Stryker Corporation (SYK) Earnings Call Transcript & Summary

Okay. Thanks, everybody, for joining us for the afternoon session of Virtual Vegas Health Care Conference. I'm Bob Hopkins from BofA. I'm really excited to have members of Stryker's senior leadership team here with us today for this fireside chat. With us today from Stryker is Spencer Stiles who run -- who's Group President for Orthopedics and Spine; Robert Cohen, who's President of Digital Robotics and Enabling Technologies; and, of course, Preston Wells, who runs the Investor Relations effort for Stryker. So gentlemen, I just want to thank you for joining us this afternoon. We look forward to a good discussion. Before we get into sort of the fireside chat portion of it, I just wanted to kind of hand it over quickly to Spencer to talk, just give a quick introduction, and then we'll go from there.

Great. Bob, thanks so much. We really appreciate the opportunity today. As Bob mentioned, my name is Spencer Stiles, and I have the unique opportunity to lead our Orthopedic and Spine business. So what does that mean? That's our hip and knee franchise, our joint replacement business; Our Trauma and Extremity business, which is responsible for the acquisition of Wright Medical, so trauma, upper extremities and foot and ankle. In our Spine business, also, a more recent addition is the development of what we call our digital robotics and enabling technology business. And that's led by Robert Cohen. Many of you know Robert, have heard of Robert. He's a 30-plus year veteran in the world of orthopedics, really one of the pioneers of driving robotics and enabling technology in this space and helping transform the market. So excited to have my teammate, Robert, on today to share a little bit more about what's going on at Stryker.

Excellent. Well, thanks again for joining us. So I want to cover a couple of key topics here coming off the first quarter call. And I want to talk about the market a little bit. I want to talk about Wright. I want to talk about hips. I want to talk about knees. So we'll get into quite a few things here. But before I go kind of drill down at a detailed level, I just wanted to get your take, Spencer, on kind of where we are from a hip and knee market perspective because Q1, the numbers were pretty soft. I'm not talking -- I'm talking really mostly about the market right now, but then you guys offered some pretty encouraging comments about what you're seeing in April. And so I wonder if you could just kind of elaborate a little bit on that in terms of what you're seeing with the recovery, specifically to start in hips and knees.

Sure. I'll go back to Q4 and sort of think about as we went through the end of the year, what we thought about opening up 2021 and turning the page. We are expecting greater predictability and more consistency on the recovery. And obviously, these micro spikes occurred really inside the United States, I'll pick on and begin with, and then I'll make some global comments. However, as you know, there are certain states where things really slowed down and we saw delay, shutdown, elective surgery being pushed out. I'm currently making this call, and I live in Kalamazoo, Michigan, where I am today. Michigan is a state that was hit hard. Across the state on the other side is a fairly large orthopedic institution, Beaumont Health, and they were hit very hard in Q1 and had to cancel and delay a lot of that elective surgery, in particular, hips and knees. As we shared in Q1 in our earnings results, we have seen more consistent recovery in Q2, in the beginning of Q2 in April. So that trajectory is on pace. It's on track. We feel good about that in Q2. And really, as we look across the U.S. right now, more vaccinations are going in arms. We're seeing that sentiment in the patient having confidence in going in and getting care. But still, some waiting rooms and orthopedic customers are -- they're at 80% on the low side. But all the way up to 100% to 105% field where, in some of these private practices, we've seen some customers that are saying, "Hey, it's going to be a busy summer." So we think we're on the right step coming out of the pandemic. We expect the trend that we saw in April to continue through the rest of the quarter, and we feel pretty good about the rest of the year. On a global basis, it's a little more complicated. As I'm sure you're seeing in the news, there are certain countries that are being hit pretty hard with COVID. India, probably the most challenging right now, but even a more established market like Japan. There's a mix right now of delays, pauses again. They're going through a phase system. And really, still, in certain parts of Japan, they're still delaying elective surgery until they see the rates of vaccination increase. So my guess on a global basis, we'll still have a little choppiness through the rest of the year, but driven underneath a stronger recovery in the U.S.

