Stryker Corporation. (NYSE:SYK) 5th Annual Evercore ISI HealthCONx Conference 2022 December 1, 2022 8:50 AM ET
Company Participants
Kevin Lobo – Chief Executive Officer
Jason Beach – Vice President, Investor Relations
Lara Mordoh – Senior Director, Investor Relations
Conference Call Participants
Vijay Kumar – Evercore ISI
Vijay Kumar
Great. Thanks everyone for joining us this morning. A pleasure to have with us the team from Stryker. We have CEO Kevin Lobo with us this morning. And from investor relations, I think in the back room we have Jason Beach and Lara Mordoh in the background.
So with that Kevin, thank you so much for taking the time this morning.
Kevin Lobo
Thank you Vijay, happy to be here.
Question-And-Answer Session
Q – Vijay Kumar
If I just look back at this year, Kevin this execution from Stryker it’s been phenomenal, that third quarter for close to 10% organic, really, really strong. Maybe just talk about what you’re seeing on the macro front right now. How a procedure, body and civilization training, anything that we watch out for in the macro front?
Kevin Lobo
Yes, well, thanks. Certainly, you saw us we actually raised the range of our organic sales growth. So that tells you that we feel very confident about Q4, at least. And then going into next year, the order book is extremely strong for all of our capital equipment, be it large capital or small capital. And what we’re seeing with elective procedures, hip and knee procedures in particular is a nice steady tailwind. So things picked up meaningfully in September, that’s continued into October, November and I think that will continue throughout the rest of 2023 and even into 2024. We’ll have this sort of modest tailwind.
In the past when we’ve had these periods of strength with based on pent up demand, we’ve had these spikes, and then kind of a settling down back to normal market growth. I think because of the staffing challenges the hospitals have, they just can’t spike the way they used to. But there’ll be this gentle tailwind. And we feel great about our position, obviously, given our strength in robotics and cementless for knees. And then in in hips, obviously, the Insignia Stem is off to a great start. It’s about 40% of the way through its launch, it takes time to do these full implant launches, as you know, but that combination with Mako, Mako hips now at 30% of the hips is pretty dramatic, because it flat line to 20% for four or five years. So we’re pretty encouraged about the momentum that we have both in hips and knees, and we expect that to continue.
Vijay Kumar
Fantastic. And I think we have a couple of points you mentioned out there, Kevin. Just out, on the utilization front, Europe has been a little spotty, some of the peers card have developed markets, as softening because of stacking challenges. We haven’t seen that more on your business, anything on utilization or China lock downs that’s noteworthy here.
Kevin Lobo
Yes, the only areas, the only pockets of disruption that are like say meaningful are really in Asia Pacific. So obviously China, as you know, still in the zero COVID mind-set. And then Australia for us is a big market, and they’re still having issues with cancellations of procedures and they haven’t been able to work off their backlog. And then as you know, the U.K. has a giant backlog. They’re actually doing pretty good volumes. So the volumes are fine, but they have a giant backlog that built through COVID and that’s our country with the highest market share for us in Europe is the U.K. based on the Exeter hip stem and historic strength. But Europe for us was very strong. In Q3, we expect another strong Q4, we’re not seeing much in the way of slowdowns.
Again, they are gated by some challenges around staffing just like the U.S. is. But we see healthy volumes there. We saw healthy volumes in Q3, you saw our international growth outpaced U.S. growth. And that that has been happening, frankly, since 2019, for Stryker, so our globalization efforts are finally bearing good fruit. And that’s in spite of China, of course, being very challenged.
Vijay Kumar
And helpful commentary out there on cancellation. Anything to call on cancellation friends here in the U.S? Any change?
Kevin Lobo
No, I like I say the volumes are getting better, progressively more stable there. There are cancellations that occur here and there. But it’s not really a problem right now. I think it’s the markets healthy, and the hospitals are learning to equip and to deal with it. You have the RSV of course you have difficult flu scenario COVID still around, but it’s not nearly as disruptive as it was even two quarters ago. We’re seeing we’re seeing pretty good momentum and pretty sustained momentum.
