Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Kevin A. Lobo - Chief Executive Officer, President and Director

Katherine A. Owen - Vice President of Strategy & Investor Relations

Analysts

Matthew J. Dodds - Citigroup Inc, Research Division

Stryker Corporation (SYK) Citi 2013 Global Healthcare Conference February 25, 2013 10:20 AM ET

Matthew J. Dodds - Citigroup Inc, Research Division

Okay, good morning. I'm Matthew Dodds from Citi, and it's my pleasure to welcome Stryker. We have Kevin Lobo, who's the Chief Executive Officer; and Katherine Owen, who is the VP of Strategy and Investor Relations. For Stryker, got to start off real well, up 14% year-to-date, ahead of the group. A lot of that has to do with the portfolio, one of the best performances in med tech, and also very good 2013 guidance. So, so far, off to a very good start. Kevin is going to give a few brief comments. It's is going to be mostly fireside chat. It's not going to be a puppet show. It's no puppet show. So it's going to be a few quick comments, and then move over to Q&A. So Kevin, Katherine, thank you.

Kevin A. Lobo

Well, thank you, Matt. Before we get to your questions, I just thought I'd start off with some opening remarks, talking about the current environment and future opportunities. As many of you know, Stryker is a broad-based medical device company that operates in 3 major sectors: orthopedic implants, MedSurg and Neurotechnology and Spine. We delivered $8.7 billion in sales in 2012, which is an increase in adjusted EPS of 9%. We finished at $4.07 a share.

As I -- I joined the company just almost 2 years ago. Initially, I joined as the Group President of Orthopedics. And I assumed the role of President and CEO last October. So during my brief tenure as the President and CEO of Stryker, it's really clear to me that there are tremendous opportunities to continue to meet the needs of patients and physicians, and to do this, by providing tremendously innovative products, which has been the legacy of Stryker over many, many, many years.

We have the key strategic priorities, which we've discussed previously with many of you. The first is expanding our global footprint. We have tremendous opportunities outside the United States to take our existing products and to increase and accelerate organic growth. The second is to invest in innovation, both internal R&D, as well as selected acquisitions. The third area is collaboration, so collaborating across the different divisions of Stryker to leverage our broad product portfolio to hospital customers. And the last area is enabling P&L leverage by driving operating efficiencies. We are committed to a 3-pronged approach to capital allocation, which I'm sure you've heard about. The first focus is on acquisitions. The second, continuing to increase our dividend. And the third, share buybacks. These 3 prongs are really enabled by a very, very strong balance sheet. So with that, I'll open it up and turn it to questions.

Question-and-Answer Session

Matthew J. Dodds - Citigroup Inc, Research Division

Okay. So we're going to start off with what I'm now dubbing the Medtronic question for this conference, and that relates to Europe. When you look at Europe, my sense has been that usually the budgets get a little stretched as you move to the end of the year. And then come Jan. 1, there's a little bit of a relief. And usually, you see a bit of a pickup. Without any specifics on how business is trending, is your view in 2013 business-as-usual in Europe broadly? Do you see anything maybe changing from the purchasing side or from the budgetary side in Europe specifically?

Kevin A. Lobo

Well, it's early in the year, but thus far, we haven't seen any change in Europe. As you know, for us, Europe was a difficult year last year. We have a lot of activities underway and we have tremendous focus in Europe, and we are expecting to see signs of improvement in our business as the year unfolds. But we aren't seeing any major change. Obviously, there's an election in Italy, there are a number of other macroeconomic factors. But to us, it's a similar concern as we had last year that we don't see things becoming more dire thus far in 2013.

Matthew J. Dodds - Citigroup Inc, Research Division

Okay. I'm going to pick up on the company-specific comments on Europe. No surprise in some of the recent calls, you've talked about improving Europe, changing distributors, changing management. Where do you think you are in the process if it was called a 9-inning game? How far along are you in at least laying the foundation for your plans improve in Europe?

