Stryker’s New CEO Lowers Expectations

Kevin Lobo, Stryker Corporation’s new president and CEO’s first job was to lower expectations.

Stryker had been without a permanent leader since last February, when Steven MacMillan was sent packing for personal behavior unacceptable to some members of the company’s board. During that time, the company’s near legendary double-digit earnings growth rate took a hit.

Third quarter net sales of $2.1 billion, up only 1% from the previous year’s quarter were, in Lobo’s words, disappointing. “As a result we are lowering our earnings outlook for 2012 and 2013, ” Lobo told analysts. “We expect market conditions to remain challenging in Europe and for capital equipment.” He also told analysts that with the new 2.3% device tax taking effect in 2013 and an estimated $100 million impact, the Stryker will not be able to meet previous earnings growth projections. The company had previously announced layoffs to cover the tax.

New Forecast

The new forecast for 2012 includes a constant currency sales increase of 4% to 5.5%, with foreign currency negatively impacting revenue by approximately 0.5% to 1.5% for the full year. Lobo said the company plans to meet the lowered expectations.

Reconstructive

Reconstructive net sales of $891 million decreased 1.1% in the quarter over the prior year, as reported. Net sales in the quarter grew by 2.4% due to increased unit volume and changes in product mix and 0.1% as a result of acquisitions. On a reported basis, hips sales dropped 3.9%, knees increased 1.4%, trauma and extremities declined 0.7% and spine dropped 1.6%.

Sales
($ in millions)

% Change

Reported Reconstructive Sales

$891

down 1.1%

     Hips

$288

down 3.9%

     Knees

$315

1.4%

     Trauma/Extremities

$235

down 0.7%

     Spine

$175

down 1.6%

Source: Stryker Corporation

Management said U.S. sales led constant currency growth with knees up in the mid-single-digits, reflecting the early impact from the company’s GetAroundKnee direct-to-consumer campaign. The drop in reported hip revenue reflects tougher year-over-year comparisons and a modest impact from the Rejuvenate recall.

Joanne Wuensch, BMO Capital Market analyst, said the company’s ADM X3 Mobile Bearing Hip Systems (now 22% of hip sales), continue to experience healthy demand, and the Accolade II launch is proceeding above expectations, noting it’s the No. 1 selling stem in the U.S. after only two quarters on the market.

Given a chance to echo previous comments by competitors that physician-owned distributors (PODs) and payer pushback were culprits for slow spine sales, company management told analysts they saw no “meaningful changes” in that area.

Lobo Looks Ahead

Turning business around in Europe will be his first job, said Lobo. He cited market and internal company problems for the sales declines and promised new leadership on the Continent. He also said he will be finding someone to fill in his own, departed roles as head of orthopedics. 

“In closing, ” Lobo told analysts, “Q3 presented challenges, while also underscoring the potential we have to deliver solid underlying revenue growth. Although the issues impacting our international businesses will not be resolved in a single quarter, I’m confident that we will be taking the necessary measures to ensure we first get back to market growth, while also ensuring we are realizing the leverage in the P&L. We have a number of important product launches underway throughout the company, coupled with a focus on driving greater operating efficiencies through our global quality and operations teams, which will drive $500 million of cost savings over the next five years.”

The disappointing results and lowered expectations didn’t spook investors. Mizuho analyst Mike Matson said that while Stryker faces a number of challenges; he thinks these are well-understood by investors and mostly priced into Stryker shares at current levels.

So Kevin Lobo’s first quarterly joust with Wall Street analysts is now behind him. He lowered expectations and promised modest improvements. Machiavelli would be proud.