Stryker (SYK) entered a definitive agreement to purchase Wright Medical (WMGI) for $30.75 per share, or a total equity value of $4 billion and an enterprise value of $5.4 billion in cash. The deal is expected to close in 2H20 and will not impact Stryker’s net earnings through 2020. Stryker leadership believes that they will realize up to $125 million in cost synergies within three years of the acquisition’s close.
In announcing the acquisition, Stryker Chairman and CEO Kevin Lobo said, “By merging our complementary strengths and collective resources, we will be able to advance our broad platform of extremities and biologics technologies with one of the world’s leading medical technology companies that shares our vision of delivering breakthrough and innovative solutions to improve patient outcomes.”
Stryker’s extremities joint replacement business has performed well in recent quarters, but has been operating below scale in upper extremities for years, per leadership. We project Stryker’s 2019 joint replacement extremities revenue to be $171.6 million, or 7% of the $2.4 billion market segment. Wright Medical’s 2019 projected joint replacement extremities revenue is $463.3 million, or 19% of the segment overall. The acquisition will make Stryker a top player in the fast-growing joint replacement extremities segment, as well as solidify their position in the trauma and orthobiologics markets. Exhibit 1 depicts changes to SYK’s segment rankings based on the acquisition.
Exhibit 1: Projected Stryker Segment Ranks Based on 2019 Combined SYK and WMGI Revenue ($ million)
|Segment||Revenue||Share||New Rank||Prev Rank|
|Joint Replacement Extremities||$634.9||26%||1||6|
The integration process will certainly come with some challenges. In 2Q19, Wright Medical faced a mutiny from Cartiva legacy distributors and an associated $17 million reduction in the company’s projected revenue from that product in 2019. Additionally, Wright Medical came up against intense competition and talent-retention issues in its core foot and ankle business, with company leadership describing it as a “knife fight” among a host of small, privately held companies. The overlap in the lower extremity portfolios for Stryker and Wright Medical will also lead to dis-synergies, including potential anti-trust issues in total ankle replacement products. Leadership repeatedly stated that it is too early to consider what divestitures may be required in closing the deal.
Stryker is bullish on its ability to navigate those challenges and believes that the acquisition hastens their path to joint replacement extremities segment leadership. The company gains access to a specialized salesforce, particularly for international upper extremities where Stryker has no presence. Leadership also expressed excitement over Wright Medical’s Blueprint upper extremity planning technology, as well as the Augment injectable biologic. Blueprint is software-based, and we believe that ultimately it could be integrated into Stryker’s planned extremity and spine expansions to Mako.
We project Stryker’s 2019 sales to exceed $7.7 billion, +8.3% year over year, as shown in Exhibit 2. The company looks well-positioned to carry that momentum through 2020. This acquisition will significantly accelerate the company’s path to leadership in joint replacement extremities and make them the clear number two player in orthopedics overall behind DePuy Synthes. Exhibit 3 illustrates our projections for WMGI’s full-year revenue.
Exhibit 2: Stryker 2019 Projected Revenue by Segment ($ million)
|Segment||2019P||2018||$ Chg||% Chg|
Exhibit 3: Wright Medical 2019 Projected Revenue by Segment ($ million)
|Segment||2019P||2018||$ Chg||% Chg|
|Joint Replacement Extremities||$449.8||$408.5||$41.3||10.1%|