Kevin A. Lobo

So let me take it in 2 parts. So certainly, for Western Europe, I would say we're further along in our progress and it's really just about execution. And then in Southern Europe, changing over distributors and just those macroeconomic factors have been pretty severe. So we still have more work to do. We're in the earlier innings in Southern Europe. But overall, I'm very pleased with the management changes that we've put people in place. As you know, the orthopedic implants represent a bigger portion of our European business. And recovering customers and turning over market share does take a little bit of time. So as I've said from day 1 in the job, I expect that the first half of this year, you won't see meaningful improvement in Europe. But starting in the second half, we'll start to see those signs of improvement. So far, all of the steps that we're taking have me feeling very confident that we will start to see that improvement.

Matthew J. Dodds - Citigroup Inc, Research Division

And then when we look at Europe for now, if I go to hips and knees, my understanding is a lot of it is tender-based. A lot of the countries or the region use tenders. Is that part of the process as you have to kind get into the next tender? And broadly, how long -- how much an influence can tender process have on the timing? Is that what's baked in here?

Kevin A. Lobo

Yes. Our tendering, we were certainly aware of tendering. It's not just that a European phenomenon. Many parts of the world have tendering. As part of the profits, we have baked that into our timeline.

Matthew J. Dodds - Citigroup Inc, Research Division

But not the U.S. yet. I hope you're not...

Kevin A. Lobo

Not quite. But even in tenders, obviously, price is a big part of tendering. But it's never the only part. Service and physician input has a lot of to do with winning these tenders. And that's the area where we've had to make our improvements to be competitive.

Matthew J. Dodds - Citigroup Inc, Research Division

Okay. And then hips and knees is the biggest part of Europe. How has some of the other businesses done in Europe? I don't -- I've looked at the last couple of call transcripts, I don't think we hit it as an analyst community. How has some of the other recon businesses or the neuro businesses done in Europe broadly versus hips and knees? I think there's a view out there that Stryker's had issues in Europe. But I think it is specific to hips and knees. So any color on how the rest of the businesses have fared?

Kevin A. Lobo

Maybe I'll let Katherine comment on the neuro, and then I'll take the MedSurg.

Katherine A. Owen

Yes. Your comments are correct in terms of where some of the original challenges, going back even -- your comments are correct in terms of where we had our original issues in Europe. Going back a few years ago, we're more focused on the implant business and to a lesser degree, MedSurg. Neurovascular, that business is a little different from the rest of Stryker. It's about the 65% of those sales are outside the U.S. This is the business that we purchased from Boston Scientific a little over 2 years ago. And they've seen very strong momentum. I'm really pleased with how they've done and it's been very much driven by new products both on the coil front as well as accessory related products. So the issues that have been troublesome for us as it relates to our European business have been very much separate from Neuro.

Kevin A. Lobo

MedSurg, I think we're very pleased with our medical [indiscernible]. Very small in terms of sales. The growth in [indiscernible] in Europe. [indiscernible] in the other parts, we were actually looking to make a little bit of investments in the neuro side to start to grow that side of neurovascular. We have other divisions that sell in the neuro space. And we're starting to see some signs of improvement there. So I would say that the challenges are really predominantly in orthopedic implants. And the other sides that are starting to pick up, very small base though. We are not nearly the same in terms of our footprint in MedSurg and even the other neuro businesses in Europe as we have in the United States. So it will take some time to build, but we're certainly much more optimistic on those.

Matthew J. Dodds - Citigroup Inc, Research Division

Is there still room for investment in Europe broadly? A lot of different companies have different opinions on how much money they're putting into Europe. You've made some changes in hips and knees. As broadly, is it still an area where you have share gains?

Kevin A. Lobo

We have share gains, but I wouldn't say that we're going to make significant investments, not nearly for the same degree as we'll make in emerging markets. But there are some dedicated sales forces that we are looking and analyzing putting into place to drive growth just as we had terrific experiences with dedicated sales forces in the United States. Whether it's foot and ankle or our CMF business, we've seen tremendous growth in sales for those businesses. Those are things that we're studying and we may put in place in Europe, but they won't be millions of dollars of investments, will be more modest.

Matthew J. Dodds - Citigroup Inc, Research Division

And then switching to recon, the direct-to-consumer campaign -- because you didn't like my get-around hip idea, I guess, I can't trademark it. So what's your take on the opportunity for direct-to-consumer? It's worked well for you in knees. This is an industry, we've seen some direct-to-consumer efforts, it comes on. It seems like now you're getting traction. What's your take on how much it's having an influence? And can it be translated to other areas?

