$12.4 Billion

KEY EXECUTIVES:
Kevin A. Lobo, Chairman and CEO
Glenn S. Boehnlein, VP, Chief Financial Officer
Lonny J. Carpenter, Group President and advisor to the CEO
Viju Menon, Group President, Global Quality and Operations
David K. Floyd, Group President, Orthopaedics
Timothy J. Scannell, Group President, MedSurg and Neurotechnology
Xavier M.C. Berling, President, Trauma & Extremities
Stuart F. Simpson, President, Joint Replacement
Bradley W. Paddock, President, Spine
Mark H. Paul, President, Neurovascular
J. Andrew Pierce, President, Endoscopy
Bradford L. Saar, President, Medical
Spencer S. Stiles, President, Instruments
Brian J. White, President, Sustainability Solutions

NO. OF EMPLOYEES: 33,000

GLOBAL HEADQUARTERS: Kalamazoo, Mich.

Taylor Koob was running out of options. Fast.

Floodwaters from a meteorological monster named Harvey were inundating his Jeep, trapping the 25-year-old Houston man inside. Pounding waves and a tremendous storm surge turned the vehicle into a virtual sarcophagus by jamming its doors and sparing the windshield from Koob’s repeated blows.

“I started kicking the front windshield. I kicked the windshield about 40 or 50 times and all there was was hairline cracks,” he recalls. “I really thought that I would die. I remember taking my last breath, and looking up at the windshield wiper motor in the back of the Jeep...after that, I passed out.”

It’s been nearly a year since Harvey dropped record amounts of rainfall on America’s fourth-largest city, and Koob still isn’t sure how he escaped his submersed tomb; he only remembers “emerging out of the water” rejuvenated. Firefighters pulled him from the deluge, but it took them eight hours (via a dump truck, boat, and ambulance) to transport the dazed and injured millennial a mere 11 miles to the nearest hospital. Koob arrived at St. Joseph Medical Center with a shattered ankle and serious flood-water-soaked gashes on his leg.

Koob spent a month in the hospital recuperating from his injuries. He underwent five surgeries and continues to be monitored for infection due to his exposure to contaminated water. Key to his recovery—at least from his surgeons’ perspective—was the Hoffmann 3 Modular External Fixation system from Stryker Corp., a lightweight device made of carbon-based materials that provides support for open and/or unstable fractures complicated by soft tissue damage. The Fixator remained on Koob’s ankle for two months as he convalesced at home.

“The Hoffmann Fixator was put on to stabilize my foot and my ankle because my tendons and ligaments were ripped and torn,” Koob explains in a Stryker website video. “I had it on for two months—I ate with it [on], slept with it [on]. It was really imperative to my recovery and getting me to where I am today in being able to walk around and starting to lift weights again. I didn’t feel like I was ever going to walk again.”

Certainly, regaining the ability to walk was an integral part of Koob’s recovery, but it’s going to take time to heal the emotional wounds that linger from Harvey. Flashbacks of rising water and vehicular entrapment still haunt Koob, making driving difficult at times (fortunately, he no longer owns a Jeep).

Despite occasional bouts of anxiety, Koob maintains a laser-like focus on his recovery. He credits his resolve to the Hoffmann 3 Fixator that helped rebuild his foot and is now a permanent part of his bedroom decor. “I keep it there on my bookshelf just to kind of remind me where I’ve been and where I still need to go in terms of recovery,” he says in the Stryker video. “As far as coming to terms with everything that happened, I think that’s a lengthy process, but we’re making steps to get back on the right path and get things back to normal.”

Normal is a relative term, though. For Koob, normal means lifting weights again and driving without fear. But for the company that saved his foot and ankle, normal translates into solid profits and product portfolio diversification.

Stryker basked in the glory of a mostly normal year in 2017 as sales topped $12 billion for the first time in its 72-year history and new solutions unfolded in total knee arthroplasty, power tools, veterbral compression fracture technology, and minimally invasive ENT (ear, nose, throat) treatment.