So the comments from -- and thank you for that. The comments from Kevin on the call that the hip and knee business at Stryker was back in positive territory versus 2019, that was a U.S. comment, correct?

That was a U.S.-focused comment, that's correct.

Yes.

I didn't touch much -- maybe just one other comment on Europe. Europe is a big part of our business, however, as you know, very different strategies and vaccination and recovery rates depending on the countries that we've seen. I'll pick on the United Kingdom. It's an important market for us where we do a fair amount of business, and this balance between the private and public sector is still playing out where the public sector say, "Hey, can we figure out a way to partner with the private sector to figure out how more access can occur, get more patients in to have their procedures." My guess is that will take quarters and quarters to figure out as we look to the future.

Okay. So obviously, there's a lot that's gone right with Stryker's orthopedic business over the last couple of years. I want to start focus on some of the things that hopefully will be improving over the course of the rest of this year. But on the hip side, that's one thing that kind of stuck out to investors. And I know there are certain product areas that you're not in right now that you will be in. But maybe you could just help us dissect what your view on what's going on at Stryker hips and when you would expect to see some better performance relative to the market.

Yes. If we go back a few years and you think about our hip portfolio, it's really one of our market-leading brands where we've seen continued strong growth. Until in '19 and '20 as we entered into the pandemic, we did see a greater shift to the direct anterior market. Although part of our portfolio plays in this, we did build I think enough of the curriculum, education and the protocols in place to really capitalize on this shift. And we think during the pandemic, part of the shift is this more efficient procedure for the outpatient setting, potentially a faster recovery time, and that played out in some of the market numbers that have come over the last couple of quarters. With that being said, in the pandemic, we did a limited relaunch of our Mako 4.0 software. So this is that new software for hips on Mako right now that does give some advantages to direct anterior, and that's just rolling out sort of in full launch as we speak. I'd say roughly 50% to 60% of Makos have that software solution out of that application right now, and we expect an uptick in our hip business because of that in the quarters ahead. A little longer term, later this year, we're also working on a new stem that will enter into the marketplace. And we think that will give us another advantage as we think about making sure we're capitalizing on this shift to direct anterior. And maybe I'd ask Robert to comment on other trends we've seen over time and thinking about what we're doing with our next-gen stem.

And just to add to your comments, Spencer. So it's not that we weren't in direct anterior. So we do have a lot of Mako, and we do have a lot of Mako and hips. One of the -- and we think and we believe with Accolade stem, and we've had Mako, we have Mako at ASCs, we have Mako at outpatient surgery centers. And the Mako adoption for direct anterior was not to the level or the extent that we thought. And part of the reason was it was user experience with the software and the way you had to register bone and the access into the joint. So what we did with this new Mako software that we released, we resolved one of the challenges that we have with direct anterior as we've modified the software for the user experience. So now it's a lot more straightforward. It's a lot more easier. It's less time-consuming to register the bone. The screenshots are more visual in a visual representation. Let's remember direct anterior, it's reestablished in the center of rotation and making sure the implants are in the correct position and you get the correct implant sizes. So Mako wins there and Mako wins big. This new software addressed some of the challenges that we had with direct anterior. So that's out. The other part of the story though is a gap in our portfolio. And as you look at direct anterior and this migration of direct anterior, although Accolade has been used very successful and the preference in this procedure is a collared stem. And we didn't necessarily have a collar fully coded stem in our portfolio. So in the second half of this year, we will have that 26%, I believe, of hip procedures. Primary hips right now are using collared. So the combination of the Mako and all the advantages Mako provides to direct anterior in combination with a best-in-class, new release hip stem that's collared, now we have the formula for success. And you should see us accelerate there.

Okay. That's helpful. And so it sounds like it makes -- there's a real cause and effect here in terms of the numbers and sort of the -- what's coming. Are there any other issues that have impacted your hip business, you think, over the course of the last 6, 9 months?

