Seeking Alpha: Stryker Offers Good Core Growth, But Not As Much Value

Investors who want to find high-quality med-tech names trading at meaningful discounts are going to have to hunt around, as there aren't a lot of obvious bargains on the high-quality shelves. Stryker (NYSE:SYK) remains a well-run and diversified med-tech player, and one with the flexibility to pursue value-creating M&A, but it's not trading at a valuation that would suggest that its prospects are overlooked by the market. I wouldn't sell the shares if I owned them, and there are worse things than buying a very good company at a fair price, but I can't call it a must-buy at this price.

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Stryker Offers Good Core Growth, But Not As Much Value

Seeking Alpha: Wright Medical And Tornier See A Desirable Partner Choose Another

It may be a little extreme to diagnose the med-tech market with buyout fever, but it's definitely a frequent talking point - particularly in the case of orthopedic extremity companies Wright Medical Group (WMGI) and Tornier (TRNX). While it may be wise advise not to own stocks just for their takeout potential, the reality is that there is a widespread expectation that major orthopedics players will look to these companies as a way of adding some extra growth (extremities markets are growing at double-digits, and likely to continue to do so for several years) and rounding out their product offerings.

A funny thing happened on the way to buyout bliss, though. Stryker (SYK), a particularly acquisitive company in the med-tech space and an ortho player with a glaring lack of extremity exposure, went and bought somebody else - announcing on Monday that it had reached an agreement to acquire privately-held Small Bone Innovations (or SBi). Stryker's move doesn't end the party for Wright Medical or Tornier, but it does cut the list of potential buyers.

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Wright Medical And Tornier See A Desirable Partner Choose Another

The Motley Fool: Is Medtronic a Buy? What Analyst Day Revealed

Medtronic's (NYSE: MDT  ) June 6 analyst day was by no means light fare, as the company crammed quite a bit of information into more than seven hours. While action-oriented investors are likely disappointed that management's commentary would seem to suggest a bid for Smith & Nephew (NYSE: SNN  ) is not too likely, management laid out a vision of an evolving global device market where Medtronic is likely to be among the few players with the scale to really cover all of the major bases. While Medtronic shares do not appear priced for supreme near-term market outperformance, they still make sense within a diversified portfolio that tends toward the conservative.

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Is Medtronic a Buy? What Analyst Day Revealed

The Motley Fool: $13 Billion Bold Play: Zimmer Holdings, Inc's Purchase of Biomet

In mid-December I wrote that there was at least some chance that ortho giant Zimmer (NYSE: ZMH  ) would make a bid for Biomet and become the dominant company in hip and knee implants, as well as leverage stronger share in areas like extremities, dental, trauma, and spine. That speculation has come to pass, as Zimmer has announced a $13.35 billion bid for Biomet. Assuming the deal passes regulatory scrunity, Zimmer is likely to see meaningful cost synergy, but there are risks involved in devoting such a large amount of capital to a market with some growth challenges.

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$13 Billion Bold Play: Zimmer Holdings, Inc's Purchase of Biomet

The Motley Fool: Could Smith & Nephew Plc Be a Good Value?

Procedures volumes have started picking up and pricing pushbacks from payers has eased, leading many stocks in the orthopedics space to log good runs. Smith & Nephew plc (NYSE: SNN  ) has done better than peers/rivals like Stryker (NYSE: SYK  ) and Zimmer over the last twelve months, but oddly enough it may yet offer more value. The company's knee business appears to be regaining some share and the acquisition of Arthrocare (NASDAQ: ARTC  ) should be a highly synergistic opportunity to grow in a space that offers better prospects than major joint reconstruction.

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Could Smith & Nephew Plc Be a Good Value?

The Motley Fool: A Sleeping Giant About To Awaken

The going has gotten tough in the orthopedic sector, and many of the major players have responded by getting going. Johnson & Johnson (NYSE: JNJ  ) acquired Synthes to become the largest in trauma and the second-largest in spine, while Stryker (NYSE: SYK  ) acquired MAKO Surgical with an eye toward getting ahead of the evolution of the hip and knee markets. Smith & Nephew has diversified into wound care and arthroscopy, while Biomet is reportedly weighing its options, including a possible IPO. That leaves Zimmer Holdings (NYSE: ZMH  ) as the next major player to move.

