Despite a drop off in elective procedures due to the COVID-19 pandemic, Stryker Corp., of Kalamazoo, Mich., unveiled first-quarter results that came in better than analysts had presumed.

BTIG’s Ryan Zimmerman noted that, unlike other companies, Stryker did not pre-announce preliminary revenue. And while investors were concerned that the company would be adversely affected by the slump in elective procedures, "the diversity of the portfolio helped to offset procedure declines in late March.”

For his part, CEO Kevin Lobo highlighted in a release the company’s organic sales growth of 2.4%, which he said reflected strong momentum throughout most of the quarter ahead of the pandemic.

“While the fluidity of the current environment makes it difficult to predict our financial performance for the remainder of 2020, given the strength of our balance sheet and cost containment efforts underway, we believe we are well positioned to manage through this unprecedented situation.” He added that as patients start getting elective surgeries again, the company hopes to work with customers to meet the anticipated demand.

Glenn Boehnlein, the company’s vice president and CFO, said during a call on the results that growth was negatively affected by a drop-off in elective surgeries as a result of the pandemic. "For the month of April, our U.S. Orthopedics and spine sales were down roughly 65%, while Medsurg and Neurotechnology posted declines of roughly 25%.”

Still, as Wells Fargo’s Larry Biegelsen noted, the company was bolstered by Medsurg, which saw sales of $1.622 billion. That included 5.6% growth in the U.S. and 9.1% in international markets.

And the company excelled in other areas. For example, Lobo noted that as hospitals witnessed a steep rise in COVID-19 patients in March and April, the company saw "a significant increase in the demand of products across our roughly $2 billion medical portfolio.”

Indeed, Zimmerman highlighted that the company experienced demand in areas such as beds & stretchers, Physio, Sage, and emergency cots. With that said, “the recovery will likely be more gradual in the deferrable procedure base (longer than we originally assumed).”

Still, Boehnlein noted that Stryker is taking steps to conserve cash, such as “reductions in planned capital expenditures and project spending, focusing on opportunities and accounts payable and slowing M&A activities.” That’s on top of measures to control discretionary spending, to include curtailing hiring, travel, meetings, consultants as well as the idling of certain manufacturing lines and facilities. Leadership also saw salary reductions.

M&A

Stryker had been very active in terms of M&A over the last couple of years. And while it is slowing M&A in the wake of the pandemic, it is moving forward with integration efforts with Wright Medical Group NV, of Amsterdam, a deal first reported last November.

"[G]iven the impact of the virus on competitive hiring, we are expecting a minimal level of sales force attrition,” Boehnlein added. He went on to note that Wright held its shareholder meeting April 24, approving the deal. “This reduced the tender of threshold from 95% to 80%,” he explained, adding that the tender offer was extended through June 30. The deal is expected to wrap near the end of the third quarter.

Boehnlein said the company would not be providing additional details or taking questions on the deal during the call.

In 2018, Stryker reported another big buy, that of Leesburg, Va.-based K2m Group Holdings Inc. for $1.4 billion. A couple of weeks later, it said it would snap up Invuity Inc. for $7.40 per share, or about $190 million.

News of the Wright deal came shortly after Stryker said it was picking up Mobius Imaging LLC, which focuses on point-of-care imaging technology, and its sister company, Gys Tech LLC.

Q&A

Bob Hopkins, of Bank of America, asked Lobo about possible return to growth in the fourth quarter, noting that other CEOs had suggested this is possible. While Lobo acknowledged he couldn’t predict the future as it relates to the pandemic, "that is a scenario that we think could very well happen. The pent-up demand is there. I think the recovery will probably come in waves.”

David Lewis from Morgan Stanley followed up, noting that orthopedic procedures are somewhat more deferrable. He asked about the company’s thoughts around the economic sensitivity of hips and knees, as well as recovery relative to other med-tech companies.

Lobo replied that health care facilities "are very motivated to do our procedures. If you think about orthopedics and spine procedures, they are moneymakers for hospitals.” He added that both hospital CEOs and surgeons are eager to bring back patients for these procedures.

Looking ahead

Cowen’s Josh Jennings noted that his organization gave Stryker an outperform rating, highlighting, as Zimmerman did, its diversified business model. He also called out its margin expansion initiatives and M&A strategy, which “should offset continued pricing and utilization headwinds in the ortho and spine markets.” In addition, the company should do well outside the U.S., with expansion in China leading the way.”

Biegelsen also expressed confidence about the company, particularly as the COVID-19 pandemic recedes. He cited solid execution, as well as recent M&A and strong end markets.

During the call, he asked how Stryker would position itself for success in a post-coronavirus world. Lobo highlighted the diverse portfolio and its commitment to remain a category leader. In addition, “[I]t's not going to take us off our approach to M&A. We will emerge from this, and we believe the fact that we've stayed and conserved a fairly conservative balance sheet has really helped us. And even with the upcoming Wright Medical acquisition, we have a very good and strong financial position.”

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