Stryker: Real Muscle in Orthopedics

S&P says the medical-device maker is boosting market share, thanks in part to innovative products, and gives it a strong buy ranking

by Robert Gold From Standard & Poor's Equity Research

In our opinion, the orthopedics market represents one of the more compelling long-term growth opportunities within the global medical device industry, with total sales estimated by S&P at about $21 billion and sustainable revenue growth of 12% to 13% over the next 10 years. We believe this growth will continue to be fueled by a rising number of individuals aged 65 and older, a segment of the population that's more active than past generations, along with rising obesity levels, and an increased level of sports-related joint injuries in younger age pools.

In our view, one of the most appealing ways to play these trends is Stryker Corp. (SYK; recent price, $53.61). Why? We believe the company has captured market share across several major product categories in recent years. Despite a competitive market, we think this trend will persist going forward as a result of a highly effective sales force and product innovation.

By our analysis, Stryker currently stands as the third-largest participant in the joint-reconstruction market, and ranks No. 4 in spine, No. 2 in trauma, No. 2 in endoscopy/arthroscopy, and No. 1 in the operating-room equipment categories. We view the stock's valuation as compelling, and our recommendation is 5 STARS (strong buy).

Wide Array

We think the global orthopedic implant market is dominated by six major players: Zimmer Corp. (ZMH), Biomet Corp. (BMET), Smith & Nephew (SNN), the DePuy unit of Johnson & Johnson (JNJ), Medtronic (MDT), and Stryker.

Homer Stryker, a leading orthopedic surgeon and inventor of several important orthopedic products, founded the company in 1941. Among the most diversified companies within the orthopedic-device industry, Stryker makes and sells a broad range of products in the orthopedic implant (59% of 2005 sales) and medical and surgical equipment (36%) segments. It also operates a network of more than 450 outpatient centers across the U.S. (5%) that offer physical, occupational, and speech-therapy services to patients recovering from orthopedic or neurological illness or injury. About 35% of the company's sales are made in markets outside the U.S.

Orthopedic implants sold by Stryker consist of products such as hip, knee, shoulder, and spinal implants, associated implant instrumentation, trauma-related products, and bone cement. Artificial joints are made of a host of modern materials including cobalt chromium, titanium alloys, ceramics, and cross-linked polyethylene, and are implanted in patients whose natural joints have been damaged by arthritis, osteoporosis, and other diseases.

Interior Design

Trauma-related products are used mainly in the fixation of fractures resulting from sudden injury, including nails, plates, and screws, along with external-fixation devices and bone cement. The company also sells the bone growth-stimulating compound OP-1 in the treatment of long bone fractures, and continues development of OP-1 for the treatment of spinal indications, including spinal stenosis.

The medical and surgical equipment business operates through four units. Stryker Instruments sells powered surgical drills, saws, fixation, and reaming equipment, along with other devices that are used to prepare hip or knee surfaces for the placement of artificial joints. Stryker Endoscopy offers medical video cameras, light sources, arthroscopes, laparascopes, powered surgical instruments, and disposable suction/irrigation devices. Stryker Medical produces 30 types of specialty stretchers customized for acute care and specialty surgical facilities. Stryker Leibinger makes plate and screw systems for craniomaxillofacial surgery to repair small bones in the hands, face, and head.