Stryker Corp (SYK) Presents at Cowen Healthcare Broker Conference Call - (Transcript)

Stryker Corp (NYSE:SYK) Cowen Healthcare Conference March 2, 2021 10:30 AM ET

Company Participants

Andrew Pierce - Group President, MedSurg & Neurotechnology

Preston Wells - VP, IR

Conference Call Participants

Joshua Jennings - Cowen and Company

Joshua Jennings

Good morning. My name is Josh Jennings from the medical device team at Cowen. We're moving through the medical device track here, day 2 of the 41st Annual Cowen Healthcare Conference. We're thrilled to have the executives from the Stryker management team joining us today. Andy Pierce, Group President, MedSurg and Neurotechnology; and Preston Wells, Vice President, Investor Relations. Gentlemen, thanks for taking time today and spending with us.

Andrew Pierce

Thank you for having us, Josh.

Preston Wells

Thanks for having us.

Question-and-Answer Session

Q - Joshua Jennings

If I may, I think investors are -- everyone's very keen on learning some updates or any updates that can be provided on elective procedure trends and anything specific that your team is willing to share, just with the COVID surges continuing into January and February, I think that's well known across the board.

But is there any updates, just in general, in kind of Stryker's elective procedure trends in the last two months? You guys updated us on the fourth quarter earnings call, I think in late January, so I guess, just in the month of February.

Preston Wells

Sure. So Josh, as we had talked about in our call, our earnings call, certainly, we did expect some of that disruption that we had in the fourth quarter to continue into January, February. And of course, as you said, we did see that.

And what we are seeing though is that the trends are starting to improve. I think as we talked about that as well, the hospitalization rates, the infection rates are really key indicators, and we've certainly seen those start to decline. And as a result, I think we're seeing some improvements in procedural volumes, but slowly coming back. And I think we would expect that to continue throughout the year as we keep going.

I think one area also to think about as we focus on the quarter, certainly, the disruption that we had with some of the weather recently in February caused some disruption on some elective procedures as well. I guess as we think about our business, one positive that comes out of that is certainly our trauma. Our trauma business is aided a little bit by a situation like that. But I think all in all, things are playing out a bit like we would expect from a pandemic standpoint. And as those hospitalization rates and infection rates do decline, we do expect the procedural volumes to continue to increase.

Joshua Jennings

Excellent. And I think on the fourth quarter call, your team provided some -- an outlook that headwind -- pandemic headwind will linger in the second quarter. And then you guided to overall corporate-wide revenue growth of 8% to 10% off the 2019 base. With that setup of the headwinds lingering into 2Q and then that level of growth just implies a healthy ramp in the back half here.

Can you just talk about some of the drivers that will lead to this acceleration in the organic revenue growth outside of just the tailwinds of the pandemic subsiding -- or sorry, the headwinds of the pandemic or subsiding? There are no headwinds. I mean, there's no tailwinds going on right now.

Preston Wells

Certainly. I mean, I think it is important, though, to just to pause a bit on the pandemic subsiding because I think that brings with it some opportunity. As we think about the -- our elective procedural areas that we support, those areas are -- where patients certainly have deteriorating situations that require surgery. And so that's not going away. And so we certainly are going to have some level of the backlog that's been building, really, since a year ago, that we'll be working through as part of the recovery as well that'll aid in some of that growth that we expect to see.

But outside of that, there's a few areas I would point you to. I think, first of all, we look at our Mako installations that we had in 2020, a record number for us as we think about it. And when we think about what that's meant in the past in terms of growth on knees and hips as utilization takes on Mako, that gives us a lot of reason to believe in terms of recovery and getting back to growing above market as we think about our R&D growth, in particular, moving forward.

Certainly, the right medical acquisition is another area of focus for us. That, an acquisition, as we talked about, is off to a good start. We like where we're headed from a sales integration standpoint and where that's moving. And again, that gives us some opportunity as well as we think about growth with category leadership in the lower and upper extremity areas of that business.

And then just a few other areas I'd probably point you to. Andy can certainly speak to this a bit more, but we continue to see strong demand in our Medical business around large capital, particularly in our beds business and emergency care areas, as well as, I would point to Sage as being an area of opportunity really coming out of the pandemic as well that has a tremendous opportunity.