Zimmer has already done what many of its rivals have found hard to do -- deliver real growth in a tough major joint recon market. Zimmer's knee sales were up 7% in the latest quarter, while hips were up 2%, and recent introductions like the Persona line have helped extend the company's lead in major joint reconstruction, with more than one-quarter market share (Johnson & Johnson is a few points behind, and Stryker is even further back). With a relatively clean balance sheet and some obvious areas to improve, though, Zimmer could have a trick up its sleeve to invigorate growth.

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http://www.fool.com/investing/general/2013/12/18/a-sleeping-giant-about-to-awaken.aspx?source=itxsitmot0000001&lidx=1

MassDevice: What Has Earnings Season Told Us About Med-Tech?

As the dust settles after another earnings season, it's time to look back at what we now know about the state of the industry. Stocks in the sector have been enjoying a run that started in November 2012 on hopes for improving utilization trends and earnings in 2013.

While the results and guidance from this latest round of earnings suggest that expectations around utilization may have been a bit too optimistic, it does look like the industry is on firmer footing than a year ago.

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http://www.massdevice.com/blogs/massdevice/what-has-earnings-season-told-us-about-medtech?page=show

Investopedia: Smith & Nephew's Costly Deal

Even granting that this is a challenging time for the orthopedics industry (and healthcare device providers in general), Smith & Nephew (NYSE:SNN) is struggling a little more than most. The company has been losing share in orthopedic implants like hips and knees and disappointing investors with regards to cash flow production, and the stock has been chopping around in a $20 range for about three years now. While the news on November 28 of the company's Healthpoint Biotherapeutics acquisition does bring in advanced wound care products with very good growth, Smith & Nephew is having to pay a pretty hefty price for this growth injection and this just isn't a sustainable long-term plan.

Read more here:
http://www.investopedia.com/stock-analysis/2012/Smith--Nephews-Costly-Deal-SNN-MMM-JNJ-MDT-COV1129.aspx

Seeking Alpha: Zimmer Is A Pure Play On A (Presently) Rotten Market

Waiting for a recovery in the orthopedics industry has been about as entertaining as watching paint dry, without the benefit of enjoying the fumes. Although it is certainly true that there are millions of Americans walking around on old knees and hips, and the number of 65+ year-old customers is on the increase, the reality is that a broadly favorable demographic push means nothing over the scale of a few years.

That makes Zimmer (ZMH) a tricky stock to assess. It certainly seems cheap relative to its likely future free cash flows, but the company's intense (70%-plus) exposure to hip and knee reconstruction is keeping a lid on enthusiasm in there here and now.

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Zimmer Is A Pure Play On A (Presently) Rotten Market

Investopedia: Mergers In Orthopedics Could Heat Up Stocks

Companies in the orthopedics space have had a rough go of it in the last few years. The federal government launched multiple investigations regarding the sales practices of these companies and prosecutors have managed to nail several skins to the wall. At the same time, hospitals and insurers have fought back on pricing and the growth rate for the sector has suffered. Making matters worse, the recession set in and many would-be patients decided to wait to undergo procedures.

Buyouts have added some energy to this space of late. Medtronic (NYSE:MDT) absorbed Osteotech late in 2010; Johnson & Johnson (NYSE:JNJ) announced its intention to acquire Swiss spine and trauma specialist Synthes in April of this year; and just the other day Stryker (NYSE:SYK) announced that it would acquire Orthovita (Nasdaq:VITA) in an all-cash deal. Given the benefits of scale, though, there may yet be more deals to come in this sector. (For background reading, check out Investing In Medical Equipment Companies.)

To read the full piece, click below:
http://stocks.investopedia.com/stock-analysis/2011/Mergers-In-Orthopedics-Could-Heat-Up-Stocks-JNJ-MDT-SYK-SNN-ZMH-NUVA-WMGI0518.aspx

Seeking Alpha: BioMimetic Clears One More Hurdle

As I suggested a couple of days ago, BioMimetic Therapeutics (Nasdaq: BMTI) did indeed get a thorough grilling from the FDA's advisory panel. 


The good news? The panel ultimately voted in BioMimetic's favor on the three key summary questions of safety, efficacy and benefit/risk. What's more, the foot-and-ankle specialists (the key intended application for BMTI's Augment product) were supportive.

