Lobo’s Big Bets Deliver in Stryker’s 1st Billion $ Recon Quarter

Stryker Corporation reached over $1 billion in reconstructive sales, opened a European headquarters in Amsterdam, repatriated billions in foreign profits without an inversion deal and completed the acquisition of Small Bone Innovations, Inc. (SBi) in the third quarter of 2014. They even ended the quarter with $4.7 billion in cash.

Sales of implants for large joint reconstruction rose a solid 8.5% for the third quarter. Acquisitions accounted for 3.7% of that rise. Knee sales rose 6.4%, hips were up 4.1%, trauma and extremities continued their double-digit tear climbing 11.5%. Spine, however, just limped along, rising 1.9%.

U.S. Sales

Sales in the U.S. were even better with total recon sales up 11.9%. Trauma and extremities were up 15.3%, with Stryker’s U.S. foot and ankle business soaring 30%, excluding the impact from the acquisition of SBi.

U.S. hips and knees grew 8.1% and 6.8%. Sales outside the U.S. were down nearly a percentage point in hips against a 9% comp last year in the quarter, but up 5.3% in knees on a constant currency basis.

POD Spine Challenges

PODs (physician-owned-distributorships) continue to put a drag on Stryker Spine sales. Analysts asked company Chairman and CEO Kevin Lobo if he is seeing any signs of POD activity slowing.

“No, it really hasn’t changed, ” said Lobo. “For every POD that goes away new PODs seem to pop up. It seems to be pretty stable overall.” He said he hopes the prosecution [of Reliance Medical] will turn that tide. He added that their spine business has obviously had some challenges in the first quarter, highlighted around some sales force disruptions. He said they are focused on upgrading their portfolio to have “much more” MIS products. They have also made some new leadership changes at spine, and have an “exciting” portfolio of products that customers will start to see at the beginning of next year, which will hopefully make them less immune to the kind of price pressures he says the company has had on their core spinal endpoint.

A Year of Acquisitions

Lobo and his team, including VP of Strategy and Investor Relations, Katherine Owen, have had a busy 12 months, completing acquisitions of China ortho company Trauson Holdings Company Limited, robot maker MAKO Surgical Corp., Patient Safety Technologies, Inc., Pivotal Medical, Inc., Berthold Holding, AG and Small Bone Innovations.

But the main Stryker story for 2014 (other than the absence of a Smith & Nephew acquisition) is the transformation of Stryker orthopedic implant business to a mix of traditional procedural approach and the MAKO Surgical robotic platform. Furthermore, Stryker doubled its foot and ankle market share in the hot extremities market.

MAKO Surgical

MAKO’s sales have been less than expected but Owen said they are encouraged by the pipeline development and clinical progress.

She told Wall Street analysts on October 16, 2014, that the company has made progress each quarter with a total of eight robots sold during the past quarter. “We are confident that the market for robots is improving as we have a strong pipeline of deals we are working on closing.” She also said they expect robotics to eventually become the standard of care.

Owen cited several reasons for their optimism about the fourth quarter and 2015.

Integrating Sales and Financing

First, the company is in the final stages of the integration of the MAKO selling organization into the recon sales force and is developing a sales coordination system between the MAKO capital sales reps and Stryker’s very large recon implant salesforce.

The first stage of this integration was completed in April as the company moved the MAKO selling and service organization into their recon division and management. Owen commented, “We continue to work toward full integration into a single implant and selling organization. Gaining near-term sales synergies has proven to be more challenging than we anticipated, but we are encouraged by the recent momentum.”

“It’s just integrating a capital salesforce alongside a very large implant salesforce, and going through the necessary training and coordination that has to take place in existing accounts. So it’s nothing truly unique, it’s a big job, ” said Owen.

Lobo added that there were certain parts of the country where some Stryker customers wanted better use of their robots. There was an HMA (Health Management Associates, Inc.) bulk buy. He said CHS (Community Health Systems), which bought HMA as a big chain, wasn’t really pleased with the performance of some of their robots. “So we went through a big process to actually transfer and move about six or seven robots to high performing locations. That took a lot of effort on the capital sales team that’s normally focused on selling. That will pay dividends for us going forward, but it’s obviously tied up a lot of activity.”

Flexible Hospital Financing

Second, Owen said they have developed and expanded a flexible financing offering that she believes a number of hospitals will find attractive. On the clinical side they have completed enrollment in their total knee trial and continue to target FDA approval in 2015.