No. I think we've been pretty pleased with the continued performance that we have seen with our portfolio as it stands today. This ramp-up with 4.0 I think will provide additional value. And in reality, it's our opportunity to continue to train and educate and build more programs around what we have today and what's coming in the future. So we're excited about things to come in hip, and we expect the quarters ahead to prove that out.

And additionally, Bob, we're now sitting here with published literature with 5 years out on Mako Total Hips and Forgotten Joint Score, patient satisfaction, all outpatient surgery with Mako, now that data, the data is out there and those that were waiting for clinical evidence on it. And we're not just satisfied with the 1 year now with ample literature, peer review literature as well as all the government registries around the world. We're sitting here with some evidence that also should sway some of the decision-making towards Stryker.

Okay. Okay. Great. One other follow-up on just kind of what's going on in the broader market for hips and knees as a category. So much talk about all the lost revenue over the course of the last year because of COVID, and that becomes "backlog." But what are your views on that? Do you have any way of trying to quantify besides sort of the obvious math? Like is this going to show up? When? Just wanted to get your view on the pacing over the rest of the year. Do you think there'll be a lot of summer vacations in there for a lull this summer and then a big boom in the fall? I know it's a hard thing to call, but just curious what your views are.

Yes. It's interesting. As we talk to the customers and look out over the coming quarters and even the seasonality, looking at the summer, we're hearing everything you've said so far. There is contemplation around things like vacations and how much vacation will they take compared to previous years and how does that play into their practice. Another area is industry shows and trade shows and society meetings. Think of Academy, for example, we're doing it at the end of summer, sort of beginning of fall at a unique time that we haven't done before in the history. So there's going to be people out of their clinic and practice out with industry and society. So we're trying to figure that aspect out. Another element that's been woven in as a variable is staff. So even as we think about this utilization rate going over 100% and trying to add these cases at the end of the day or on a Saturday morning or even shifting the outpatient center and adding more time to the scheduling block, do we have the right staff in the right geographies to keep up with that continued surplus? So we do think over the coming quarters, we are going to see this continued increase in growth in volumes and rates. We're still working on what exactly that will look like in terms of is that over the next 6 quarters, over the 8 quarters, 12 quarters? My guess is that we're not going to see a big pop, but we'll see a steady increase throughout the rest of this year and into 2022 as we work through that backlog of patients that are out there. I'd tell you, the sentiment that we're hearing from the customers about their patients is they are much more willing now to come in to have these procedures done. So we do think there are even potential patients and customers that were entering the practice to begin with. They weren't showing up for the initial consult to be diagnosed, that's opening back up again. And on the low side, we're hearing this number about that the waiting room, that's at about 80% is the lowest number we hear. And as I mentioned, all the way north of over 100% where you have a lot of the private practice facilities that are figuring out ways to attract those patients, get them in and figure out how to make sure they're having surgery. So I'm guessing over the coming quarters, we'll continue to see this tailwind.

Anything illustrative about what's going on in Australia right now because they're kind of low COVID and they're in their fall, so post-summer? What are you seeing there? And do you think it's at all representative of what might happen here this fall?

Yes. I don't think it's a direct parallel we can play in the U.S., but it is interesting to see their accelerated growth rates. In our particular business, we feel very confident that we're winning and growing share in that market while we're capitalizing on some of that growth. But they've obviously dealt with the pandemic differently than most countries where they've had the luxury of closing the borders, really managing these isolations and even when a breakout occurs, a quick 3-day sort of quarantine and then things are back to normal, which allows them to have a more consistent approach to providing care. I think it's unique, some of the accelerated growth we see in this market. But maybe it's -- this tells us that there's hope that we'll see this backlog continue to be pulled through in the U.S.

