I'm Larry Biegelsen, the medical device analyst at Wells Fargo, and it's my pleasure to host this session with Stryker. From the company, we have Glenn Boehnlein, the CFO, and Jason Beach, the Vice President of Investor Relations. In terms of format, it's gonna be a fireside chat. If anybody has a question, just raise your hand. We'll come around with a mic. Glenn and Jason, thanks so much for being here.
Thank you.
Thanks for having us.
So, if someone, Louis, can you close the door, please? Can someone just close the door? Thanks. So, let's start, Glenn, at a high level here. Stryker had a really impressive H1, I think 12% organic growth. Could you talk about the momentum you're seeing at Stryker and how you're thinking about the operating environment today?
Yeah, sure. I think, yeah, we're obviously very happy with the growth that was achieved in the H1 of this year. You know, I think it's a combination of factors. First and foremost, we are seeing some relief on the supply chain front and seeing a little more normalization, and so we're able to get you know, products manufactured and delivered to our customers. I think secondly, we are also experiencing sort of elevated levels of orthopedics procedures. And that's something I kind of attribute a couple things to. Obviously, there's just a backlog of patients, and I'm sure we'll talk more about that. And then furthermore, it's really you know, this meaningful footprint of Mako robots that we have out there now that are really driving utilization of our products on joint procedures.
And then the other thing that really has continued to be very robust is just our, you know, capital order pipeline and the related shipments that are derived from that continue to be strong, continue to be robust. We are seeing our backlog at record levels, and it's something that's been stable, which means that the new orders coming in are really matching the shipments that are going out, which just speaks to a, you know, a strong environment for capital as well.
Okay. That's great to hear. Just maybe check the box here on China. It's a very small part of your business, 1%-2% of sales. You know, we've heard concerns about anti-corruption policies in China. What impact could this have on Stryker? What is your expectation?
Yeah, I mean, we... You know, I, I've read the same things and heard about it as well. You know, our China business people have not necessarily alerted us to any specific impacts that they're anticipating. I guess at the very top level, China is less than 2% of Stryker's revenue, and so any impact that I think we might feel just would not be material at an overall level.
That's helpful. In terms of the guidance, turning to 2023, 12% organic growth the H1 of the year, the guidance implies 7%-8% in the H2. You know, how are you thinking about the H2 of the year? You know, why would growth slow, you know, materially from the H1?
Yeah, maybe slow is a strong word, but I would tell you that, you know, Q3 is just seasonally the slowest quarter of the year for us. And so if anything, this year is starting to really look more normal in terms of the seasonalities that we've experienced in the past pre-COVID. So we'll feel a little bit of that seasonality that normally happens in Q3. There's, you know, vacations and breaks and things like that, and so procedures don't run as robust as they normally do. Whereas Q4 is seasonally our largest quarter and will also be our largest quarter this year. But keep in mind, Q4 a year ago, we grew 13%, so we're growing off a very high comparable for Q4 this year.
You know, overall, we are at the midpoint, still forecasting double-digit growth for the full year, which is, which is pretty healthy.
When you set the guidance, you know, the comp is very different in Q4, but you have one less selling day in Q3. How did you think about the year-over-year organic growth, Q3 versus Q4, when at the time of the Q2 call?
Yeah, I mean, I think, you know, we knew that Q3 was gonna experience a little more pronounced seasonality than we had seen sort of in the COVID years, and so, that was definitely factored in. And, you know, at the point we do the Q2 call, we sort of have July under our belt, too, so we begin to see how that's unfolding. Definitely thought of that. You know, if we look at Q4, we, you know, we know based on sort of quotas and targets and where the sales reps are, combined with, order pipeline and capital backlog, to feel confident that Q4 will be a robust quarter like it normally is. But we also are mindful that, you know, growing off of a 13% number in the prior year is a tall task.
Okay. And just to on the seasonality thing, basically, your comments are that, you know, it's normal this year, normal, kind of a pre-COVID normal.
Yep.
Nothing out of the order.
Nothing unusual.
Nothing unusual.
No.
