Stryker Corp., a maker of artificial knees and hips, agreed to buy a Boston Scientific Corp. unit that makes devices to treat strokes for $1.5 billion to move into faster-growing markets.
The all-cash deal includes a $100 million payment to Boston Scientific contingent on development of a device for stroke victims and on the transfer of manufacturing plants, Kalamazoo, Michigan-based Stryker said in a statement today. The transaction, expected to close by year’s end, may have no effect or add “slightly” to 2011 earnings per share, Stryker said.
Stryker is acquiring a unit whose implantable devices help treat aneurysms and clogged arteries in the brain, a new area for the company. The business comes with “a big price tag” that may seem too high to investors, especially given Stryker’s lack of experience in the market, said Michael Weinstein, an analyst at JPMorgan Securities in New York, in a note to clients.
“The competition will also be fierce,” Weinstein wrote today. “This has been a highly competitive market for quite some time with the target being the market leader, but also the company giving up share” to Johnson & Johnson of New Brunswick, New Jersey, and Covidien Plc of Dublin, he said.
Restoring Sales Growth
Stryker expects new products and better execution will restore sales growth for the unit and that tax benefits will lower the ultimate price paid, Weinstein said. The deal gives Stryker a division that has generated operating margins of more than 30 percent for Boston Scientific, he said.
Boston Scientific said it expects after-tax proceeds of $1.2 billion from the deal and will use half of the money for acquisitions and the rest to retire debt. The sale will reduce 2011 earnings by about 4 to 6 cents a share, the company said in a separate statement today.
Stryker fell 70 cents, or 1.4 percent, to $50.20 at 4 p.m. in New York Stock Exchange composite trading. Natick, Massachusetts-based Boston Scientific gained 7 cents, or 1.1 percent, to $6.38.
Stryker, which has been hurt by slowing global sales of orthopedic implants, had sales of $6.7 billion in 2009, unchanged from a year earlier, said Derrick Sung, a New York-based analyst for Sanford C. Bernstein & Co.
The neurovascular unit generated $348 million in sales last year, the most in a global market worth $900 million, Stryker said in its statement.
Barclays Capital was Stryker’s financial adviser in the deal, the statement said.
Boston Scientific Chief Executive Officer Ray Elliott has moved to sell product lines, cut expenses and refinance debt acquired in the 2006 purchase of Guidant Corp. The world’s second-largest maker of heart devices has been dealing with slowing sales of cardiac stents and surgically implanted pacemakers and defibrillators that help treat heart rhythm disorders.
Boston Scientific announced Sept. 20 that it was buying Asthmatx Inc., a closely held company in Sunnyvale, California, that makes an asthma treatment device, in a deal that could be worth as much as $443.5 million.
Boston Scientific is also looking for a buyer for its neuromodulation unit, which makes implantable products used to relieve pain, said Rick Wise, a Leerink Swann & Co. analyst in New York, in a note to clients today. The unit competes with Minneapolis-based Medtronic Inc. and St. Jude Medical Inc., based in St. Paul, Minnesota.
While the neuromodulation unit “has the best core technology” of competitors in the field, Boston Scientific hasn’t introduced a new product since 2005 and has lagged behind Medtronic and St. Jude in developing brain-stimulating devices to treat serious tremor disorders, Parkinson’s disease and epilepsy, Sung said.
The neuromodulation unit had sales of $285 million last year, compared with almost $1.6 billion for Medtronic’s unit. The comparable St. Jude unit had revenue of almost $331 million, according to data compiled by Bloomberg.