Wright Medical Group Inc. (WMGI:US)’s chances of becoming the next target in orthopedic surgery may be increasing after Mako Surgical Corp. (MAKO:US) last week received one of the industry’s fattest takeover premiums.
Wright, a $1.2 billion maker of ankle replacements as well as implants to fix hammertoe, a deformity of the toe joint, is a prime acquisition target because of its growth prospects, Summer Street Research Partners said. Wright’s sales are projected (WMGI:US) to top $600 million by 2017, up more than 150 percent from this year, according to analysts’ estimates compiled by Bloomberg.
Stryker Corp. (SYK:US) last week offered Mako, which pioneered the use of robot-assisted surgery in orthopedics, a price that’s 89 percent more than the stock’s 20-day average, the second-highest premium ever paid for a medical-products deal larger than $500 million, data compiled by Bloomberg show. To capitalize on technological advancements in orthopedic surgery and help restart growth, other large device makers such as Zimmer Holdings Inc. (ZMH:US) and Johnson & Johnson (JNJ:US) also may be looking at acquisitions, Piper Jaffray Cos. said.
“The appetite is out there,” Matt Miksic, a New York-based analyst at Piper Jaffray, said in a phone interview. “From the target side, there are some in the growthier, more attractive medical-device markets. Wright Medical is one.”
Julie Tracy, a spokeswoman for Arlington, Tennessee-based Wright, declined to comment on whether the company has been approached by suitors or is weighing a sale.
Representatives for Warsaw, Indiana-based Zimmer and J&J in New Brunswick, New Jersey, declined to comment on their interest in acquiring orthopedic-device makers.
Stryker agreed to pay $30 a share for Mako, which had an average price of $15.90 in the 20 days leading up to the Sept. 25 deal announcement. It’s the industry’s biggest premium since J&J offered breast-implant maker Mentor Corp. a record 101 percent in 2008, data compiled by Bloomberg show.
The transaction values Mako at $1.35 billion after accounting for its net cash (MAKO:US). At about 12 times its sales for the past year, that’s almost triple the industry’s median takeover multiple, the data show.
While Wright’s enterprise value (WGMI:US) of 4.5 times next year’s estimated sales is the highest among its orthopedic device peers, it’s still a fraction of what Stryker is paying for Mako, the data show. Wright jumped 1.9 percent the day of the deal, and the stock is up 26 percent this year (WMGI:US).
Today, Wright fell 0.1 percent to $26.39 at 9:59 a.m. New York time.
The market for orthopedic extremity devices, in which Wright operates, will grow by more than 6 percent a year to about $5.3 billion by 2021, according to Toronto-based Millennium Research Group Inc., which studies the medical-technology industry.
“Demographic factors -- such as the aging U.S. population, the expanding active population, and the increasing incidence of obesity, osteoarthritis, and osteoporosis -- will drive the number of people that will require treatment with orthopedic extremity devices,” a Millennium Research report published in June said.
Analysts on average project that Wright’s revenue will be about $638 million in 2017, up from the $239 million forecast for this year, estimates (WMGI:US) compiled by Bloomberg show.
“The potential for many years of solid double-digit topline growth differentiates Wright from its orthopedic peers and makes it a prime acquisition target,” Mark Landy, a Boston-based analyst at Summer Street Research, wrote in a Sept. 25 report.
Wright’s $290 million sale of its hip and knee reconstruction business this year adds to its takeover appeal, according to Brean Capital LLC’s Jason Wittes.
The divestiture “made it a really attractive pure play in foot and ankle,” the New York-based analyst said in a phone interview. “It’s a very well-positioned, fully-developed business in foot and ankle, which is at this point the fastest-growing market in orthopedics.”
Even so, Wright may not fetch as rich of a price as Mako did, Wittes said.
The valuation Stryker offered Mako shareholders “was surprising,” he said. “Stryker is paying a lot for it. I wouldn’t initially expect others to get taken out at such high premiums.”
Wright’s Chief Executive Officer Robert Palmisano has a history of selling companies. He was at the helm of medical-device maker Ev3 Inc. when Covidien Plc acquired it for $2.5 billion in 2010, and ran Summit Autonomous Inc. until Alcon Laboratories Inc. agreed to buy it for about $900 million in 2000 to enter the laser eye-surgery market.
“Wright is unique in that it’s been skippered by a CEO who is known for tuning up operations in medtech and then selling them,” said Piper Jaffray’s Miksic.
Tornier NV (TRNX:US), a Dutch maker of replacements for upper and lower extremities, is another potential takeout candidate, Miksic said. Tornier, with a market value of $932 million, is forecast by at least one analyst to have $430 million of revenue (TRNX:US) in 2017, a 35 percent increase from this year, estimates compiled by Bloomberg show.
NuVasive Inc. (NUVA:US), which has a market value of $1.1 billion, also may fit what buyers are looking for, according to Mike Matson, a New York-based analyst at Needham & Co. NuVasive’s devices treat spinal problems. Revenue at the San Diego-based company is projected to climb to $855 million in 2017 from $658 million this year, the data show.
Shawn McCormick, chief financial officer at Tornier, declined to comment. Nicole Collins, a spokeswoman at NuVasive, didn’t return a phone call or e-mail seeking comment.
Large medical-technology companies are likely seeking targets with “commercialized products, differentiated technologies, and higher revenue growth that operate in attractive markets” adjacent to their own, Matson wrote in a Sept. 26 report. Among the stocks he covers, NuVasive and Wright “best match this profile,” he wrote.
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