Stryker 2Q: Hips and Trauma Shine

Stryker Corporation’s reconstructive sales climbed 5.6% to $979 million in the second quarter of 2013.

“We delivered another solid quarter of operational results with balanced sales growth across all segments and geographies, as well as strong cash flow performance, ” said the company’s President and CEO Kevin Lobo, on July 18, 2013.

On a reported basis, hips were up 3.5%, knees up $3.4, trauma up 14.4% and spine rose 3.8%

On a constant currency basis, total sales rose 7.6% during the quarter. Excluding the expected impact of foreign currency and acquisitions, projected 2013 sales growth is 4.0% to 5.5% for the full year.

William Jellison, the company’s new chief financial officer, told analysts that a $170 million increase associated with the voluntary recall of the Rejuvenate and ABG II modular hip stem and an increase of $19 million for estimated settlement expectations for previously disclosed regulatory issues, depressed profits by 35%.

Analyst Reactions

Jefferies analyst Raj Denhoy said recon growth came in higher than expected due to growth in extremities (and an extra selling day), which remains one of the few growth areas in orthopedics and where Stryker is now a market leader. He noted several positive developments, including hip/knee market stabilization; progress in the company’s turnaround efforts in Europe; and limited impact thus far from major knee launches from Zimmer Holding, Inc. and DePuy Synthes Companies.

Joanne Wuensch, BMO Capital’s analyst, said hip sales came in above the market growth rate, driven by the launch of the Secure-Fit Plus Stem (launched at AAOS in March 2013), following the Accolade II launch in the second quarter of 2012, and, most importantly, “just good ol’ execution.” With three of the manufacturers having reported so far, Wuensch said it looks like the company gained a bit of share during the quarter, “Impressive given the Rejuvenate and ABG II modular neck hip stems recalls in July 2012.”

Strong trauma sales were driven by the Trauson acquisition, and, according to Wuensch, an impressive demand for its foot and ankle products. She noted that U.S. foot and ankle sales were up 34% in a market increasing in the 10%-15% range. “Stryker is clearly taking market share in a fragmented market.”

“Management delivered a very ‘Stryker-like’ quarter, showing solid execution and upside across a wide range of business lines, including the company’s hospital capital business lines, where many investors had been bracing for downside, ” added Piper Jaffray’s Matt Miksic. “Management’s commentary regarding the tone of the orthopedics market was similar to Johnson & Johnson and Biomet, Inc., describing a stable or potentially improving environment in the U.S.”