Okay. And then you made some comments on margins on the Q2 call that I just wanted to kind of clarify. You talked about continued improvement in the gross margin as you move into, you know, Q3 and Q4, and you talked about operating margins following gross margins. Were you talking about sequential or, or year-over-year, or both?
Yeah, and let me clarify this. If you think about gross margins and just what we're expecting to see and really the impact of spot buys sort of falling off in Q3 and Q4... So at the gross margin level, we should see sequential improvement and year-over-year improvement in gross margin. You know, similar to what we experienced, maybe not quite of the magnitude in Q2, but similar to that. You know, at the op margin level, you know, that will definitely drop through. But keep in mind, too, just because of the seasonality, you know, Q3 op margin is a little more pressured than Q4.
Sounds, it makes sense. And just transitioning, look to 2024. Kevin was asked about it, you guys were asked about it on the Q2 call, about this tough comp and this backlog coming through. Does that create, you know, a headwind for next year? Sounds like you still expect, you know, to grow at the high end of med tech. And it sounds like, you know, you haven't given guidance, but you still expect to have robust growth next year, despite some of this backlog coming through. Is that fair?
Yeah. Yeah, we, we haven't given guidance, and we're not giving guidance for 2024 until, till January. But I would tell you that, you know, if I look at the order flow, I look at what's in backlog, I look at new product cycles and where we are and where those are coming out, that gives me a lot of confidence that, that, you know, we'll be positioned very well for, the high end of med tech growth for 2024.
Okay. And then we were talking about earlier, branding on your call, product super cycle and sprinting back to pre-COVID margin. So let's take the margin one first. I guess, what's giving you the confidence that you can, you know, sprint back to pre-COVID margin levels, operating margin, which was, you know, 26.3? And, you know, this year, by our math, you'll do a little over 24% on the operating margin line. So what kind of visibility do you have to be able to kind of get back to pre-COVID margins?
Sure. Yeah, Kevin, Kevin does a good job of branding these, these things internally and externally. So, that'll probably stick for a couple of years here. You know, what I would say is, you know, first of all, what we'll have accomplished this year. We'll see spot buys, you know, moderate and, you know, basically, disappear from our gross margin. That'll carry over into next year, a full year impact of that for next year. And then from a manufacturing perspective, we're back, and we expect to get back to sort of a more normalized kind of leverage and efficiency drive within manufacturing. That is, you know, a regular manufacturing scheduling, which we haven't been able to have because of supply chain interruptions. That helps us drive better fixed cost coverage.
We'll get back to a better position with our vendors and purchasing and be able to drive volume discounts on purchasing. We're also seeing more normalization of freight, and it sounds incidental, but when you go from ocean freighting most of the time to air freighting most of the time, it's a big pickup in expense. And so moving that back to more predictable ocean freight and those rates should help, too. We'll also. You know, dropping down to operating expenses, we'll also continue with the normalized sort of leverage game plan that we have on operating expenses. The biggest variable operating expenses we have is sales commission. We take a hard look at that every single year. The divisions are pretty active in making commission cuts, which helps us drive leverage.
And then the single biggest thing that we'll continue to leverage is our D&A spend, and making sure that we're only growing that, and that we're able to leverage off of that fixed cost spend.
That's helpful. I think when we look at kind of how The Street and we approached it on the margin ramp back to pre-COVID levels, it looks like people said, "Well, your prior guidance was called 30-50 basis points." You know, you took the high end off, you know, at the last analyst meeting, those 30 basis points plus annual, you know, leverage. And, you know, people said, "Well, maybe they'll do 60 a year." So we netted out at kind of 60 next year and the following year. I think The Street's kind of about the same level. Are people thinking about it the right way, Glenn? I know, you know, you don't want to front run the investor meeting in November, but-
Yeah, I mean, I'm not going to confirm or deny your model, but what I will say is that it will have to be at an elevated level to sprint back to 2019. So, that's what you should expect.
Fair enough. That's helpful. Jason, anything else that we can expect at the analyst meeting in November?
You know, certainly, I think as you think about kind of how we think about growth and into the future, I think. You know, I won't get into details of the agenda, but certainly, I think what you can expect to see is how we're thinking about growth organically, inorganically, as we move forward, will be hot topics in November.
