Medical Device Daily

NEW YORK — For the first time in several years, the presence of John Brown, long-time president and CEO of orthopedic giant Stryker (Kalamazoo, Michigan), was missing at last week's annual Piper Jaffray Health Care Conference at the Pierre Hotel.

Also somewhat missing was Brown's absolute and very aggressive promise to investors that Stryker would set, and always meet, an annual goal of 20% earnings growth.

Still another absence at this year's big investor event was new Stryker CEO Steve MacMillan, who took over the reins of the company from Brown late last year (Medical Device Daily, Dec. 14, 2004).

Rather, presenting the case for the company's continuing strong prospects was Dean Bergey, vice president and CFO, who, up front, praised Brown's leadership since 1977 — helming Stryker following the death of Lee Stryker, son of company founder Dr. Homer Stryker, in a plane crash in 1976.

Bergey credited Brown with bringing both “a result orientation“ to the company and “unbending integrity“ and for establishing, he said, “what came to be known as our 20% standard-of-growth mantra.“

Bergey, however, was clearly less definitive in reaffirming that standard as an absolute over the long-term future of the company. And Piper Jaffray (Minneapolis) analysts, as well, seemed somewhat concerned that the mantra eventually will be replaced with a less aggressive promise.

Like the other pitch-makers at the conference, Bergey began by reviewing Stryker's accomplishments for the past year. These included a 14% increase in sales “in dollars“ for 2004, a 13% increase in local currency and a 21% increase in earnings.

Sales for the year were up 18% to $4.26 billion from $3.63 billion.

Among product highlights described by Bergey were the introduction of a hyaluronic coating for implants, a ceramic-on-ceramic hip product and an antibiotic bone cement, called Trident, which he said had been “extremely well-received in the marketplace.“

He noted that Stryker competes in a broad range of orthopedic sectors. While it holds leadership in only one of these, Bergey said that the company's overall high share position in all the other areas makes it “the most broadly-based orthopedic company in the world.“

The conclusion to be drawn, he said, is “how diverse“ the company is. And he found a cause for optimism in its lack of a broad range of leading sector positions.

“One of the things this represents,“ he said, “is that there's still a lot of opportunity for the company to continue to grow and strive to be No. 1 in all of these areas.“

Interestingly, Bergey only used about half of his 30 minutes of presentation time and then was peppered with questions, during the remainder, from Piper Jaffray analyst Raj Denhoy, with most of Denhoy's questions seemingly centered on the company's ability to maintain Brown's 20% “mantra.“

“How long do you really think that's sustainable?“ Denhoy asked. And: “Can it go for another 10 years, or do you see a point where you're going to have to capitulate?“

Bergey answered that if Brown were making the presentation, the 20% promise would be “forever.“

But his answer was: “At this point in time, we're very comfortable [with 20%] through the end of the decade, given things we have coming on board.“

Those things, he said, included turning current losses from the company's OP-1 bone matrix product, with a “putty approval,“ to profitability with expanded approvals for “posterior lateral spine fusion.“

That, Bergey said, “will be the rocket ship that takes OP-1 forward in terms of profitability.“ But he did not see that happening until 2008.

A second notable opportunity he cited is in artificial vertebral discs, though still three years and more away.

Bergey projected the conclusion of enrollment in the company's lumbar disc program “sometime this year, probably in first half of the year,“ followed by two-year follow-up and a “plan“ to get U.S approval in the first half of 2009, with overseas sales “in the intervening period.“

Approval of a cervical artificial disc is even further out, he said, with the company seeing application for an FDA investigational device exemption for such a device “in the first half of 2009.“

The company clearly is sound financially, with $350 million in the bank.

Bergey said this was more likely to be used for acquisitions than share buybacks. Such acquisitions would be more “niche-type“ and in the $100 million to $300 million range,“ he said.

Expressing a continued optimism, he said that Stryker is “in a good industry with a lot of growth prospects . . . and a lot of franchise headroom“

But Bergey may not have answered all questions or totally reassured those who had read the comments on the company in Piper Jaffray's “Market Perform“ notes on presenting firms that it issues for the conference.

Those notes cite a 2005 revenue target of 17% to 18%, saying: “[T]his target may be aggressive and [we] model for growth of 14%. Notably, there appear to be enough expense levers so [that] the Stryker standard of 20% earnings growth should be readily achievable for at least the next two years.“

It also said that “a slowing top line, management changes and acquisition risk also continue to overhang the stock.“

While it credited MacMillan as “a worthy successor“ to Brown, it said that “anxiety around the [executive] change persists . . . While Stryker has demonstrated a positive track record in its purchases, the uncertainty around future acquisitions is a source of concern.“

In other words: Stay tuned.

No Comments