And then finally, on the Neurovascular side, we really saw that business, after that second quarter downturn last year, really come back to what we would expect it to be and behind some really key product launches and really being able to get out behind those product launches in '21, also expect that to be a good catalyst for us as we look at '21 growth.

And so I think all in all, just in a typical year as we think about Stryker, it's not any one thing that we would point to. It's really going to be a lot of different activities across our diverse portfolio that's really going to drive that growth.

Joshua Jennings

That's helpful. And just one more quick question just in terms of the guidance or the expectation that you guys had put forward on kind of headwinds lingering into 2Q. We've been -- we host these physician expert panels during our conference. And some of our checks recently have suggested that maybe some of the older Medicare patients, there's kind of this new kind of delay set up in waiting to get their vaccine before moving forward in an elective procedure. Is that something you guys baked into that kind of lingering into 2Q expectation? Was that kind of one of the major points of that outlook?

Preston Wells

It certainly was a thought. I mean, I think the one thing that we've seen is you can't really attach any one overarching assumption to the pandemic because it's so variable. But there's certainly an element of patients that will defer because they're going to wait on getting their vaccines. That being said, we know that the vaccine is starting to roll out a bit faster. We know we just have our third entrance from a U.S. perspective into the vaccine market for this. So I think that you're going to see that pick up as well. And once we see that really picking up, I think we'll see a lot of those people that are deferring coming back in at the same time.

But there also are people that are, quite frankly, just ready to have this procedure done. And hospitals have demonstrated their ability to segregate patients, to make sure the right testing protocols are in place. So that patients can feel more comfortable coming in and having those procedures. So I think it's going to be varied. But certainly, it was one of the factors that we took into consideration.

Joshua Jennings

Great. And maybe another just high level '21 question for both of you. Just on the U.S. capital -- hospital capital equipment or capital spending budgets. It's impossible to predict how those revolve. But it seems like from some of the reports of smaller capital, med tech companies, and you guys continue to assess with Mako with some of that placement, some of it is upfront capital purchasing. But the environment has improved sequentially in 3Q to 4Q. I mean, nothing -- not claiming that it's back to normal by any means. But any help just in terms of where we sit today relative to '19 levels and the U.S. hospital kind of capital purchasing trends and the outlook for recovery there over the course of '21?

Preston Wells

Yes, sure. Yes, you're absolutely right. I don't think we could get any worse than we were in Q2 last year. So Q3 was a nice improvement. Q4 took a slight step back, and we are -- as we move through the first 2 months of the year, we're not back to normal, but it is normalizing. We are seeing that. And sequentially, as we move through the month of February, we started to see that well.

As elective procedures come back, much of that small capital that we have in our business will closely follow that trend as customers get more confident in their revenue streams. But we feel quite good that it's not exactly where it would have been in 2019, but it's definitely coming back. And we're feeling very optimistic about where we're going to head through the course of the year.

Joshua Jennings

Actually it seems as if -- I mean, just as more of a statement than a question. But as elective procedure recovery has come back, hospitals have been more -- have more certainty that volumes aren't going to take a deep pit. They're more comfortable kind of treating sick COVID patients in parallel with maintaining elective procedure flow and having that profitable revenue stream back almost to normal has given them some confidence in going forward with some capital purchases that may have been frozen in Q2 and Q3. Is that kind of -- and it's very, very high level and hard generalize across the board, but...

Preston Wells

Yes, that's absolutely fair and exactly what we're seeing, Josh. And the reality is, is if we think about these replacement cycles that we have in our small capital businesses, think about endoscopic cameras or our power tools for orthopedics, they do have a natural cycle. And of course, through the course of last year, that was pushed for many customers into this year. So we're, as exactly, as you say, as elective procedures start to come back, as confidence grows in our customers, we're expecting to see that upgrade cycle kick back in. And like I said, we've already started to see signs of that.