All right. Well, we'll be there. We'll look forward to it. Look forward to it. Glenn, switching gears, the worldwide hip and knee market or recon market is still running above the historical growth rate. How long do you expect the backlog to last?
Yeah, I mean, right now, based on what we're seeing, just based on even the rough math that we saw, what is a normalized growth, what happened in the last three years, patients that didn't present themselves, patients we know that also should be coming into the pipeline that just didn't. And then we look at, you know, our interactions with the ortho docs that we work with now and what they're telling us in terms of their own backlogs. I think it's safe to say that this ortho joint replacement backlog should continue well into 2024.
And once the backlog's exhausted, do we go back to the 2%-3% we saw in 2012-2019, or are there structural changes that could drive that higher?
Yeah, I mean, I think, you know, I think a couple things. That there's a consolidated, more consolidated landscape. There's the impact of robotics. There's a smarter consensus around pricing for these contracts. So I wouldn't say that I think it'll go back to that lower level, say that 3%, maybe land more like 5%.
Okay, that's helpful. And Glenn, here's one I'm sure you haven't gotten today. The impact of GLP-1s on orthopedic procedures. How do you think about, you know, the short-term and potential long-term impact on hip and knee procedures?
Yeah, we haven't gotten that question today, so I'm glad you asked that. Now, a couple things. First of all, we're early days relative to the impact, relative to definitive data that would support us quantifying that impact. I don't have a spreadsheet. I'm pretty sure Jason doesn't have a spreadsheet either.
I don't.
That would support a number. What, what I will tell you is that, you know, we have done the work. We've talked to our KOLs, wanting to understand what is their viewpoint and how they look at it. And what they have explained to us is basically, as they look at their day-to-day practices, to a doc, they are all turning away patients who have certain higher levels of BMI or obesity, and as not patients that can qualify for these procedures. So their thinking is that to the extent there is this drug or a process where those patients can bring their BMIs down to acceptable levels, that makes them qualified for these procedures, where previously they weren't. So most docs think that it potentially brings more patients into the product, into the procedure pipeline.
The other thing I hear is that, you know, osteoarthritis is a degenerative disease. It's highly impacted by activity, as one of the indicators of, you know, when you might need a procedure. So to the extent that there are patients that lose weight and become more active, that already have the indications for this disease, it might make them candidates, sooner rather than later, in the process. So to try to put a bow on this, I guess I would say that, you know, our belief, in working with our KOLs is that, you know, this is a net neutral to a slight positive in terms of the impact that it could have. But I think we'll see, you know, more data that will come out.
I also think, too, that if you just look at how the drug is used, how it's priced, and what that impact could be, you know, you don't have a lot of patients that can afford $17,000 a year in drug bills. We are seeing that most patients are coming off of the drug in 24 months, and that the weight is coming back on. So I do think, you know, that that's a factor, too, in terms of where these patients may end up.
Do you know off the end of the BMI, like, limit that an orthopedic surgeon will typically, you know, treat a patient?
You know, somewhere between 27 and 30. In this environment, if you think about the backlog of patients that most of these docs have, you know, they're not looking to take on the high-risk patients. So, you know, those patients that probably have BMIs of 27 or higher are getting turned away in this environment.
Interesting. Thanks. So in MedSurg, so the other aspect we haven't talked about is the super cycle. It's mainly in MedSurg. So there's three or four major new products there. Glenn, maybe just remind everybody of what these products are, for people who might not be, you know, super familiar with Stryker.
Sure. I'll just give a couple examples. One of the products that was launched towards the end of last year and that we're in sort of the first full- year of launch is System 9. Basically, our power tool product line that's used in orthopedic procedures. This System 9 is a meaningful upgrade from System 8 in that it has a new wireless battery capability, new sterilization protocols. It also allows for sort of greater efficiency and more serviceability. So it has features that customers want that drive better efficiencies in their ORs. And so we're seeing a couple things with that. You know, a meaningful price differentiation between System 8 and System 9. We're definitely feeling that.