The bad news? The FDA (and the panel, to some extent) clearly has concerns about the product, and it is far from certain that the agency is going to grant approval to BMTI to market the product.

A Meeting With A Challenging Tone
While some observers of the meeting (or those who followed the tweets of those following the meeting live) may have felt the panel was contentious and negative, it didn't strike me as all that unusual relative to recent meetings. Certainly there were some pointed questions, and the panelists took the company to task more than once for deficiencies in the study and/or its results, but it is frankly rare to see these meetings conducted as love-fests for the applicant.

To read the full piece, please go here:
BioMimetic Clears One More Hurdle

Seeking Alpha: Tough Talk From The FDA Batters BioMimetic

These are difficult times for any company trying to get through the FDA approval process with anything less than 100% perfect data, and BioMimetic Therapeutics (BMTI) is the latest stock to suffer. In response to FDA concerns posted on Tuesday ahead of the company's Thursday panel meeting, BioMimetic's stock is down about one-third on the fear that the company will panel rejection and/or FDA rejection for its new bone-graft substitute.

That said, investors with patience and a healthy appetite for risk might want to consider buying in ahead of the panel recommendation and FDA decision. While BioMimetic's Augment product is not perfect, it does seem to be a safe and efficacious product with a multi-hundred-million dollar market potential.

FDA Playing The Devil's Advocate
In almost all cases, the FDA plays the role of devil's advocate during panel meetings – questioning the safety and efficacy of data and challenging the company at every turn. It is not unusual, then, for the FDA's pre-meeting review to be challenging and adversarial. That said, the FDA was more negative than usual and certainly more negative than most investors expected.

To read the piece, please follow this link: Tough Talk From the FDA Batters BioMimetic

Investopedia: JNJ And Synthes - A Good Deal With Some Questions

In many respects Wednesday's announcement that Johnson & Johnson (NYSE:JNJ) was acquiring Synthes was not much of a surprise. Many analysts have gone in print with the prediction that JNJ would do deals to improve its growth prospects, and deflect attention away from management's failures, and Synthes was a very logical candidate.

In true modern JNJ fashion, though, even this straight-forward and logical deal has some lingering questions to it. The deal structure is a bit puzzling, and leads to at least two major questions: is JNJ done, and can it maintain the quality of the company it is buying?

The Terms of the Deal
Although the movements of JNJ shares and currency could alter the final deal value, at the time of announcement, JNJ's acquisition of Synthes was a $21.3 billion deal, with a net value of $19.3 billion after stripping out Synthes' cash. At this price, JNJ is paying a bit more than four times trailing revenue (enterprise value to sales), which is arguably a slight bargain for a company of Synthes' quality and market position.

The deal terms call for JNJ to pay a total of 159CHF per share, with approximately one-third of that in cash and the remainder in JNJ stock. The stock component will be collared, though, between 1.71 and 1.97 shares. This structure does leave some risk for Synthes shareholders as JNJ's stock could slide or currency could move against them. (For more, see Mergers And Acquisitions: Understanding Takeovers.)

To read the full piece, click the link:
http://stocks.investopedia.com/stock-analysis/2011/JNJ-And-Synthes-A-Good-Deal-With-Some-Questions-JNJ-SYK-MDT-NUVA-RDY-SNN0428.aspx

Investopedia: Does Stryker Need Further Reconstruction?

Stryker (NYSE:SYK) has been relatively active of late in recrafting its business, but the first quarter's results suggest that management's work may not be done yet. Stryker remains a good core holding for GARP-oriented investors, but management is going to need to deliver better results on the "guh" side of GARP to get the Street excited again. 

An Okay (but Not Great) Quarter
Stryker did not disappoint, per se. But analysts are not going to be thrilled with the company's numbers nevertheless. Revenue grew more than 12% on a reported basis, with core constant currency organic revenue growth of 4%. That continues a rather unfortunate trend of unimpressive growth that stretches back a few years now.

While that revenue growth met expectations, the composition is the tricky bit. The orthopedics business was flat, while the MedSurg unit was up more than 12%, with double-digit growth in instruments and endoscopy. Even though companies like Johnson & Johnson (NYSE:JNJ) and Covidien (NYSE:COV) have long done well in endoscopy and its a good repeat business, other aspects of MedSurg are more tied to hospital capital budgets - that, and the margins, are largely why analysts don't love that unit so much.

