UPDATED Oct. 28, 3:45 p.m. EST

Stryker Corp. (NYSE:SYK) will pay $1.5 billion for Boston Scientific Corp.’s (NYSE:BSX) neurovascular business, confirming a deal that’s been rumored to be in the works since August.

Kalamazoo, Mich.-based Stryker said it will pay cash for the Natick-based medical device maker’s stroke-treatment business, including $100 million in milestone payments. The unit posted sales of about $348 million last year, however, sales have been on the decline for the better part of two years. Still, company officials at Stryker said during a conference call with investors that the acquisition makes them a major player in the nearly $1 billion neurovascular market.

The milestone payments are contingent in part on the commercialization of the next iteration of Boston Scientific’s Target coils, which are delivered via catheter to treat hemorrhagic stroke. The milestones also depend on the transfer of manufacturing operations, expected to take about two years.

Boston Scientific started the Fremont, Calif.-based division when it acquired Target Therapeutics in 1997. It employs roughly 1,150 workers.

Boston Scientific Neurovascular president Mark Paul will continue to lead the division under the Stryker banner, reporting to Stryker CFO Curt Hartman. The deal is expected to close during the fourth quarter, according to a press release.

“The acquisition of Boston Scientific Neurovascular is an important strategic move as it positions us as a leader in the highly attractive neurovascular space, which we believe is well positioned to remain one of the fastest growing and most innovative sectors in medical technology,” Stryker chairman, president and CEO Stephen MacMillan said in prepared remarks. “Going forward, the proposed acquisition allows us to substantially broaden our product offerings and relevance to these customers and over time, we believe will afford us with a unique competitive advantage. We are highly enthusiastic regarding the prospects for Boston Scientific Neurovascular’s next generation portfolio of coils and other diagnostic and therapeutic devices, which are expected to provide the opportunity to regain momentum and return to market leading growth.”

For Boston Scientific, the sale means $1.2 billion in after-tax proceeds and an immediate gain of $500 million once the deal is consummated. Half of the proceeds will go towards acquisitions, with the remainder to go toward paying down debt.

“The sale of our neurovascular business is part of our overall strategic plan that will refocus our portfolio to, amongst other criteria, leverage existing sales forces with least invasive, cost and comparatively effective medical devices that reduce or eliminate refractory drug regimens,” BSX president and CEO Ray Elliott said in prepared remarks. “The proceeds from this sale will allow us to invest in future growth opportunities more aligned with that strategy while also reducing overall debt leverage.”

Boston Scientific said the divestiture will likely dilute 2011 earnings per share by four to six cents.

In a note to investors, Leerink Swann analyst Rick Wise called the deal “a positive move” for both companies and praised BSX officials for garnering such a high purchase price, calling it “pretty impressive valuation for an underperforming asset.” He noted that sales in the neurovascular division had been on the decline for the past seven quarters.

Wise said the deal for BSX was, “just one small step in what we see as an ongoing portfolio shaping and optimization process for Boston.”

For Stryker, Wise said the deal will expand its neurosurgery businesses and, “add an important new growth platform” that will likely start to bare fruit by 2012.

Stryker’s Hartman said during the company’s conference call, that the they were projecting some 10 percent growth in the market over the next two years.

“We think 2011 will be a step in right direction and 2012 gets the business back in line with market growth,” he said.

The deal is a variation on speculation that surfaced last summer that Stryker would buy Boston Scientific’s pain management arm for about $1.4 billion. A second deal for the neurovascular business, alleged to be worth about $1 billion, was also rumored to be in the works.

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