Vijay Kumar
Understood. And since you brought up Insignia, Hip and now Mako, maybe let’s start there, U.S. have 30% growth in here now in third quarter. It’s really, really strong. And you mentioned now I was not aware of Mako is now 30%. What changed? Is there something different about Insignia, the implant itself that’s driving this acceleration?
Kevin Lobo
No. So there’s it’s a combination. As we launched the Hip 4.0 Software, if you recall roughly a year ago, maybe a year, year and a half ago. So that software took time to sort of get that adopted and in updated throughout our Mako footprint. So that was the first step, the software was a very important change made the registration faster provided information on pelvic [ph] tilt. And then that combination with Insignia, which obviously was a necessary gap in our portfolio, for a fit for purpose direct anterior stem. Of course, you can use the athlete to for direct interior, meaning our surgeons do, but this collared stem was a gap in our portfolio.
And so that combination has increased the demand for our products and the growth of our hip business. So it’s not just one thing, it’s the two together that are very, very powerful. And when we launched the Insignia stem, we launched it with compatibility with Mako. And so we’re seeing the stem being adopted, both robotically as well as in manual procedures. But again, only 40% of the way through we did prioritize competitive accounts for the early parts of this launch. And we’ll eventually be able to launch that through the rest of our systems. In some cases, some surgeons may choose to switch from Accolade to Insignia but for now we’re very focused on competitive business.
In some cases, they were using our cup but not our Stem. And that’s obviously the first place you’re going to go when you launch a new product is to convert that stem business when they’re already Stryker loyal customers, maybe using our knees using our cups, but not using our stems because they wanted to call it Stem.
Vijay Kumar
And if I go back in time, Kevin, back in the day, I think when Mako was seeing this lease kind of trends, we were seeing 100, 200 basis points of shared gains. Is that something we can expect from the hip side as well?
Kevin Lobo
Well, we’re excited. I don’t know if it’ll be to that degree, but we expect to gain share. I don’t think there’s any question we should be growing faster than the market. We had a period of time when we did that when we first launch Accolade I and II. And then we grew slightly below the market for a period of time because of that gap in our portfolio around direct interiors. So we will outpace the market will repeat to the same degree as knees, hard to say, I don’t know that it’s as compelling. The robotic, offering for hips. If you have a large deformity, it’s fantastic, the larger the deformity. So we’re seeing that in Asia Pacific where hip says, the hip volume is similar to knees, or even higher in higher number of hips than knees in Asia Pacific, but they also have larger deformities. And the larger the deformity, the more Mako makes it an obvious benefit for you. So I don’t know if I give you those kind of numbers but definitely outpacing the market. And we’ve done that in Q3, and we will do that for the foreseeable future.
Vijay Kumar
Understood. And as we think about hips overall in the franchise here, is that market [Indiscernible] volumes and with a little rough shout rates, high singles, is that the right way to think about Hips?
Kevin Lobo
Yes, that’s a good way to think about it.
Vijay Kumar
Understood. And then shifting gears underneath it again, really, really strong here. You know, how much of this is just actually working on increasing our install base, right make, maintenance, install base growth versus growth and persistent utilization.
Kevin Lobo
It’s a bit of both to be honest with you. So, obviously through the pandemic, we continued to, to have large numbers of installations of Mako all the way through the pandemic. And that’s bearing fruit for us. Obviously, with over half of our knees being done on Mako, and the utilizations increasing, it’s just hospitals are buying their third or fourth or fifth or sixth Mako, so that the demand is absolutely continues to be very, very strong. And they’re very happy when they do the procedures. And so that and frankly, ASCs, were selling a lot of our Makos and ASCs. A higher percentage this year, then we have historically of our Makos are going into the surgery centers and high demand for that, which is great.
So the surgeon doesn’t want to have to switch when they moved from their hospital to performing their procedures in the surgery center, they want makeovers in the surgery center. So we expect this to continue. It’s hasn’t slowed down. The percent of procedures using Mako continues to climb. The percent of knees done cementless continues to climb as well. And as you know, we’ve have a long history many, many, many years with cementless and a giant head start versus the competitive set on cementless as they’re just starting to launch their products or relaunch some of their products.