Joshua Jennings

Great. Just going back to that 2021 guidance range that -- for corporate-wide guidance range, organic revenue growth 8% to 10% off that '19 base. Andy, how should we be thinking about internal assumptions for the organic revenue growth for MedSurg and Neurotech? Both businesses have been accretive over the past couple of years to Stryker's organic revenue growth performances. And we're assuming that historical trends will come back in play, but just wanted to do a sanity check there. I mean, is there anything to call out in terms of headwinds or tailwinds as we go through 2021 for -- it's a lot of businesses within MedSurg and Neurotech, but -- and a lot of products, but anything you'd point to?

Andrew Pierce

Yes. Sure. I think we feel very good that as you note, historical trends will continue. MedSurg and Neurotechnology will be accretive to Stryker's growth this year. We have every expectation of that. That's the way we budgeted the businesses. The businesses are quite bullish on their outlook. Morale is high in our sales organizations. They're out today, thousands of MedSurg and Neurotechnology sales reps, working with our customers, taking care of our customers and introducing our terrific products to them, especially as we've launched some new ones as of late.

But we feel very good on the -- we talked about on the tailwind side as procedures start to come back, that will drive our business all throughout. And if -- I know Preston mentioned this. If you look at our Sage business, for example, as we've normalized in the ICU, for example, and actually, as we've seen, to some degree, the benefit of COVID, you talked about tailwinds from COVID over the last few months. We've started to see our Sage business really, really pick up as the ICU census has gone up. And we would expect that, of course, to normalize going forward as well in the ICU.

So across our businesses, we feel very good. If you look at our neurovascular business, hemorrhagic was impacted last year. Strangely, patients not showing up in the hospital. And over the last several months, we've really started to see that improve, and that's been very consistent through the first couple of months of the year. So call it normalization of what you would see in stroke care as well. So all across the board, we feel very good.

We will face some tougher comparables in our Medical business from last year. But if you look at it relative to '19, we should see very, very nice growth.

Joshua Jennings

That makes sense kind of calling out that setup for Medical. And it's way too early to talk about 2022 in any detail. But again, the consensus estimate out there implies, of the consensus estimate for 2021, 7%, 8% revenue growth. That is kind of the historical kind of pre-pandemic range that Stryker was delivering. Actually, I think since Kevin Lobo took the seat, organic revenue growth has accelerated every year, while he's been in that seat. The only thing that could slow down was the pandemic apparently.

But just getting back on track there. I mean, presumably for the MedSurg, Neurotech business and the -- I mean it implies, again, even higher growth with your business as being accretive to the corporate revenue growth trajectory. I mean, off of -- I think we always worry about -- basically the question is I mean how long can MedSurg and Neurotech grow above 7% to 8% and maintain that accretive status when comps just continue to stack up? I mean -- and I think I know the answer, but the question is, I mean, is that par reasonable still as we get out to 2022 and beyond? And then that's the goal to continue to deliver north of 7% to 8% from your businesses?

Andrew Pierce

I'll just be very frank with you, Josh. If it's not, I would be very disappointed. That is our historical expectation that we grow in that high single-digit range in MSNT. We have some terrific markets behind us. We have amazing portfolios of products, world-class sales organization, very specialized teams. And we have every reason to grow at that rate or faster. And frankly, as mentioned earlier, be -- continue to be accretive to Stryker Corporation's growth.

Preston Wells

Yes, Josh, just to add to that. I mean, I think Andy's right. The one thing that hasn't changed is the overall growth strategy across Stryker, the pandemic obviously caused some disruption. But again, short-term in nature, all of the disease states, we still treat all the categories we compete in. Those are all still very, very good things for us as we think about what growth's going to look like going forward. There's no reason to believe that we won't get back to that.

Joshua Jennings

Great. I mean -- and just -- I appreciate that. Andy and Preston, I mean, just the tuck-in strategy that Stryker's executed on the M&A front over the past number of years has been -- born a lot of fruit. It's contributed to MedSurg's and Neurotech's organic revenue growth trajectory. And both of those businesses have been major participants in these initiatives on the M&A side. Can you talk about just the business development integration playbooks that you guys are running? I mean, is this each acquisition unique? Is there a playbook, overall, at a high level that you guys put in play? And maybe -- should more be -- credit be given to the biz dev teams or the integration teams? Or are those one and the same in your view?