Kevin A. Lobo

Yes. No, we're big believers of the direct-to-consumer campaign. The knee business has done, as you saw, extremely well last year. And it's obviously not a new knee. Knee has been on the market for more than 5 years, and we gained market share. We're continuing with that view. If you watched the golf events on the weekend, you would have seen our ads during the match plays. And so we are continuing this year with our direct-to-consumer on knees. On hips, it's not so much that I didn't like the idea of doing direct-to-consumer. Your concept is with the knee concept. We need to come up with a hip concept. And we haven't yet found something that's very differentiating and compelling, not as yet. The team is studying it. There is a possibility that you'll see something perhaps later this year. But we're also looking in our sports medicine franchise or even foot and ankle. Wherever we can get the word out to patients who have a much more vested interest in their health care, we think that's a trend for the future. Now I'm not sure that, that will all be 30-second spots or 60-second cable television spots. It might just be on the Web, it might be in local offices. So we're looking at a multiple, different approaches to speak to the consumer. It's something we plan to continue doing going forward.

Matthew J. Dodds - Citigroup Inc, Research Division

And internally, how do you track the value of the DTC? Is it website visit? How do you determine it's making a difference?

Kevin A. Lobo

We actually have about 20 different metrics. And these are metrics that if you talk to any advertising agency, the same kind of metrics they use in consumer business. So a consumer products business have the same type of leading indicators, click-throughs, websites going to surgeon visits. We even have referrals when people are going into their doctor to talk about their treatment. We ask where did you get -- find out about this. We also have competitive trackers to say surgeons that we have been approaching that are suddenly interested in our knee, we sort of ask them what the trigger was. Oftentimes, they'll say it's the patients that are coming in and asking for our knee. And they just don't want to refer that patient somewhere else, which is what many of them did initially. So it's probably 15 different metrics, the most important of which are the website visits and then the click-through to the surgeon locators.

Matthew J. Dodds - Citigroup Inc, Research Division

Okay. And then one other thing on hips and knees. It seems like there's been kind of a resurgence in personalization. I wouldn't say it's here yet, but there seems to be more players talking about it. What's your take on the ability to use personalization as a differentiated weapon or a share gain or in at least, I think, the hip market has started?

Kevin A. Lobo

Well, I think personalization, if you just look at sort of how each -- if look at the cutting blocks, as an example, in knees, the cutting blocks are an approach to personalization. You all obviously have to get consistent outcomes. And the challenges we have with both hips and knees is the amount of variation in the procedures. Whether you use intraoperative imaging, whether you use preoperative imaging, placing the actual implant exactly where you want to place it is a huge issue, let alone getting into the customized implants. And so I think the drive towards personalization makes sense. But it has to be done in a very smart way and it has to be done in a way that doesn't add tremendous amounts of cost and complexity. So having every single different size range per product puts so much inventory on the shelf. And if the real challenge is actually where you place the implant, just having a broad size range isn't necessarily the answer. So I would say personalization is a trend that will continue. And certainly with our ShapeMatch, we're at the forefront with that and we're seeing good results from it.

Matthew J. Dodds - Citigroup Inc, Research Division

Okay. And then also in recon, if we shift to trauma extremities, really strong quarter last quarter. Part of it was related to a recall. My sense is there's still some spillover into Q1. But I think the bigger picture here is in trauma, you probably now are the most complete package after Synthes in terms of having a full suite. So when you look at the opportunity in trauma, how much do you need to kind of build on, on sales force broadly now that you have the full suite? And are the expectations that even post the nail -- and even taking foot and ankle and putting that aside for a second, you've done really well there. But just on base trauma, is there still the expectation that there's room to gain share?