Okay. I want to ask about knees for a second because it's -- the last couple of years, it's been a real standout in terms of the level of growth that Stryker has been able to deliver versus the market has been, really incredible over the last couple of years. And we know the drivers. There's -- a lot of it's related to Mako. Some portion of it is probably related to self-inflicted wounds and competitors, but a lot of it is just driven by Stryker. There's a narrative that exists right now in the marketplace that it's going to be very, very difficult for Stryker to continue anywhere close to that level of outperformance because the competition is not shooting themselves in the foot quite as much, and they are launching robotic platforms. So I know you always aspire to grow at a pace that's above the market, but what could you say to help kind of hit that point or hammer that point home to investors? Like what are your thoughts on what we should expect for the outlook for Stryker knees? And at some point, will you launch a new knee or so you're just talking about Mako that no one asked about new knee platforms anymore? Just curious if there's anything in the pipeline in that regard.

Yes. Bob, I'll offer some remarks, and I'll ask Robert to share a few as well as he thinks about the technology and clinical differences and really what we've been able to build with Triathlon. But if we step back and look at the overall knee market, we're still about 1/4 of it on a worldwide basis. So that tells us there's a tremendous opportunity to earn more of that -- our fair share of that market over time and deliver market-leading performance. That obviously is coupled with our continued strong growth strategy around Mako and the utilization of Mako for total knees. And again, I think different than our competition yet aided by these other competitive entrants is the discussion around needing a robot is really a standard-of-care-type discussion right now. And that's open more doors for us, played favorably and is continuing to allow us a platform we can go out and talk about why Mako makes this difference. And interestingly, different in that strategy, we start finding that super user, that champion. It's going to go really drive the sale process and actually where we sell the product to the customer, then we install it, and then we build that utilization and championship in the account. Because of that, that also grows sort of the excitement in the customer account in that hospital where we do see other surgeons and physicians wanting to trial Mako and utilize that technology for their knees. It opens up more doors, more conversations And we still think there's a tremendous opportunity in front of us to continue to fill the market with Makos. So as you think about these 2 things combined, our market position, our growth strategy, our Mako, we have strong expectations in ourselves. We'll continue to provide market-leading growth with Mako, with Triathlon in our knee position. A final thing, as we think around the corner, we utilize Triathlon as sort of the platform technology. We're surrounding it with other great technology in the future, Mako, we mentioned, but even with Orthosensor, and we think about how do we bring more enabling technology to surround the implant, ultimately, longer term, to make it a smarter implant that has built-in sensors, giving us the data and information. But taking the world-class clinical platform that we have with Triathlon and then building around it with these other technologies gives us this advantage where we have confidence we can continue to deliver this market-leading growth. But maybe I'll let Robert share a few more remarks on the platform itself.

