Stryker Corporation - Pearson Education



Internet Mini Case #3

Stryker Corporation

Maryanne Rouse

Stryker Corporation (SYK), a leading maker of specialty medical and surgical products, traces its origins to a business founded by Dr. Homer S. Stryker, an orthopedic surgeon with a talent for invention and a desire to improve the tools that physicians use to treat patients. At the end of 2000, Stryker was composed of three operating divisions: orthopedic implants (55% of sales); medical and surgical equipment (38% of sales); and physiotherapy (7% of sales.) In 2001, the company created a new operating group, Stryker Biotech, Spine, and Trauma, bringing the number of operating divisions to four. Responsibility for international sales is divided between the MedSurg Equipment (Canada and Latin America) and Stryker International. Stryker International is responsible for sales and distribution of the company’s products in Europe, Japan, and Asia/Pacific. The company has grown via internal venturing, acquisition, and strategic alliances. Recent acquisitions and alliances include:

Date Acquisition/Alliance

April 2002 Stryker Japan entered an agreement with Integrated Surgical Systems, a pioneer in medical robotics for surgical applications, to develop software for the Stryker knee prostheses. While the agreement is with Stryker Japan, the software will be made available worldwide.

November 2001 Acquired the business of an independent Italian distributor of the company’s products to consolidate the distribution of substantially all of Stryker’s products in Italy

August 2000 Completed the acquisition of Image Guided Technologies, Inc., a manufacturer of three dimensional optical devices

June 2000 Acquired Colorado Biomedical, the developer and manufacturer of the Colorado Microdissection Needle, a device used for precision electro-surgery

November 1999 Acquired all the outstanding common stock of InfoMeddix Communications, a developer and manufacturer of video communications hardware and software that enables telecommunication of surgical images

December 1998 Acquired Howmedica, the orthopedic division of the global pharmaceutical competitor Pfizer.

Operating Divisions

Howmedica Orthopedic Implants

Stryker’s presence in the orthopedic implants market was boosted by the $1.8 billion acquisition of Pfizer’s Howmedica unit in 1998. Renamed Howmedica Orthopedic Implants, this division produces a variety of total and partial hip and knee implants, shoulder and spinal implants, associated instruments, trauma-related products, and bone cement. Made of cobalt chrome, titanium alloys, ultra-high molecular weight polyethylene, or ceramics, artificial joints are implanted in patients whose natural joints are damaged by arthritis, osteoporosis, other diseases, or injury. In 2001, Stryker received FDA approval for the OP-1 Bone Growth Device. Composed of recombinant human osteogenic protein-1 and a bioresorbable collagen matrix, OP-1 induces formation of new bone. Key competitors in the orthopedic implant segment include Biomet, the Swiss medical technology firm Sulzer Medica, Zimmer Holdings, Orthofix International, and Johnson and Johnson.

MedSurg Equipment

The MedSurg (medical and surgical) equipment division is composed of four operating units:

The Stryker Instrument unit designs, manufactures, and sells powered surgical drills, saws, fixation, and reaming equipment as well as other surgical instruments used for drilling, rasping, or cutting bone, wiring or pinning bone fractures, and preparing hip or knee surfaces for the placement of artificial hip or knee joints.

The Stryker Endoscopy unit designs and manufactures a broad range of medical video imaging equipment and instruments for arthroscopy and general surgery. Arthroscopic procedures, in which the surgeon removes or repairs damaged tissue through several small punctures rather than an open incision, are less invasive than traditional surgical procedures. Patients experience reduced trauma and pain, less time in the hospital, and a quicker return to health. Arthroscopic procedures also have a lower total cost than traditional surgical procedures. Pioneering engineering work in miniaturization has enhanced Stryker’s position as a leader in the development of medical video imaging systems: it was the first company to offer surgeons full color, broadcast-quality imaging. This unit also makes laparascopes, powered surgical instruments, and disposable suction/irrigation devices. Stryker Endoscopy introduced a new digital platform in late 2001 to enhance surgical visualization by aligning the image with the surgeon’s hands.