Kevin A. Lobo

Well, absolutely. I mean, we're the clear #2, but we have about a 20%, 21% market share. We saw a significant scope for improvement in share. We've gained roughly 1 share point per year in the United States over the past 5 years, and that was absent any competitive recall. Clearly, you'll see in the first quarter some more impact from the competitive recall. It's starting to abate since that product is coming back onto the market. But we're very bullish on our trauma extremities business. We have a dedicated sales force. We also have some reps that share in remote areas in the United States, share trauma and recon. But we've been moving towards dedicated sales forces in trauma for the last 5 years. We've also completely filled out our product bag with clavicle plates and a number of other products that we just didn't have before. So we are now able to compete with Synthes in Level 1 trauma centers, big teaching hospitals, areas that frankly we had no chance to compete with them 5, 6 years ago. So we're very bullish on trauma. We think we're going to have another strong year this year. And there's plenty of market share for us to gain.

Matthew J. Dodds - Citigroup Inc, Research Division

Okay. And then switching gears to MedSurg. The endoscopy cameras that 1488 just started rolling out. How big is the opportunity for that? And when will it really kind of get full traction? How long is the kind of a rollout take in endoscopy cameras?

Kevin A. Lobo

I'll let Katherine...

Katherine A. Owen

Well, if you look historically, we launched the 1488, which is our next-generation camera. It's got a lot of nice features and benefits primarily around the level of visualization. There's a lot more lines within the optics that give you much greater clarity. And obviously, when you're doing these minimally invasive procedures, that's a major advantage. It also has applicability along multiple surgical procedures, so it increases its flexibility within the operating room. We launched it officially at the tail end of the second quarter of last year. We had some initial challenges with the product launch, not dissimilar to what we've seen with prior-generation products. And as you get them out into a broad-scale use, you typically see some issues. And those have largely been resolved. I would say as this year unfolds, you'll start to see the full benefit of having that product out in the market. And they tend to have about a 3-plus year run in terms of the historical life cycle for new products of this nature.

Matthew J. Dodds - Citigroup Inc, Research Division

Okay. And then one question on the camera endoscopy. How powerful of a main component in, say, a bundle of selling other products is the camera within that business? Is there ability with a stronger camera launch to have some pull-through in other areas of endoscopy?

Katherine A. Owen

Yes. I think the best way to think about it, whether it's the camera for endoscopy or power tools for the instruments, it's really what drives -- it's the main engine there that powers that business. So the momentum those businesses or those franchises tend to see is really on the heels when we have a new product launch of that magnitude. And those related products, whether it's the screens or ancillary lights and booms that are part of that selling process, but it's really the main thrust of what drives the revenue for that division.

Matthew J. Dodds - Citigroup Inc, Research Division

Okay. And then on that same lines, the power tools. How would you compare and contrast that to where the camera is? How far along are we in that rollout?

Katherine A. Owen

So that was launched earlier. That was launched at the very tail end. Late in the fourth quarter of 2011, we launched our latest-generation power tool. We're the market leader by far in the U.S. in power tools. And they're used primarily in Reconstructive, but also in another surgical procedures, neurovascular -- neuro and other things that you use power tools for...

Matthew J. Dodds - Citigroup Inc, Research Division

ENT?

Katherine A. Owen

Yes, thank you. And so that was -- it's not a dissimilar life cycle, it's 3-plus years. We have dedicated power tools. This year marks our 30th year -- or 2012 was our 30th year in this business, so there's a lot of homegrown talent and knowledge around how to make these products very effective. And that you've seen we've reported out the growth that we've seen in heavy-duty power tools, very strong double-digit gains throughout much of last year on the heels of that. You're not going to maintain that same level of momentum as we go into year 2, and then you typically see another slowdown in year 3, ahead of the next launch.

Matthew J. Dodds - Citigroup Inc, Research Division

Okay. So there's a -- power tools and endoscopy, 3-plus year cycles is roughly the standard?

Katherine A. Owen

Give or take.

Matthew J. Dodds - Citigroup Inc, Research Division

Okay. Neurovascular, Katherine, you touched on this a second ago. When it was part of Boston, and I think initially when Stryker took over, there was share loss. What I was trying to figure out is where do get take -- where do you think the business took the biggest share hit? If you look at that business, it was, I remember, very strong in Japan, pretty big in the U.S. -- I mean, in Europe, and to your point, not big in the U.S. So where -- if you look at the 3 regions, where is there the most opportunity to kind of gain back what the business lost largely before it came into Stryker?

