Stryker Navigates To Continued Growth

June 23, 2008
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KALAMAZOO — Kalamazoo’s $6 billion Stryker Corp. is coming out of an encounter with the Department of Justice with a stronger program governing relationships with doctors, and a stable of new products is expected to help drive the company to an eighth consecutive year of double-digit growth, executives told analysts in May.

In the past few years, the company, which makes medical devices and is one of the top five in the joint replacement market, has made the transition to a new CEO and invested millions in its West Michigan facilities.

Stryker, which has 16,000 employees, about 1,700 of them in West Michigan, also was one of seven orthopedics device makers investigated by the federal Department of Justice regarding financial relationships with doctors.

Stryker’s quarterly report in April put first quarter net earnings at $291 million, an increase of 20 percent over the first quarter of 2007. Net sales were up 14.7 percent to $1.6 billion.

“These three words — performance over time — are words that we think this company has stood for,” President & CEO Stephen P. MacMillan said during the analysts’ meeting in New York. “We don’t take these three words lightly.”

MacMillan, who was appointed in 2005, stressed the company’s transition after the 27-year reign of John Brown in the top chair. The pair worked together for a year to make the change as smooth as possible.

“We really have tried to just make that transition seamless, and I think we’ve done a reasonable job with that.”

Stryker’s orthopedics division, led by Mike Mogul, was in the DOJ’s crosshairs, along with the company’s competitors. The department investigated the money that changed hands between the companies and doctors, who have a close relationship in areas such as clinical trials, training and consulting. Anderson said Stryker was the first of the orthopedics manufacturers to cooperate with the DOJ, which now is focusing on doctors who may be soliciting kickbacks.

Four of the companies of the top five had deferred prosecution agreements, while Stryker had a non-prosecution agreement. All five companies have a federal monitor, including Stryker.

At the analysts’ meeting in New York, Mogul said the DOJ investigation, two warning letters from the Food and Drug Administration, and a January voluntary recall of hip cups made in one of the company’s Ireland plants created “very turbulent waters” for the division. Still, outside of hips, the orthopedics division has “delivered better-than-market growth” and expects “the best product launch year in 2008 than we’ve had in a decade,” Mogul said, with products for resurfacing hips and knees.

He said that during the first quarter, Stryker has worked with a federal monitor to detail doctors’ daily activities on behalf of the company.

“We are now in a position where we can develop products hand-in-hand with surgeons, which we need to do. We can clinically study products hand-in-hand with surgeons, and surgeons can teach other surgeons,” said Mogul, whose division recently opened a new Homer Stryker training facility in New Jersey. “We are getting back on to a footing that we’re very familiar with, and frankly with a much improved set of systems to manage this group and manage this activity. I’m convinced we’ll come out of this with better systems to go forward.”

Mogul said the recall was “painful, but it was the right thing to do” and supplies of the cups are replenished and ready for the market. He said the company has been in close communication with the FDA regarding the warning letter on its New Jersey plant, and a renewed focus on quality has descended on all four plants and the research and development division.

A recent New York Times report on complaints about squeaky ceramic hips prompted a letter to the editor from J. Patrick Anderson, vice president of corporate affairs. He criticized the report as misleading and said it did not rely on scientific data.

Sales are approximately split between orthopedics and medical-surgical products, which includes instruments, endoscopy and medical products. With a widely diversified set of products, the company thinks the division has room to grow — not just in the U.S., but in the international market, according to the analysts’ meeting.

MacMillan noted that Stryker has increased its commitment to research and development from 5 percent to a little over 6 percent.

In its 2007 annual report, Stryker projected a 22 percent increase in diluted net earnings per share for 2008, to $2.88. For the first quarter, diluted net earnings per share were reported to be 70 cents, an 18.6 percent jump from 2007’s first quarter.

The company’s stock price has been running lower in this year’s volatile market, particularly as compared to several years of strong increases, Anderson noted.

Over the past several years, Stryker has invested $65 million into two new manufacturing facilities and a new headquarters in the Kalamazoo-Portage area, he added.

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