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Current & Critical

Stryker to Acquire Wright Medical, Bolster Extremities Portfolio

Stryker announced their intention to acquire Wright Medical, effectively boosting their extremities portfolio and making them the clear second-largest player in the orthopedic market by revenue, according to our estimates.

Wright Medical is expected to be purchased for $30.75 per share, equating to an equity value of $4 billion and enterprise value of $5.4 billion (including convertible notes). The acquisition is projected to close in 2H20. Stryker estimates cost synergies between $100 million and $125 million, most of which will be achieved within a three-year period after the acquisition closes. 


What Advantage Does Stryker Gain?

The acquisition affords Stryker access to an upper extremity, specifically shoulder, portfolio of implants and technology and a salesforce to sell them.

Stryker’s extremities joint replacement segment performed above market segment average for the last three years, but has been operating below scale in shoulders, where Stryker has low market share, according to leadership.

The purchase of Wright Medical provides Stryker:

  • A specialized salesforce, particularly for international upper extremities where Stryker has no presence.
  • Access to Wright Medical’s BLUEPRINT upper extremity 3D planning software. Stryker leadership expressed excitement over the technology, and we believe that it could ultimately be integrated into Stryker Mako’s planned extremity and spine expansions.
  • On the lower extremity side, use of Augment injectable biologic for ankle and hindfoot.

 

What Could Hinder the Deal and Integration?

Stryker could face anti-trust issues and dis-synergies within lower extremities due to the overlap in ankle and foot products between the two companies. Stryker’s management team commented several times during the acquisition announcement conference call that it was too early to consider potential divestures that may be required to close the deal. However, analysts have noted that Stryker may need to divest its STAR total ankle.

Additionally, the acquisition comes at a time when Wright Medical’s lower extremities business faces issues with its portfolio, as well as talent retention.

In 2019, Wright Medical has faced the following:

  • Cartiva sales in legacy distributor territories declined 40% in 2Q19 vs. 2Q18. (Cartiva is the manufacturer of the Synthetic Cartilage Implant to treat arthritis in the great toe; Wright acquired Cartiva in 4Q18.) On August 1, all U.S. Cartiva sales were transitioned to Wright’s direct salesforce. Stryker does believe that Cartiva is a great product for the right patient and that they can navigate the recent salesforce issues.
  • Wright’s legacy lower extremities sales growth slowed in 2019. This was mainly due to a decline in the U.S. core foot business, where Wright competes with numerous small private players. In their 2Q19 conference call, Wright commented that they saw a larger than normal attrition rate of their salesforce in the foot market, affecting revenues in the lower extremity segment.


Wright’s management stated that the current issues at hand would persist and lowered their revenue guidance for 2H19. Due to Stryker’s expected one-year timeline to close the acquisition, it is possible that salesforce attrition gets worse. 


What does this Mean for Stryker’s Position in Orthopedics?

Stryker has performed above orthopedic market growth for each of the last three years, and well out-paced its main competitors DePuy Synthes, Zimmer Biomet and Smith & Nephew. The Wright Medical acquisition renews Stryker’s portfolio in extremities—one of the fastest-growing markets—and will firmly seat them in the number two spot in orthopedics and within striking distance of No. 1 DePuy Synthes.

We project Stryker’s 2019 sales to exceed $7.7 billion, +8.3% year over year, and Wright Medical’s sales to reach $899.6MM, +7.6% vs. 2018. Stryker looks well-positioned to carry momentum through 2020.

To understand the acquisition’s impact on Stryker and the industry as a whole, we ran the exercise of combining Stryker and Wright Medical’s 2019 projected overall revenue, as well as total joint and trauma revenue. This is depicted in Exhibits 1 through 3, below. (All 2019 numbers in the exhibits are ORTHOWORLD’s projections from THE ORTHOPAEDIC INDUSTRY ANNUAL REPORT®.) Prior to the proposed acquisition, we ranked Wright Medical as the eighth largest player in orthopedics. Therefore, we included the eight largest orthopedic companies in the exercise.  