And Bob, what a difference 5 years makes, right? 5 years ago is when we commercial -- first commercial release of the Mako Total Knee. And if you remember, at that time, when we were by ourselves, we were verbally attacked for introducing robotics and the thought that something that was more accurate and precise wouldn't manifest itself into clinical improvements. Now 5 years later, we're sitting here with over 200 peer review literature registries around the world showing short-term benefits, long-term benefits. And it's sort of -- the Mako robot is validated. So if you look at the different surgeons, right, you have surgeons that are in the hospitals already that are -- that have a Mako. And, as Spencer said, they may have been providing -- or waiting for more clinical evidence, we got that. They may have been invited for surgeons talking about their experiences surgeons to surgeons. And that's why we're selling multiple robots at hospitals where we've had one. And then you look at the new person to robotics, well, the great thing is you do have J&J and Zimmer talking about robotics. So now it's not as much this fallacy that robotics is a short-term blip and it's going to go away. That's further revalidation that robotics can benefit. And robotics has never entered an industry and left it. And this is going to be no different. So instead of Stryker where we had 2 burdens, convincing someone that robotics made sense and then showing what our robot did, now we don't necessarily have the first threshold to get over with convincing someone just because now the market is talking so much of and is considered high tech, that gets us into a better conversation, which we enjoy more, which is the differentiation between robots. And unfortunately, the term robot is a very broad category, and there are a lot of things that fit in it. None of these robots are anything alike. There's a reason we design the robot. We write the software. We build the robots for a reason because this is still the robot that only has soft tissue protection capability, haptic boundary capability in working with accurate 3-dimensional foundational scans. So you're talking about real individualized medicine. When you talk though about an implant in second generation, so Triathlon is 10-plus years, and we've had the knee growth that we've had for -- because of the knee implant, its great articulating surface has proven itself. But the story isn't as much of the implant because if it was, there were 2 major implant system releases in the last 5 years, and it's not really moved market share and it's not really shown any beneficial clinical outcomes with those. So the real story, since we have the articulating surface right with Triathlon, is where the implant goes in an individual. That's the next step to make the prosthesis work better, individualized medicine. And that's the value of robotics. So we're going to focus on pre-op, intra-op and then with Orthosensor post-op and get more information in patient inputs and performance metrics on patients. So now we'll still have more runway because we just released a total hip software, next generation. So we're going to do a total knee next generation. We're going to go on to make our shoulders and likewise. So the current platform is good, and we can add more software. So we'll build it. But going back to the knees, now through the whole continuum of care, we'll have more data on the total knee orthopedic patient whose total knee, as an example, than we've ever had before. So where is Stryker going to sustain this growth? Well, there's a lot more Mako to go. Mako's superior. We're going to keep driving it. The publications and literature support it. The patient outcomes support it. And then data science will win. And we will have more data on these patients through this continuum of care all the way through wearables. And now you are in the Stryker ecosystem. So all these residents and fellows that are getting in trained on Mako, it's not just about the physical embodiment of the robot, it's the decision-making, it's getting more information on that patient and it's the data science aspect to it. And we're uniquely positioned with the pre-op information we're capturing now as well as we can port out the final 3-dimensional placement of the implant and extrapolate it. So in the future, if with Mako, say, you're a 64-year-old female, BMI 39, the -- your disease of osteoarthritis progress 2 millimeters of bone wear, what's your best implant, Bob? What's the surgical approach for you? Where does that implant go for you? Should you be outpatient or inpatient? How long a physical therapy? What's managing your patient's expectations? How long are you going to be on pharmaceuticals? When should you go back to work? When should you expect to walk up and down stairs right? That is all part of the Mako program. So the robot is a piece of it, and it's the missing piece of the puzzle. Now with more information and more data, Mako will thrive for years and years to come. So we're on a good journey, and this has more runway.

Well, that's the great overview. I mean a couple of quick follow-ups to that. I just -- I'm sure investors would be curious about -- especially since how much noise -- I think it's the wrong way to phrase it, but especially Zimmer's commentary on Canary and what they're doing with sensor-based implants, you guys have obviously a relationship with Orthosensors. When will that come to market roughly? What -- roughly, what year should we assume that you're able to bring a sensor-based implant to market?

So -- go ahead, Spencer.

Maybe I'll start just giving an overview of Orthosensor and want to bring a few fine points to it, and then Robert can build upon it. First off, you know that we acquired Orthosensor and that was very intentional to bring that technology into Stryker. So we both have the intellectual property behind it as well as we pick up that intellectual horsepower, all that R&D competency around sensing technologies in musculoskeletal. I sort of say it's like we picked up more Robert Cohens, they're now part of the Stryker team, and they're working on this. And really, 3 distinct platforms or parts of that portfolio. First off, VERASENSE, which is the intraoperative sensor that's out in the marketplace today that's helping with this balancing in the soft tissue aspect and giving us this information. So that's available today, and we have a next-generation version right on the horizon. A second, which is also close to entering the market, is our wearable technology. And that's wearable at the point of care or point of where the disease is. So different than wearing a watch that's from a tech company or utilizing an accelerometer in a phone, this is actually wearables that you place on the knee or the hip that are giving this real-life accurate data in a platform we're going to call MotionSense. And we'll see that into the marketplace still this year, which is really exciting. So you can think about wearables and collecting post-operative data for sure, but also migrating eventually to a preoperative opportunity. So we know more about what we need to do in terms of taking care, and as Robert just articulated, that particular intervention. And then a little further down the line is an implantable sensor where you're actually now putting the sensor inside the implant itself and giving you access to more information. Obviously, movement information, but temperature for infection, detection to begin with and maybe someday even prevention, but really thinking about changing the way that an implant works throughout the entire body. And you can think about that across musculoskeletal. Obviously, things like knees to begin with, but hips, shoulder, spine. And we have that capability and access to all those different areas. But I'll let Robert to share a couple of remarks as well.