There is a steady cadence and good backlog of customers that want System 9, and we are experiencing that as well. I would tell you that, you know, most customers that have a System 8 or even a System 7, they, you know, at the point that that system becomes, say, five years old, it has reached its useful life. And so those customers are also entering into the pipeline, the order pipeline for a System 9. Keep in mind too, that in power tools in the U.S., Stryker has roughly 90% market share. So in any one given situation, we know where these customers are in that spectrum, and who to approach. And so that's-.
It's a powerful product brand for us, and one that will certainly show benefits the rest of this year and on into next year. Another big product line that I'll feature that will fully launch this quarter in the U.S. is the 1788 camera system. Again, it has meaningful step up in visualization technology and connectivity within the stack of equipment that the endo uses in the OR. You know, we typically, when we see changes in technology, especially in our camera technology, we're able to gain meaningful price increase, so that will happen with the 1788. What we also see is there's sort of two camps of customers. There are those early adopter customers who, no matter what, want the latest technology, they're the leading doctors in their fields.
So those customers will get in line very early, and we'll feel a little bit of an impact from them within this year. And then, just like instruments, there's those customers that you know have reached the end of their useful life of their cameras, say three-five years, that will have to upgrade, and so we'll see the benefit of that. I think the real benefit for the camera kind of comes in that next year, next full year. We will have worked through sort of that initial bolus of customers this year that are the early adopters. And we'll we'll also have perfected our cadence for capital trials.
Customers will have more wide, sort of visibility of what that product can do, and so we're very excited about it, and it should be a big uplift for Endo for next year.
Glenn, you mentioned System 9, you mentioned 1788, and you didn't mention Neptune S, and you didn't mention the new defibrillator. Is that because those are the two most impactful or just more near term?
They're probably more near term. Neptune S is a, you know, it's a smaller footprint product, really geared for the ASC and the GI suite, which is a place we haven't played in before. So it kind of opens up some new markets for Neptune, which is exciting. There isn't really a viable competitor per se for Neptune, so these are, these are really. These are markets we're going in, and, customers—Neptune customers are generally very excited about the Neptune system and its ability to collect fluid in a safe, clean, efficient, and sterilized way. Nurses literally hug their Neptunes. They love them so much because they don't want to deal with these liquids.
And so it really, it really makes a difference in the OR, and we're seeing really good results so far. The defibrillator, it's been a long time coming. It is what we'll say is a complex defibrillator, a business defibrillator, if you will. Back of ambulances, emergency rooms. It has a lot of feature sets that our customers have wanted for quite some time, and so we're excited about that launch. I think, you know, there will be a line just because of the current defibrillator market and some of the constraints on competitors. There will be a good tailwind for that defibrillator business when we launch.
So you got a launch in medical, you have two launches in instruments, one in endoscopy. So should be MedSurg should have some pretty nice growth next year. Fair?
Yeah, they'll have some big targets. I'm sure they're listening.
You know, you talked about price a few times. I mean, ballpark, when you come out with a new product, 10% premium? How do we think about that?
I would say. Feels like he's looking at me here. I would say, think high single digits, typically. I think as you think about the recent product launches, System 9, 1788, we are getting, you know, higher price increases, double digits, I think, and partly because of the current environment, right?
Yeah.
Inflationary pressures and those types of things. So it is a little bit greater than historical on these couple launches.
Yeah, we're in a weird spot. Inflation plus the technology premium-
Yeah
Pushes it up to the upper ranges that we're used to.
You know, customers are still lining up to order these products, so you know, they understand the price increase.
Glenn, I didn't hear you talk about beds. Beds have been very strong for you in medical. How is that going?
Yeah, Procuity's been, you know, we launched during COVID, and so we were maybe a little, a little handicapped in really feeling the big impact related to Procuity. Procuity is a bed that can be configured in a way that it can be in the ICU and in a hospital room and in, you know, other hospital settings. So it makes it very relevant for what's going on right now in the marketplace. I also think that, you know, we've been able to capitalize on maybe some disruption of our normal beds competitor, and that's been helpful too. And so Procuity has done very, very well. And another big thing, sort of on bed orders, and you saw a little bit of this in Q2, you know, hospital systems are standardizing.