Exhibit 1: Total Revenue for Top 8 Orthopedic Players ($Millions)

  Total Orthopedic Revenue  Growth Rate  Market Share 
 Companies 2017  2018  2019P  2018  2019P  2017  2018  2019P 
 DePuy Synthes $8,987.9  $8,828.1  $8,790.4  -1.8%  -0.4%  18.2%  17.2%  16.6% 
 Stryker $6,647.2  $7,126.1  $8,615.0  7.2%  20.9%  13.4%  13.9%  16.2% 
 Zimmer Biomet $6,958.9  $7,081.7  $7,124.6  1.8%  0.6%  14.1%  13.8%  13.4% 
 Smith & Nephew $3,353.4  $3,464.0  $3,622.0  3.3%  4.6%  6.8%  6.8%  6.8% 
 Medtronic $3,059.8  $3,158.0  $3,280.2  3.2%  3.9%  6.2%  6.2%  6.2% 
 Arthrex $2,306.3  $2,514.3  $2,755.7  9.0%  9.6%  4.7%  4.9%  5.2% 
 NuVasive $1,026.7  $1,101.7  $1,165.7  7.3%  5.8%  2.1%  2.2%  2.2% 
 Wright Medical $745.0  $836.2    12.2%  N/A  1.5%  1.6%  0.0% 
 Other $16,407.2  $17,117.7  $17,667.0  4.3%  3.2%  33.2%  33.4%  33.3% 
Total  $49,492.5  $51,227.7  $53,020.6  3.5%  3.5%       

 

Exhibit 2: Total Extremity Joint Replacement Revenue ($Millions)

  Extremity Joint Replacement Revenue  Growth Rate Market Share
 Companies 2017  2018  2019P  2018  2019P  2017  2018  2019P 
 Stryker $153.6  $161.3  $621.5  5.0%  285.3%  7.3%  7.1%  25.2% 
 Wright Medical $338.3  $408.5    20.8%  N/A  16.0%  17.9%  0.0% 
 Zimmer Biomet $404.0  $415.4  $432.3  2.8%  4.1%  19.1%  18.2%  17.5% 
 DePuy Synthes $415.4  $416.8  $413.7  0.3%  -0.8%  19.7%  18.3%  16.8% 
 Arthrex $55.2  $60.0  $66.3  8.7%  10.5%  2.6%  2.6%  2.7% 
 Smith & Nephew $54.0  $53.3  $53.0  -1.3%  -0.5%  2.6%  2.3%  2.1% 
 Other $689.5  $763.9  $879.3  10.8%  15.1%  32.7%  33.5%  35.7% 
Total  $2,110.0  $2,279.2  $2,466.1  8.0%  8.2%       

 

Exhibit 3: Total Trauma Market Revenue ($Millions)

  Trauma Revenue Growth Rate Market Share
 Companies 2017  2018  2019P  2018  2019P  2017  2018  2019P 
 DePuy Synthes $2,513.4  $2,576.8  $2,604.1  2.5%  1.1%  36.3%  35.8%  34.7% 
 Stryker $1,378.1  $1,425.9  $1,810.8  3.5%  27.0%  19.9%  19.8%  24.1% 
 Zimmer Biomet $562.7  $580.7  $595.9  3.2%  2.6%  8.1%  8.1%  7.9% 
 Smith & Nephew $441.0  $426.7  $424.4  -3.2%  -0.5%  6.4%  5.9%  5.7% 
 Wright Medical $282.9  $298.8    5.6%  N/A  4.1%  4.1%  0.0% 
 Arthrex $83.6  $93.1  $103.4  11.4%  11.1%  1.2%  1.3%  1.4% 
 Other $1,658.3  $1,803.9  $1,969.9  8.8%  9.2%  24.0%  25.0%  26.2% 
 Total  $6,920.0  $7,205.9  $7,508.5  4.1%  4.2%       

                               

Mike Evers is ORTHOWORLD’s Digital Content Strategist.