Stryker Hits the Mark

Quarterly earnings are strong, even as the device maker fields manufacturing complaints.
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continues to hit its targets, delivering strong quarterly results even as the company fields complaints about its manufacturing practices.

Fourth-quarter sales jumped 18% to $1.66 billion, beating analyst projections of $1.6 billion, due to rising demand for the company's artificial joints and medical equipment. Profits grew even faster, rocketing 21% to $276 million, with earnings per share of 66 cents matching Wall Street's estimate.

"Our strong fourth-quarter financial results capped another excellent year -- our seventh consecutive year of double-digit sales growth," Stryker CEO Stephen MacMillan boasted on Wednesday. "Domestic sales were particularly strong, as every key franchise achieved double-digit growth in the fourth quarter, and international sales were also solid."

Stryker expects that momentum to continue despite a recent crackdown by regulatory inspectors. The company predicts that 2008 profits will grow a full 20%, reaching $2.88 a share, and meet Wall Street's expectations once again.

Of course, many analysts embrace the company already.

Earlier this week, in fact, Wachovia analyst Michael Matson singled out Stryker as his favorite large-cap stock in the entire orthopedics group. Still, he acknowledged a potential threat to some of the company's popular devices.

Two months ago, Stryker fielded a harsh warning letter from the U.S. Food and Drug Administration. That letter, made public just last week, highlights alleged shortcomings in Stryker's manufacturing practices that could lead to defective medical devices. It demands "prompt action" from the company in order to avoid regulatory backlash.

Wall Street has felt somewhat uneasy about the company ever since.

"We note that the warning letter disclosed last week is the second in under a year," Morgan Stanley analyst Matt Miksic wrote on Tuesday. "And there is still a risk of this snowballing into a corporate-wide warning letter, which would be significantly more difficult and time-consuming to resolve."

Miksic remains on the sidelines with an equal-weight rating on Stryker's stock in the meantime. His firm seeks to do business with the companies it covers.

After the warning letter appeared on the FDA's Web site, Stryker this week took some action. The company announced a voluntary recall of popular Trident-brand hip cups manufactured in its Cork, Ireland, factory.

Stryker will continue to sell identical devices made at its New Jersey plant. The company anticipates some "short-term supply disruption," but no material impact to its 2008 sales as a result of this move.

"The company does not believe there is any clinical evidence to indicate that the products mentioned in the warning letter present a safety issue to patients," Stryker stressed on Tuesday. Indeed, "numerous published independent reports validate the long-term clinical performance of these products."

Stryker says it has been "cooperating fully" with the FDA to resolve the situation. In fact, the company says that it has already validated its manufacturing processes in Ireland and has stepped up production at both of its facilities.

Still, the FDA issued its warning letter after uncovering possible problems during an inspection of the company's New Jersey factory. The FDA identified three broad shortcomings and then cited specific examples that posed potential threats. The agency found the company's responses inadequate in the end.

"Your firm must test the performance of your devices under actual conditions of use in the actual environment in which the device is expected to be used," the FDA emphasizes halfway through its six-page letter to the company. Meanwhile, "your firm continues to receive complaints that have resulted in revision surgeries without verifying and validating a corrective and preventive action."

The FDA claims that Stryker fielded "continual complaints" about its hip implants beginning in January of 2005. The agency, in turn, spent six weeks inspecting the company's New Jersey factory last summer. Meanwhile, the agency says, customer complaints continued to escalate without prompting corrective actions from the company.

Following last summer's inspection -- and at least four attempts by Stryker to address the problems -- the FDA finally responded with a formal warning letter on Nov. 28. But Stryker kept quiet until Tuesday, a week after the FDA posted the letter on its official web site and caught the public's attention.

"Stryker does not normally comment on discussions with the FDA," the company explained this week. However, "the company believes it is obligated to provide additional information to healthcare professionals, providers and patients in light of several media reports that draw erroneous conclusions surrounding the warning letter."

That letter has had a profound effect on Stryker's stock, causing it to reverse course completely. Rallying hard, the stock hit a 52-week high of $76.89 on Christmas Eve. It has tumbled 15% to $65.25 -- setting a new four-month low -- since that time.