The Stryker Medical unit designs, develops, and manufactures specialty stretchers and beds customized to fit the needs of acute care and specialty surgical facilities. Among the products Stryker Medical has developed in consultation with hospitals and surgeons is a line of innovative stretchers, the Trio Mobile Surgery Platforms, that reduce the number of patient transfers (from bed to stretcher, to operating table, and back again.) This unit also produces accessories such as bedside stands and overbed tables.

The Stryker Leibenger unit makes plate and screw systems for craniomaxillofacial surgery and external fixation systems and to repair small bones in the hands, face, and head. This unit also makes BoneSource, a patented bone substitute material. Stryker Leibenger is an industry innovator in the development of image-guided surgical systems, providing the only systems that offer two-way wireless communication between the surgical instrument and the camera.

Stryker Biotech, Spine, and Trauma

Stryker created this division in 2001 to position the company to take advantage of the potential and meet the challenges in commercialization of the OP-1 resorbable bone growth product. Creation of the new division also recognizes the synergies among the three product lines/businesses since spine and trauma indicators will be key to the long term success of OP-1.

Physiotherapy Associates

Through a network of 302 outpatient centers in 26 states and the District of Columbia, the Physiotherapy Associates division provides physical, occupational, and speech therapy to patients recovering from orthopedic or neurological illness or injury. This division generally operates multiple facilities within a single area, offering patients a choice of locations. This grouping of facilities also allows sharing of administrative and other functions resulting in substantial operating efficiencies.

Marketing

Product

New products and product improvements play a key role in supporting Stryker’s aggressive growth strategy. The company takes a decentralized approach to research and development, allocating research funds to each of the three manufacturing divisions. Stryker’s close working relationships with physicians, surgeons, and medical personnel in hospitals and universities strengthen customer relationships and help R&D engineers better understand customers’ product needs. Total expenditures for product R&D&E were $142.1 million in fiscal 2001, $122.2 million in 2000, and $105.2 million in 1999. Stryker owns patents covering a broad range of products and processes and also maintains licensing and cross-licensing agreements. Its patents are significant because they prevent competitors from duplicating unique designs and features.

Promotion/Distribution

In the United States most of Stryker’s products are marketed directly to more than 6,000 hospitals, other health care facilities, and physicians by approximately 1,700 sales and marketing personnel. About 70% of the company’s 2001 U.S. sales were to large individual accounts and hospital cooperative buying groups.

Stryker’s products are sold in over 100 countries through over 1,300 local dealers and direct sales relationships. Sales outside the U.S. accounted for 38% of the company’s total revenue in 2001. The company’s second largest geographic market is Europe, comprising 58% of international sales, followed by Japan with 24%; sales in all other countries accounted for 18% of the company’s international sales.

Manufacturing

Stryker both purchases and manufactures components and finished products. Total purchases from outside sources were 41% of cost of sales in 2001: 13% comprised finished products while component parts accounted for 28%. Manufacturing processes include casting, and finishing of specialty metals, precision machining, metal fabrication, and assembly operations; principal raw materials include stainless steel, aluminum, cobalt chrome, and titanium alloys. The company relies on single sources for at least some of its purchased materials. Stryker Medical’s products are generally manufactured to order while products of the other divisions are stocked in inventory.

Finance

Stryker’s reported net sales of $702.9 million for the first quarter of 2002, an 11% increase over the same quarter in 2001. Domestic sales grew at a robust 15% for the quarter while international sales posted a gain of just 3%. The impact of foreign currency fluctuations was unfavorable by approximately $15 million: excluding the effect of currency translation, international sales increased 9% for the quarter. The company’s 2001 operating results placed it well ahead of the average of competitors in the medical equipment and supplies industry:

Stryker Industry

Return on Sales 10.3% 6.3%

Return on Assets 11.2% 4.6%

Return on Equity 25.7% 10.7%

Sales per employee $202,687 $152,965

Stryker’s five-year annual revenue growth (1997-2001) was 26%, twice the industry average of 13%, while net income grew at 22% over the same time period. (NOTE: the company’s annual reports and SEC filings are available via the company’s website, , and the FreeEdgar site.)

