Stryker Increases Dividends, Expands In China

| About: Stryker Corporation (SYK)
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Stryker Corporation (NYSE:SYK), a medical device maker, is paying a cash dividend of $0.265 per share scheduled for January 31, 2013. This is a 24.71% increase over the prior quarter payment of 21 cents. The ex-dividend date was on December 27, 2012.

Stryker's dividend has grown at a compound rate of roughly 40% since 2006, and it has been increased at a fairly consistent clip above the level of earnings growth.

In 2012 Stryker repurchased 2.1 million of its shares at a cost of $108 million. The company has repurchased roughly 2 billion of its shares since 2008.

Expansion in China

In recent years the growth of the U.S. market for orthopedics, such as hip and knee replacements and spine implants, has nearly ground to a halt. The copays required nowadays can reach thousands of dollars. The economic crisis prompted even insured patients to delay procedures. Also depressing the market were widely publicized hip-implant recalls and medical journal articles raising doubts about key spine products.

The $12 billion U.S. orthopedic market is now growing by only 2% to 3% a year, according to Frost & Sullivan, a market-research firm. But foreign markets, like China, are expected to soar from $1.6 billion last year to $2.7 billion by 2015.

The Chinese government plans to build 5,000 new hospitals, as many as the current US total. As a result, U.S. medical-device makers are moving into China in droves, hoping that a surge in Chinese middle-class patients will revive their sluggish sales.

In January 2013 Stryker offered to pay $764 million in cash for the spine-products maker Trauson Holdings Co., a Chinese orthopedics company. The deal follows Medtronic Inc.'s (NYSE:MDT) September 2012 acquisition of another Chinese orthopedics company, Kanghui Holdings Co., for $816 million.

Other medical-technology companies like Zimmer Holdings Inc., (ZMH) diabetes firm Fresenius SE (FRE), device and nutritional maker Abbott Laboratories (NYSE:ABT) and medical-equipment company Covidien Inc. (COV) have also bought interests in China.

Trauson is the largest maker of trauma products and one of the top producers of spine products in China, supplying over 2,500 hospitals. The acquisition will boost Stryker's slim exposure to emerging markets, which currently account for only 6% of its sales.

Surpass Medical

Stryker is also acquiring privately held Surpass Medical in an all-cash transaction for $100 million and up to an additional $35 million in milestone payments. Surpass' specialty is a flow diversion stent technology to treat brain aneurysms.

Its key product, NeuroEndoGraft, is designed to redirect blood flow away from an aneurysm using a unique mesh design that allows a stable clot to form within the aneurysm pouch. With NeuroEndoGraft, Stryker is able to treat large and giant unruptured intracranial aneurysms, and complete its portfolio of coils.

The NeuroEndoGraft is approved in Europe with a limited launch underway outside the U.S. In the US, Surpass is beginning to enroll patients in an IDE clinical trial.

Another acquisition in 2011 was Boston Scientific's market-leading Neurovascular business, which focuses on the treatment of hemorrhagic strokes.


Stryker also acquired Concentric Medical for its product called Trevo in 2011.

Trevo is part of a new generation of clot retrieval devices cleared by the FDA to help stroke victims: Solitaire from Covidien was approved in March 2012 and Trevo Pro from Stryker in August 2012.

The devices are fairly similar to each other in that they both have a stent-like design, using a tiny wire cage instead of a coil. With the help of a catheter the device is snaked up from the groin in the artery all the way to the brain. The clot is pushed up against the walls of the artery and enmeshed in the wires, allowing doctors to pull the clot back out of the groin. After the device is withdrawn, the blocked blood vessel is reopened.

Patients whose strokes are caused by large vessel blockage respond poorly to the drug and are candidates for treatment with the Trevo or Solitaire device. Clot-busting drugs only partially reopen 40% of large blocked arteries.

The new devices partially reopen 70-90% of large blocked arteries. Also, the devices can be used in patients in whom it is not safe to give "clot busting" drugs, such as patients on blood thinners, patients who have had recent surgery, and patients between 4.5 to 8 hours after stroke onset.

Investors' summary

The medical device sales tax introduced in 2013 might reduce near term earnings. Stryker projects an estimated $100 million pre-tax annual impact from the tax. Softer hospital budgets might also affect earnings growth unfavorably.

Yet in the U.S., reconstructive sales are expected to recover. Stryker's future growth could come from acquisitions as well as new product launches. Stryker spends 17% per year in R&D expenses in an effort to maintain market share.

In the third quarter, hip, knee, and trauma products represented about 43% of the total sales. Knee device sales in the US were up in the mid-single digits, reflecting an impact from the GetAroundKnee direct-to-consumer campaign. U.S. trauma sales posted an impressive increase of 11% in the quarter.

The MedSurg product segment (instruments, endoscopy and medical solutions) represented about 38% of sales.

Neurotechnology and spine made up about 19% of company totals, and sales increased 9.2%. There was a strong uptake for the Target Coil, while the early launch of the Trevo stent retriever was off to a good start. Core spinal implant sales were down slightly.

On the negative side the Company recorded a charge of $174 million or approximately $0.35 per share in the fourth quarter of 2012, related to the recall of the Rejuvenate and ABG II modular-neck hip stems.

The recall was announced in June 2012, when the Company terminated the distribution of these hip products and notified doctors and regulatory bodies. The reason for the recall was the potential risks associated with corrosion in the product that may lead to adverse tissue reactions. The Company intends to reimburse implanted patients for the costs of testing and treatment. The probable loss to resolve this matter is estimated in the range of $190 to $390 million, before third-party insurance reimbursement.

Stryker now projects 2012 adjusted diluted net earnings per share in the range of $4.05 to $4.07, an increase of 8.9% to 9.4% over adjusted diluted net earnings per share of $3.72 in 2011.

In the past 52 weeks the share price has ranged from $49.43 to 61.59. In January 2013 Stryker hit a new 52 week high.

Stryker is an innovative company with good dividend yield and may be appropriate for long term value investors.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.