Stryker aims to boost flagging spine division with $1.4B acquisition of K2M
Analysts say that Stryker’s purchase of a small but fast-growing public company in the complex spine market should help its own struggling spine business.
Orthopedics company Stryker announced Thursday that it is buying K2M Group Holdings, a maker of 3-D printed implantable, minimally invasive spine products, for $1.4 billion. Analysts reacted positively pointing out that while a small player K2M will help to boost Stryker’s spine division that has not been performing well as of late.
K2M is a public company based in Leesburg, Virgina with annual sales of $300 million and is known as a leader in the 3-D printed implant complex spine market.
“[K2M] along with [Stryker] are the two leading 3D printed implant manufacturers in Spine currently,” wrote Richard Newitter, an analyst with healthcare investment bank Leerink Partners, in a research note following the announcement from Stryker. “The company also has had success driving share gains in the complex spine (deformity) segment with its MESA Rail technology platform. The company’s customers are very sticky and our feedback over the years from spine surgeons has suggested very high marks on [K2M’s] products.
Newitter noted that the acquisition should be positive for Stryker’s “subscale spine division, which has been struggling in recent [quarters]. (really the single division for [Stryker] that hasn’t been outperforming).”
Stryker’s chief executive officer hopes the purchase will increase the company’s profile with spine surgeons
“We believe K2M will significantly enhance our presence with surgeons, patients and employees in both the spine and related neurotechnology markets,” said Kevin Lobo in a news release.
The transaction is expected to close later this month following the appropriate regulatory waiting period and a vote by K2M shareholders, among other closing conditions.
Another analyst saw the deal as slightly bigger than Stryker’s regular tuck-in deals but ultimately in line with the Kalamazoo, Michigan company’s penchant for acquiring fast-growing companies that complement its product portfolio.
“While the K2M acquisition is larger than the typical [Stryker] deal, typically [about] $100M in sales, the product profile of K2M fits the bill, adding products that will add to [Stryker’s] complex and minimally invasive offerings,” wrote Ryan Zimmerman, an analyst with BTIG, in a research note Thursday. ”
Zimmerman also noted that Stryker’s decision have Eric Major, the CEO of K2M to lead the combined Spine division was a good move, implying minimum disruption as the two companies merge. Stryker’s current president of the spine division will help with integration efforts and moving his responsibilities over to Major.
“In addition, with Eric Major, CEO of [K2m], retained as head of [Stryker] Spine, we expect [Stryker] to improve its sales force through the combination of the two entities while keeping the best reps amongst the two sales forces,” Zimmerman wrote.
Leerink Partners’ Newitter echoed the difficulty of spine-market mergers, writing, “Spine mergers in general are often associated with integration headaches and sales force disruption, but in our view, K2M should be a fairly straightforward and “digestible” asset as we view this as a product-oriented tuck-in (not too big, not too small) that adds several differentiated products in expandable cages and deformity, two of the faster growing areas within spine. Also, given that [Stryker] said it intends to keep [K2M’s] existing sales force intact this could minimize sales force integration risk.”
Back in 2007, Medtronic made an expensive, $4 billion acquisition in the spine market bringing in Kyphon and saw years of problems related to sales force integration.