Kevin A. Lobo, President & CEO
Lonny J. Carpenter, Group President, Global Quality and Operations
Ramesh Subrahmanian, Group President, International
David K. Floyd, Group President, Orthopaedics
Timothy J. Scannell, Group President, MedSurg & Neurotechnology
J. Andrew Pierce, President, Endoscopy
James N. Heath, President, Instruments
William J. Huffnagle, President, Reconstructive
Vivian Masson, President, Osteosynthesis
Mark H. Paul, President, Neurovascular
Bradford L. Saar, President, Medical
Spencer S. Stiles, President, Spine
NO. OF EMPLOYEES: 22,010
GLOBAL HEADQUARTERS: Kalamazoo, Mich.
Stryker Corp.’s 2012 narrative reads like a fairy tale without the happy ending: The company triumphed over a tough economy and still-stagnant joint replacement market to grow sales, profit and adjusted net earnings by respectable margins, but it was blindsided in the year’s final quarter by exorbitant recall charges that dragged down income.
The cost of last summer’s Rejuvenate and ABG II modular neck-hip stems recall, along with various restructuring efforts, cut fourth-quarter net income by 32.7 percent to $270 million. On the quarter, Stryker spent about $133 million to handle the repercussions of its global retraction, but that price tag could nearly triple as the manufacturing behemoth covers the cost of possible replacement surgeries and settles lawsuits with disgruntled customers.
Stryker halted worldwide production of the all-metal implants in June 2012 amid concerns of fretting, corrosion and failure in some cases. At least 45 patients have claimed the modular neck-hip stems—which attach to artificial hips—caused pain and/or tissue swelling.
Freshman President and CEO Kevin A. Lobo ignored the recall blemish in his annual letter to investors, preferring instead to focus on the more enchanted aspects of his company’s performance last year, specifically, double-digit growth in emerging markets and neurovascular products.
“Our tradition of high performance continued in 2012, a year of significant achievements,” Lobo told shareholders in his first literary lecture for the company’s 48-page annual report (he assumed the top job on Oct. 1). “Despite the challenging marketplace…most of our U.S. businesses accelerated, with particular strength in reconstructive, instruments and sustainability solutions.
Internationally, we achieved strong double-digit growth in emerging markets and [we] are pleased with our neurovascular business, which also had double-digit growth.”
The Neurovascular unit cast its spell over the company (and Lobo) through the Trevo Pro Retriever and Trevo ProVue Retriever blood clot removal devices. The stent-based products—designed for use in acute ischemic stroke (AIS) patients—are only the fourth mechanical thrombectomy devices to receive U.S. Food and Drug Administration (FDA) approval for AIS. Clearance for the Trevo Pro came on the heels of clinical trial results that showed significantly greater revascularization rates for the product compared with Stryker’s Merci Retriever system (86.4 percent vs. 60 percent). Functional outcomes also improved, with 40 percent of Trevo Pro patients achieving a modified Rankin score of two or less compared with 21.8 percent of Merci patients. Other measures that favored the Trevo Pro included National Institutes of Health Stroke Scale scores and hospital length of stay.
“In this patient population, rapidly restoring blood flow to the brain is critical,” said neurologist Wade Smith, M.D., of the University of California San Francisco Medical Center. “This technology advances our ability to help many patients avoid the devastating effects from a large stroke if they can get to a comprehensive stroke center quickly for treatment.”
Likewise, the Trevo ProVue Retriever—launched worldwide in November—can help minimize AIS damage, but it also potentially can identify underlying stenoses because the tool is fully visible during the clot removal procedure (previous iterations only have provided visibility to the device’s edges).
“Trevo ProVue sets a new standard in stent retrieval technology,” Mark Paul, president of Stryker’s neurovascular division, said when the product debuted. “It’s the first fully visible device allowing physicians to visualize placement, clot interaction and retrieval—that can make a big difference in patient treatment.”
Both Trevo Pro devices certainly made a big difference in the company’s neurovascular net sales last year—revenue jumped 12.3 percent to $842 million, according to the annual report. The growth helped boost total Neurovascular and Spine segment sales by 9.2 percent to $1.56 billion. Spinal product sales climbed 5.8 percent to $727 million.
The Neurovascular and Spine unit was Stryker’s top-performing business in 2012, outpacing growth in both the MedSurg and Reconstructive segments by nearly a 3-1 margin. The MedSurg unit posted a 3.3 percent gain in total net sales, due mostly to a 6.2 percent surge in medical instrument revenue while the Reconstructive division generated a 3.1 percent net sales increase.
The likely driver of Stryker’s $1.26 billion in net instrument revenue was the System 7 surgical power tools launched in early spring. Used in joint replacement procedures, the System 7 family includes a less noisy saggital saw; a dual trigger rotary with substantially increased torque; a reciprocating saw; longer-lasting batteries (the small battery lasts 220 percent longer than previous versions, while the large battery lasts 183 percent longer); a sternum saw; sealed sterilization containers; a preventative maintenance program; and a remote device management system that transfers device usage data to remote Stryker support teams to help monitor and recommend ongoing tool maintenance.