The new offerings supplemented Stryker’s product portfolio through both acquisitions and market releases. In the year’s most significant and highly anticipated rollout, Stryker unveiled a total knee replacement application for its Mako System robotic arm. The advancement, according to company executives, distinguishes Mako as the first and only functional robotic technology for total knee, hip, and partial knee replacement procedures.

The new application gives Mako the ability to implant Stryker’s Triathlon knee, which won U.S. Food and Drug Administration (FDA) approval in August 2015. Mako creates customized surgical plans for patients through computed tomography-based 3D modeling of bone anatomy; it also allows for intra-operative planning and assists in bone resectioning procedures.

By adding the Triathlon knee to Mako’s skill set, Stryker is casting the robot as a market share and quality improvement play—both crucial factors given the slow growth of the global hip and knee replacement market and dearth of significant technological innovations, particularly in the hip arena. The strategy seems to be paying off, too: Just three months after commercially releasing the Triathlon application (March 2017), Mako performed its 100,000th robotic arm-assisted procedure in the United States. In November, the company added a cementless option to its offerings—Mako Total Knee with Triathlon Tritanium.

“This [procedural] milestone demonstrates strong continuing acceptance of this technology and highlights how together with our customers, we are creating the future by growing the robotics market,” Bill Huffnagle, president of Stryker’s Joint Replacement Division, said in marking Mako’s milestone.

---

ANALYST INSIGHTS: Always aggressive, Stryker is as dangerous as ever in 2018 as it has cash to spend on acquisitions. Rumors continue to circulate about Smith & Nephew and Boston Scientific as possibilities. However, I look to more small to medium-size acquisitions that strengthen their existing portfolios or provide adjacent space penetration.

—Dave Sheppard, Co-Founder and Principal, MedWorld Advisors

---

In addition to growing the robotics sector, Stryker expanded its power tool market share with the March release of the System 8 product line, a family of instruments that deliver extended battery life (a 30-day shelf life), improved ergonomics, and better durability compared to previous System 7 models.

New to System 8 is the EZout Powered Acetabular Revision System, a line of hip revision tools that enable surgeons to remove an acetabular cup in three to five minutes. Other System 8 rookies include a cordless driver for drilling, cutting, and reaming in sports medicine and trauma procedures; a lightweight saggital saw for optimal cutting speed, control, and accuracy; and a precision saw featuring an oscillating tip to reduce vibration and enhance handpiece control.

All System 8 tools are designed as smart devices and connect to Stryker’s new online data module called Smart Equipment Management. The module aims to help clinicians manage the company’s smart products through device-derived, actionable data.

Stryker followed up the System 8 product release with an enhancement to its non-power ENT instrument portfolio, purchasing ear, nose, and throat device maker Entellus Medical Inc. for $662 million. The December acquisition gave Stryker ownership of Entellus’ complete slate of products including forceps, sinuscopes, implants, wireless cameras, and the XprESS Multi-Sinus Dilation System.

The latter device was the subject of an April 2017 FDA warning letter that admonished the company for failing to prevent doctors from violating the approved protocol for an XprESS pediatric clinical trial. Entellus was authorized to conduct clinical trial surgeries on the maxillary sinuses of children younger than 12 but did not have clearance to operate on the frontal and sphenoid sinuses of subjects aged 12 and under. Yet 18 of the trial’s 33 pediatric sinus surgeries involved balloon sinuplasty on the frontal or sphenoid sinuses.

“This off-protocol use could have led to serious medical complications in these children, including cerebrospinal fluid leaks, intracranial complications, and meningitis,” the FDA stated in its letter, made public in September. “You were informed on several documented occasions that the FDA had safety concerns and did not approve the use of the device for the treatment of the frontal and sphenoid sinuses on pediatric patients ages 2-12.”

Entellus’ warning letter came to light about a month before Stryker acquired a controlling interest in Vexim, a French medical device company specializing in minimally invasive vertebral compression fracture treatment. The firm’s flagship product, the SpineJack system, is a mechanical expandable VCF implant for fracture reduction and stabilization. Vexim’s technology is a natural fit for Stryker’s Interventional Spine business and a logical catalyst for market growth.

