It’s Not Homer’s Stryker Anymore

It’s Kevin Lobo’s now.

Lobo has been president and CEO of Stryker since October 2012. He was recruited in April 2011 to head the newly formed neurotechnology and spine group. He was then quickly appointed group president of orthopedics.

He became CEO while the company was working its way through the drama of his boss’s resignation—former CEO, President and Chairman Stephen MacMillan. MacMillan fell out of favor with his board after a private matter became very public.

Lobo has been a different leader from MacMillan. “Mac” led like the baseball manager of the Kalamazoo Kings who played at Homer Stryker Field, often giving Wall Street analysts baseball metaphors of the company’s strategy in hitting “singles and doubles” and executing basic fundamentals of business. And Mac’s results were great. He and his team posted up double-digit earnings growth.

Lobo took over at a time that Eric Topol, M.D., author of “The Creative Destruction of Medicine” calls the most disruptive period in the history of medicine as we enter the “Era of Big Data.” Technology is exploding, competitors are consolidating, payers are demanding more evidence, baby boomers are expecting more active lifestyles and Obamacare is bringing in millions of newly insured customers.

Reshuffled Leadership Team

Among Lobo’s first acts as the new boss was to redeploy his top lieutenants and bring in new blood. One month after assuming the leadership reins, he brought in David Floyd, the former head of DePuy Orthopaedics to manage Stryker’s orthopedics and spine businesses. In addition to heading up the company’s MedSurg unit, Tim Scannell was also given neurotechnology. Lobo also hired a new CFO, Bill Jellison. The company’s Vice President of Strategy and Investor Relations Katherine Owen remained.

Then Lobo and his board went swinging for the fences.

Getting Strategic

The company made strategic acquisitions in China, buying trauma and spine manufacturer, Trauson Holdings Company Limited for $685 million. They announced an agreement to buy Patient Safety Technologies, Inc. for $120 million and jumped into robotics with the $1.65 billion acquisition of MAKO Surgical Corp.

After the last quarterly analyst conference call, it was clear from Lobo’s comments in the call that he is intent on being a transformational leader. Lobo left no doubt that he is imprinting a bold and aggressive strategic and operational vision on Homer Stryker’s company. He told analysts on January 2, 2014 that mergers and acquisitions are his top priority and with almost $4 billion in cash—he has one of the largest war chests in orthopedics.

Lobo is embracing Creative Destruction. Case in point is MAKO which Lobo told analysts has the potential to transform orthopedic surgery.

And the results so far? The numbers of the company’s last quarter tell the story.

The Numbers

Reconstructive net sales of $1.1 billion increased 5.8% in the quarter, as reported, and 8.0% in constant currency. Net sales grew by 7.1% due to increased unit volume and changes in product mix and 2.8% as a result of acquisitions.

Most analysts expect that Stryker’s organic sales growth in 2014 will be in the range of 4.5% to 6.0%.

In the U.S., reconstructive sales were up 9%, reflecting a 10% increase in hips and 8% growth in knees, in a tough year-over-year comparisons of 7% hip and 9% knees growth. And despite also facing challenging prior-year growth of 26%, which benefited from a competitor recall, sales of trauma and extremities products in the U.S. rose a respectable 8% for the quarter. Finally sales of foot and ankle products in the U.S. continued to roll, up an impressive 36%.

Lobo and his team were especially pleased with the knee unit’s performance. Zimmer Holdings, Inc. and DePuy Synthes Companies have both introduced groundbreaking new knee designs and are reporting strong market acceptances. Despite those competitive headwinds, Stryker’s own knee products did well. “We are still dealing with the absence from the market of our ShapeMatch Cutting Guides…. We believe [knee results] reflects the strength of both our Triathlon Knee and our highly motivated sales team, ” said VP Owen.