Explaining the financing offering, Owen said the financing was offered because of the capital components that exist within many of the company’s MedSurg businesses. “We have been in that financing area for a number of years. What we are doing is expanding that and leveraging that expertise over to the recon side, where the MAKO capital fits, and really helping them work with some of the budget limitations that exists between capital and operating budgets within a hospital…It’s something that MAKO couldn’t offer to customers.”

MAKO Hips for 2016

Stryker is also moving hips to the robotic platform.

Owen said they are seeing an “increasing interest” on the hips side where there is an indication for clinical use. The company expects to get approval with Triathlon on the robot in 2015.

She told analysts to think about 2016 as the year when the company is really going to be on a trajectory “where it’s indicative of us taking meaningful market share gains.”

Lobo said “surgeons for the most part are pretty happy with our hips, so this requires really a change management with surgeons, to really get to try it and have a good experience.” But he still sees the total knee as a much bigger opportunity. “There is less overall satisfaction with patients and the perception of improvement we think is far greater than total knee. The knee still for us is the biggest opportunity.”

SBi (Small Bone Innovations)

Regarding SBi, Owen said they were very pleased with the early integration and sales have been better than expected. “We have trained over 100 Stryker reps on the STAR Ankle and various products. By the time the training is complete, we will have over 200 reps trained and selling the STAR Ankle and over 400 reps trained and selling SBi’s various upper extremity products.”

She said most of the growth is coming from expanding the market. “We are calling on new surgeons that weren’t putting in implants before. That has been really the engine of growth. The STAR ankle really fills a very important gap in the product portfolio.”

Recon Market

Asked about the overall recon market, Owen and Lobo said clearly the momentum they are seeing in Europe continues, and that’s helping growth outside the U.S. Owen reminded analysts that the company had some very difficult comps, particularly on the hip side. “Japan, with the price cuts have been challenging…But overall, [we] feel pretty good about the environment.

And on the U.S side?

She said it was a little tough to tell yet, because not all companies have yet reported their quarterly sales. “But in terms of hips, we feel pretty comfortable that we are growing ahead of the market, even after adjusting for MAKO. For the past eight quarters, we have kept pace with the market. We may be a little trailing in that this quarter. It does seem like overall, this is a year where the hip market is stronger than the knee market.”

Regarding seasonality, she said analysts will see a similar dynamic recognizing that [the market] was exceptionally strong in the fourth quarter last year. “Clearly, Q4 is going to see the benefit of that seasonality.”

In the U.S., hip and knee pricing was consistent with what they saw in the second quarter of this year—approximately in the mid-single-digit range.

“Dramatic” Medical Acceleration

Lobo said the company clearly saw a “nice performance” in medical last quarter and that has accelerated “very dramatically” in the third quarter. “We can see conditions in the market improving.” He said they will have a better sense on how much of Stryker’s growth is a growing market, versus taking market share. “My sense is, we are probably growing a little faster, but I can’t dimensionalize that for you just yet.”

The story on hips is not a new story, said Lobo. Somewhat like trauma, where the company has continued to sustain double-digit performance, “Hips, if you go back 12 quarters, we have been growing faster than the market, at a pretty steady rate.” He attributed that to a combination of some new products like Accolade II, as well as really strong execution in the field.

With the knee business, Lobo said they have just been performing with the market, “Which is a very good performance, given that we had two large competitive launches.”

Lobo on “Consolidation Disruption”

Analysts indirectly asked Lobo if Stryker would benefit from any sales force disruption from the pending Zimmer/Biomet deal.

“We are not really seeing much in the way of disruption yet. As we saw with the previous big acquisition [DePuy/Synthes], the disruption really didn’t occur sort of post-implementation. Once implementation begins and people really understand ‘what does this mean to me?’ that’s when we really start to see disruption. So I would say it’s sort of business as usual right now, and we are seeing a pretty stable marketplace, at least at this point. Once the companies integrate, that’s usually when we tend to see more turmoil.”

Stay Tuned

Lobo, Owen and company continue to maneuver around the existing and in-the-making ortho superpowers, DePuy Synthes and Zimmer/Biomet with big bets on robots and extremities. With a new beachhead in Amsterdam, the ortho world waits to see if Stryker has London and Smith & Nephew in their sites. Stay tuned.