So if you take a look at where we are today, right, we have a RecoveryCOACH. So we have applications. We're not -- we don't talk very loud about it because one thing that you get with the data is you get some patient inputs with RecoveryCOACH, and we get some information out of the robot. We already put a Mako data analytics program together somebody with the inputs. We can get access to a watch and things like that. But as far as differentiating Stryker technology or differentiating Stryker implants, that doesn't do it. Now once you do the wearables, now we have the pre-op information on Mako already, right? We have CT and we've got lots of information on patients. We've got the intra-operative change level plan characteristic of that patient as well as the final position of the implant. The missing piece was post-operative. Now if I put sensors on you, I'm able to know how you're walking. I'm able to know how you're doing in physical therapy. By the way, a watch and a phone can't tell you how you're doing through physical therapy and how much motion you're getting. We'll be able to be very specific, and that will help us understand are these implants in the right place. We'll be able to get into predictive modeling if wearing an implant is best for you. Then you get into the implantable. So the implantable, we have technology and through the acquisition, we have IP on implantables where we're looking at all the attributes for what it needs to do. But implantable by itself has to show itself into some information that we can't get. I know everyone likes the idea of an implantable. I like the idea of implantable. But what data uniquely are you getting at? If you're going to put a sensor and a battery in somebody, what unique information are you doing that is significantly contributing to the beneficial outcome of that individual, whether mobility or health, that you couldn't get from some other vehicles such as a watch, a phone and wearables. So therefore, you have to look for something. So do you do something that detects temperature? And maybe you'll tell if there's an infection around the implant? Well, that might be okay. Knowing this infection detection, you're not resolving the infection, but it's good you know. If you have pain, does it tell you whether the implant is going to get loose? Maybe. Just putting an implantable in for the purposes of measuring motion, we can do that. How much someone gets off out of the couch, we can already do that. So the whole value proposition of implantables, we're looking at. And the implantable concept that we're working on will be able to work in a knee, it will be able to work in a hip, it will be able to work in ankle, it will work in a shoulder and it'll be able to do anything. But let's not just -- not -- the only thing I ask is we don't get ahead of ourselves because we really need to find out that value proposition that is doing something different and gaining new type of data. We need to start asking the question, what information is truly going to come off this that we didn't have before that is a true clinical and economic benefit that we are working on?

Makes sense. So there's whole portions of your business that we didn't get to today, but I do want to ask one more question that maybe wraps up your views on just how everything is going inside of Stryker orthopedics. So you've got Spine and the Wright Medical deal, I guess the way I'd wrap those into the question is, Spencer, as you look forward in 2022, 2023 and you look at the progress you're making with Wright and you look at the progress you're making in Spine and all these things you're talking about at hips and knees, is it reasonable to expect that this orthopedic business can be an upper single-digit grower? Just curious how you would frame the growth opportunity for your business as you see it today.

Yes. I won't give you specific growth numbers a few years out. But as you heard, we have a lot of great things going on across Orthopedics and Spine. I do want to comment that Wright Medical, we're 6 months post the close today, ironically. And we're ahead of our activities there and our integration expectations and really credit the team for quick decision-making, but that's going very well, which is terrific to see. You heard a lot about our joint replacement business and the continued momentum that we have in areas like Mako and knees and obviously, future technologies. And then thinking about Spine, we expect to continue to post growth in that space. And we think some of the enabling technology investments we've made will continue to pay dividends and on top of, obviously, the K2M acquisition, which has opened up more of the portfolio for new product developments, we do think that we have good confidence in our performance in the quarters to come and well into '22 and beyond.

Great. Well, sorry, we ran out of time. Thank you very much for the opportunity to have a chat today and appreciate everybody listening in. And that will close out today's session. Thanks very much, everybody.

Great. Thank you.

Thank you.

Thank you.