Stryker Corp. executives have made progress this year toward putting U.S. Department of Justice matters behind them, but the orthopedic implant maker continues facing uncertainty on other fronts. With a new CEO at the helm as of February, Stryker must deliver on aggressive bets about its recent acquisitions.
The DOJ had subpoenaed Stryker in 2010 about its sales and marketing of OtisKnee, which is a custom-fitted joint replacement. After offering to settle the matter for $33 million on May 31, Stryker said in a regulatory filing on June 5 that it will deduct the amount from its second quarter earnings in its “best estimate of the minimum of the range of probable loss” it will experience. The company had already said in January this year that its unit Stryker Biotech paid a $15 million fine related to DOJ allegations that it fraudulently marketed medical devices used during invasive spinal and long bone surgeries. As part of its settlement, Stryker plead guilty to one misdemeanor and the DOJ dismissed all thirteen felony charges in its 2009 indictment.
Despite having all that almost out of the way, interim-CEO and CFO Curt R. Hartman’s hands remain full. He took the extra role after then-CEO Stephen P. MacMillan resigned “for family reasons,” the company said February. MacMillan had mishandled a relationship with a former flight attendant for Stryker’s corporate jets while his wife pursued a divorce, the Wall Street Journal reported on May 23.
MacMillan had orchestrated some ambitious deals for Stryker. The spine and orthopedic company Orthovita Inc. in May 2011 announced its entering a merger agreement in which Stryker would buy all of Orthovita’s stock at $3.85 per share, representing around $316 million at the time. And in January that year Stryker had completed its $1.5 billion acquisition of Boston Scientific’s neurovascular division, which it sees as a “global leader” in the approximately $900 million-sized market for stroke treatments. Since Stryker paid more for these assets than they were worth in terms of book value, it reported that its goodwill and other intangible assets such as brands amounted to $3.51 billion at the year ended December 2011 – up significantly from $1.78 billion in 2010. If those investments don’t end up being worth as much as Stryker initially estimated, someday the company’s new management might have to adjust its valuations by taking a hit to its earnings.
Hartman said in an April 24 meeting with shareholders that his company’s strategy for years has been to invest in its core business while also doing M&A. He sees acquisitions as a long-term growth play that benefits shareholders. “We’ve been on this journey for a while, and we continue to stay on this journey,” he said.
Fair enough, but it’s an uncertain journey. Due to acquisition activity and other red flags, Stryker’s financial statements reflect an AGR of 30, indicating more accounting and governance risk than 70% of companies. In September 2010 the AGR was an 8. That doesn’t necessarily mean Stryker has done anything wrong, but it shows that investors should take the company’s financial statements with a grain of salt when using them to evaluate shares. Stryker is in such upheaval these days, its earnings numbers have necessarily derived from guesswork.
GMI gives Stryker a D on its corporate governance overall.