The Industry

Overall, analysts expect industry revenue to grow by 15% in 2002 with more robust growth in 2003; total sales in the global orthopedics business are estimated at $12 billion for 2002. In orthopedics, the demand for hip, knee, and shoulder replacements is expected to remain strong, reflecting both favorable demographic trends in both the U.S. and global markets and continued technological innovation; the spinal repair segment is expected to grow at a 25% annual rate during 2002. Positive long-term fundamentals include expanding global demand for sophisticated diagnostic equipment and quality health care and an aging population. The global medical device industry is not subject to the economic cycles that affect most other industries. Emerging markets are expected to grow rapidly and to account for as much as 25% of world-wide demand by 2005. New product introductions, although hampered by long approval times in the U.S., will be spurred by the development of engineered raw materials (polymers, alloys, and compounds) and shorter approval times in non-U.S. markets.

Hospital mergers will result in a decline in the number of acute care facilities in the U.S. Health care cost containment efforts by government programs (Medicare, Medicaid), third party payers (e.g., Blue Cross/Blue Shield), and large employers will limit total medical device expenditures. The industry can expect further downward pressure on prices as more purchasing decisions have shifted from physicians and hospitals to managed care providers. A strong U.S. dollar over the past several years has made US medical devices more expensive while an unfavorable exchange rate of the U.S. dollar relative to the euro and the Japanese yen has negatively impacted revenue and earnings.

Competition

The global market for diagnostic and therapeutic medical devices has grown increasingly concentrated over the last decade, with most major segments dominated by from three to five key competitors. Stryker is one of five leading global companies in the orthopedic and reconstructive products segment. The others are: JJ Depuy Orthopedics (a subsidiary of Johnson & Johnson), Zimmer Holdings, Inc., Biomet, Inc., and Sulzer Medica.

In the trauma segment, the company’s three key competitors are Synthes-Stratec, Smith Nephew Richards, and JJ DePuy. In the spinal implant segment, Stryker competes against Medtronic Sofamor Danek (a unit of Medtronic), DePuy AcroMed (a subsidiary of Johnson & Johnson), Synthes-Stratec, and Spine-Tech (a subsidiary of Sulzer Medica.) In the powered surgical instruments segment, the company is one of three leaders, the others being Linvatec (a subsidiary of Conmed Corporation), and Midas-Rex (a subsidiary of Medtronic.) Aesculap-Werke AG, a large European manufacturer, is a strong competitor in this segment in international markets. Principal competitors in the arthroscopy segment are Smith Nephew Endoscopy and Linvatec. In laparoscopic imaging, Stryker is one of four global leaders with the principal competitors being Karl Storz GmbH (a German company), Circon Corporation (a subsidiary of Maxxim Medical), and Olympus Optical Company (a Japanese company.) In the craniomaxiofacial segment, Stryker competes against Synthes-Stratec and Walter Lorenz (a subsidiary of Biomet.)

Stryker is a new competitor in the rapidly growing surgical navigation segment. The company’s five principal competitors are Medtronic Surgical Navigation Technologies (a unit of Medtronic), BrainLAB, Inc., Radionics, Inc. (a subsidiary of Tyco International), Surgical Navigation Network, Inc. (a division of Cedara Software), and Visualization Technology, Inc.

The company’s primary competitor in the hospital bed segment is Hill-Rom, a division of Hillenbrand Industries. In the specialty stretcher segment, Stryker’s main competitors are Hausted, Hill-Rom, and Midmark Hospital Products. Stryker’s principal competitors in the physiotherapy segment are independent practitioners, medical groups, and hospital-based services. Competitors also include such national rehabilitation companies as HealthSouth, NovaCare/RCI, and Rehability.

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