Stryker Corporation Business Information, Profile, and History

Company Perspectives

At Stryker, we believe results speak louder than words. Since the Company's founding in 1941, that philosophy has made us a leader in the worldwide orthopedic market and placed us at the forefront of medicine's most promising solutions. Today we are one of the preeminent medical products and services companies in the world.

History of Stryker Corporation

Stryker Corporation, founded by an orthopedic surgeon, makes the vast majority of its annual sales in the worldwide orthopedic implant and equipment market. Other business segments include the global endoscopic market, domestic outpatient rehabilitation services market, and the North American medical bed and stretcher market. Descendants of the founder own about one-quarter of the company.

1940-77: Innovations in Patient Care

Stryker Corporation was founded by Dr. Homer Stryker, an innovative orthopedic surgeon from Michigan. Stryker, born in 1894, started his medical career as a general practitioner in his hometown of Kalamazoo. After spending eight years in general practice, however, he decided to enter the field of orthopedics. He spent three years in an orthopedic residency at the University of Michigan Medical School at Ann Arbor before returning to Kalamazoo in 1940 to practice his specialty. He was 45 years old.

As an orthopedist, Stryker discovered that some of the medical products used in his field were less effective than they could be, in terms of both caregiver efficiency and meeting patient needs. While this was, no doubt, a common complaint of many physicians, Stryker's response was somewhat atypical. He began designing new devices to replace those that he found inefficient. His first such device was the Wedge Turning Frame, a mobile hospital bed with a frame that pivoted from side to side. This turning frame, which came to be known in the industry as the "Stryker Frame," allowed doctors to position injured patients as needed while still keeping them immobile. When his invention proved to be successful, Stryker formed the Orthopedic Frame Company, the predecessor to Stryker Corporation, to manufacture and sell the beds.

Stryker continued to pursue his medical career while at the same time overseeing his small company. As before, he found various aspects of patient care that needed improvement, and, as before, he designed and built solutions. One of his next inventions was the Cast Cutter, a motorized saw that cut through patients' casts without cutting the skin underneath. As his company grew and began to manufacture a more diverse line of medical devices, Stryker insisted that each product either improve the efficiency of the caregiver or reduce the cost of providing treatment. In 1964, the name of the company was changed to Stryker Corporation.

Stryker's son, Lee, who became general manager in 1955 and then president of the company in 1969, ran it in much the same fashion as had his father. Stryker worked to improve and market the company's line of hospital beds and stretchers, which made up almost 70 percent of total sales. He also focused on the development of a series of innovative medical devices, including the first medical pulsed irrigation system and the first flume evacuator for bone cement. As Stryker grew the company's product line and sales presence, he maintained a very centralized form of management, keeping a close hold on all decision making.

In the mid-1970s, one of his top-down decisions had very negative results. After tinkering with his salespeople's compensation arrangement, switching them from commission to salary, Stryker found himself with virtually no sales force at all. While it was still in the middle of this sales force crisis, the company was dealt an even worse blow. Lee Stryker was killed in a plane crash in July 1976.

It was into this turbulent atmosphere that Stryker's new president and CEO, John W. Brown, entered in 1977. Brown, a 43-year-old native of Tennessee, had previously been in charge of a subsidiary of Bristol-Meyers Squibb that manufactured surgical instruments. When he was first offered the Stryker position in 1976, he declined. He was happy at Squibb, satisfied with his progress and thoroughly entrenched in the corporate culture. The Stryker board was persistent, however, offering Brown a second chance at the CEO position in 1977. That time he accepted, although apprehensively.

1977-83: John Brown's Company

Brown had definite ideas about what Stryker needed, and he moved quickly to realize them. One of his first moves was to rebuild the decimated sales force, changing the compensation structure back to commission. He also set up a formal budget, worked to trim operating costs, and established a procedure for managerial goal-setting. After instituting more formal management controls, Brown turned his focus to Stryker's product line. In addition to expanding the line of surgical power tools, Brown added a new category to the company's product line with the 1979 acquisition of Osteonics Corp. The three-year-old Osteonics was a maker of hip implants for joint replacement surgeries.

Also in 1979, the Stryker family decided to sell some of their stock in the company, and Stryker was taken public. It was at this time that Brown announced an ambitious goal for the company: a 20 percent annual growth rate from then on. He chose this goal because he had been told that emerging growth companies had growth rates of no less than 20 percent. Brown did not soft-pedal his expectations, referring to his 20 percent growth goal as "the law" and demanding that each and every employee do his or her part to achieve it.

