Stryker 2Q12: Slightly Disappointing; Searching for New CEO

Stryker Corporation reported $2.106 billion in sales for the second quarter on July 18, a 5% increase on a constant currency basis. The Street had expected sales of $2.130 billion.

The company’s reconstructive division, including hips, knees and trauma, increased revenue by 3.5% to $927 million. Spine sales, part of the company’s neurological/spine division, rose 8.6% to $181 million.

On a constant currency basis, Stryker hip sales only rose 0.8%, knees rose 2.1% and trauma and extremities rose 9.3%. Spine sales climbed 8.6%.

Sales
($ in millions)

% Change* 

Total Reported Sales

$2, 106

5.0%

     Reconstructive

$927

3.5%

          Hips

$308

0.8%

          Knees

$329

2.1%

          Trauma/Extremities

$233

9.3%

     Med Surg

$786

3.3%

     Neurotech/Spine

$786

12.4%

          Spine

$181

12.2%

Source: Stryker Corporation
* Constant currency

Ortho Market Recovering

As the third orthopedic company to report revenue for the second quarter, (after DePuy Synthes Companies and Biomet, Inc.), we are beginning to see a clearer picture of the overall orthopedic market.

BMO Capital Markets analyst Joanne Wuensch said management commentary during a conference call with analysts, supports a recovering orthopedic market. “Given a weaker showing in Europe, it looks like the company lost hip and knee share, but the balanced portfolio and expense management seems to be paying dividends to the corporate strategy, ” said Wuensch.

Jefferies & Company analyst Raj Denhoy said Stryker’s performance provided further evidence of a stabilizing and potentially improving U.S. market, though he cautioned implant volumes for large joints remain below historical trend as macroeconomic headwinds weigh on these end markets.

“Interestingly, Biomet management noted that volume trends may have actually approached historical trend levels, though we continue to believe that prevailing implant pricing trends deem a return to historical overall market growth rates highly unlikely, ” said Denhoy.

Hips, Knees, Trauma and Spine

In hips, the company launched the ADM X3 Mobile Bearing Hip System and X3 Modular Dual Mobility (MDM) Mobile Bearing Hip System, as well as the Accolade II system in the quarter. Management also reiterated that the recall of its Rejuvenate and ABG II modular-neck stems should not have a material impact on sales, that only 30, 000 units have been implanted globally, and that the failure rates are still relatively low.

In knees, the company is roughly two months into its direct-to-consumer campaign for its Triathalon knee, and management expects third quarter results to be an improvement based on the activity it has generated thus far.

Trauma and extremities sales were aided by the July 2011 acquisition of Memometal, which Wuensch estimated, added $17 million in the quarter.

Spine sales benefiting from revenue associated with the Orthovita acquisition. Wuensch said the core spine business remains challenged, although double-digit growth rates were noted in Neuro Spine ENT (ear, nose, throat), interventional spine and in craniomaxillofacial.

CEO Search Update

The big question around Stryker is, of course, what about a new CEO? Management said the board does anticipate a decision regarding a new CEO in 2012. The board shouldn’t dawdle as the company’s EPS (earnings per share) missed consensus for the first time since 2008.

Forecast

The financial forecast for 2012 includes a constant currency sales increase of 3.5% to 6.5%, with exchange rates negatively impacting net sales by approximately 2% to 3% in the third quarter of 2012 and negatively impacting by approximately 1% to 2% for the full year of 2012.  Excluding the impact of acquisitions, sales growth is projected to be 2% to 5% in constant currency over the prior year.