Orthopedic Market Grows As Younger Patients Seek New Hips

12 5 2007 12:29PM

For close to three decades Stryker Corp. has been making artificial hips that help seniors live more active and satisfying lives.

Now, the company is trying to help members of the younger set overcome their hip problems. Stryker (NYSE:SYK - News) is the No. 1 player in the $28.6billion orthopedic market. It offers reconstructive hip and knee, spine and trauma implants, biomaterials and regenerative biological products, as well as medical and surgical equipment.

Stryker has been making artificial hips since 1979 and is No. 2 in the $4.5 billion worldwide hip market.

The market for hip replacements is expanding. The age of hip replacement recipients is coming down due to advancements that make artificial hips last longer. The average age of an artificial hip recipient used to be 66. Today, one of the faster growing segments includes recipients ages 45 to 55.

Stryker recently moved to serve the younger end of the curve with a new offering, Chief Financial Officer Dean Bergy says.

New Product

In August, Stryker began training surgeons on the Cormet hip resurfacing system, a product it is marketing in the U.S. through a partnership with U.K.-based Corin Group, the system's manufacturer. In July, Corin received the Food and Drug Administration's nod to market Cormet in the U.S.

The hip resurfacing product differs from Stryker's artificial hips, Bergy says.

When performing a hip replacement, the surgeon removes the ball-shaped top of the thigh bone -- called the femoral head -- that fits into the hip socket, and replaces it with an artificial stem and ball.

With hip resurfacing, the femoral head is retained and reshaped to accept a metal cap placed over it.

Hip resurfacing has advantages over hip replacement, Bergy says. There's less bone loss to the patient, there's less potential for dislocation and there's better range of motion, he says.

"To some degree there are less limitations placed on the patients in terms of lifestyle," he said.

Hip resurfacing is typically used for younger patients with a more active lifestyle, analyst Brian Wong of Broadpoint Capital adds. He says younger patients view hip resurfacing as a first step.

"They always have a full hip replacement to fall back on," he added.

Bergy says the market opportunity for Cormet is "largely incremental." He pegs the age of hip resurfacing recipients in their mid-40s to mid-50s.

It's been estimated that between 5% and 10% of all hip replacements/implants could be done with hip resurfacing, adds analyst Wong.

Stryker is the second company to come to the U.S. market with a hip resurfacing product. Smith & Nephew was the first.

Stryker doesn't expect to see a significant impact from the sale of this system until 2008.

Meanwhile, Stryker has been on the fast track with its current lineup. From 2003 to 2007, earnings have grown at a 22% average annual rate and sales by 14%.

"This is a company which has put up 20% bottom line growth for many years and is very reliable," said analyst Ed Shenkan of Needham & Co. "The drivers for the company are products for hip and knee reconstruction, and the products work."

Stryker's products have been on the market for years and are tried and true, he adds.

In the third quarter, earnings rose 20% from the prior year to 55 cents a share. Sales grew 18% to $1.45 billion.

Orthopaedic Implants segment sales rose 15.4%, while its MedSurg Equipment arm's sales were up 22%. International sales rose 18%.

Stryker gets about 35% of sales from overseas.

Overall, Stryker is benefiting from changing demographics. The baby boomers are getting older and are coming to an age where they have orthopedic issues.

At the same time, with people demanding knee and hip replacements at younger ages, we're seeing two or more replacements of the older artificial hip or knee in a lifetime, Shenkan says.

Obesity is another trend that impacts the joints, adds Bergy.

"On the flip side of obesity is the fitness craze," he said.

Running, for one, puts a lot of pressure on the joints, creating wear and tear.

Stryker has made sure to keep pace with demand. Stryker has had a good track record of coming out with some nice new products, says analyst Wong.

"Its new product pipeline has been pretty solid," he said.

One recent new product Bergy is excited about is the System 6 powertool system. It consists of a hand piece and cutting accessories used in large joint surgery such as knee and hip replacements. It's akin to a drill you'd find in a workshop.

The product came out during last year's third quarter. Bergy says it has gotten a good reception. Stryker has paired the System 6 with a new saw blade that's used with it. The way the blade is designed allows for more precise cutting, he says.

Another new product, which came out during last year's fourth quarter, is a second generation high-definition camera called the 1188 HD 3-Chip Camera. This camera can be used in arthroscopic surgery, where a surgeon looks into your joint with a camera, and in general surgical procedures.

The 1188 provides a clearer, sharper picture than the prior generation camera, says Bergy.

In the future one new product is Stryker's next generation critical care bed.

"We think it will be a nice product," Bergy said.

Sold Service Company

On another front, Stryker in June sold its outpatient physical therapy business, Physiotherapy Associates, to private equity firm Water Street Healthcare Partners for $150 million.

The physical therapy arm was a service business as opposed to what Stryker is good at, which is making and selling products, says Bergy.

The physical therapy side of the business was the lowest gross margin business unit and the smallest contributor to earnings, says analyst Shenkan.

"Without that, its overall business has a higher earnings growth rate," he said.

Followers expect Stryker to continue to do well. Analysts polled by Thomson Financial expect full-year earnings to rise 19% to $2.40 a share, then another 20% in 2008.

"It's been a good performer," said Shenkan. "I would expect it would continue."

Orthopedic Market Grows As Younger Patients Seek New Hips

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Orthopedic Market Grows As Younger Patients Seek New Hips

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