Overall, Brown's early years at Stryker were not smooth ones. His style of management and straightforward attitude clashed with many of the existing executives, and his changes were not always met with enthusiastic acceptance. Rocky transition notwithstanding, Brown delivered on his promises; Stryker consistently showed no less than 20 percent annual growth. In 1981, it was named to the Forbes list of the Best 200 Small Companies in America, where it would remain for ten consecutive years.

1983-85: Sweeping Changes

While Stryker was struggling through its own personal transitions, the healthcare industry itself was undergoing even greater upheavals. Since the passage of the Medicaid and Medicare bills in the mid-1960s, healthcare costs had skyrocketed. Between 1970 and 1980, U.S. annual medical care expenditures had more than tripled, triggering a social and governmental backlash. Concerned with excessive spending under the Medicaid and Medicare plans, the federal government began looking for ways to control those costs. In 1983, the Reagan administration instituted a new payment system for hospital patients on Medicare, which was designed to reduce unnecessary treatments and hospitalizations. Under this system, the Prospective Payment System, hospitals were reimbursed for the cost of care determined by diagnosis rather than by length of hospitalization or actual services performed.

The Prospective Payment System took its toll on hospitals and on patients. Many treatments and procedures that had formerly required hospital admission became outpatient procedures. Hospital admissions dropped, patient stays became much shorter, and healthcare providers had to look for ways to contain their own costs. Unfortunately for Stryker, fewer hospital admissions meant the need for fewer hospital beds, the company's main source of revenue. To offset this slowdown, Brown led Stryker into new product areas that would be less affected by healthcare cost controls.

One such area was biotechnology. In 1985, Stryker entered into a long-term collaborative research program with Creative BioMolecules, Inc. The purpose of the collaboration was to develop an implant that utilized an osteogenic protein. The protein, OP-1, occurred naturally in humans and helped to promote natural bone growth and healing. Using DNA engineering, Stryker and Creative were able to produce this protein and began testing its use in animals. Early trials indicated that OP-1 stimulated the formation of new bone when it was implanted in bony areas that were not healing properly.

A year later, Stryker again added to its product portfolio with the acquisition of Syn-Optics, Inc. Syn-Optics specialized in endoscopic systems: medical video cameras, light sources, powered instruments, and disposable materials used in minimally invasive surgical procedures. Unlike the hospital bed market, the demand for endoscopic equipment was growing rapidly. Endoscopic procedures, which were usually done on an outpatient basis, were increasingly replacing traditional, more invasive procedures for a wide range of diagnostic and surgical applications. Stryker's newly acquired endoscopy business soon became one of its fastest growing divisions.

As the company's product line grew more diverse, Brown made a radical departure from Stryker's traditional management style. He completely decentralized the company, breaking it into several fully autonomous operating divisions. Each division head became responsible for setting the division's goals, establishing its manufacturing operations, and managing its sales and marketing efforts. Brown believed that in a business operating in diverse markets, decentralization was a natural choice. "Decentralization allows each division to run like its own business, and make quicker decisions about product and strategy," he said in a November 1994 interview with Sales & Marketing Management. "We want each autonomous division to enjoy all the thrills of success and all the anxieties of failure. There's nothing like running your own business," he observed.

1986-97: New Products, New Divisions

One byproduct of Stryker's decentralization was a closer relationship between sales staff and customers. Whereas previously sales reps had been responsible for selling the whole gamut of Stryker's products, the decentralization allowed them to narrow their focus. They became better acquainted with a smaller product portfolio and thus better able to understand and respond to their customers' needs. From these closer customer relationships, salespeople began to garner ideas for new products and for ways to improve existing ones. Stryker responded to this influx of product ideas by sinking more money into research and development. Between 1986 and 1991, the company almost quadrupled its research and development (R&D) budget, and doubled its product line.

The 1990s ushered in a flurry of acquisitions for Stryker. In 1992, the company acquired Dimso S.A., a French maker of spinal implant systems used for patients with degenerative spinal diseases and spinal injuries. Another acquisition followed in 1993, when Stryker bought an interest in Matsumoto Medical Instruments, Inc. Matsumoto was one of the largest distributors of medical devices in Japan. In 1994, the company purchased a product line called Steri-Shield from a private company. Steri-Shield was a personal protection system that helped protect operating room personnel from infectious diseases. Stryker entered the market for orthopedic trauma treatment systems in 1996 with the acquisition of Osteo AG. The Switzerland-based Osteo was a maker of equipment used to set bone fractures.

