In 2005, Stephen P. Macmillan was placed in an unenviable position at Stryker Corp. (SYK). He had to replace John Brown, who, during a stellar 27-year run as CEO, turned Stryker into one of the leading makers of replacement joints, such as shoulders, knees, and hips. To ease Wall Street's fears about his retirement, Brown took a measured approach to the succession process, first bringing MacMillan in as chief operating officer in 2003. Brown and MacMillan worked side by side for more than a year to ease the transition--and still investors were skittish. "Clearly there were questions about whether the company could continue to do well," MacMillan says.
The Street is over its jitters now. In 2006, Stryker's net profit soared 21%, to $778 million, on sales that jumped 11%, to $5.4 billion. The Kalamazoo (Mich.) company--which also sells high-tech tools such as imaging systems to help surgeons reconstruct jaws, spines, and other body parts--has returned 29% to shareholders during MacMillan's tenure. That performance far outpaced the Standard & Poor's 500 Health Care Index.
MacMillan has some strong demographic winds at his back. As 77 million baby boomers sail into their golden years, their joints are beginning to wear out. And unlike their parents, they're unwilling to hang up their skis and adopt sedentary lifestyles eased by ice packs and ibuprofen. "They don't want to be told to stop doing their activities," says MacMillan, 43. "They want to get [new joints] early in life rather than sitting on the sidelines."
When MacMillan became CEO, however, Stryker wasn't taking full advantage of this opportunity. Growth in sales of knees, hips, and other joints, which account for about 60% of Stryker's business, was down several percentage points from the torrid 23% growth in 2003. And there were relatively few innovations in the pipeline.
MacMillan acted swiftly. Within days of taking the helm he replaced the chief of the orthopedics division with someone he trusted to motivate the sales force. At the same time, to stoke the product pipeline, he hiked spending on research and development. In 2006, R&D jumped 14%, to $324 million. That's 6% of sales, up from 4.8% in 2002.
The changes are starting to pay off in products such as Stryker's Triathlon knee system. This compact implant was introduced in late 2004, but it didn't catch on as quickly as MacMillan had hoped. So Stryker revamped the marketing strategy, instructing salespeople to pitch the knee as an ideal implant for women, whose knees are typically smaller, and who might be attracted by the idea of a custom fit. The message resonated with patients such as Judy Webster, who had both her knees replaced with Triathlons last year. "Women come in different shapes and sizes than men," says Webster, 59, whose knees had been worn down by rheumatoid arthritis. She is now virtually free of pain, she says, and hopes to restart her career as a special education teacher. Stryker doesn't break out sales of individual products, but MacMillan says the strong response to Triathlon helped push Stryker's U.S. knee sales up 16% in 2006.
Triathlon is part of a push at Stryker to carve out new market niches in orthopedics. The company has recently entered the field of hip resurfacing, a new technique that doctors use to reshape and cap part of the hip rather than replacing it outright. Although orthopedic surgeons are debating the effectiveness of the procedure, MacMillan defends it as an important new choice for patients. "Some younger patients don't want to go through the agony of a full hip replacement," he says. Stryker launched its own hip resurfacing device overseas in January. It hopes to launch a second product in the U.S. this year, developed by Corin Group, pending a verdict from the Food & Drug Administration.
All this slicing and dicing of the orthopedic surgery market hasn't met with uniform approval, however. Devices such as the Triathlon are more expensive than older technologies, prompting some protest from the hospitals that buy them. Dr. Kevin J. Bozic, assistant professor of orthopedic surgery and health policy at the University of California at San Francisco, says his hospital has shied away from gender-specific knees and other newfangled implants. He estimates that the overall cost of hip and knee implants has doubled over the past dozen years. "We don't think the incremental change in the technology justifies the cost," he says. Such reactions worry some Wall Street analysts because downward pressure on prices could stall Stryker's momentum. "There is push-back already," says Michael N. Weinstein, an analyst at JPMorgan Securities Inc. (JPM).
Stryker is spreading its bets. Last year it paid $50 million for Sightline Technologies Ltd. in Haifa, Israel, which makes flexible endoscopes, tiny cameras for procedures such as colonoscopies. Weinstein estimates that Stryker will generate $800 million in free cash flow this year, and MacMillan says he'll use some of Stryker's war chest to make other small acquisitions. Increasing the breadth of the product selection will help Stryker win the confidence of price-wary hospitals. "They can say: 'We'll provide all your hips and knees, and we can set up your operating room cameras,'" says Jeffrey D. Johnson, an analyst for Robert W. Baird & Co. "That's a powerful negotiating stance." And it's a more comfortable position for MacMillan, as he strives to preserve the legacy he was handed.
By Arlene Weintraub