Stryker Corp & DePuy Report 1Q:04 Earnings and Provide Insight into Strength of Large Joint Reconstructive Market
BY JOHN CHOPACK, APRIL 19, 2004
DePuy and Stryker Corp. both reported their 1Q:04 earnings during the last week of trading activities. This provided some insight into both the strength of the Large Joint Orthopedic market and how the additional orthopedic companies will report during the upcoming weeks.
DePuy reported revenues of $839 million during the 1Q:04, which was a 14% increase over the 1Q:03. The Company disclosed that 6% of the increase was a result of foreign currency translation. The 14% net revenue growth is slightly below the 15% increase the overall orthopedic market experienced during 2003. DePuy also disclosed that while knee sales remain very strong, hip sales rose an anemic 9% during the 1Q:04, which is well below the market growth rate of 15%.
Stryker Corp. reported next, disclosing that net revenues totaled $1,035 million, which was a 22% increase over the 1Q:03. In a similar fashion to DePuy, Stryker reported that 5% of the growth was a result of favorable foreign currency translation. A clear driver of Stryker's net revenues were hip sales which increased 30% in the U.S., 25% as reported and 17% on a constant currency basis during the quarter. The overall hip growth is approximately 3% faster than our estimated overall hip market. Trident ceramic-on-ceramic sales are very strong and now represent 30% of all acetabular insert sales. The Company also reported that knee revenues increased 26% in the U.S., 24% as reported and 18% on a constant currency basis over the 1Q:03. Stryker reported that pricing remains favorable and contributed 6% of net revenue growth in the U.S. and 3% worldwide. The Company also disclosed that product mix contributed 14% of the growth in net revenues.
The strong growth in revenues drove a 31% increase in net earnings, which totaled $104.1 million during the 1Q:04. Diluted earnings per share totaled $0.66 during the 1Q:04, versus $0.51 during the 1Q:03. The $0.66 in earnings per diluted share was $0.03 better than analysts had predicted.
We believe that some interesting conclusions can be drawn by both reports.
- The significant positive effect of foreign currency translation experienced by U.S. orthopedic companies during 2003 is likely to continue in the near-term.
- DePuy's growth is well below the overall orthopedic market and the Company is likely losing market share.
- Stryker's ceramic-on-ceramic sales are driving market share gains.
- Pricing remains favorable in the orthopedic sector especially within the U.S.
In our opinion the difference between two of the largest orthopedic companies is clear. Stryker's recent investment in an IDE ceramic clinical trial is a significant point of differentiation. The introduction of a novel alternate bearing hip surface which carries a significant premium to traditional acetabular inserts ($2000 ceramic vs. $750 polyethylene acetabular insert list price) is both increasing the size of an existing market as well as providing an ability to gain market share.
We believe those lessons were apparent, in even the DePuy numbers. DePuy's hip sales were comparatively weak since they don't offer the most novel current technology. But, by contrast, DePuy's knee revenues remain quite strong due to their exclusive and hard won, right to sell a mobile bearing knee in the U.S. market. We continue to believe that the mobile bearing knee will gain significant market share in the next five years and could become the prosthesis of choice for the younger, more active baby boomer patient population.
Like all markets, competition in selling novel technologies will soon emerge. Mobile bearing knees are currently being sold by all the major orthopedic manufacturers overseas. It is likely that the FDA will down classify the mobile bearing knee prosthesis from a device requiring a full IDE clinical study to a product requiring merely a 510(k) approval. While it is unknown when such a down classification is likely to occur, we believe that the market will be swamped with competing mobile bearing knees in the near future. Additionally, with Ceramtec positioned to license its PMA for ceramic-on-ceramic hips to the entire orthopedic industry, it is likely that Stryker Corp. will see a significant increase in competition during the next two years.