Andrew Pierce

Go ahead, Preston.

Preston Wells

Yes. No, I would just say that overall, I mean, as you know, the tuck-in strategy and the overall M&A strategy has been something that's just been key to our growth and ,really, in our DNA over the last several years. And so when we look at M&A, it's really across the business focus and obviously starts with those business development teams that are in the divisions, in those business units that are focused on those markets, identifying the right targets. And then it's across the organization in terms of that integration effort that really is done to make sure that we're integrating the right way.

I mean, just like anything else, the whole process of acquisition and integration is like building a muscle. And it's something that we've been working on for years and years. And now we continue to get better at. We learn from every deal that we do, and we apply that learning to the next deal. And if we look at Wright Medical, for instance, it's something that we've taken some learnings from previous acquisitions, and we're applying it to Wright Medical. And all of that's built on all the various acquisitions that we've had throughout the years, really, from all the tuck-ins, doing the larger adjacent deals. But it's -- I'd say credit is certainly due across the organization. But I think, really, it starts with the strategy, the decentralized focus of those business development teams to sit very close to the commercial organization and understand the categories that they compete in.

Joshua Jennings

And just to follow-up there, I mean just because M&A has contributed to the organic revenue growth trajectory. Just for MedSurg and Neurotech, you haven't had the major acquisitions. Major tuck-ins have been in on the ortho side with Wright Medical and then on the spine side with K2M over the past couple of years. I mean, how should we be thinking about the M&A cadence for MedSurg and Neurotech from here? Is it your turn, if you will, Andy? And does that create a headwind just because your -- the tuck-in acquisitions have been so accretive to both your major businesses?

Andrew Pierce

Sure. Yes. Well, I don't think it creates a headwind. We have plenty of great products across our portfolio, both organic and inorganic, if you think even about recent deals like TSO3, Zipline Medical in our instruments businesses. Those are just building steam today. We have other smaller acquisitions. We have deals that are distribution deals that we've been very busy on over the last year as we've sort of pivoted with the integration and large expenditure of Wright Medical.

We have plenty of opportunity in M&A. Our M&A teams are very busy. They are -- certainly, if you think about over the past year, busier than any point over the past year. And they didn't go pencils down in the past year. It just slowed down a little bit. And it's really cranked back up on the MedSurg and Neurotech side.

Tuck-ins have been our general play. If you look across MSNT in general, sometimes you see the headlines, the InteliSys of the world or Invuities or the occasional NOVADAQ and maybe the occasional Sage and Physio-Control. But the majority of what we do in MSNT flies under the radar a little bit on the M&A side, and we build great businesses out of relatively small acquisitions over time, and I think that tuck-in strategy will generally continue.

Joshua Jennings

Well, that's a great point. Because I think -- I don't think it's appreciated as much. And just to highlight just under the radar distribution deals or even technology acquisitions and MedSurg that investors may not be aware of, but I think in our kind of talking to some private companies over the -- even the last 2 months, we had two companies talk about these distribution agreements with Stryker. And that's just -- all that is under the radar, at least I wasn't aware of how meaningful that could be to your businesses.

Just going back to capital, I mean, it is an important piece of the Medical business. Andy, Stryker -- and Preston, you guys have called out capital and portfolio represents about 25% of Stryker's overall revenue base; large capital, 9%; small capital, 16%. Are you guys willing to break that out for Medical specifically within MedSurg or just MedSurg surg, I should say. I mean, I assume it's a higher percentage, but is that too granular?

Preston Wells

No, so I mean, as you think about MedSurg, and what's been interesting is that evolution of what portion of the business is capital and then breaking it down between large and small is something that's continued to change and evolve with acquisitions like Sage, for example.

So when you think about MedSurg, MedSurg takes those numbers to be in about 45% of the business being capital, with 30% being small and 15% large. So it still shows that diversity across the business, and it's not all capital, certainly not all large capital, maybe, sometimes is assumed.

Joshua Jennings

Great. And Andy, you called out kind of the comp headwind for Medical. I think some of the COVID-19 essential product lines, bed, stretchers, emergency cots, Physio-Control, even Sage products, I think the flight personnel protection offering a lot more demand during the pandemic, eye of the storm and beyond last year. But any detail in terms of how we should be thinking about growth of kind of that essential capital or those products that did see increased demand in 2021 off of that 2019 base?