Katherine A. Owen

So when we acquired that business a little over 2 years ago, they had gone through about 5 years without any major new product launch. And the business had long been the market leader. They really developed the device-based treatment for hemorrhagic stroke, which is about 15% of all strokes, but it's about 85% of the device-based revenue. And so it's a very large market. But given some of the quality remediation issues that Boston was going through, a lot of the resources were redirected towards addressing that, something we can appreciate given what we went through with our own warning letters. And as a result, there was really a dearth in products. They are primarily an o U.S. business with about 65% of revenues outside the U.S. So geographically, that part took a bigger hit. But that really struck us as we went through the due diligence on that target was although they did lose market share, they actually managed to hang on to pretty decent share across the businesses. And part of that is the breadth of the offering and part of it is also they did a good job keeping the sales force in place. And so yes, there was share erosion, most notably on the coil side because at the time, it was about half the revenue for the neuro business.

Kevin A. Lobo

But since the acquisition, we've actually gained share in coils. We've gained share pretty much in every region primarily because we launched the new Target coils right after our acquisition, very well timed. And they followed up with successive launches in addition to the acquisition of Concentric, the acquisition of Surpass. So I can tell you, the management team that we acquired stayed in place during the years of underinvestment at Boston Scientific. And they could not be more happier than to be part of Stryker right now, given the commitment we've shown both to giving them R&D as well as the 2 follow-on acquisitions. So we're in a terrific place right now with our neurovascular business.

Matthew J. Dodds - Citigroup Inc, Research Division

And the final piece in that acquisition, the last manufacturing transfer, is that a relatively seamless process, where you just take over the facility? Or is there anything unique about it?

Katherine A. Owen

So for -- externally, yes. I'm sure the integration team would not call it. It takes a lot of time and resources. But there's nothing unforeseen in terms of challenges or anything that we would expect it to be disruptive. It's pretty much all gone according to schedule.

Matthew J. Dodds - Citigroup Inc, Research Division

Okay. And I assume, because we haven't talked about this, there's really no tangible benefit to margins, it's not big enough. And you had a pretty good OEM price point, I would assume.

Kevin A. Lobo

Correct.

Matthew J. Dodds - Citigroup Inc, Research Division

Okay. And then last thing on neurovascular, kind of hit this, the Surpass NeuroEndoGraft. How should I think about that product? I haven't done a lot of work on it.

Kevin A. Lobo

So flow diverters is a very new segment of the neurovascular market. It's really -- they're designed to treat very, very large aneurysms. So in some cases, those used to be treated with coils, and you pack a large number of coils into those aneurysms. We're now seeing obviously with Covidien's flow diverter, a successful clinical result. The Surpass, we're enrolling in patients for our U.S. trial and are selling o U.S. So to us, it's a very promising technology. It's still early. So to call the market and the size of the market is -- this whole neurovascular space is a pretty young industry as a whole, maybe 15, 16 years old. And this is the latest technology. And so we're excited about it. We believe it does have a very strong potential for the future. But the treatment time is reduced dramatically versus packing in a large number of coils. And we feel good about it enough to make the acquisition. I don't know, Katherine, if you want to add anything else?

Katherine A. Owen

The only other follow-on I would say -- because often we get questions that say, "Well, the coil market, you must be really getting hit on coils and how you're growing your business, given the impact of flow diverters." And they're probably in the low double-digits penetration rate. But the other reality is the ability to treat these wide-necked aneurysms not only instead of coils but also simply patients who are untreatable before because you couldn't coil them. They were too wide, the coils would basically fall back out. So really it also has expanded the market, so there's an impact on coils. But also the overall applicability of being able to treat a broader subset of patients that you weren't able to treat previously has been enabled by the diverters.

Kevin A. Lobo

It's very early, it's a new market. And so to predict the size of this market right now is just too early.

Matthew J. Dodds - Citigroup Inc, Research Division

I guess, I didn't ask this before. But is that product's Europe timing relatively -- I know U.S. just started the clinicals, but...