Speaking of profitability, Stryker saw better gross margin on an adjusted basis. Adjusted operating income rose 10%, but margins still contracted all the same. So, the company met its numbers but not in a way that is going to have anybody pounding the table.


Please click the link to read the piece at Investopedia:
http://stocks.investopedia.com/stock-analysis/2011/Does-Stryker-Need-Further-Reconstruction-SYK-JNJ-COV-ZMH-SNN0421.aspx

Seeking Alpha: Johnson & Johnson: Potential M&A Targets To Recharge Growth, Divert Investor Attention

There is no question that healthcare and personal care giant Johnson & Johnson (NYSE: JNJ) has been an active acquirer over the years – doing over 20 deals worth more than $40 billion in the last ten years alone. With the company struggling through a dry spell in organic growth and embarrassing itself with a series of product defect (and recall) announcements, it would seem likely that the company will once again lean on M&A to recharge its growth prospects and divert investor attention away from management's own poor recent record.

With that in mind, it seems appropriate to take a look at JNJ's menu of options and its potential shopping list.

A Few General Thoughts

There is nothing wrong with small deals or the acquisition of pre-revenue companies with promising products in the pipeline, but for purposes of this analysis I am only considering major, multi-billion-dollar deals that could meaningfully impact short-term revenue and earnings performance.

Based on what the company has done in the past, it would seem improbable that the company would look too seriously at areas like life sciences (thus excluding names like Thermo Fisher (TMO), Life Technologies (LIFE), or Illumina (ILMN)). Likewise, services would be a big change in strategy, so names like Lab Corp (LH) or Davita (DVA) are likely out, as are imaging or “big iron” companies like Varian (VAR).

Generally speaking, it would also seem that JNJ should target businesses with good emerging market exposure – JNJ has good overall non-US revenue exposure, but not so much in the faster-growing emerging markets.

To read the full piece, please go to Seeking Alpha:
Johnson & Johnson: Potential M&A Targets to Recharge Growth, Divert Investor Attention 

Seeking Alpha: Boston Scientific At A Crossroads - The Case For Bowing Out

In Part 1, I discussed some of the unfortunate events that led to Boston Scientific (BSX) falling from its once-lofty position alongside Medtronic (MDT), Johnson & Johnson (JNJ) and other major med-tech players. Through a mix of mismanagement, excessive appetite, and competitors' successes, Boston Scientific has found itself languishing for years.

Now, though, the company appears to be serious about change. Company-wide restructurings are underway, the company sold its once-promising neurovascular business to Stryker (SYK), and both management and investors await what they hope will be successful new product launches in the coming years. While all of this is taking place, though, there is a steady drumbeat in the rumor mill that Boston Scientific will not be independent for long.

In this section I mean to examine what the buyout environment for Boston Scientific could be like and who could be interested in this company.


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http://seekingalpha.com/article/257222-boston-scientific-at-a-crossroads-the-case-for-bowing-out-part-2-of-2?source=mc_all

Investopedia: Meet The New Stryker

This is not your father's Stryker (NYSE:SYK) anymore. Although Stryker is still thought of first and foremost as an orthopedics company (and ortho is more than 58% of sales), the company has a sizable surgical/medical equipment business and has been using acquisitions to add more markets to its portfolio. Though Stryker is not liable to turn into a serial acquirer like Integra Life Sciences (Nasdaq:IART) used to be, or Danaher (NYSE:DHR) still is, investors should keep their eyes open to the possibility that Stryker might have a few more tricks up its sleeve and more growth potential than commonly thought. 

The Quarter Was What We Thought it Was
Stryker pre-announced its fourth-quarter results prior to a major investor conference earlier in January, so there were not many surprises in Tuesday night's report. Revenue rose 8.8% as reported (and 8.6% in constant currency), with the ortho business showing 4.5% growth. Ortho growth was helped by relative strength in hips and trauma, and hampered by weakness in spine. The MedSurg business continues to recover well, with better than 15% growth in this quarter. (For more, see Investing In Medical Equipment Companies.)

