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Morningstar | Stryker Delivers Another Stellar Quarter Thanks to Mako and Neurotechnology; Raising Our FVE

Stryker’s third-quarter results again demonstrated how well the firm has melded smart strategy with top-notch execution. While the year-to-date performance has consistently tracked along with our expectations and we’re not altering our underlying assumptions, we have modestly raised our fair value estimate to reflect cash flows realized since our last update. We continue to be fans of Stryker’s wide moat, though shares have consistently traded above our intrinsic value for the past two and a half years.

As we’ve seen for nine quarters now, Stryker has grown its knee implants faster than the market, primarily fueled by its Mako robot. In the third quarter, Stryker saw its U.S. knees rise 8.4%, while Johnson & Johnson U.S. knees fell 2.3%. Stryker continues to steadily place more robots and train more surgeons. The firm is now just shy of 600 installed robots, and notably, utilization rates have grown 40% year over year. Perhaps most intriguing are the hints from one published prospective study that suggest, compared with non-Mako-treated knee patients, Mako patients see significantly decreased pain, faster recovery, and more early discharge from the hospital. Another study found that Mako knee patients typically cost approximately $2,400 less to treat, as they were less likely to use skilled nursing following surgery, and 90-day readmission was one third lower than that of non-Mako patients. These preliminary indications leave us more optimistic about the clinical and economic benefits of Mako. If more favorable data is shared at the major orthopedic conference in March, we plan to revisit our assumptions for longer-term Mako placement and product pull-through.

Stryker also continues to see strength in its neurotechnology segment, as the firm has been able to benefit from its beefed-up product portfolio of coils and catheters, as well as growing adoption of stent retrievers for ischemic stroke. We expect to see low double-digit growth through the midterm.

Finally, we think Stryker’s planned acquisition of K2M is a savvy decision. On the whole, we’re not fans of the spine market, which is dominated by Medtronic and caters primary to patients with degenerative spinal conditions. We’ve long held that the clinical underpinnings of many commonly performed spinal procedures are shaky, at best. There are few high-quality, randomized, controlled, prospective studies to compare the outcomes of procedures. Those studies that do exist have suggested that more conservative measures, such as physical therapy, may work just as well as invasive spinal surgeries.

However, K2M is squarely aimed at the complicated spinal market, which is primarily composed of moderate to severe scoliosis patients (pediatric, adolescent, and adult), with some spine trauma mixed in. The clinical value of surgical treatment of these types of patients is clear, and significantly higher than what's been seen among degenerative spinal patients. Thanks to this foundation of clinical benefit, reimbursement is well-established. At this point, the addition of K2M is immaterial to Stryker, from a financial standpoint. However, we view this acquisition as another example of how this management team is acutely discerning when it comes to identifying med-tech opportunities.