Elective Surgery Halt Threatens 50% of Stryker’s Revenue

05/12/2020
stryker

According to a recent earnings call, Stryker saw a 65% drop in orthopedics and spine sales during the month of April alone. The Michigan-based medical technical manufacturing company is particularly vulnerable to the near halt on elective surgeries due to COVID-19 as nearly half of their revenue is linked to elective surgery procedures. CEO Kevin Lobo stated that other parts of the company are seeing an increase in demands as hospitals seek to stockpile beds and stretchers. Lobo also stated there is an increase in mobile CT scanners needed to take chest images while testing patients with COVID-19.

 

Key highlights include the following:

  • Stryker loses 65% in orthopedic and spine sales in April and predicts that nearly half of their revenue may be affected due to elective procedures being canceled amid the coronavirus pandemic.
  • Stryker sees an increase in mobile CT scanners needed to assess chest images in coronavirus patients.
  • The company plans to deal with the loss of revenue by freezing hiring, reducing capital expenditures, slashing the salaries of higher team members, and furloughing certain workers until manufacturing lines return to normal demand.
  • Other medtech companies see similar losses, including Boston Scientific (down 45% to 50%) and Medtronic (down 60%).

 

Stryker, and other medtech companies like it, are seeing a decline in sales that has only increased since state lockdown orders began in late March, prompting a 30% decrease over last year’s numbers due to the nearly extinct demand for non-essential procedures. Despite these numbers, Stryker’s drop isn’t as steep as some other medtech companies. According to a recent earnings call, Boston Scientific stated that its April global sales were down 45% to 50% while Medtronic reported that their United States revenue, which makes up over half of the company’s revenue, was down 60% from last year over the last few weeks alone.

According to Lobo, Stryker’s first-quarter impact was hit hardest by the deferment of hip and knee replacement procedures. Other areas of their orthopedic centers that were impacted include its extremities and trauma business. This is because social distancing is reducing the number of people participating in high-risk activities, including working at construction sites or driving. Stryker’s MedSurg branch is not as affected during the pandemic as its orthopedic branch with reduced numbers of sales in April of 25%. The MedSurg division is seeing a lower demand for endoscopy products, but it is seeing an increase in demand for hospital beds, emergency care equipment, and stretchers.

Stryker expects to see large capital equipment sales to suffer. For example, the company's Mako surgical robot line is slow, due to lack of demand. According to Lobo, when you’re laying out large amounts of money, liquidity of hospitals is important. They are not currently canceling any orders. However, they are delaying them until elective surgeries resume.

While assessing the company’s current projects, Jefferies listed its rating for Stryker as “hold.” According to analyst Raj Denhoy, the problem that a lot of medtech companies face is the uncertainty that 2021 holds. There may be an increase in demand for surgeries due to the current period in which they are on hold. This would lead to a bigger year than average for most companies. However, other factors may depress these results, especially if the economy does not rebound. For now, most companies are striving for middle ground. With so many businesses tied to elective procedures, the next few months will be rough.

 

Pushing The Pause Button On Future Deals

Stryker management did not offer many details on its integration of Wright Medical into its orthopedics business. However, they stated that the deal is still on track and close to closing around the year’s third-quarter. On April 24, Wright shareholders voted to approve the deal and offer with a threshold of 80%. The offer expires June 30. Since the economy has taken a downturn, Stryker stated that they are expecting minimal levels of sales from the Wright team. Wright, as well as many other medtech teams, decided to significantly reduce the compensation for their executive and high-earning board members in response to the changes the COVID-19 outbreak has caused.

Lobo stated that slowing certain activities is one of the company’s methods for conserving cash. They also plan to reduce capital expenditures, cease hiring, reduce the leadership team’s salaries, and furlough certain employees until manufacturing lines are back to full operations. Lobo stated that deal-making decisions are slowing down, but not stopped altogether.

Lobo said that the company may get back to smaller tuck-in acquisitions, but they have currently slowed or stopped decisions without turning them off. He stated they are sticking close to the market in an attempt to have a better understanding of it. He stated that in some ways, the economy will allow them to have more time to make better decisions about how they execute manufacturing operations in the future.

Most of the company's regional impacts of the coronavirus have been isolated to the end of the first-quarter. However, Stryker’s revenue growth of 2% to $3.59 billion outperformed Wall Street’s estimates by approximately $130 million while GAAP earnings per share of $1.30 from analysts were off by approximately $0.26. China was the weakest region during the first quarter, according to Stryker, while Canada, Japan, and smaller European countries and emerging markets performed better. Stryker predicts that China will do better in the second-quarter, but other companies may experience a worse impact due to COVID-19. On March 31, Stryker withdrew its 2020 financial guidelines that predicted sales growth between 6.5% and 7.5%. The company did not offer a new second-quarter or full-year guidance review.

 

Medtronic Also Sees Reduced Revenue

Stryker isn’t the only medtech company to suffer from the postponement of elective surgeries. On April 21, Medtronic’s press release report indicated that the company is actively supporting its communities, customers, and employees through these hard times. The delayed procedures are negatively affecting the company’s financial results. Despite this, they are in a strong financial position and continue to drive long-term strategies.

As one of the leading producers of ventilators in the world, Medtronic plays an important role in the fight against COVID-19. The company has pushed its ventilator production team to make more than 1,000 ventilators per week by the end of June. This is a five-fold increase from pre-pandemic times. The company continues to monitor the impact of COVID-19 on the business, but expects the pandemic to negatively affect its fourth-quarter results, which ended on April 24. The company also predicts that their fourth-quarter results will cause an additional month of impact, due to the timing of the pandemic.

 

While the majority of Medtronic’s sales have experienced declines since the start of the pandemic, the following product lines are in high-demand:

  • Minimally invasive therapies group: ventilators, pulse oximetry, advanced parameter monitoring products within the respiratory and patient monitoring business, and capnography
  • Diabetes group: consumables and supplies
  • Cardiac and vascular group: extracorporeal life support devices, including ECMO disposables and machines within the cardiac surgery business

 

Like Stryker, Medtronic has seen a major drop in sales within China of 7% compared to pre-pandemic times. On average, their weekly revenue dropped approximately 50% per week starting from the week of March 9. Since then, the company has seen a decline of approximately 20% to 40%. In Western Europe, which accounted for approximately 20% of the company’s revenue before the pandemic, there has been a decline of 20% to 30%.

In the United States, sales before the pandemic accounted for 53% of total revenue. Since the week of March 16, the company has seen declines of approximately 60%. As for the rest of the world, which accounts for 20% of the company's sales, there has been an average of 40% to 50%. The company does not expect the market to rebound quickly.