While many bullish analysts and investors had previously mentioned the possibility of MAKO Surgical (NASDAQ:MAKO) receiving an attractive buyout bid, the reality proved even better than expected. On Wednesday morning, MAKO and Stryker (NYSE:SYK) announced that the two companies had agreed on a deal that will see Stryker buy MAKO for $30 share in cash - a $1.65 billion deal that exceeded the highest sell-side price target on MAKO by 15%.
With only scant odds that a rival bidder will top Stryker's offer, the MAKO story comes to a relatively happy conclusion. What's more, Stryker would seem to be an ideal partner to grow MAKO's business and maximize the potential of the robot-assisted makoplasty concept.
Stryker Does A Head-Fake
Stryker hosted a pretty bullish analyst day during the first week of September, and made it clear at that time that acquisitions were a major priority for the company's cash. At the time, though, it sounded as if the company were more interested in acquiring more scale (and market share) in the spine market and/or the sports medicine/extremities market. The company had also indicated that it didn't have any plans for a new knee system, even though its knee program had lost some ground to Johnson & Johnson (NYSE:JNJ) and Zimmer (ZMH) and was getting on in years.
So much for all of that.
In buying MAKO, Stryker isn't adding much near-term revenue to its orthopedic business (MAKO logged $28 million in revenue in the second quarter against $979 million for Stryker's total recon business and $340 million in knee reconstruction revenue). What it is adding, though, is a technology that can facilitate faster-growing partial knee replacement procedures - a segment that could be worth $1 billion or more within five years. There is likewise billion-dollar potential in robot-assisted hip procedures, with clinical data building showing that MAKO's RIO system can meaningfully improve long-term outcomes for patients.
Stryker is certainly paying up to own MAKO. Although MAKO shares once traded in the $40's on enthusiasm for all things robotic in medicine, Stryker is still paying more than 10.5x 2014 revenue - more than Heartware (NASDAQ:HTWR) currently trades for and close to dearly-valued DexCom (NASDAQ:DXCM), and a strong multiple relative to historical norms in the growth med-tech segment. It's also worth noting that MAKO is apparently close to a deal of its own; Stryker's announcement mentioned the anticipation that MAKO will be issuing 3.953 million shares for an acquisition. Depending on whether the price for that deal anticipated this transaction, that deal could be worth between $60 million and almost $120 million, and I'm curious to see what MAKO is getting for that.
Stronger Together Than Apart?
I'm not going to pretend that I saw the Stryker-MAKO deal coming (and certainly not at this price), but this deal seems like an excellent match - particularly given some of the deficiencies that had been holding MAKO Surgical back on its own.
It's worth remembering that the RIO system costs around $850,000 - an expensive outlay for a non-essential machine that makes it easier to do a procedure that experienced high-volume surgeons can do without it and/or where surgeons can use special guides from established ortho players like JNJ, Stryker, Zimmer, and Biomet. Stryker is deep in the hospital equipment business, though, and already sells a variety of high-ticket tools/instruments and durable equipment to hospitals.
Not only can Stryker leverage its existing capital equipment distribution and marketing system, but Stryker already has the attention of hospital administrators. In addition, Stryker is better-positioned to do more of the training and "hand-holding" that it often takes to accelerate the adoption of new technologies. System utilization has been a challenge for MAKO and while Stryker cannot make the RIO system any better than it is today (at least not immediately), Stryker can use its large sales force to address any deficits in training or doctor comfort that were holding back adoption.
Stryker can also accelerate the development of implants for MAKO's system. Implant development had been a challenge for MAKO and the combined company can take advantage of Stryker's existing R&D capabilities, as well as its IP estate to develop implants more quickly than MAKO could have done on its own. That could be particularly relevant as MAKO moves into total knee replacements.
Last and not least, Stryker can do what MAKO was never going to be able to do on its own - position the RIO and makoplasty as a valuable tool/approach within the broader context of orthopedic reconstruction. In the relatively stagnant hip-and-knee market, MAKO gives Stryker a way to stand apart and get around some of the reimbursement challenges. At the same time, Stryker can now bundle this within a comprehensive set of tools and products for the market, including (and I'm only speculating here) giving price breaks on the robot in exchange for wide implant/tool purchase agreements. If Stryker can ultimately develop tools and implants that allow MAKO to address a wider swath of major joint reconstruction, that will prove particularly valuable.
The Bottom Line
The market reaction to this deal suggests that the Street believes Stryker may be overpaying by about $4 per MAKO share, and I'm not too inclined to disagree. Credit to MAKO, then, for having confidence in the value of its technology and driving a hard bargain for its shareholders. On a side note, I'm a little surprised that Globus (NYSE:GMED), Tornier (NASDAQ:TRNX), and Wright Medical (NASDAQ:WMGI) weren't down in early trading on this news - I don't necessarily think this transaction means that the deal window is open again in med-tech, and these three companies would have all been logical takeout targets for Stryker.
At a minimum, though, MAKO's deal serves as a good reminder that differentiated technology still matters. While reimbursement, procedure volumes, and capital budgets are all pressuring the med-tech world, larger companies will still pay for technologies that drive better patient outcomes and/or allow a company to stand apart in the tightening reimbursement world.
Disclosure: I am long WMGI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.