2013 has offered up a tantalizing start for shareholders of Stryker (NYSE:SYK). January's barely half-over, and already the medical device stock has exploded upwards in gaining more than 8% since New Year's. The gains have come at a time when medical device makers are struggling with slow orthopedics growth here in the United States, forcing some companies to look outside North America for new sales growth.
You can add Stryker to that list. The company on Thursday announced that it had offered $764 million in cash for Chinese orthopedics maker Trauson Holdings Co. With China's health care market rising, let's see why this is just the type of deal Stryker needed to make to bolster its future gains.
What China means to Stryker
This is no throwaway buy by Stryker. While Trauson had sales of only around $60 million in 2011, according to the company -- making the sale a premium of more than 12 times annual revenues, at least for that year -- the company is the No. 3 distributor in China's spine market and the largest trauma device manufacturer in the country. The company's gross margins range higher than 60%, according to an analyst from JPMorgan(NYSE:JPM).
That's nothing to sneeze at, and as a leading orthopedics maker itself, Stryker has a lot to gain from this pickup -- even at a 45% per-share premium to Trauson's closing price on Wednesday. China's already a major health care market. The nation is expected to become the second-largest orthopedic implant market in the world by 2015, with projected annual sales of $2.7 billion to push it ahead of Japan. China is also not a well-established market like Japan, the United States, or Europe, either, opening up plenty of opportunity for forward-thinking foreign companies.
With one foot in the door, Stryker should be able to translate orthopedics sales through Trauson into a strong foothold for its other businesses in China. Considering that medical device sales in the top 10 markets worldwide are expected to easily exceed $200 billion by 2015, it's important for Stryker to cement its niche now, rather than let competition gain ground.
Orthopedic competitors on the move
Important that is, as Stryker's rivals in the orthopedics business haven't been sitting on their hands recently in Asia.
Medtronic (NYSE:MDT) has already led the way in high-profile Chinese purchases, inking a $816 million acquisition of orthopedic implant company China Kanghui Holdings back in September. Medtronic made another purchase in China back in 2007 -- a $221 million acquisition of Shandong Weigao Group Medical Polymer Co. -- and with the company hoping for 20% of sales from emerging markets by 2016, Stryker can't let its strong rival push too far ahead in the world's top emerging market.
Johnson & Johnson (NYSE:JNJ) has also been performing strongly abroad. While the company dwarfs Stryker's size, J&J's medical devices and diagnostics business managed to post growth of 1.5% internationally despite currency issues because of the weak dollar, and revenues there still beat out domestic sales. The Asia-Pacific region has been especially strong for J&J, and Stryker can't allow such gains to go uncontested.
Even Zimmer (NYSE: ZMH), a less-notable rival of Stryker's in the orthopedics space, has found success in Asia. The company's sales in the region account for more than 18% of its total revenues, even as total sales have fallen through the first nine months of 2012. The company also made a Chinese acquisition in orthopedic implants back in 2010, reinforcing its position in the growing economy.
Stryker can't sit idly by while its competition keeps the heat on in the most attractive region for sales growth. Fortunately, the purchase of Trauson opens up plenty of room for the company to run.
Leadership for international success
The U.S. orthopedics market is expected to grow only around 2% to 3% a year, and with two-thirds of Stryker's sales in the U.S. through the first nine months of 2012, the situation required the company to make some moves abroad.
Stryker's new CEO should make things easier. The company named Kevin Lobo its president and CEO near the end of 2012 -- and Lobo's former position as Stryker's head of its orthopedics unit makes the Trauson purchase all the more clear. Lobo's experience with orthopedics should make incorporating the Chinese company all the more easier.
That's good for Stryker's international growth, which hasn't been as fortunate as the global sales of its rivals. Stryker's international revenues grew only 2% at a constant currency through the first nine months of 2012; in the third quarter, worldwide sales actually declined. As the American market continues to slowly slog through economic recovery, Lobo's proactive approach to foreign markets is just what the company needs to continue its surge.
Moves for the long-term future
Stryker's purchase of Trauson won't automatically vault the company to the top spot in the world's second-largest economy, but it will help the company immensely in its goals to expand its international footprint. With rivals such as J&J and Medtronic on the move, Stryker can't help but counter -- and buying into a strong, specialized company in one of the fastest-growing top medical device markets is a move to be celebrated. Stryker might not be able to continue its impressive gains to start the year, but this latest acquisition ensures that this company has its eye on the future -- right where yours should be with your portfolio.