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Stryker Moves to Strengthen Spine Business with $1.4 Billion Purchase of K2M

Stryker moved to considerably improve its position in the spine market with its intent to acquire K2M for $1.4BB by late 4Q18.

When completed, this transaction will rank Stryker among the top three players in spine (excluding orthobiologics), stepping over NuVasive—thus, changing the lineup to #1) Medtronic, #2 DePuy Synthes, #3) Stryker, according to our estimates. (See Exhibit 1)

“This acquisition underscores our commitment to the spinal market, which is the largest segment of orthopaedics with significant unmet needs,” said Stryker Chairman and CEO Kevin Lobo. “We believe K2M will significantly enhance our presence with surgeons, patients and employees in both the spine and related neurotechnology markets.”

Stryker performed below the spine market growth rate of 2% the last two years (See Exhibit 2). In 2016 and 2017, leadership cited portfolio gaps and committed to turn around the spine division. Growth had started in earnest in 1H18 with leadership citing Stryker’s Tritanium interbody implants and interventional products (e.g. vertebral augmentation, vertebroplasty and radiofrequency ablation, etc.) posting double-digit growth. Still, leadership affirmed that core spine product sales were challenged by market conditions and mid-single-digit price declines.

Leadership also noted that investment was underway to refresh the core spine line.

Enter K2M, a pure-play spine company that has experienced high-single-digit growth in recent years. K2M is focused on the treatment of complex spine disorders and degenerative conditions, offering implants, disposables, instruments and minimally invasive solutions. In terms of product enhancements, the acquisition provides Stryker with a complex spine portfolio to compete with Medtronic and DePuy Synthes, and enhances the company’s additively manufactured product portfolio—K2M and Stryker are leading additive manufacturing (AM) players in spine with their proprietary Lamellar 3D Titanium Technology and Tritanium technologies, respectively.

       

Exhibit 1: Spine Sales Performance:
T
op 10 Players and All Others ($Millions)

   2017   2016   $ Change   % Change 
 Medtronic   $2,445.0   $2,429.0    $16.0   0.7% 
 DePuy Synthes  $1,498.4   $1558.5   -$60.0   -3.9% 
 NuVasive  $883.8   $801.9   $81.9   10.2% 
 Stryker  $707.1   $712.5   -$5.4   -0.8% 
 Globus Medical  $604.8   $537.7   $67.1   12.5% 
 Zimmer Biomet  $455.1   $450.8   $4.3   1.0% 
 K2M  $249.3   $229.1   $20.2   8.8% 
 Aesculap  $173.8   $168.8   $5.0   3.0% 
 Spinal Elements  $167.3   $152.5   $14.8   9.7% 
 ulrich medical  $132.0   $120.0   $12.0   10.0% 
 ~275 companies   $1,764.3   $1,722.9   $41.4   2.4% 
 Total  $9,080.9   $8,883.7   $197.2   2.2% 

Of note, Zimmer Biomet acquired LDR in 3Q16. Zimmer Biomet's 2016 revenue includes LDR's 1H16 revenue. Amendia acquired Spinal Elements in 2Q17 and changed its name to Spinal Elements. Spinal Elements' 2016 revenue combines our estimates for Amendia and Spinal Elements in that year.

Source: THE ORTHOPAEDIC INDUSTRY ANNUAL REPORT®


 
Exhibit 2: Stryker and K2M Sales: 2017-2015 ($Millions)

  2017  2016  2015 
 Stryker $707.1  $712.5  $700.2 
$ Change  -$5.4  $12.2   
% Change  -0.8%  1.7%   
       
 K2M $249.3  $229.1  $211.5 
$ Change  $20.2  $17.6   
% Change  8.8%  7.7%   

 Source: ORTHOWORLD®, Inc.

Among notable products on the complex spine side is K2M’s CAPRI® Cervical 3D Expandable Corpectomy Cage System, which received approval in 4Q17 under the CE Mark. The system is reportedly the first 3D-printed expandable device on the market that supports continuous in situ height expansion and endplate angulation in the cervical spine.

            Mojave
              K2M's MOJAVE PL 3D interbody device
             
             
             

Among notable additively manufactured minimally invasive products is MOJAVE PL 3D, the first 3D-printed expandable interbody device. MOJAVE supports independent control of anterior and posterior height in the lumbar spine, a capability reportedly not available with any other product. In 3Q17, to further support development of new products using Lamellar 3D Titanium, K2M acquired an exclusive license to a portfolio of 17 issued and pending patents for expandable interbody fusion devices.

As we have written in the past, Stryker has also prioritized additively manufactured devices. In 2Q18, the company launched Tritanium® TL, an additively manufactured curved posterior lumbar interbody fusion cage. Stryker’s spine portfolio also includes Tritanium posterior lumbar and anterior cervical cages.

In 2017, Stryker formed a partnership with GE Additive that covered new machines, materials and services for use by Stryker’s global supply chain. Stryker has been involved in AM since 2001; its history includes investments in Concept Laser and Arcam systems (now part of GE Additive), and collaborations with universities in Ireland and the U.K. to employ the technology for the healthcare industry. K2M partnered with additive company 3D Systems in 2017.

Other products that have led to strong sales growth for K2M include:

  • EVEREST minimally invasive tools
  • CASCADIA
  • YUKON OCT posterior fixation
  • NILE proximal fixation

Finally, differentiating K2M products that Stryker will be able to leverage include:

  • The Balance ACS (BACS) platform, which addresses each anatomical vertebral segment with a 360-degree approach in the axial, coronal and sagittal planes, and has patient-specific components.
  • A partnership with Brainlab to co-market future navigated K2M spinal systems for open and MIS procedures, which are also compatible with Brainlab spinal navigation. Prior to the acquisition, commercialization was expected by end of the year.

In recent years, we’ve noted that pure-play spine companies like K2M would be prime acquisition targets for larger, diversified companies seeking to broaden their portfolios and curb market share loss to smaller spine players.

Though viewed by analysts as a strong "tuck-in" acquisition that better positions Stryker for consistent growth in future years, dissynergies involving salesforce integration and related channel disruptions could occur. Stryker seeks to mitigate disruptions by keeping K2M’s sales infrastructure intact. Also, as part of this strategic plan, K2M CEO and co-founder Eric Major will serve as President of Stryker’s Spine division and lead the combined business, which is an important step toward minimizing integration issues. Bradley Paddock, Stryker’s current President, will assist in these efforts and transition his responsibilities to Major.

We expect that M&A activity will continue in the spine space. As existing players decide to bypass the time and cost of developing their own new technologies, they seek to enhance their product portfolios with novel offerings ripe for growth. 



Julie A. Vetalice, Editorial Assistant and Rob Meyer, Senior Editor, co-authored this report. Reach Rob by 
email.

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