Medtronic Grows Biologics Business

Medtronic (MDT), one of the largest medical devices companies, seeks to strengthen its biologics business by its decision to acquire Osteotech Inc (OSTE) for $6.50 per share or $123 million in total. The offer price represents a 65% premium to Monday’s closing price. The transaction is subject to shareholder and regulatory approvals.

After Cardiac Rhythm Disease Management, the next biggest segment in Medtronic is Spinal which contributed 22% to its top line in fiscal 2010. This segment generated $3.5 billion in revenues in 2010, up 3% compared to the previous year. Both divisions of the segment – Core Spinal and Biologics have been struggling for the past few quarters. However, the company is targeting to revive this segment by the end of the current fiscal by introducing new products. We believe the acquisition of Osteotech should accelerate the growth rate of the Spinal business of Medtronic.

Osteotech develops biologic products consisting of MagniFuse bone grafts and Plexur biocomposites, which are used for musculoskeletal surgeries. The company is awaiting clearance from the US Food and Drug Administration (FDA) for its human collagen technology platform.

The acquisition should expand Medtronic’s biologics bone healing portfolio. Moreover, the company will also be able to target areas of joint reconstruction, foot and ankle, and sports medicine.

Our Recommendation

Medtronic has made some strategic acquisitions in the recent past, which should boost revenues in the forthcoming period. Although the company is witnessing pricing pressure in the domestic market, new product launches and geographic diversification should enable it to offset the impact to some extent.

Moreover, a strong balance sheet augurs well for more acquisitions. Medtronic exited fiscal 2010 with $1.4 billion in cash and cash equivalents, up from $1.3 billion at the end of fiscal 2009. During the fiscal, the company generated $4.5 billion in free cash flows, after adjusting for the impact of certain litigation payments. However, the company is highly exposed to the unpredictable movement of foreign exchange and operates in a highly competitive market.

Based on the long-term potential of the company, we maintain our Neutral rating on the stock, which also corresponds to the Zacks #3 Rank (short-term Hold recommendation).

MEDTRONIC (MDT): Free Stock Analysis Report
OSTEOTECH INC (OSTE): Free Stock Analysis Report

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