Katherine A. Owen

It's actually -- it's sold outside the U.S., very minimal revenue. And obviously we're going to bring greater resources to it. But the big focus right now is really on getting the U.S. approval. And that clinical enrollment in that trial started in the fourth quarter.

Matthew J. Dodds - Citigroup Inc, Research Division

Okay. And then shifting to cost structure. Not specific to Stryker, but a lot of companies given their year-end guidance, their most recent investor meetings give long-range plans. And everyone was talking about taking cost out of the system. No one's really talking about R&D. I assume there's nothing -- there's no change there. But it's mostly coming out of SG&A and cost of goods. And just wondering from Stryker's perspective, is there more opportunity in cost of goods or SG&A? Because I feel like on the calls, there's a lot of discussion on SG&A. You've done a really good job leveraging SG&A. I don't ask as much about how you've taken down costs to keep your gross margin flat, maybe even get it up. Of the 2, where do you think there's -- is there more opportunity in one versus the other?

Kevin A. Lobo

Sure. So we've discussed very publicly our goal for $500 million of cost savings over 5 years. 2012 was year 1, along that continuum. And that just relates to cost of goods. So that doesn't include SG&A and even inventory benefits. So that's -- we're feeling very positive about that impact. And that's clearly where you're seeing the offsetting of price decreases is the benefits in the cost of goods area. We are still pursuing SG&A savings, G&A primarily through implementing shared services where we're much later than other companies. And in the selling area, not just looking at certain sales comp. But if you look outside of sales compensation, just the sheer amount of inventory we have in the system, the lack of automation, those are all selling costs. The sets that we have all over the United States and around the world, we're actually on a drive to improve that. We had very good results in the fourth quarter, and looking forward to improving that in 2013 and beyond. I don't know, Katherine, if you want to add anything else on that? I would say that I don't expect R&D would decrease as a percent of sales. I think R&D needs to stay at the same level. In fact, it might even increase because the demands on clinical and regulatory are only increasing. And we have to demonstrate value for our products even more in the future than we have in the past. So we need to find these cost savings to offset any kind of price pressure as well as to be able to invest in R&D.

Matthew J. Dodds - Citigroup Inc, Research Division

And the R&D comment, I assume that's kind of globally. I mean, I keep hearing more and more about emerging markets trying to raise the bar on clinicals and approvals that...

Kevin A. Lobo

It's a global issue. I think the demands for economic evidence are going to increase. The good news on that is the cost for economic evidence is far below cost for clinical. The potentially bad news is that you have to do it in every single country. You can't do an economic study that's global because the economics vary country-by-country. But there's a lot more demand for that and something we're gearing up for.

Matthew J. Dodds - Citigroup Inc, Research Division

And just sort of back one more time on the cost of goods. If you look at ways to reduce cost of goods, there's generally 2, I hear, that come up the most. Plant consolidation, and then also lowering your material cost because I feel with med tech, a lot of it is on the material side versus the labor side. Are those fair statements? And which one do you think has -- does one have more opportunity than the other for Stryker.

Kevin A. Lobo

So I would say they're definitely fair statements. We've been rationalizing, and we call it supplier consolidation. We're on a drive to do that. We took out 15% of the number of suppliers 2 years ago, about a similar number again last year. And so through that process, obviously we're getting savings. We still think there's significant scope for improvement there. We don't source a lot of our materials from low-cost countries. So that's an area that we're going to continue to explore. In terms of the optimizing the network, I'd rather use that term versus just rationalizing the number. Rationalizing sites is part of optimizing the network, but it's not the only part because we now have a centralized operation organization around the world, which didn't exist 2 or 3 years ago. And part of that is to say which sites are the best at which technology and putting those technologies in the right site. So moving that around is actually creating tremendous improvements in our competence. So part of that, of course, as a result, you will have some site rationalization. But I don't really have the split between the 2, they're both very important. You have the overall number, the $500 million over 5 years is what we're chasing. Those are the 2 biggest levers to achieve those savings.

Matthew J. Dodds - Citigroup Inc, Research Division

And I would also assume, with some of the plant optimization, there's got to be room on the tax rate as well long-term. You do sell more in the U.S. than some of your peers, but you also have a significantly higher tax rate. How much of that is related to the actual manufacturing versus the actual sales? Is it...