At the same time Stryker was expanding via acquisition, its existing businesses were meeting Brown's goal of growing by 20 percent each year. The company's revenues steadily ratcheted up, increasing from sales of $280.6 million in 1990 to $980.1 million in 1997. Net earnings followed suit, from $33.5 million in 1990 to $125.3 million in 1997. Its consistent success won high favor from Wall Street pundits, industry analysts, and even a U.S. president. In 1992, President George H. W. Bush paid a visit to Kalamazoo to recognize Stryker for its achievements. "Stryker is celebrated across the nation and around the world for the quality of your work and the excellence of the management, the way it's handled," Bush said in an address to Stryker employees. "You're leaders in an innovative industry that makes our country proud."

Becoming a Big Player

Near the end of 1998, Stryker acquired Howmedica, the orthopedic division of Pfizer, Inc., for $1.65 billion. Howmedica developed and manufactured specialty medical products used to treat musculoskeletal disorders. Its main products included hip and knee implants, bone cement, and trauma systems for bone repair. Through its subsidiary, Leibinger, Howmedica also manufactured products and instruments used in craniofacial surgery. Howmedica was integrated with Stryker's Osteonics division, which was renamed Howmedica Osteonics.

The purchase of Howmedica was highly significant in that it transformed Stryker from a small player into a very large one. Brown's decision to make this jump had much to do with the changing face of the healthcare marketplace. For the prior several years, a trend toward consolidation had been sweeping the industry. Increasingly, independent hospitals and surgery centers were being absorbed into large healthcare conglomerates. As a result, purchasing power was often centralized, and physician preference became less significant than economies of scale. Stryker, who had built its sales approach on personal relationships with individual decision-makers, realized that it could not compete effectively as a small company any longer. "Larger institutions and buying groups are demanding ever-higher quality at ever-lower cost, and they prefer to deal with clearly identified market leaders," Brown wrote in his 1998 letter to shareholders, adding, "In this environment, only companies that offer scale and superior efficiency will succeed."

As Stryker wound down its sixth decade in business, it remained true to its growth goal. Although the purchase of Howmedica broke its 21-year streak of 20 percent net earnings increases, the company expected to return to its historical growth rate as early as the year 2000. Its long-term growth strategy centered around the global marketing of diversified product lines with an orthopedic core. With well-developed markets in the United States and Asia, Stryker planned to improve its position in Europe, Australia, and the rest of the world. It also planned to continue aggressively developing and marketing new, innovative products within its key markets, as well as improving and expanding its existing lines.

Late in the 1990s, Stryker Corporation was developing and manufacturing specialty surgical and medical products for healthcare markets around the world. The company's product lines included various powered surgical instruments, orthopedic implants, trauma systems for use in bone repair, endoscopic systems, and patient care and handling equipment such as stretchers and hospital beds. Stryker also provided outpatient rehabilitative physical therapy through its Physiotherapy Associates Inc. subsidiary, and was engaged in clinical testing of a patented bone growth protein through its Stryker Biotech subsidiary. The company was broken into ten discrete operating divisions: Howmedica Osteonics; Stryker Endoscopy; Stryker Instruments; Stryker Medical; Physiotherapy Associates; Stryker Pacific; Stryker Europe; Matsumoto Medical Instruments; Stryker Americas; and Stryker Biotech. Each division operated as its own entity and produced its own line of health-related products or services. In 1999, annual sales reached $2.1 billion, and by January 2000 Stryker's earnings had rebounded from the Howmedica purchase.

Going for Fluid Movement: 2001-05

Brown's formula for success continued to produce results. Michael A. Verespej wrote for Chief Executive (U.S.) in June 2002: "Last year Stryker's net income increased 21 percent, matching the compounded annual growth rate of the past decade and pushing its 25-year compound growth rate to near 24 percent. In this year's first quarter, net earnings were 27 percent higher than the first quarter of 2001. 'They are hitting on all cylinders right now,' asserts Katherine Martinelli, medical technology analyst in the New York office of Merrill Lynch. 'Their earnings are well above the industry average of 13 to 14 percent.'"

External factors favored Stryker in the early years of the new century. With many high growth technology companies down and out, investors began flocking to the medical equipment sector. Stryker and its competitors stood to be the beneficiaries of ailments inherent to an aging U.S. population; moreover, they engaged in product sales relatively independent to swings of the economy.

