An aggressive acquisition strategy in order to broaden its product usage in trauma units and hospitals continues to be the focus for Stryker ($SYK). But pricing pressure, currency exchange impact and lower margins are all providing headwinds for the orthopedics and surgical specialist. It's looking for additional acquisitions, as well as rollouts of innovations such as upper extremities implants to keep up its revenue growth pace.
Last year, almost one-third of Stryker's sales growth came from acquisitions. The company's sales grew 7.3% to $9.7 billion last year with acquisitions accounting for 2.5%, organic growth for 5.8% and a negative 1% impact for currency exchange. That mix was even more strongly tilted toward acquisitions during the fourth quarter with 3.1% of growth from acquisitions, 5.5% from organic growth that was offset by a negative 2.6% currency impact to hit 6.1% growth to $2.6 billion.
The fourth quarter organic growth came from volume and mix changes--but pricing brought the growth rate down by 2%. The company said that it expects pricing to continue to weight on the company going forward.
"Pricing was down 2% in the quarter and also 2% for the full year. Pricing pressure remains challenging and is expected to be down approximately 2% for the company moving forward. Margins were also negatively impacted from foreign exchange movements compared to last year," said Stryker VP and CFO William Jellison on a conference call.
The company denied that an aggressive hospital discounting strategy rolled out last year by competitor Smith & Nephew ($SNN) was hurting pricing.
"It's something that's been tried previously and we didn't see an impact then either and as we look ahead to 2015, it's not something that we were factoring in," Stryker VP of Strategy and IR Katherine Owens. "Obviously we pay attention and we don't want to just make assumptions, but so far we've seen zero impact from it."
Owens also detailed progress on recent M&A activity. She chalked up the recent, and slightly odd, buy of CHG Hospital Beds for an undisclosed sum to expanding the range of hospital product offerings, highlighting the company's low-height hospital beds. Specifically, she noted a bed aimed specifically at bariatric patients in the acute care segment.
On the 2013 purchase of Mako Surgical for $1.7 billion, Owens noted the late 2014 510(k) application for a total knee implant on the Mako robot that is slated for 2015 clearance.
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| Stryker CEO Kevin Lobo |
Stryker chairman and CEO Kevin Lobo stressed the key role that robotic surgery is expected to play for the company in the longer term.
"So obviously with the launch of the total knee and the launch of our Stryker hip products on the robot. The robot is going to start to gain a lot more adoption and then our primary end points are going to also be placed on the robot. So the increased run rate works with the existing products, with the MAKO products," he said on the call.
Lobo added, "Our plan is to have as many robots as possible all over the country and that all of our end plants will be placed using the robot as many as possible. It's going to take a long, long time for that to happen."
Medical surgical (or MedSurg) products are by far the company's fastest growing business, up 12.1% to $1.1 billion during the fourth quarter. Neurotechnology and Spine net sales gained 3.9% to $454 million, while Orthopedics was up 1.7% to $1.1 billion.
Finally, on the August acquisition of Small Bone Innovations for up to $375 million, Owens said Stryker is continuing to conduct 6 months of intensive training, with strong momentum expected in 2015 for its Star Ankle product.
Lobo also highlighted SBI's upper extremities products, a market which he sees as ripe for growth. He added that the company is pilot testing the use of specialized sales people for those products.
Acquisitions continue to figure prominently in Stryker's growth strategy. If those don't pan out, it will direct cash toward exceeding the anticipated roughly $400 million in share buybacks slated for 2015.
"What I have been consistently saying which is the first priority for cash is for acquisitions and obviously the timing of acquisitions is unpredictable," Lobo said unequivocally on the call. "And that if those acquisitions don't materialize in a reasonable period of time, then we would be open to larger share buybacks. So right now, we are pursuing the acquisition deal flow and we'll see what happens."
- here are the fourth quarter release and transcript