc. agreed to buy it for about $900 million in 2000 to enter the laser eye-surgery market.

Other Targets

“Wright is unique in that it’s been skippered by a CEO who is known for tuning up operations in medtech and then selling them,” said Piper Jaffray’s Miksic.

Tornier NV (TRNX), a Dutch maker of replacements for upper and lower extremities, is another potential takeout candidate, Miksic said. Tornier, with a market value of $932 million, is forecast by at least one analyst to have $430 million of revenue in 2017, a 35 percent increase from this year, estimates compiled by Bloomberg show.

NuVasive Inc. (NUVA), which has a market value of $1.1 billion, also may fit what buyers are looking for, according to Mike Matson, a New York-based analyst at Needham & Co. NuVasive’s devices treat spinal problems. Revenue at the San Diego-based company is projected to climb to $855 million in 2017 from $658 million this year, the data show.

Shawn McCormick, chief financial officer at Tornier, declined to comment. Nicole Collins, a spokeswoman at NuVasive, didn’t return a phone call or e-mail seeking comment.

Large medical-technology companies are likely seeking targets with “commercialized products, differentiated technologies, and higher revenue growth that operate in attractive markets” adjacent to their own, Matson wrote in a Sept. 26 report. Among the stocks he covers, NuVasive and Wright “best match this profile,” he wrote.

To contact the reporter on this story: Tara Lachapelle in New York at tlachapelle@bloomberg.net

To contact the editor responsible for this story: Sarah Rabil at srabil@bloomberg.net

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