While demand for knee and hip replacements was expected to continue to grow, pricing faced a drop-off. The cost of implants had risen an estimated 90 percent since the early 1990s, according to Business Week Online. In terms of product development, the industry was keyed in on improving existing products.

The device manufacturers continued to be attentive to crucial relationships with surgeons inserting their products. Patients, meanwhile, benefited from technology changes, undergoing less invasive procedures using longer lasting and more maneuverable artificial joints.

Stryker and competitor Zimmer Holdings Inc. engaged in advertising directed at the public in the fall of 2003. Golf legend Arnold Palmer touted Stryker's ceramic and titanium implant in a television ad run during 60 Minutes. Departing from industry norm, ads for the complex medical device drew critics. According to the New York Times, patient advocates voiced concerns over the lack of information about risks inherent to such implant surgery. The Food and Drug Administration required pharmaceutical companies to follow strict guidelines for their ads, but the agency regulated ads for artificial hearts and pacemakers, only, with other devices falling under the Federal Trade Commission rules.

Historically, device makers marketed their products to surgeons, often making first contact during their medical training. Many of the leaders in the field helped companies improve their products and also trained students in implant procedures.

John Brown relinquished his management position at the end of 2004. During his 27 years at the helm, Stryker produced average annual earnings growth of 22 percent. The anticipated change put pressure on the stock during the later half of 2004. Additionally, investors were cashing in on the recent upswing in stock price. Costs related to the purchase of a spinal device company and delays in a new product also took a toll, according to Business Week.

Former pharmaceuticals executive Stephen P. MacMillan succeeded Chairman Brown as CEO. MacMillan joined Stryker in June 2003, coming from Pharmacia Corp. Prior to that he marketed consumer products, including Tylenol, for Johnson & Johnson. He envisioned a new source of growth through biotech products, such as OP-1, which was commercially launched in 2001. Selective additional acquisitions and increased in-house product development rounded out his game plan for Stryker.

However, the competition had plans in motion. Johnson & Johnson's DePuy and Zimmer had introduced products comparable to Stryker's longer lasting, higher priced ceramic and titanium joints. OP-1, although used in Europe and Asia, had FDA approval for only very limited use as U.S. clinical trials continued.

Although Stryker held a 24 percent share in the artificial hip and 19 percent in the artificial knees markets, artificial spine disk products brought on board through the 2004 SpineCore, Inc. acquisition were still in clinical trials. Powerhouse medical device maker Medtronic Inc. held nearly half of the spinal products market.

Orthopedics remained Stryker's biggest moneymaker midway through the first decade of the twenty-first century. Stryker and DePuy led the market followed by Zimmer. While Stryker continued along a track of solid growth other factors came into play. "Actually, 20 percent earnings per share growth is our second most important metric," MacMillan told the New York Times in March 2005. "The most important thing we need to do is to make sure we continue to run the company in an ethical manner where we don't bend the rules to meet our goals."

The Justice Department had begun looking into the practices of large orthopedics manufacturers in 2005 in respect to their relationships with hip and knee surgeons, as well as medical students. DePuy, Biomet Inc., and Stryker were among the companies under scrutiny. As for the highlights of the year, Stryker's net sales and net earnings continued their upward trajectory.

Principal Subsidiaries

Howmedica Osteonics.

Principal Competitors

DePuy, Inc.; Smith & Nephew plc; Zimmer Holdings, Inc.

Chronology

• Key Dates
• 1941 Homer Stryker starts medical products business.
• 1946 Orthopedic Frame Company is incorporated.
• 1964 Name is changed to Stryker Corporation.
• 1969 Lee Stryker, son of Homer, becomes company president.
• 1977 John W. Brown heads company, a year after Lee Stryker is killed in plane crash.
• 1979 Company completes initial public offering, enters into orthopedic implant market.
• 1983 New Medica payment system undercuts sales to hospitals.
• 1985 Company embarks on collaborative research into osteogenic protein (OP-1).
• 1986 Company enters arthroscopy and endoscopy fields via acquisition.
• 1992 Stryker buys French spinal implant system maker.
• 1993 Stryker gains part ownership of a Japanese medical device business.
• 1996 Company enters trauma market with acquisition of Swiss company.
• 1998 Company nearly doubles in size through acquisition of Howmedica.
• 2001 OP-1 is launched commercially.
• 2002 Sales reach $3 billion; company is listed on Fortune 500.
• 2004 Stryker enters artificial disc market.
• 2005 Stephen P. MacMillan succeeds Brown as CEO.