UPDATED: Stryker to buy disposable device maker for $2.8B to reduce hospital-acquired infections

Prevalon Turn and Position System--Courtesy of Sage Products

With an eye on earning more recurring revenue, Stryker ($SYK) announced the $2.8 billion acquisition of Sage Products, a maker of disposable devices that reduce the risk of hospital-acquired infections and other adverse events in the intensive care unit.

The move demonstrates that reducing hospital-acquired infections has become a top priority for med tech players large and small, mainly due to federal government incentives. For instance, a section of the Affordable Care Act mandates a 1% Medicare payment reduction for hospitals that fall in the top 25% in certain hospital-acquired infections. A similar section applies to hospital readmissions.

With $430 million in FY 2015 sales (up 13% year over year), the Cary, IL, company makes decontaminants to ward off infections, cloths to clean incontinent patients, specialized hospital furniture and tools to reduce the risk of caretaker injury, among other offerings.

"This acquisition aligns with Stryker's focus on offering products and services that support a mindset of prevention, specifically in the area of 'never events' such as hospital acquired infections. Today, through our medical (surgical) division, Stryker offers products that are complementary to those produced by Sage. Sage has a 45-year history of focus on patients and caregivers that is evident in their culture and fits well with our Medical division. This business will also provide a consistent disposable revenue stream that will complement our capital equipment offerings. We look forward to welcoming the Sage team to Stryker," said Stryker CEO Kevin Lobo in a statement.

For example, Sage's patient turning and repositioning system, designed to prevent sacral pressure ulcers (or bedsores) will be complementary to Stryker's hospital bed business, which it last year bulked up by acquiring Turkish hospital bed maker Muka for an undisclosed sum.

Recurring revenue is important because "device companies are a cost that hospitals are managing" Jefferies equity analyst Raj Denhoy told the Wall Street Journal. "If you're just offering an implant that's used in a one-off procedure, that's going to be difficult business over time, and it already is a difficult business."

The latest deal is an "exit" for Chicago-based investment group Madison Dearborn Partners.

In a statement, Sage CEO Scott Brown hinted that Stryker will help the company expand globally saying, "With Madison Dearborn's support, our business has grown domestically and we have achieved significant initial success with our international expansion. We are grateful for Madison Dearborn's partnership over the past few years and believe that Sage is well-positioned for continued achievement and long-term success with Stryker, a company that understands our business, supports our goals and embraces our values."

Following closure, expected in Q2 2016, Sage will join Stryker's $3.9 billion MedSurg division, where net sales increased 3% in 2015.

"This is an area in which that SYK has been acquisitive historically -- albeit through smaller transactions (e.g., Ascent, Patient Safety acquisitions). But it's one that in our view is increasing becoming a greater focus for hospitals as institutions look to minimize avoidable (and burdensome) expenses associated with so called 'never events.' Mgmt noted that integration is viewed more as a bolt-on that doesn't require complex integration of the sales force or manufacturing, and that there should be sales synergies associated with the combination," commented Leerink analysts Ravi Misra and Richard Newitter in an analyst note.

The investment community continues to believe that Stryker has an interest in a multi-billion dollar deal for midsized orthopedics player Smith & Nephew ($SNN) to counter the recent merger of Zimmer ($ZBH) and Biomet. S&N was named the top European takeover target for the second year in a row in a recent Bloomberg survey of analysts.

S&N shares are down about 1.5% on the London Stock Exchange because investors believe that the Sage Products transaction makes the company's takeover by Stryker less likely.

- read the release
- here's more from the Wall Street Journal

Editor's Note: This article has been updated with additional information from equity analysts from Leerink and Jefferies.