They want one bed across their platforms. So we're seeing, you know, very large orders in our bed business, and that creates a little spikiness maybe in medical in terms of big capital, but I do think overall it's very robust, and there's still quite a bit of opportunity out there.
And on the Q2 call, Kevin teased us a little bit with this instrument launch in spine that would be help you in the market, I think, and maybe be synergistic with the robot, if I'm not mistaken. Any color there? Any timing?
Yeah, Kevin, Kevin loves to put those things out sometimes. You know, I don't think I have anything really to add to what Kevin has said other than, you know, stay tuned when we get closer to these things, we'll give you more detail.
Is that close to the, you know, 2024, the H2 when you're coming out with the spine robot, or is that sooner?
Yeah, no, I think that's right. I think you'll learn more as we get into 2024, but I think, you know, to Glenn's point, there will be an ecosystem here, right? That is very great for the spine business, and we'll talk more about it as we get closer to 2024.
The spine and shoulder robot still H2 2024, kind of limited launch, if you will, but I assume we'll learn more about those before. I don't know if there'll be anything before then that we'll learn.
Yeah, I would say nothing new to report at this point. To your point, we have said spine kind of back half 2024, shoulder, the end of 2024. Things continue to progress really well, and as we have new updates, obviously we'll share, but nothing to share at this point.
That's helpful. And Glenn, Stryker's obviously been a very acquisitive company over the years. You've talked about maybe, you know, pausing a bit here in 2023, ramping back up next year. How are you thinking about M&A, even next year, you know, deal size? The last big deal where you did Vocera was, I think, three-
Three billion.
Three billion.
Yeah.
Mako was four or five, something like that.
Mako was-
Not Mako, I'm sorry.
Wright Medical.
Right. Apologies.
Four.
Mako was, like, $1 billion in-
Yeah, Mako was-
I was thinking about-
A bargain.
How are you thinking about-
Vocera and, Wright Medical.
Going forward, deal size, we think about Wright and Vocera?
Yeah, I mean, you know, we have done a couple deals this year. There'll probably be another little one before we finish out the year, but, but small. That being said, these divisional business development teams have continued, working with potential targets, looking at sort of, what fits well within their businesses. And those range from tuck-ins to maybe smaller adjacencies. And so I think once we get back to, opening sort of the capital floodgates for M&A, there's a pretty known lineup of companies that we would target initially for that M&A. And they're, you know, they're generally on the, you know, the singles and doubles side of things. You know, maybe $200 million, $300 million, $400 million type acquisitions that are out there.
I mean, we never stop looking at these larger sort of adjacencies, but a lot of that has to do with, you know, how we feel about the timing for it, and are we ready to absorb that, and, and things like that. And so right now, in the immediate future, for 2024, I think you'll see more of these sort of mid-sized tuck-in deals than anything else.
Then when you say mid-size, the $200-$300 million, or you-
Yeah, $200 million, $300 million, $400 million.
In deal, the deal size.
Deal size.
So not as big as Vocera or Wright?
No.
Okay, and why is that?
It's just timing, it's what fits into the pipeline now for these divisions, and honestly, it's what the business has prioritized. So we don't sit at the top and go, "Hey, here's what we're prioritizing." They really are the closest to customers and know where they think the best opportunities lie, and so that's where things have played out thus far.
So the sprint, the 26.3%, getting back to pre-COVID margins, if people are concerned that you'll do a large deal and it'll be dilutive and, you know, it'll set you back from achieving that 26.3%, it doesn't sound like that.
I mean, I think at the point we definitively come out with guidance relative to that, we'll bake in what we know about M&A, so that we're giving you the best number and the best timing, at that point in time.
One business we didn't talk about, which is Neurovascular, had been a really strong business for you for many years. It's still good, but just not quite as good as it has been. How are you thinking about, you know, that business going forward?
Yeah, we're making strides and changes and at Neurovascular. I would say, you know, we need VBP to anniversary, and then we'll get back to growing off of a comparable that's normalized for the worldwide NV business. We also just put in a new president there. Mark Paul retired, and so the new president is looking at potential changes he's making to the sales force. And I think we'll feel the impact there, especially in the U.S. And then I think too, you know, as we we have some newer products in the pipeline that we'll see over the course of next year, that, you know, not big products, but smaller products that will be helpful.