Andrew Pierce

Sure. Yes, you're absolutely right. It is -- we're about ready to enter into a period of time where it gets a little more challenging from a growth perspective. If you think about the boost that we received in our Beds business, our stretchers business and particularly in our defibrillator and automatic chest compression business, all categories that have very much benefited from COVID, it's going to get tougher.

But if you think about it relative to '19, and you look at our trends today, Josh, we are continuing to see strong demand in our emergency care business, which covers that LUCAS chest compression device that I mentioned, our defibrillators, our beds and stretchers, in our acute care business. And as noted, of course, not capital, but our Sage business really coming back very nicely. So we are very bullish and continue to be bullish, particularly as you look at it relative to '19 with our Medical business. Demand is high. We've just launched ProCuity, an amazing product. That is our new bed for acute care patients, both in the mid-acuity and high acuity. It's a very flexible bed that we have and we've seen really, really nice success with that out of the gates, and that will just gain steam through the course of the year.

And our emergency care business is really continuing to do quite well right now. So we feel very good about our Medical business, an amazing sales organization across the board in their multi-specialized sales forces and very experienced leadership. They really know what they're doing, and we're very excited about our Medical business.

Joshua Jennings

Excellent. And just -- and we kind of lumped -- I don't know if you guys do the same thing, but just kind of into capital in the COVID-essential and COVID-nonessential capital. Some of that's in the spine business, but -- you've endoscopy cameras, power tools, maybe neuro-powered instruments and waste management. We believe we've done a priority list within the hospital capital budgets. But can you talk about the performance of maybe the nonessential capital budget within MedSurg and Neurotech? How they performed through 2020? And then, I mean where you stand in terms of the recovery here?

Andrew Pierce

Yes, Josh. As noted prior, the capital businesses in 2020 were softer than we would typically see, of course, with that big dip that we saw in the second quarter, in particular. I don't think Stryker was unique in that regard. But as we come into the new year and also, as we've mentioned already, and you start to see COVID cases dropping, hospitals getting more confident, patients gaining more confidence, certainly, as the vaccines roll out, we expect a close trail on that with our smaller capital businesses that are directly tied towards, and this is a very good thing, revenue streams, important revenue streams for our hospital customers as they provide surgical care for patients.

And again, we have these typical upgrade cycles that we would see, and they could get pushed a little bit from '20. So we'll start to see that picking back up in '21. So I think we are confident, and we have many reasons to be optimistic in our business, along with, of course, market-leading portfolios, great innovation that we have across the business. So we're feeling quite good.

Joshua Jennings

Great. Sorry to throw a similar question, but I to want to just focus on endoscopy because that is a -- kind of a subset -- big sub-segment within MedSurg. And maybe just help us think through the components. Endoscopy, you've got sports in there as well. Maybe if you can just give us the relative percentages of contribution to endoscopy from the different sub businesses within endoscopy and then just talk about how it's positioned as we're moving forward in 2021.

Preston Wells

Yes, Josh. Sorry, one second, Andy. So Josh, we haven't really provided that level of granularity in terms of the breakdown, but I'll certainly let Andy speak to the parts and what's driving there.

Andrew Pierce

Yes. So thanks, Josh. The endoscopy business is a typical high performer for the corporation. If you look at the performance over time, we certainly wouldn't expect that to change anytime soon. Terrific team, great sales organizations, leadership team, innovation and all the things that we would look for out of the Stryker business are very much represented in our endoscopy division.

So what is endoscopy? Of course, the flagship product, being surgical visualization, where we lead the market in that regard. We are extremely excited about our leadership position in fluorescence imaging. And frankly, as competitors come into that market, it further legitimizes fluorescence imaging and drives uptake more as a standard of care across our customers. So we expect to benefit from that. And again, we do love our leadership position there, and we continue to fuel that.

