Stryker Treading Water – Going Shopping

Stryker Corporation’s 2014 fourth quarter orthopedic sales of $1.11 billion were roughly in line with Wall Street expectation and rose 4.5% on a constant currency basis from the previous year’s quarter.

On a reported basis, hips, knees and spine dropped 3%, 2.2% and 2.5%, respectively. Trauma saved overall sales by climbing 9.2%. There was some good news as 20 MAKO robotic knee systems were placed during the quarter, compared to eight sold in the third quarter. In addition, company management hopes for FDA approval of the MAKO total knee is expected sometime in 2015. BMO Capital Markets analyst Joanne Wuensch said excluding the benefit of MAKO in knees, “The segment saw its sales decline slightly, likely resulting from not having a brand new knee on the market.”

Wuensch also said the compatible-product launches with the MAKO system “is a positive step to help sway the hospital purchasing groups to purchase the system, but at the same time, these products are not new, and are likely to see the same pricing pressures as other implant devices. Looking forward, we do expect management to sell more MAKO robots, but sales should likely ebb-and-flow (and we don’t expect 20 robots every quarter).”

The company has submitted a 510(k) application for the Triathlon Total Knee, but Wuensch does not anticipate clearance contributing to sales until 2016. Management also anticipates launching, though on a limited basis, its cementless unicompartmental knee in the second quarter of 2015. On the hip side, Wuensch anticipates management to add its Accolade Hip and X3 Poly Bearing on the MAKO in 2015.

On a conference call with analysts on January 27, 2015, company officials blamed the weak sales on operational issues in Japan associated with the ERP (enterprise resource planning) rollout, implant pricing pressure and tough year-over-year comparisons. They do not believe the company lost any market share on a volume basis.

4th Quarter Recon Market

Glenn Novarro of RBC Capital Markets estimates the recon market grew 2.0 to 2.5% during the quarter on a constant currency basis. That’s a big change from last year’s fourth quarter growth when there was a big push to get procedures done before the Affordable Care Act took full effect and patients used up their health savings accounts before year’s end. Mike Matson of Needham & Company also estimates that the recon market grew by 2% during the quarter versus 4% in the third quarter. Matson estimates that, on a constant currency basis, global knee growth was 2% and global hip growth was 2%. He attributes the slower growth due to the big sales growth seen in last year’s fourth quarter, making this year’s fourth quarter a tough comparison.

Stryker: Going Shopping

But analysts on the January 27 conference call were mostly interested in what Stryker is going to do with all its cash. The company ended 2014 with $1.79 billion in cash, up from $1.33 billion a year earlier. Company CEO Kevin Lobo the worked analysts into a lather by emphasizing that acquisitions are the priority use of cash. Jefferies analyst Raj Denhoy wrote that merger and acquisition is likely, but remained cautious on the merits and likelihood of a Smith & Nephew acquisition.

To fatten the war chest even more, the company plans to repatriate some $2 billion in cash held overseas in the second half of 2015.

According to Reuters, Lobo speaking at the JP Morgan healthcare conference in San Francisco on January 13, 2015, said the company was in a very strong cash position that would allow it to make acquisitions that are “small, medium or even large…. We need to be market leaders in the areas that we choose to play in…. We’ll look at deals of all different sizes…to strengthen our position.”

Stryker currently has about two-thirds of its total sales in the U.S., with about a quarter coming from other developed markets and 8% from emerging markets.

Lobo told attendees at the JP Morgan conference that he sees Europe as a critical area with room for improving the company’s performance, and said he believes the capital spending climate there is improving. “Our market shares are dramatically lower in Europe than in the U.S., Canada or Japan, ” he said. “Our products should be garnering higher market share there.”

2015 Guidance

Finally, company management told analysts it expects 2015 constant currency sales growth in the range of 5.5% to 7.0%, including organic sales growth in the range of 4.5% to 6.0%.