Stryker buys spine device maker K2M for $1.4B

Dive Brief:

Stryker has agreed to buy K2M Group Holdings, a maker of products used in spinal surgery, for approximately $1.4 billion, or $27.50 a share.
The orthopedic device and medical instruments maker said K2M’s product portfolio, generating annual sales of about $300 million, will complement its own offerings in the roughly $10 billion spinal market.
K2M co-founder and CEO Eric Major is expected to join Stryker as president of the spine division, leading the combined business. Bradley Paddock, the current spine division president, will transition his responsibilities to Major and support the integration of the two businesses, Stryker said.

Dive Insight:

The latest deal by Stryker could put to rest any lingering speculation of a looming combination with Boston Scientific, which Stryker strongly denied last month. Kalamazoo, Michigan-based Stryker also reorganized its management structure in July, including naming company veteran Timothy Scannell as president and chief operating officer.

Stryker’s spine division, one of its smaller units contributing about 6% of overall sales, has lagged behind the company’s other businesses in recent quarters as reimbursement cuts for spinal procedures caused a slowdown in the sector.

Katherine Owen, vice president of strategy, said on the company's earnings call last month there has been no change in how management thinks about acquisitions, noting that historically the vast majority of Stryker’s deals have involved small and mid-sized companies. “That’s a proven offense that’s helped accelerate our organic sales growth, and that’s the offense we’re going to continue with,” she said.

The acquisition of K2M gives Stryker some needed heft in spine, with several differentiated products in two of the faster-growth areas: treatments for spinal deformities and cage systems used in back fusion surgery, according to Leerink analyst Richard Newitter.

Spine company mergers can be complicated to integrate, but K2M is a manageably sized business, and Stryker plans to retain the company’s sales force, which should minimize disruption, Newitter said.

K2M’s product portfolio addressing complex spine procedures as well as minimally invasive techniques and its focused sales force have driven double-digit compound annual growth over the past five years, Stryker said.

"This acquisition underscores our commitment to the spinal market, which is the largest segment of orthopaedics with significant unmet needs," Stryker CEO Kevin Lobo said in a press release. "We believe K2M will significantly enhance our presence with surgeons, patients and employees in both the spine and related neurotechnology markets."

The deal is expected to close by year's end and have an immaterial impact on 2018 earnings, Stryker said. The company left its forecast for adjusted earnings per share unchanged for the full year, in a range of $7.22 to $7.27.