Katherine A. Owen

I don't have the split, but it's focused on -- I mean, we've got, call it, 65%, 64% of our revenue is in the U.S. So that's a factor there. But even adjusting for that, there's the component related to where we manufacture, so it's both. And your comments are right, we haven't quantified it, but there's clearly a continued downward bias exclusive of anything that may happen related to tax reform to our tax rate.

Matthew J. Dodds - Citigroup Inc, Research Division

Okay. And then capital allocation. Trauson, which you recently announced to acquire in China, how much are you looking at expanding your footprint in other emerging markets? A lot of med tech, and especially more recently in orthopedics, there's a lot of focus on China. Don't hear as much on the other emerging markets. Are there ways to get in there like Trauson? Or is it something where these are -- that China is a little more developed in terms of local companies and you're more likely to have to kind of build the infrastructure out from the ground up?

Kevin A. Lobo

So we're very excited about the Trauson acquisition. And for us, the first priority is China and making sure that business grows effectively in China. We're in a slightly different position maybe than some of our competitors because emerging markets represent only 6% of our sales. So we have a lot of room to grow. As we grow in China, we're also going to look at that product portfolio as being ideal to export to other emerging markets. And obviously we'll be focused on the BRIC countries initially, and then even Turkey has a significant promise in the future. We did buy a small medical company in Turkey, very small, which we're looking to export those kind of products around the world and emerging markets as well. So you'll see small acquisitions here and there that will fill out the bag. But for us, it's really making investments, increasing professional education and taking this platform -- in India, as an example, we sell virtually no trauma products. We just didn't have the platform, the product platform to be able to sell in India. With this Trauson acquisition, we now have a platform that could potentially be sold in India. So we're excited. Emerging markets is a big piece of our international growth ambition. It takes time. We have to first -- and actually, we haven't even closed the Trauson deal, so I am getting a little ahead of myself. But you can see I'm excited about it. We first have to finish that deal, ensure that the China business stays on a very, very good growth trajectory. But then clearly, we're going to broaden beyond that.

Matthew J. Dodds - Citigroup Inc, Research Division

And for BRIC broadly, is the model still a 2-tiered approach, where the Stryker product, premium products will be in even a Turkey or a Russia, and then you'll fill that in with, what we'll call, mid-tier? Is that a fair model outside of China, which seems like that is the model?

Katherine A. Owen

Yes. It's certainly the model in China and we didn't or have not yet participated in the value segment or the second-tier segment, however you characterize it. But it is similar. In other emerging markets, there's a similar dynamic. It going to vary based on the specific geography. But being able to compete in both segments is critical. And for us, to be able to do it organically is going to be really challenging in any type of reasonable timeframe.

Kevin A. Lobo

Yes. It would take a long time clearly in China because of the registration process. It would've taken us 5, 6, 7 years. So we really -- we have a very broad portfolio. Brazil, a good example is Brazil, where you have the private sector and the public sector. We don't participate really at all in the public sector. So they have a 2-tier system. And as Katherine said, each country is a little different. But there is a huge part of the market that we couldn't access before that we are now going to be able to access.

Matthew J. Dodds - Citigroup Inc, Research Division

Okay. So a broad M&A question. You don't have to take it on if you don't want. If you look at Stryker's main businesses in the scale, I would argue it's pretty strong almost across-the-board. Are there any areas or subareas where you feel there is room to build out the scale? Are there any obvious candidates?

Katherine A. Owen

Yes.

Kevin A. Lobo

Yes.

Matthew J. Dodds - Citigroup Inc, Research Division

How about more than 2?

Katherine A. Owen

I'm not going to name any specifics because then the phone will ring off the hook, and I won't get...

Matthew J. Dodds - Citigroup Inc, Research Division

From bankers or from...

Katherine A. Owen

Yes, exactly. But I think we've been very consistent in the messaging that our primary focus with acquisitions is in core and key adjacent markets. Well over 80% of the deals we've done have all been focused in our core area. But obviously, the biggest one we did, neurovascular, was in an adjacent market, where we're calling on neurosurgeons with some of our access products. But we didn't compete obviously in the implant side of that business. That's continued to be the focus, so there's certainly businesses that we have, where we don't have -- you could argue we don't have enough scale. Whether we end up investing through R&D or acquisitions, it's really going to depend on are the right targets there, but probably wouldn't call out any specific areas other than to say we think this approach, in terms of core and key adjacent markets, continues to make sense.

