As ortho procedures recover, Stryker turns focus to supply chain

After several difficult months, where hospital staffing shortages put many “elective” procedures on the backburner, orthopaedic procedures are starting to recover. In February, surgical procedures for hips, knees, spines and other deferrable procedures began to pick up in the U.S., according to Stryker’s CFO.

While hospital staffing challenges haven’t gone away, Boehnlein said the decrease in COVID-19 cases has provided some relief to hospital staff, and that facilities are also “starting to moderate and adjust to what’s required to continue to pick up their day-to-day activities.”

Ongoing supply chain challenges, on the other hand, are having a “far greater impact” on Stryker’s financials. In particular, Boehnlein pointed to shortages of electronic components, which is delaying the company’s ability to ship products.

“It’s not just a Stryker manufacturing issue; it can be an issue for our vendors that provide components that go into the capital products,” the CFO added. “And so it really is up and down the whole supply chain.”

Other medtechs, including GE Healthcare and ResMed, have also noted an effect from the chip shortage. Medtronic CFO Karen Parkhill on Monday told the Cowen conference the company’s supply chain challenges include semiconductors and resins.

“On resins, in particular, I think our teams have done a really nice job improving our resin supply. So, we expect to be able to meet near-term demand of things like our MedSurg business that uses resins. But on semiconductors, we do expect that short supply to persist a little bit longer at least until the first half of next fiscal year,” Parkhill said.

Stryker expects its orthopaedic implant business, which hasn’t been as affected by the supply chain issues, to make up a bigger percentage of its gross margins. Boehnlein said Stryker is also acquiring components for both the company and its second-tier manufacturing suppliers, as it looks to buy enough supplies for six to nine months.

“So, as we are successful in those efforts, that gives me confidence that the supply will be there for manufacturing as we think about the second half of the year,” the CFO said.

Of course, all of this comes at a cost, which will affect the company’s gross margins. Increased shipping costs are also a concern; as sea freight has become less reliable, the company is increasingly turning to air freight.

“All those costs are compounding to put a lot of pressure on gross margin,” Boehnlein said.

The company is not providing updated guidance from January, when it said it expected net sales to increase between 6% and 8% in 2022.

The CFO said that Stryker’s operating margins will be “very pressured” in the first quarter, but expects they will improve later in the year. The company is looking for ways to increase prices and enter longer-term contracts with more fixed pricing.

Dive Brief:

• Medtechs saw orthopaedic procedures slow at the end of 2021, as COVID-19 surges driven by the delta and omicron variants led to hospital staffing shortages. Now, as cases are abating, procedures are coming back, Stryker CFO Glenn Boehnlein said at Cowen’s annual healthcare conference on Monday.
• However, the medtech, like its peers, is facing continued supply chain challenges, which are affecting its ability to ship some products and eating into its margins. Boehnlein said Stryker was looking to buy six to nine months’ worth of components, and that the company has relied on air shipping more recently, which has also driven up costs.
• Stryker does not expect a big immediate impact from Russia’s invasion of Ukraine, Boehnlein said, noting that Russia makes up a very small portion of Stryker’s total revenue, less than half a percent. The CFO described the attacks as “senseless and tragic,” while also noting that the company felt “our responsibility is to support our employees and customers and patients, wherever they reside.” Stryker has a limited presence in Russia, Boehnlein said, and the company does not manufacture products there.

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