Operationally, Stryker has always been a solid performer, and this time around was no different. Gross margin increased 100 basis points (to 68.7%). Stryker ramped up its operating spending, particularly in R&D, and that took almost two and a half points out of the operating margin (after adjusting for some exceptional items). Nevertheless, adjusted earnings did grow more than 12% for the period, and the company posted year-on-year free cash flow growth once again (continuing a six-year streak). (For more, see Profitability Ratios: Introduction.)

The Road Ahead
It is still early in the reporting cycle, but Stryker's commentary on the orthopedic market was definitely more positive than that of Biomet and another large rival that recently reported earnings. With new products in the hip category, it looks like Stryker is a share-taker in the market once again, though pricing is still an issue. As an aside, though, investors who want really exciting growth in orthopedics shouldn't be looking at Stryker, Smith & Nephew (NYSE:SNN) or Zimmer (NYSE:ZMH); look instead at much smaller companies like Orthofix (Nasdaq:OFIX), Alphatec (Nasdaq:ATEC) and Nuvasive (Nasdaq:NUVA).


Please click the link for the full text:
http://stocks.investopedia.com/stock-analysis/2011/Meet-The-New-Stryker-SYK-BSX-ZMH-ATEC-BMTI0128.aspx

Maybe The End Of The Line With JNJ

This earnings report may be the straw that breaks the camel's back between me and Johnson & Johnson (NYSE: JNJ). It has been a while since JNJ has really impressed me, and I find that I often end up telling myself "don't worry, it'll get better ... after all, it's JNJ". Well, sometimes once-great companies don't rebound and just continue to fade.

A Quick Run Through The Numbers
JNJ reported that revenue fell more than 5% this quarter, missing the average estimate and actually coming in below the lowest published estimate. Consumer was the worst performer of all, as sales fell 15%. Within that, woundcare was down 16% and OTC was absolutely crushed (sales down almost 31%) by the never-ending series of recalls. Pharmaceutical sales were down almost 5% and there were almost no signs of life in the segment, with only Prezista showing any meaningful growth.

Devices were ironically the best story this quarter, as sales rose 0.2%. Cordis (drug-coated stents) was weak yet again though, and sales fell 10%. Orthopedic sales (DePuy) were also down (2%), and so was diabetes (down 2%). Ethicon was up 4% and diagnostics grew 7%.

Oddly enough, gross margins were stable this quarter and that's pretty good considering that the company should have seen operational de-leveraging. Moreover, operating margin actually expanded by 1.5%, but almost half of that was from lower R&D spending. I do NOT like to see health care companies cutting their R&D budgets, but even moreso when their current revenue trajectory and near-term pipeline are uninspiring.  At the bottom line, earnings were down 12%

This And That
It annoys me that JNJ does not provide a cash flow statement with its earnings. If other equally large and diverse conglomerates can do so, what is their excuse? I frankly find it dismissive and disrespectful to investors, but I don't expect that they will change. Nevertheless, it means I cannot immediately re-run a DCF analysis on JNJ shares, but I cannot imagine it will be better than my last run-through.

I also take issue with the company's strategy. JNJ overpaid for Crucell; vaccines can be a great business, but Crucell is not going to help the company much in the short-term. And if JNJ did make a bid for Smith & Nephew (NYSE: SNN), it's just another sign (to me, at least)  that JNJ cannot compete on the basis of its own internal R&D efforts. What next, a bidding war for Beckman Coulter (NYSE: BEC)? And then there's the whole mess in Consumer ... though I believe management has actually started handling that better and that's on the way to resolution.

The Bottom Line
On the basis of my last valuation run, JNJ shares are worth about $71.50 - about 15% higher than where the stock will open today. If JNJ were executing well and giving my confidence in management's abilities and direction, I wouldn't mind that relatively low appreciation potential.

But JNJ is *NOT* executing well, and I cannot see any immediately obvious reasons to think that will change anytime soon. Consequently, I think I will be selling these shares. I'd frankly rather pay up for Abbott (NYSE: ABT) or Becton Dickinson (NYSE: BDX) than own JNJ, and if I was going to own a troubled health care company that needed some TLC, why not own Roche (Nasdaq: RHHBY) instead? Obviously, I'm annoyed as I write this, so I need to let the emotion fade a bit and then decide how to proceed. At this point, though, I'm thinking it's time to move on from JNJ.

At this point, I would probably SELL (though not short) JNJ shares.

Disclosure: I own shares of JNJ