Matthew J. Dodds - Citigroup Inc, Research Division

So we still have to go back to that chart at the investor meeting?

Katherine A. Owen

No one will ever see that again. Hang on to your copy.

Kevin A. Lobo

Well, what I would say, Matt, though is when we see a market that we like -- so foot and ankle is a good example. We saw this as a market that we liked. And we studied large acquisitions, we studied small acquisitions, we've started building internal developments in R&D. And then ultimately, we chose to acquire Memometal and we just added that to our existing internal development, created dedicated sales forces and were off to the races. And we had a terrific fourth quarter. So you see we're very, very close to Wright Medical already in such a very, very short time. So the answer is we see these spaces. How we get there will vary based on you have to have the right kind of deal economics to do the deal. And if you don’t, we'll invest internally. And we're still going to pursue those spaces.

Matthew J. Dodds - Citigroup Inc, Research Division

Two more quick ones for me. The buyback, it's been kind of consistent in prior years. I don't get the impression that the guidance reflects as much. Is the -- historically, do you look at where you were with the buyback. Is there any reason to think there's a change in the attractiveness of the buyback? Or is it something where if the opportunity presents itself, prior year amounts could be the norm going forward?

Katherine A. Owen

Yes. I would say last year probably wasn't the norm for a number of reasons. If you mean because the stock's appreciated, I mean, we're not even back to where we were 2 years ago. So it isn't when read notes about us being overvalued, it just doesn't feel that way. I mean, but...

Matthew J. Dodds - Citigroup Inc, Research Division

I think I said fairly though.

Katherine A. Owen

Euphemism. So no, I would say we have a 3-pronged approach to capital allocation and buyback is a part of it. You saw the increase in the authorization that we put in place in December. I will say we have typically always exited the year with some amounts still available under it. So I don't think anybody is dialing in $1 billion. But beyond that...

Kevin A. Lobo

But you should expect to sort of a return to kind of a more normal year, just broadly speaking.

Matthew J. Dodds - Citigroup Inc, Research Division

Okay. Last one is easy. Of your roughly -- at least as of September 30, the $4 billion in cash, how much roughly is overseas for you? Is it the majority, like most companies?

Kevin A. Lobo

Yes. It's about 2/3 roughly.

Matthew J. Dodds - Citigroup Inc, Research Division

All right. I've hogged a lot of time. Is there any question? Let's have it right out front.

Unknown Analyst

There's a number of medical journals showing the importance of alignment and placement both in hip and knee. And a predecessor has spoken of a robust robotic development project. Now when should we expect to see you enter robotics and maybe give us some help in terms of the capabilities that you're targeting?

Katherine A. Owen

Yes. We've actually never discussed externally about whether or not we have an internal robotics program. And that's really very much in keeping with we don't really talk about our R&D pipeline broadly speaking. We typically highlight things either at launch or close to it. We have said publicly that we think there's ultimately a role for robotics, not just in orthopedics but in medical technology. And that's been demonstrated certainly by Intuitive. Whether -- we've also said we don't believe the optimal robot for orthopedic surgery is on the market yet. So we're going to continue to assess that. Whether we enter that market remains to be seen. And whether it's through internal or acquisitions, like any other of the segments we pursue, it's something that we continue to evaluate.

Unknown Analyst

And can you give us any help in terms of the timeliness?

Katherine A. Owen

No. Again, we haven't talked about any specific robotic programs. I certainly couldn't point to a hypothetical timeline. The only thing I would point to is historically, we're pretty close to or at the time of launch when we talk about products.

Matthew J. Dodds - Citigroup Inc, Research Division

Any more questions? All right. We'll wrap it there. Kevin, thank you. Katherine, thank you very much.

Kevin A. Lobo

Thank you, Matt.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Stryker's CEO Presents at Citi 2013 Global Healthcare Conference (Transcript)
This Transcript
All Transcripts