Stryker to buy Boston Sci’s neurovascular unit

By Debra Sherman

CHICAGO (BestGrowthStock) – Stryker Corp (SYK.N: ) said on Thursday it will buy Boston Scientific Corp’s (BSX.N: ) business that makes devices used to treat stroke, aneurysm and other vascular conditions in the brain for $1.5 billion in cash to diversify its products as its orthopedics business slows.

Stryker, a manufacturer of orthopedic implants, hospital beds and surgical instruments, said the price includes $100 million of milestone payments. The deal is expected to close before the end of the year.

Stryker executives said on a conference call on Thursday that the company expects the acquisition to be neutral to earnings or add to them immediately and to contribute to earnings more meaningfully in 2012 and beyond.

They said they project sales of the business to finish the year at $330 million to $340 million, down from $348 million in 2009.

Stryker executives said they expect sales in the unit to increase by high single digits to low double digits on a percentage basis by 2012 after launching new products. They said operating margins are running around 30 percent and they expect a steady flow of new product launches over the next 12 to 24 months.

It will be a stand-alone business with its own research and development team, sales force and marketing department.

The worldwide market for neurovascular products, which include implantable devices used for the minimally invasive treatment of hemorrhagic and ischemic stroke, is about $900 million, growing 9 percent to 10 percent annually, Stryker said.

Chief Executive Stephen MacMillan told analysts that he views the acquisition of the neurovascular business as an extension of Stryker’s core business, but on a new platform.

He said that Stryker’s balance sheet remains strong and that management will continue its strategy of using its cash for acquisitions, share buybacks and dividends.

“In my mind, the ultimate rationale is it moves (Stryker) further away from being somebody like Zimmer (Holdings Inc (ZMH.N: )), which is so beholden to the orthopedic market, which is under a lot of pressure,” Jefferies & Co analyst Raj Denhoy said.

“You look at Zimmer’s result this morning, orthopedics is not a place that you would expect companies to want to double down in; so that Stryker is deploying their capital in areas further outside of orthopedics in my mind is perhaps not a bad strategy,” Denhoy said.

For Boston Scientific, the deal provides much-needed cash to expand into other areas as its core markets in heart stents and implantable defibrillators have slowed. Boston Scientific also has its pain management business up for sale.

Some Wall Street analysts noted the high price Stryker is paying. “The sale price is well above the $800 million to $900 million we expected,” Wells Fargo analyst Larry Biegelsen wrote in a research note.

Boston Scientific said it expects to allocate about half of the net proceeds to acquisitions as it works to reshape its portfolio, and the remainder to repay debt.

As a result of the divestiture, Boston Scientific estimated its 2011 earnings per share will be diluted by about 4 cents to 6 cents.

“It is not clear to us that this deal is obviously beneficial to either Boston Scientific or Stryker,” Bernstein Research analyst Derrick Sung wrote in a research note.

“From a deal perspective, we think that Boston Scientific is the winner in that they received a good price for their business and that Stryker paid a high price for what they are getting. However, Boston Scientific is giving up a highly profitable division and further concentrating medium-term earnings prospects in the decelerating DES (drug eluting stent) and CRM (cardiac rhythm management) markets,” he wrote.

Shares of Stryker were off 72 cents or 1.4 percent to $50.18 in afternoon New York Stock Exchange trading, while shares of Boston Scientific were up 86 cents or 1.3 percent to $6.39.

(Additional reporting by Lewis Krauskopf in New York; Editing by Gerald E. McCormick and Robert MacMillan)

Stryker to buy Boston Sci’s neurovascular unit