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Why Entellus Medical Inc. Skyrocketed Higher Today

By Brian Orelli, PhD - Updated Dec 7, 2017 at 1:09PM

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The medical device company is getting acquired. Could a higher offer be in the works?

What happened

Entellus Medical (NASDAQ: ENTL) is up 50% at 12:33 p.m. EST after announcing that it's being acquired by Stryker (SYK 2.48%) for $24 per share.

Stryker's investors seem to think the deal is just OK, with shares trading basically flat. Of course, at just over $600 million, it's a fairly small deal for Stryker, which sports a market cap of $56 billion.

Two men shaking hands in a conference room

Image source: Getty Images.

So what

In the acquisition, Stryker will get Entellus' minimally invasive treatments for various ear, nose, and throat (ENT) diseases, including the Xpress Multi-Sinus Dilation System and the Latera Absorbable Nasal Implant.

Stryker already has ENT products -- the NasoPore bioresorbable nasal dressing, for instance -- so this is a typical tuck-in acquisition where Stryker is hoping to use of economies of scale to increase sales while decreasing selling costs, resulting in higher profits for the larger acquiring company than the smaller company could muster.

Entellus Medical expects adjusted EBITDA for 2017 to come in at negative $23.0 million to negative $25.0 million, but revenue is growing at a 22% to 25% clip compared to last year, so with the cost savings and continued revenue growth, it shouldn't take too long for Stryker to turn a profit from the acquisition. Stryker thinks the acquisition will dilute its 2018 adjusted net earnings by approximately $0.04 per share and be accretive thereafter.

Now what

Shares of Entellus Medical touched above the $24 acquisition price today, implying that some investors think a competing deal could come in and top Stryker's offer. But considering the 50% markup, buying on hopes of an even higher price sounds more like gambling than investing.

Nevertheless, it might make sense for current investors to hold on to their shares for now to see if another offer appears, especially if it makes sense to take the tax consequences of selling in 2018 rather than this year.

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