Then Cerus Endovascular will sort of be fully integrated and digested, at least as it relates to their European business next year, and that should help with growth.
On Cerus, you're expected on the Q2 call. I checked ClinicalTrials.gov, and it looks like the pivotal U.S. trial, if that's accurate, completes in September 2023. Does that, which would mean, you know, it's not that far away. I don't, maybe ClinicalTrials.gov is not always, you know, up to date, but we have heard, you know, good things about that product.
Yeah, I don't think we've commented specifically on the timing. That sounds a little aggressive to me, though.
Sounds a little. Okay. No, it's not always,
ClinicalTrials.gov. I'll take a look.
Okay. It's not always up to accurate or up to date, but,
Yeah
That's what it had for you as trial. So, just curious, yeah, as the person who asked the question on the Q2 call said, you know, the feedback's been good, so-
Yeah, we have, we have seen good feedback, and we've, we've known Cerus for quite a while, so we, we were very aware of their product, and the features that it provided. Plus, the good news is, we're selling it in Europe, so we have, you know, good feedback and understanding of, you know, what is the use case for that product in Europe.
And the ASC shift, do you see that continuing in the U.S.?
Yeah, I think, you know, the customer has spoken. If you look at, you know, what happened during the pandemic, patients prefer, to the extent they can have a procedure done in an ASC environment, that's where they wanna be. And if you're, you know, if you're a healthy patient with not a lot of comorbidities, I think that to the extent you're getting a joint procedure, a sports med procedure, maybe a routine spine procedure, or even a GI procedure, you're probably gonna go to an ASC for that. So I think we'll continue to see that grow. I think that's a trend that's not ending. I think, you know, before the pandemic, we set up that offense in how we think about and how we attack the ASC market. It's a unique customer.
It's a customer that, you know, is not capital rich, doesn't have a lot of back office complexity or nor can it handle a lot of complexity. So to the extent we have simplified that sales process, that billing process, that inventory delivery process, and even the capital acquisition process, I think that has really advantaged us in terms of how we compete in that market.
Glenn, how does the, you know, so you have all these products coming out in MedSurg. MedSurg's margin profile is different from the Ortho margin profile. If MedSurg grows faster than Ortho, how does that impact your ability to get back to pre-COVID margins?
Yeah, you know, I would. Well, I would tell you a couple things. We have lived with that for decades, MedSurg growing faster than Ortho, and so it's really baked into the baseline delivery that we have. I would tell you that we have looked heavily at that growth, in terms of it is the kind of growth that is market-leading growth. You're right, it is growing faster than Ortho. It's absolutely baked into our thoughts in terms of getting back to those pre-COVID op margin levels.
You know, it's in terms of what are the formulas to drive that achievement of those levels. You know, as I said, it's driving efficiencies in gross margin, and it'll also be driving some efficiencies down in operating expenses, and that's really where MedSurg drives a lot of efficiency, is on the operating expense side. They're a little more efficient in terms of their business relative to Ortho. So I think the combination of those two will help get us back to the 2019 op margin levels.
All right, perfect. I wanted to give you the last word here. You have 40, 40 seconds.
40 seconds!
If you want to take it. If you want to, we got a couple extra minutes if you want. But seriously, appreciate you guys being here, and if you want to make any closing remarks, please.
Yeah, no, I don't know that I have a lot to add. First of all, I hope I see a lot of you at our analyst meeting in November. We are gonna put a stake in the ground on both this, when we get op margin back to 2019 levels. We also will lay out sort of our long-term growth framework, which is what we've done before, but in this case, it'll be updated for the current environment. And then differently than last year, we have a little bit more of a structured product fair, which I think will give you more information into sort of some big sort of buckets of products that we have, both on the MedSurg side and on the Ortho side. So I think it's gonna be a great program.
It'll be a little bit of Jason's coming out party as the VP of IR. So, we're excited for that, too.
Yeah.
So anyways, I look forward to seeing everybody there.
Great. I think we all, we all know Jason.
Yeah.
But look, we look forward to it as well. Thanks, guys.
All right.