The second quarter of the 2014 calendar year, or first quarter of the 2015 fiscal year, was big for several device companies, with mergers, acquisitions, new product releases and rumors to go around.
Medtronic acquired medical device company Covidien and announced plans to move headquarters overseas in a tax inversion strategy that gained national attention. The company's spine business revenue continued a steady decrease, but Medtronic isn't losing sleep over this; the company set its sights on other aspects of the business and so far in the second quarter of FY 2015 acquired two new companies. The second quarter was exciting for Medtronic, but even bigger quarters could be ahead.
On the other hand, Stryker's second quarter didn't go exactly as planned. The company still reported net sales up, but were disappointed with MAKO's performance. Stryker acquired MAKO Surgical — with its robotic joint replacement platform — at the end of 2013 and sales have been challenging. But, Stryker CEO Kevin Lobo is bullish on the future and long-term opportunities with MAKO. The company also acquired Small Bone Innovations, a potentially smart move as the small bone and extremities markets have great opportunities for growth. However, some feel Stryker missed a huge opportunity to acquire Smith & Nephew, which would have solidified the merged entity among the top-tiered players in the orthopedic device space as other companies are consolidating.
Zimmer's second quarter report on the heels of announcing plans to merge with Biomet was relatively as expected. Biomet posted better growth numbers in the fourth quarter of the 2014 fiscal year, which may or may not become a trend going forward. The merger could put Zimmer among the leading players in the market, but time will tell exactly how pivotal this quarter has been.
Johnson & Johnson also reported a strong second quarter for its orthopedics business, driven by DePuy Synthes. The company also announced plans to continue investing in research and development, including in three-dimensional printing which has emerged as an area of excitement in orthopedics and spine during the third quarter of 2014.
Finally, Smith & Nephew — the darling of the orthopedic market — reported an interesting quarter. The company was courted earlier this year by potential buyers, but no deal has been struck yet. In fact, Smith & Nephew CEO Olivier Bohoun says the company isn't looking for a buyer and will focus on future growth. In the second quarter, Smith & Nephew completed an acquisition of ArthroCare, which added to the quarter's revenue growth. The company also launched a new sales and marketing strategy in the United States for hospitals, focused on delivering quality products for a lower cost. The strategy, known as Syncera, could become a model for changes in other larges companies in the future.
So who had the best second quarter? I'll let the numbers speak for themselves:
Medtronic
1. Medtronic reported first quarter FY 2015 revenue at $4.2 billion, up from $4 billion in the same period last year. The quarter ended July 25, 2014.
2. Medtronic announced in June plans to acquire Covidien in a $43 billion transaction and relocate legal headquarters from Minnesota to Ireland, according to a Star Tribune report.
3. The Covidien acquisition will move company headquarters to Ireland — which has a lower tax rate. The lower rate will free up cash generated overseas to reinvest in the United States.
4. Medtronic's tax rate on global income will fall around 2 percent when the acquisition is complete and the headquarters are moved overseas. However, the company will still pay federal, state and local income taxes on United States earnings, Social Security taxes, property taxes and the medical device tax.
5. The company also expects to return 50 percent of the free cash flow to shareholders.
6. United States revenue reached $2.3 billion, a 6 percent increase and the highest revenue growth performance in the past five years.
7. International sales made up 45 percent of Medtronic's worldwide revenue.
8. The company's emerging market revenue reached $539 million, an 11 percent increase over the same period last year.
9. Emerging markets made up 13 percent of the company's revenue.
10. Spine revenue declined 3 percent on a constant currency and reported basis.
11. The company's Core Spine and BMP declines offset growth in the interventional spine markets. The Core Spine revenue hit $552 million, a 2 percent decline.
12. The company hopes new product launches in the future will improve performance in the Core Spine line going forward.
13. Interventional spine review grew 4 percent to $81 million while BMP revenue continued its steady decline 11 percent to $110 million. However, the company did report seeing sequential stability in the underlying demand for BMP.
14. Medtronic reported profits fell 9 percent in the first quarter despite gains across most business lines, driven by one-time costs.
15. Medtronic CEO Omar Ishrak also reported the company will continue paying significant taxes in the United States after closing the Covidien deal, expected by the end of this year. He reported the new corporate structure would "allow Medtronic to invest much more aggressively in the U.S.," according to a Reuters report.
16. Since releasing the financial report, Medtronic acquired Sapiens Steering Brain Stimulation for $200 million and NGC Medical for $350 million.
Stryker
17. Stryker net sales were up 6.8 percent in the second quarter, reaching $2.4 billion.
18. The net sales growth was due to increased unit volume and changes in the company's product mix. Acquisitions also accounted for around 2.1 percent of the company's growth.