Another boon to MedSurg’s bottom line was the 1488 HD 3-Chip Endoscopic Camera System, which features complementary metal oxide semiconductor technology (used to build integrated circuits) and premium optics to provide doctors with a clear, bright image. The device also standardizes video systems to one platform.
In the Medical division, Stryker launched its Power-LOAD cot fastener system for lifting and lowering ambulance beds. Executives claim the system improves patient safety by reducing spinal loads and consequently, the risk of cumulative trauma injuries.
Despite its advantages to the trauma patient, however, the Power-LOAD cot fastener system failed to keep total Medical sales out of the red last year. Revenue tumbled 4.3 percent to $691 million, offsetting the 2.9 percent rise in endovascular product sales ($1.1 billion). Yet the loss—the sole spoiler of a flawless financial record—had little effect on total MedSurg sales of $3.26 billion.
Still, there were other foibles along Stryker’s path to fiscal perfection, such as the Rejuvenate and ABG II recalls (which stymied third-quarter Reconstructive sales and fourth-quarter diluted net earnings) and a $33 million payoff to close a federal investigation into the sales and marketing of the company’s OtisKnee implant. The U.S. Department of Justice subpoenaed Stryker in 2010, alleging that it violated federal laws by selling a device the FDA hadn’t cleared for marketing.
Nevertheless, the Reconstructive unit held up well last year, posting an overall 3.1 percent gain on $3.82 billion in sales. Trauma and extremity devices were the top revenue-generators for the division, collecting $989 million, a 6.2 percent increase compared with 2011 and a 17 percent rise compared with the products’ 2010 total of $845 million.
Hip and knee sales performed surprisingly well for the company, considering the ongoing fluctuations in demand for elective procedures and continuing brouhaha over metal-on-metal implants. A study funded by the National Joint Registry and published last spring in The Lancet found that patients with all-metal hip implants are nearly three times as likely to need their artificial joints repaired or replaced after five years (6 percent vs. 1.7-2.3 percent for ceramic or partially plastic joints).
“If I were a patient, I would not choose a metal-on-metal hip,” study author Ashley Blom warned when the findings were released.
A growing number of convalescents no longer are choosing them, either: Industry estimates indicate metal-on-metal hip sales in the U.S. and Europe plunged from 20 percent of the market in 2007 to less than 2 percent in 2012.
The staggering loss in market share helps explain Stryker’s flat hip sales ($1.23 billion) in the year ended Dec. 31, 2012, despite the launch of a computer-assisted surgery system for its Gamma3 Locking Nail System and a hip stem with a morphometric wedge design (the Accolade II).
Knee sales, conversely, grew 3 percent to $1.35 billion, thanks largely to the success of Stryker’s GetAroundKnee direct-to-consumer advertising campaign. The savvy scheme not only publicized the benefits of the company’s 5-year-old Triathlon Knee System, it also represented a change in the way executives approach innovation and market share.
“There is this feeling that innovation is the enemy of good, cost-efficient healthcare,” Lobo said at Cleveland Clinic’s 2012 Innovation Summit. “Innovation doesn’t mean a more expensive implant. The freshness index isn’t as important as it used to be. We have a very fast-growing knee business, and it’s not all new knees.”
Such a novel approach to innovation is just one facet of Lobo’s long-term growth strategy for Stryker. Other components of his plan include building scale in emerging markets and other uncharted lands; shifting innovation teams from groups of R&D engineers to groups of engineers, IT technicians, supply chain personnel and health economists; cost cutting; and restructuring (Lobo already reshuffled his executive team’s roles, adding Spine to Orthopaedics Group President David K. Floyd’s responsibilities and tacking on the Neurotechnology business to MedSurg Group President Timothy J. Scannell’s duties).
Lobo’s plan also could entail more M&A. Over the last few years, Stryker has gone on quite a spending spree, snatching up such companies as Concentric Medical, specialty spine company Orthovita Inc., Ascent Health and the neurovascular division of Boston Scientific Corp. The company cut back on its M&A spending last year, shelling out a mere $100 million in cash for Israeli stent technology developer Surpass Medical Ltd. The company’s key product, the CE marked NeuroEndoGraft family of flow diverters, is designed to redirect blood flow away from an aneurysm, allowing a stable clot to be formed within the aneurysm pouch.
“The strategy is going to continue to evolve…” Lobo told analysts last fall.
His strategy may still be evolving, but it already has shown promise: Overall sales jumped 4.2 percent in 2012 to $8.6 billion and gross profit climbed 6.9 percent to $5.8 percent, according to Stryker’s annual report. U.S. sales rose 7.3 percent to $5.65 billion but foreign currency exchange rates stymied international sales by 1.3 percent ($2.9 billion). Revenue, however, was up 4 percent in the Asia/Pacific region ($1.33 billion) and 7 percent in “other foreign countries” (Canada and Latin America).