Stryker Mulls Buying Boston Unit

Orthopedic devices giant Stryker Corp (SYK) is reportedly negotiating with Boston Scientific (BSX) to buy the latter’s pain management devices unit, also known as the neuromodulation unit. Based on preliminary information, Stryker may pay $1.4–$1.5 billion to acquire the Boston Scientific’s unit.

If everything goes well, a deal is expected in the week starting August 23, 2010, according to media reports. While Stryker prefers to fund the Boston Scientific deal with cash, it may also choose to finance the acquisition through a $1 billion senior unsecured revolving credit facility (due in August 2013), which it obtained earlier this month.

The neuromodulation division is one of the two non-core businesses, which Boston Scientific is divesting as part of its ongoing aggressive restructuring initiatives. The medical devices giant is also looking to jettison its neurovascular devices unit, which may fetch roughly $1 billion. Besides Stryker, Johnson & Johnson (JNJ) and Abbott Labs (ABT) are the other potential suitors for the neuromodulation unit.

Boston Scientific has undertaken a series of management changes and restructuring initiatives under its “2010 Restructuring Plan”. The company plans to expand its footprint into the emerging markets by reinvesting the savings from restructuring efforts into customer focused and development oriented areas to boost future growth.

The neuromodulation unit, which makes spinal-cord stimulators to treat severe pain of the lower back and leg, has been one of Boston Scientific’s growth businesses, generating revenues of $285 million (up 17% year-over-year) in 2009. However, the division’s sales were flat in the most recent quarter.

The deal bodes well for Stryker’s business model and the neuromodulation unit will complement its existing pain management product portfolio that deals with back pain. If eventually acquired, the company is expected to integrate the unit into its MedSurg division, which represents roughly 40% of its annual sales.

Stryker remains well positioned for growth across its Orthopedic and MedSurg divisions driven by new product launches and acquisitions. The company’s MedSurg division is benefiting from acquisition synergies from Ascent Healthcare Solutions (purchased in late 2009 for $525 million), a market leader in the reprocessing and remanufacturing of medical devices.

Stryker is, however, challenged by competition-driven pricing pressure on implant products and a still sluggish hospital spending environment, which could potentially weigh on future earnings. Currently, we are Neutral on Stryker.

STRYKER CORP (SYK): Free Stock Analysis Report
BOSTON SCIENTIF (BSX): Free Stock Analysis Report

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