Stryker: Good Prospects (NYSE:SYK) | Seeking Alpha

American medical device make Stryker (NYSE:SYK) delivered a solid Q1 2023 and prospects are positive.

Q1 2023: solid quarter with revenues and profits up

For Q1 2023 (quarter ended March 2023), Stryker’s net sales increased 11.8% YoY on a reported basis to USD 4.8 billion. Organic net sales rose 13.6% YoY driven by 12.9% increase in volumes and 0.7% price contribution. Stryker’s performance is comparable to rival Zimmer Biomet (ZBH) who reported revenue growth of 10.1% on a reported basis during the same quarter.

Both business segments reported solid growth;

• MedSurg and Neurotechnology, net sales increased 11% YoY on a reported basis to USD 2.7 billion. Organic net sales was up 12.4% YoY driven by a 10.5% increase in unit volumes and 1.9% increase in prices. All subsegments grew except Neurovascular which declined due to Stryker’s unsuccessful bids in China’s VBP program. Stryker’s MedSurg and Neurotechnology segment offers products including surgical equipment and navigation systems (Instruments), endoscopic and communications systems (Endoscopy), patient handling, emergency medical equipment and intensive care disposable products (Medical), minimally invasive products for the treatment of acute ischemic and hemorrhagic stroke (Neurovascular), a comprehensive line of products for traditional brain and open skull based surgical procedures; orthobiologic and biosurgery products, including synthetic bone grafts and vertebral augmentation products (Neuro Cranial).

• Stryker’s Orthopaedics and Spine segment saw net sales up 12.7% YoY on a reported basis to USD 2.1 billion. Organic net sales rose 15.2% YoY driven by a 16% increase in volumes offset by a 0.8% drop in prices. The segment’s products primarily comprise implants used in hip and knee joint replacements and trauma and extremity surgeries, and cervical, thoracolumbar and interbody systems used in spinal injury, deformity and degenerative therapies.

Revenues were up across both geographic segments:

• The United States, Stryker’s biggest market accounting for nearly three quarters of revenue, saw net sales up 13% YoY to USD 3.5 billion.

• International sales rose 8.2% YoY to USD 1.26 billion.

Near term, Stryker should continue benefiting from positive trends in procedure recovery and spending on capital products. Stryker management expects continued organic sales growth this year with full year 2023 organic sales expected to increase 8%-9%.

Looking further ahead, a number of positives could support the company’s prospects.

Favorable industry prospects

An aging population and increasing disease burden is driving healthcare spending, an opportunity for industry participants. The World Health Organization expects 1/6th of the world’s population to be aged 60 and over, and their numbers are projected to increase from 1 billion in 2020 to 1.4 billion by 2030. By 2050, their numbers are projected to double to 2.1 billion presenting a structural growth driver for medical equipment players like Stryker.

Significant growth runway for surgical robots

The global surgical robots market is expected to grow in the mid teens over the coming years driven by an aging population, increasing disease burden due to urbanization and lifestyle changes, and growing preference for surgical robots to perform minimally invasive surgeries due to their precision.

Surgical robot penetration is still low and has room for growth, particularly in international markets. China for instance accounts for just 5% of the global surgical robot market compared with 55% for the U.S. and 21% for EU accounting to Frost & Sullivan.

In addition, surgeon interest for surgical robots is high but adoption still lags according to a survey by consultancy firm Bain & Co. Of note, orthopedic surgery has the highest surgeon interest but is among the lowest in surgical robot adoption further bolstering the outlook for orthopedic surgical robot makers. Stryker, as the leading player in the U.S. with its Mako surgical robot (rival Zimmer Biomet’ ROSA robot is second), is positioned to benefit from the opportunity.

Innovation could support market leadership and market share gains in fast-growing surgical robot market

With USD 1.36 billion in R&D expenses, Stryker had an R&D intensity of 7.4% (for perspective, rival Zimmer Biomet spent 5.8% of revenues on R&D). One notable result of these investments include innovations around Stryker’s Mako surgical robot; Mako currently performs hip and knee replacements, but efforts to expand the device’s applications to spine and shoulder are under development. Surgical robots for spine-related surgeries are currently available in the market, but there are no surgical robot options for shoulder-related surgeries which would increase Mako’s addressable market and provide a strong competitive edge over rivals. Mako Spine and Mako Shoulder are expected to be launched next year.

Other notable innovations under development include integrating data and AI algorithms to improve surgical robot Mako’s accuracy and precision. Mako also differentiates itself from rivals with its AccuStop haptic technology which ensures bone resecting is limited to the pre-defined, pre-calculated area..

Acquisitions to expand product portfolio, addressable market, and competitive position

Acquisitions are a key aspect of Stryker’s inorganic growth strategy. Notable acquisitions include Vocera Communications last year, and Cerus Endoscular. Acquisition of Vocera Communications gives a platform to capture share in the digital care and coordination market, an underpenetrated opportunity. Stryker estimates the market is worth about USD 1 billion and will grow 15% annually. Vocera provides hardware and software products for remote communications such as clinical communication, and has 20 years experience in the industry. Acquisition of Cerus expands the company’s portfolio of solutions to treat hemorrhagic stroke.

Going forward, Stryker management has stated that they are focused on paying debt and so will pursue tuck-ins this year, but may pursue big ticket deals next year provided cash flow performance is good. Rival Zimmer Biomet echoed a similar approach with management noting they are open to smaller deals as pricey valuations make acquisitions a relatively unappealing strategy at the moment.

Given higher financing costs, paying down debt is sensible and would enhance Stryker’s balance sheet flexibility; the company’s debt to equity of 80.3 is considerably higher than rivals like Zimmer Biomet’s 49.2, and Johnson & Johnson’s 74.6 (JNJ).

Risks

Competitive risks, notably in surgical robots

High cost of surgical robots could limit adoption particularly in developing economies which in turn opens opportunities for lower-cost entrants. China, a particularly attractive growth opportunity, is seeing the rise of its own homegrown orthopedic surgical robot players. The possibility of Chinese players emerging as formidable competitors cannot be ruled out. For instance in Western medical device manufacturers at one time dominated China’s drug-eluting stent market. Now, Chinese stent makers account for 75% of the market.

Conclusion

Analysts are split between buy and hold.

Stryker’s earnings multiple is on par with its five year average and is higher than the sector average which could be viewed as fair given its position as a leading medical device player, particularly in the fast-growing surgical robots space which could support medium term growth prospects. Some may view the stock as a buy while others may view it as a hold.