Endoscopy also is our communications business. So if you think about the audiovisual routing that happens in a smart operating room or the booms, lights and tables that would make a safer, more efficient operating room, as you get equipment off the floor, that's our communications business. That business has been a little more impacted as hospital capital expenditure -- capital projects, rather, if you look at new builds and hospitals or remodels of operating rooms, that has slowed down. And we -- of course, as we come out of the pandemic, we expect that to pick right back up and that business will benefit from that.

And then third, as noted, our sports medicine business, which has really become a terrific business for us on the backs of innovation and some very strategic acquisitions over the last 5 or 6 years, a legitimate big business with high-growth for the corporation and much upside and very much benefiting from our offense as we look to expand our positions in ASC. So we feel very good about our endoscopy business. They will continue to perform. They will continue to be accretive over the long haul to Stryker Corporation, and you can expect to see a lot out of them.

Joshua Jennings

Excellent. Just left a couple of minutes here for the most -- one of the most accretive business units within your -- underneath your watch, Andy, Neurotech. But a couple of questions here before we wrap this up. I mean, one of the focus on aspiration. You were launching the full portfolio or full suite of product -- aspiration products at the end of 1Q '20, and the pandemic hit. Just maybe you could talk about that launch during the pandemic and then -- and just the setup for 2021? I mean, I think a lot of launches in '20 have been stub launches and maybe silver lining. There's a lot of prep work that's been done in '20, and then the full launch hits in 2021. It could be even stronger than what you would have experienced in the non-pandemic 2020, anyway, but I'll let you take it from there.

Andrew Pierce

Sure. Yes. Our neurovascular business is remarkable and -- both on the innovation side, but also terrific customer engagement, great KOL development that we have in that business. And we did launch some very innovative new products through the pandemic, so real shot in the arm to that business. But as you note, it was a little truncated as we would expect through the pandemic with access to customers being a little more challenging through much of the pandemic. So we would expect our catheter business, particularly our Vecta 74s that have launched here in the U.S. to really start to pick up this year.

Our streamlined Evolve business for the flow diverting stent, we really expect to -- and it's been, by the way, quite well received in the market. Both of those products have, and we expect to see that really pick up steam through the course of the year. If that business weren't accretive to Stryker Corporation, I shouldn't be here. So you can expect really great things out of our Neurovascular business, and they're off to a very nice start this year.

Joshua Jennings

Excellent. Maybe just one last follow-up on Neurotech. I mean just in terms of the market. Any comments on, I guess, the sustainable kind of market growth rate sustain that double-digit clip? And should Stryker be outperforming the market or growing at the market? I mean, there are some new entrants into the space, and the competitive landscape is heating up. But clearly, you guys are in the number kind of 1, 2 player for years. And I mean, since you bought the Boston business came over back, I think before Kevin's time even. Anyway -- but just any comments on the market and in your expectation to outperform the market, grow at the market?

Andrew Pierce

Sure. Yes. You'd likely know that Stryker has been -- Stryker Neurovascular has been built on the back of our Coil business for hemorrhagic. And of course, that was the majority of the neurovascular world for a long time. But as AIS, ischemic stroke care, has really come into play, it's provided an immense opportunity for us. And we are still a relatively low market share player, but with a terrific portfolio and an emerging portfolio in AIS, that will provide some very nice tailwinds for a long time to come.

Your question around do we expect to grow at market? Or should we expect to grow faster than market? At Stryker, we always expect to grow faster than our markets. And Neurovascular is no different. When you see markets growing 13%, 14%, 15%, we're pretty pleased when we see growth rates in any of our businesses that are like that, but we expect our neurovascular business to grow faster, and we feel quite good about that.

If you look over the past year, even though it was a pandemic year and there were some challenges in the business, that did happen, certainly relative to our larger competitors. We did outperform them, and we believe that we're outperforming them now that we are taking share and that we'll continue to do that.

Joshua Jennings

Excellent. I see the red light on the clock here, but it's a nice place to stop following those comments. Andy, Preston, thanks so much for participating in the Cowen Health Care Conference this year. Always great to have Stryker as a part of the action. So great, great discussion. Can't thank you enough. Have a great rest of the day, and we'll be in touch.

Andrew Pierce

Great. Thank you, Josh.

Joshua Jennings

Thanks, guys.