New Implants With MAKO

Lobo and his team believe MAKO, the crown jewel of their acquisition strategy so far, has the potential to transform orthopedic surgery through procedural advancements, improved patient experiences and a new generation of implants. They point out that the MAKO robotic platform has already proven itself capable of achieving consistently reproducible surgical results.

They believe that robotic-assisted surgery will enable surgeons to improve bone preparation, geometry and precision. Indeed, the Stryker team believes that MAKO’s approach is a significant improved over conventional manual instrumentation. “There’s a potential to develop new implant designs that specifically enables robotics capability and functionality. In the near term, our teams are focused on leveraging Stryker’s considerable sales and distribution capabilities to help drive adoption for MAKO’s current applications. Two areas of initial focus, which we are currently evaluating, are enabling Stryker-marketed implants to be put on the robot software and starting the trial for a total knee application in the first half of this year, ” said Owen.

Importantly, Stryker starts its integration of MAKO with an existing 20% market share in the unicompartmental knee segment. So layering MAKO over this existing market position has most analysts expecting excellent market acceptance of its partial knee application. And it could potentially build significantly from there as Lobo and his team talks about taking MAKO into total hips and total knees to leverage Stryker’s reconstructive implants.

“That is the biggest opportunity that we see for robotic-assisted surgery. We’re going to continue to use our sales and distribution capabilities to build on current indications, but the long-term potential really is around total knees, optimizing total hips and, longer term, the potential to introduce the next generation of implants that aren’t feasible with the current instrumentation, ” added Lobo.

Transformative Leader

Lobo was asked by analysts whether or not the MAKO acquisition would lead to greater use of robotic surgery in orthopedics or whether it was just part a portfolio of advanced technology for the operating room.

Lobo said the move was made to really drive market share and become the clear leader in reconstructive surgery. “So I would not assume we’re going to be passive about the way that we sell this technology. But surgeons take different times to convert. There are some that will convert very quickly, early adopters. There are others that will wait a little bit before they’ll start to convert, and there are some that will be very stubborn and want to stick to their tried and proved approaches. So we will have approaches for all types of surgeons.”

“Without a doubt, we plan to rapidly move the adoption of robotic surgery. This is a big play that we’ve made and we’re not going to be passive about really taking this to the market. Certainly, our implant sales force is extremely excited about being able to sell the implants, so they can be associated with the robots, leveraging their own relationships.”

“So make no mistake, we’re going to be leaning forward, ” added Lobo.

Lobo on Healthcare Reform and Orthopedics

In a Wall Street Journal interview last October, Lobo said the move away from pay-for-service to paying for outcomes is a positive trend. He said he believes the knee replacement business could benefit from the [Affordable Care Act], because that’s a more elective procedure. “We’re hopeful that those patients will start to come into the healthcare system and the knee volumes would grow.”

He told analysts, they won’t have to wait long to find out.

He said that after a big fourth quarter of 2013, the first quarter of 2014 will tell whether or not there is an overall uptick in the market. “Since the middle of last year, I felt that the market has been gradually improving.”

Generics and Reps

When asked about generic reconstructive joint implants and rumors of a “large” player entering the market by midyear, Lobo said he didn’t see generic hips and knees as being really a viable option in the near term because the procedures are very difficult to do.

He said, “So until the procedures are de-skilled, which has been the case in some other parts of med-tech, when a procedure is very easy to do and you don’t need a sales rep performing the high level of services that’s required to enable patient outcomes, then generics take off.”

“There’s a reason why, in China, you have a low-priced segment that does not include hips and knees, and it does not include hips and knees because these procedures are very difficult to do. That low-priced segment, which we are now participating in through Trauson, is a spine and trauma market. And so, I don’t really perceive this as a major threat. We’re always going to keep our eyes open. But frankly, until you de-skill these procedures, the sales force representation is extremely important.”

Kevin Lobo has laid it on the line. It’s his team, his strategy and his vision of transformation. Welcome to Lobo’s reconstructed Stryker.