Indeed, the $223 million Vexim purchase—like most of Stryker’s acquisitions in recent years—was conceived with existing market expansion in mind. But its $674 million buyout (June) of Novadaq Technologies Inc. (and Entellus to lesser extent) is indicative of the company’s willingness to tap new sectors.   

Mississauga, Canada-based Novadaq sells fluorescence imaging systems that allow surgeons to visualize blood flow during open surgery—procedures in which Stryker’s core devices are not generally used. Clinical studies, however, have shown Novadaq’s technology reduces postoperative complications in breast reconstruction operations and potentially can lower hospital costs—key survival factors for the 21st-century healthcare environment.

“Fluorescence imaging is like having a GPS system during surgery,” Dr. Santiago Horgan, from the School of Medicine & Center for the Future of Surgery at the University of California, San Diego, noted in Stryker’s 2017 annual report. “It will become the standard of care.”

Upon closing the Novadaq deal, Stryker incorporated the fluorescence imaging technology into the Endoscopy division of its MedSurg business, its most profitable unit in 2017. Total sales jumped 13.6 percent to $5.5 billion, due largely to double-digit growth in the Endoscopy and Medical divisions (12.4 percent and 20.5 percent, respectively). Instrument revenue swelled 8.1 percent to $1.68 billion, while Sustainability solutions (reprocessed and remanufactured medical devices) grew proceeds 8.9 percent to $258 million.

Interestingly, the MedSurg unit proved immune to any sustained fallout from last summer’s voluntary recall of certain Sage Products items. The late August recall was triggered by an FDA warning letter about contamination issues with a handful of cloth products manufactured by a third-party supplier. The letter cited three consumer complaints about Sage’s Comfort Shield cloths as well as positive testing for Burkholderia cepacia, the same bacteria responsible for four previous Sage cloth recalls from 2006-2016.

Last year’s market retraction affected Sage cloths distributed between July 2015 and August 2017; the affected Oral Care products were manufactured on equipment shared with “non-pharmaceutical” items, according to FDA. Although the contaminated cloths did not cause any serious harm to consumers, Stryker acknowledged reports of some minor irritations and allergic reactions associated with the tainted batches.

To safeguard future production of its Sage cloths, Stryker cut ties with the culpable supplier and moved all Oral Care product manufacturing in-house.

Stryker shares slipped 3.7 percent on the recall news and its third-quarter sales fell by $45 million, but the company nevertheless turned a healthy profit in 2017, growing total revenue 9.9 percent to $12.4 billion and diluted earnings per share 11.9 percent to $6.49. Moreover, gross profit rose 9 percent to $8.1 billion and operating income climbed 5.7 percent to $2.3 billion.

“Our sales growth was once again at the high end of the medical technology industry,” Chairman and CEO Kevin A. Lobo told investors in Stryker’s 2017 annual report. “We maintained our commitment to R&D, spending 6.3 percent of sales and...we also continued to be acquisitive. In 2017, our growth was well-balanced across businesses and geographies.”

Actually, growth was nearly identical geographically: U.S. sales jumped 10.1 percent while international proceeds ballooned 9.4 percent.

Gains were a bit more disproportionate among Stryker’s business units and divisions. Orthopaedics, for example, reported a 6.6 percent sales increase last year as Neurotechnology and Spine revenue surged 8.2 percent. Growth in the latter segment mostly was driven by a 13.4 percent rise in Neurotechnology division proceeds ($1.42 billion) and tempered by flatlining Spine sales ($751 million).

Such disparity was evident in Orthopaedics as well, though no division crossed into negative territory last year. The segment’s “Other” category was the top performer, growing sales 18 percent to $337 million. Trauma and Extremities trailed behind with an 8.3 percent revenue bump (to $1.47 billion), followed by Knees (7 percent increase to $1.6 billion) and Hips (1.6 percent boost to $1.3 billion).