19. Last year Stryker acquired MAKO Surgical for $1.65 billion; this year the company has made a few other acquisitions, including Small Bone Innovations. Despite the growth, however, net sales were unfavorably impacted by 2 percent due to price changes.
20. The company's Vice President of Strategy and Investor Relations addressed the MAKO Surgical acquisition in the company's conference call, saying it's been "more challenging than anticipated," according to an Medical Device and Diagnostic Industry report. However, there were six MAKO systems sold during the second quarter.
21. Stryker still plans to launch a hip product on the MAKO platform next year, and a total knee system is in development. Stryker President and CEO Kevin Lobo is "extremely bullish" on MAKO's long-term opportunity.
22. The company's neurotechnology and spine net sales reached $430 million, a 3.8 percent increase over the same period last year.
23. Net sales grew by 5.5 percent due to increased unit volume and changes in product mix; acquisitions only impacted the neurotechnolgy and spine business slightly with a 0.2 percent growth.
24. The largest growth occurred in the MedSurg net sales — increasing 8.8 percent as reported to $905 million — and reconstructive net sales reached $1 billion, a 6.5 percent increase.
25. The company now projects full year organic sales to grow 5 percent to 6 percent and the adjusted diluted net earnings per share to reach between $1.12 to $1.16 and $4.75 to $4.80 for the third quarter and full year, respectively.
26. The company does not expect the foreign currency exchanges rates to impact the third quarter or full year net sales significantly, as long as the rates hold near current levels.
27. Since the second quarter report, Stryker Director Ronda Stryker has sold thousands of shares. At the same time, Winton Capital Management increased portfolio participation 33 percent — now owning more than 1 million shares worth $82.4 million — and Soros Fund Management increased portfolio participation 144 percent — now owning 1.09 million shares valued at $89.5 million.
28. In the United States, sales reached $1.5 billion for the quarter.
29. Spine sales in the United States were down 6.1 percent, but up 9.5 percent internationally.
30. The company's knee sales remain huge, reaching $350 million during the quarter — a 2 percent increase.
31. On July 1, Stryker opened regional headquarters in Amsterdam, which will give the company tax advantages in 2015.
32. Since releasing the second quarter financial results the company has been embroiled in rumors it will acquire Smith & Nephew, but S&N CEO Olivier Bohoun says the company is not looking for a buyer.
Zimmer
33. Second quarter net sales of $1.18 billion, a 1.2 percent reported increase over the same period last year.
34. Net earnings for the second quarter were $176.5 million on a reported basis, a 4.6 percent adjusted over the previous year.
35. Operating cash flow for the second quarter was $254.1 million.
36. Net sales in the Americas were $640 million. European net sales were $335 million and Asia Pacific net sales wer $208 million.
37. Knee sales reached $498 million, a 4 percent increase over the same period last year. Hip sales reached $341 million and spine sales were $52 million.
38. The company increased full year revenue between 2 percent and 3 percent on a constant currency basis.
39. Zimmer projects full-year diluted earnings per share will be $4.65 to $4.76 on a reported basis. The updated guidance reflects inventory and manufacturing related expense changes and quality and operational excellence initiatives as well as the $70 million in expenses related to the pending Biomet merger.
40. The full Biomet merger will total $320 million.
Biomet
Fourth quarter
41. Consolidated net sales increased 7.7 percent to $844.5 million worldwide over the same period last year. Excluding foreign currency effects, consolidated net sales increased 7.2 percent during the fourth quarter.
42. United States net sales increased 6.9 percent during the fourth quarter to $498.5 million while European net sales were up 10.8 percent to $208.9 million. Overall international sales — primarily focused on Canada, Latin America and Asia Pacific — had a 6.4 percent net sales increase to $137.1 million.
43. Last year the company reported a $221.2 million net loss during the fourth quarter over the previous year; however, this year Biomet reported operating income at $103 million during the fourth quarter of the fiscal year.
44. The company reported a 5.1 percent increase in knee sales and 3.5 percent increase in hip sales overall; United States growth was 2.2 percent and 0.4 percent, respectfully.
45. Sports medicine faired better at 5.8 percent growth in the United States and 5.9 percent growth overall. However, the company's spine business hit a home-run after acquiring spine device company Lanx last year. The company reported a 27.1 percent overall growth and 27.3 percent growth in the United States.
46. The company reported net income of $66.7 million during the fourth quarter. The company's gross profit was $594.3 million.
Full year
47. Net sales for the United States increased 5.8 percent during the fiscal year to $1.9 billion and European net sales increased 8.7 percent to $772 million.
48. Overall consolidated worldwide net sales increased 5.6 percent to $3.2 billion in 2014 fiscal year.
49. For the full year, Biomet reported operating income at $313.2 million. The company reported a net loss of $623.4 million in the 2013 fiscal year.
