Stryker Corporation’s second quarter 2014 reconstructive revenue increased by a reported 6.5% to $1.03 billion.
On a reported basis, knees rose 2.7%, hips up 2.3%, trauma and extremities up 11.8%, while spine fell 1.6%. Knees in the U.S. were up 7.1%. Hips also did well in the U.S., climbing 6.3%, but international sales were sluggish.
During a conference call with analysts on July 17, 2013, company management said the growth was due to increased unit volume and changes in product mix, 2.8% as a result of acquisitions and 0.1% due to the favorable impact of foreign currency exchange rates on net sales. Net sales were unfavorably impacted by 2.9% due to changes in price. Excluding the impact of acquisitions, net sales increased 3.6% in constant currency. Stryker’s orthopedic products have faced ongoing pricing pressure from hospitals in the U.S., as well as in Europe and Japan, but company executives told investors that the trends and pricing for hips and knees had remained stable.
William Jellison, Stryker’s chief financial officer, reported that charges related to the Rejuvenate and ABG II recall increased by $160 million during the period. The company also noted that charges associated with the 2012 recall may increase or decrease over time,
Jefferies analyst Raj Denhoy said despite signs of some U.S. recon market softening seen by competition (DePuy Synthes Companies and Biomet, Inc.), Stryker’s recon results make the case for continued market stabilization.
Acquisitions
Management spent considerable time discussing the company’s recent acquisitions, including MAKO Surgical, Trauson Holdings Company, Small Bone Innovations (SBi) and Berchtold Holding.
MAKO Surgical
Analysts believe the execution of MAKO has been disappointing so far. Management spent the first quarter working on their integration plan and the second quarter on beginning to train their existing reps on the technology. The company has trained only approximately 20% of its 1, 000 existing sales reps in the U.S., but management expects all of its existing sales reps to be trained by year-end.
Additionally, management expects a Stryker specific hip implant to be approved for the MAKO system in 2015 as well as the Pipeline total knee. The timeline for a specific knee on the MAKO platform is still unclear.
Denhoy said the company hopes to provide a unique and differentiated product to surgeons through MAKO. Their hope is to convert a surgeon to only use the MAKO robotic system for all of his/her joint replacement cases, with the end goal of utilizing lower cost technical reps to cover cases, thereby freeing up sales reps to sell/generate revenue rather than serve as OR support.
Small Bone Innovations
Management mentioned the SBi acquisition as a catalyst for future revenue growth. Denhoy said SBi fills in a notable gap in Stryker’s bag of foot and ankle products and provides the sales force with the only FDA-approved mobile bearing, uncemented total ankle replacement on the market. Those revenues should benefit from Stryker’s large, existing trauma and extremities sales force and an ankle recon market that it expects will grow at a 20%+ CAGR over the next several years.
Berchtold and Trauson
The company also noted the Berchtold acquisition has already resulted in over 100 additional leads exchanged between the Stryker Communications and Berchtold team, and should continue to provide both teams with increased access to C-suite decision makers.
On the international front, Denhoy said the Trauson acquisition provides Stryker with a notable presence in the growing Chinese recon market, where the company will now have a full line of both premium and low-priced product offerings. Stryker has also started the process.
Smith & Nephew Still Alive
This spring the company announced that it had started a process of looking at Smith & Nephew. Wells Fargo analyst, Larry Biegelsen, said given UK takeover law, the two companies could enter into a friendly, agreed deal only after August 28 or Stryker could bid without an agreed deal after November 28. On the call with analysts, Kevin Lobo, Stryker’s president and CEO commented that companies considering inversion deals with a good strategic rationale would not likely be deterred by the Obama administration’s request for legislation banning inversions.
Overall, Lobo said the company delivered another “solid quarter” of sales growth.
