Medical Device Daily National Editor

NEW YORK – Medical Device Daily last month carried a story about the rosy growth outlook for some of the bigger players in the orthopedics sector, despite a variety of significant challenges arising from Department of Justice (DoJ) investigations into the industry (MDD; Nov. 15, 2007).

During last week’s Piper Jaffray Health Care Conference at the Pierre Hotel, two of those players drilled down on the reasons for that upbeat outlook.

After hearing Piper Jaffray (Minneapolis) med-tech analyst Mark Mullikin introduce the Stryker (Kalamazoo, Michigan) presentation by describing the firm as “ourfavorite large-cap pick for 2008,”VP and CFO Dean Bergy said the company’s diversified businesses give it a solid foundation for continuation of the long string of both top- and bottom-line growth reports it has recorded.

As opposed to the widely held belief that Stryker is purely an “ortho” firm, Bergey told a Grand Ballroom audience that the big reconstructive devices such as hips and knees aren’t even the company’s largest line of business.

He noted that Stryker’s MedSurg business accounted for 40% of overall revenues; Reconstructive, 39%; and Other Orthopedic Implants, 21%.

For the 3rd quarter, said Bergy, overall revenues grew by 18% to $1.45 billion on what he characterized as “strong, balanced growth.” Orthopedics grew by 15%, and MedSurg is, well, surging. MedSurg was up 22% in the quarter, he said, and was “a tremendous quarter, exceeding even our expectations.”

Among the orthopedic segments, growth totaled 16% overall and was strong pretty much across the board, with the exception of hips, which posted a below-market gain of “only” 6%.

Knees, including the franchise-leading Triathlon, were up 14%, while the Trauma segment was up 29% – “the seventh straight quarter of revenue growth up 20% or more,” Bergy said – and Spine gained 31%.

He said that Stryker’s partnership with the Corin Group (Cirencester, UK), for the latter’s Cormet hip-resurfacing device is “starting to come on line ... and we expect that to reinvigorate our hip franchise in the first half of 2008.”

As part of looking ahead, he cited the expansion of the company’s R&D spending in recent years, noting that it has grown from 5.1% of revenues in 2002 to 6.3% in the first nine months of 2007.

However, he said that “today, we feel that the various divisions have a lot on their plates, so you probably won’t see the percentage grow beyond this.” Bergy emphasized Stryker’s “strong portfolio of products ... coming for the rest of this decade.”

He said Stryker is “maximizing what we have, and looking to the future.” Under the “maximizing” banner, he cited the fact that new leadership in the Orthopedics business has allowed the company to create new focus on the Trauma and Spine areas, as well as to expand the MedSurg business outside the U.S.

Bergy said that one of the key steps for the company moving forward was the recent resolution of the DoJ investigation into ortho firms’ relationships with physician buyers of its products, “with a non-prosecutive agreement” insofar as Stryker was concerned.

Asked by Mullikin how the company is managing to expand in the Spine and Trauma areas faster than growth in that market, he said that it is the result of “more feet on the street,” boosted also by expansion of Stryker’s product lines in those business areas and new product acquisitions.

In response to a query about the company’s $2 billion in available cash, Bergy said the primary focus would be on acquisitions, adding that “any new platforms will be close to what we’re doing now.”

Jim Crines, executive VP and CFO of Zimmer Holdings (Warsaw, Indiana), voiced a similar optimism about growth prospects for his company, built upon $3.5 billion in revenues in FY06 and “driven by outstanding demographics.”

He cited the company specifically, and the orthopedic sector in general, as “driven by a period of potentially significant growth in procedure volume.” That growth, he said, will result from “patients [who are] better-informed and more demanding – they want to be able to return to their previous levels of activity.”

He noted the particular demographics of arthritis in older persons – especially among women. “The incidence of arthritis increases with older females,” Crines said, “[so] the company has developed devices specifically designed to fit the female anatomy.”

Citing Zimmer’s strong market positions in reconstructive implants, Crines said the company is No. 1 in knees with a 28% share, and in hips with a 27% share. “We’ve also had great success with our extremities line,” he added.

“We also believe that we can build [share volume] in the dental, spine and orthopedic surgical markets, where we don’t presently have large market shares,” he said.

Crines termed Zimmer “the world’s No. 1 knee company,” a segment where it posted 9% growth in 3Q07, much of it built on the success of the NexGen Gender Solutions knee, which he characterized as “the world’s least-revised knee at just 1.8% of implants.”

He said the firm’s M/L Kinectiv hip — just launched — is “the first gender hip,” being both “gender- and MIS [minimally invasive surgery]-friendly.”

He acknowledged that the growing impact of a market push in hip resurfacing “is a challenge for us,” and that such efforts “will cannibalize the hip-replacement market.” Zimmer “expects hip sales to lag the market for the next several quarters.”

Noting that Extremities and Dental are “two segments where we have had success of late,” he said Zimmer posted sales gains of 38% in the Extremities space in 3Q07.

He said that the Trauma segment “poses challenges,” but that Spine is a growth area, with the acquisition of Endius (Plainville, Massachusetts) “giving us a bit of a lift.” Zimmer acquired the maker of spine products early this year for an undisclosed amount of cash (Medical Device Daily, Feb. 13, 2007).

The company reported revenue growth of 7% in its Spine business in the most recent quarter.

Like Bergy, Crines said the settlement of the DoJ investigation was a positive event for the company, moving forward.