50. Adjusted net income totaled $420.1 million for the fiscal year excluding special items.
51. As of May 31, 2014, Biomet reported gross debt of $5.7 billion.
52. Cash and cash equivalents totaled $247.6 million, with a net debt of $5.4 billion. This is slightly lower than the debt reported at the same time last year — $5.6 billion.
53. Biomet's knee sales grew 5.9 percent for the full year to $995.7 million while hips were slower at 2.6 percent growth to $649 million.
54. The sports medicine business grew 9.3 percent to $647 million and the spine, bone healing and microfixation business grew 9.3 percent to $446.7 million.
55. The company reported net income at $36.8 million, compared to a $623.4 million loss at the end of the 2013 fiscal year. The company's fiscal year gross profit was $2.1 billion.
Johnson & Johnson
56. Johnson & Johnson is still dealing with cost associated with the 2012 acquisition of Synthes. The second quarter results included a charge for after-tax special items of around $400 million, primarily related to litigation accrual as well as integration and transaction costs related to the Synthes pick-up.
57. Second quarter orthopedic sales reached $2.4 billion, a 3.5 percent increase over the same period last year.
58. The company's orthopedics segments continue as a leader in the worldwide market and DePuy Synthes is realizing revenue and cost savings from integration.
59. International orthopedic sales were $1.1 billion, a 5.8 percent increase over the same period last year.
60. United States orthopedics sales reached $1.2 billion, a 1.6 percent increase over the previous year.
61. At the six months end, worldwide orthopedics sales reached $4.8 billion, a 2.5 percent increase over the same period last year.
62. International sales were $2.3 billion, a 3.1 percent increase, and United States sales were $2.5 billion, a 2 percent increase over the same period last year.
63. DePuy Synthes recently partnered with Tissue Regeneration Systems to develop three-dimensional printing technologies. The agreement allows for potential opportunities in the future for a range of DePuy Synthes applications.
64. The company also released the GLOBAL UNITE Anatomic Shoulder System and CORAIL revision hip system.
Smith & Nephew
65. Company revenue was up 3 percent underlying and 7 percent on a reported basis, reaching $1.1 million.
66. The company's performance was led by the sports medicine joint repair, trauma and extremities and orthopedic reconstruction business lines, which grew significantly over the previous quarter.
67. The company reported a 6 percent increase in trading profit, reaching $255 million. The trading profit increased 10 percent on a reported basis and the trading profit margin was 22.3 percent, up 70bps.
68. Smith & Nephew completed it's acquisition of ArthroCare during the second quarter. The acquisition strengthens the company's sports medicine business, which is part of the company's strategy for future growth. The second quarter financial report includes one month of trading from ArthroCare. Smith & Nephew's knee implant franchise was up 2 percent, reporting a 4 percent growth in the United States market.
69. The global hip implant franchise was up 3 percent and sports medicine joint repair had a 9 percent revenue growth for the quarter.
70. The company's trauma and extremities franchise reported 7 percent growth and other segments, including ArthroCare's ENT and other gynecology business, grew revenue 18 percent in the quarter.
71. Revenue was up 1 percent in the United States, but fell 3 percent in other established markets.
72. However, the company's revenue in emerging and international markets was up 17 percent in the second quarter with strong numbers across focused markets such as China, India, South Africa and the Middle East.
73. The company plans to transform their organization in established markets through focused investment and greater efficiency. In the second quarter, the company began streamlining the European business model by moving to a single general manager for each country under a new "Head of Europe."
74. In the emerging and international markets, the company built an entrepreneurial business to maximize growth through both premium and mid-tier products to more customers.
75. During the first half of 2014, 14 percent of the company's revenue came from emerging markets, up from 8 percent in 2010. The company expects to continue this momentum by delivering more products and benefits from organic investments and acquisitions in these markets.
76. Trading cash flow was $179 million with a trading profit to cash conversion ratio at 70 percent.
77. Net debt for the quarter reached $1.9 million, up significantly from $216 million at the end of the first quarter. The increase is due to the ArthroCare acquisition closing.
78. In the second half of 2014, the company plans to release several new products and work on new ways to serve customers in light of the economic burden placed on healthcare systems. The new products will be focused in the trauma and extremities and sports medicine markets.
79. By the end of the quarter, the company achieved nearly $140 million in annualized savings by simplifying and improving its operating model, and is commencing a program to realize another $120 million in savings. These efforts bring Smith & Nephew close to the 2011 program goal of generating $150 million in annual savings. The new program will ensure the company's ability to invest in growth opportunities.
80. The company has been investing in an innovative commercial solution for orthopedic reconstruction that serves a different value proposition for customers. Syncera offers customers two clinically proven primary hip and knee implants combined with technology that streamlines the supply chain and logistics as well as enables technical support in the operating room.
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