Vijay Kumar
And correct me if I’m wrong, but I think the last period was maybe a half release or now cementless, is that wherever we are?
Kevin Lobo
That’s that’s where we are. Roughly half and it continues to climb. Now it’s not climbing as rapidly as Mako utilization, but it’s continuing to grow, which we’re very excited about. And the accounts that have Mako index above that. So they’re well north of 50%. If you have a Mako you tend to do a lot more cementless than if you don’t. So there’s a synergy between robotics and the beautiful cut that you get from a robot with you can do one millimeter re-cuts with the robot. And so that type of precision combined with cementless, it’s a it’s a very, very beautiful combination.
Vijay Kumar
Understood. And then I know there were some installation delays in third quarter. Has that situation changed since the quarter, I know there was some supply chain sort of issues here that impacted the quarter?
Kevin Lobo
Yes, so let me so supply chain issues really didn’t impact Mako. So our supply of Mako is fine, the supply chain. The supply chain issues really affected medical significantly, even though they had good organic growth of 13%, it would have been a lot higher. If we had more product and instruments, it affected those two divisions the most. It’s affecting a little bit of everybody but it’s most acute in medical. And then secondarily in instruments. Mako, we have good supply of the electronics and the components, the issue is just being able to get the Mako’s placed in the accounts and installed in the accounts and it’s getting better. I would say fourth quarter is going to be certainly better than third quarter, it’s going to be a good quarter for Mako, the demand is still strong. They’re being pushed out for various reasons, delays of construction, staffing, availability, there’s various reasons that they’re getting pushed out a little bit. But we still feel very strong about our offering. Obviously, we have competitive offerings that they try side by side. So now that we have every major player with an offering, it has slowed the purchasing cycle a little bit as they assess the different technologies, but we love our chances.
Vijay Kumar
And now that you mentioned, all cooperative offerings are there in the market. Have you seen any change in win rates, in maker win rates when you go up to win business? And what do you think are we here in adoption, robotics in large joints?
Kevin Lobo
Yes, I’d say we’re still in the early innings. So sort of less than we’re not yet at the fifth inning, we’re somewhere in the third and fourth inning probably is the way I describe it. I think robotics will become standard of care in orthopaedics, as it has become standard of care in other as you know, prostate or other procedures it has become standard of care. It will take time before that happens. But we’re still in the early stages, and our win rate is just as high as it has been historically. So the reason I say that is the win rate is they’re buying a new piece of capital, and they’re going to assess different technologies. Right? That’s that’s if there are some accounts, let’s say they’re a loyal, competitive account, loyal surgeon who does not want to change implant. And so that’s an account where we don’t really have a fair chance. Right? So I’m not worried about that, that business. It’s when they are open to technologies and we get to try our products side by side our win rate is very high and we frankly encourage our customers to try the products because they sometimes complain about the price that we’re charging. And we say, well try them side by side, just do a side by side comparison. And we know we have the winning solution in the marketplace.
Vijay Kumar
That’s helpful. I know there was some transition here from a selling perspective more from an offer and sell to a higher lease. Are we through that transition here? And should we start seeing those numbers being reflected from a growth perspective in 2023?
Kevin Lobo
Yes, there’s a lot of dynamics at play here. So in terms of the shift towards more financing, all of our ASC deals are financed. Because you have you have partial physician ownership, they don’t have the same capital budget as a hospital. So as our ASC penetration of Mako increases, the proportion that are in ASC is you’re going to see financing increase. But that still provides tremendous value over the lifetime of the deal. And so we’re really agnostic, as long as they’re paying for, for the robot, how they pay for it, it’s not so important to me, even though I might lose a little bit of other ortho revenue in the short term, it pays itself over the life of the deal. And they these deals tend to be five to seven year long. So they’re long deals. And that’s great for us because we lock up the volume over that long timeframe, fixed pricing over that entire timeframe, versus the annual three year grind that we have in the hospital environment.
So we are very excited when we were able to do these ASC deals, and certainly our sports medicine business is the largest beneficiary of these deals, because every ASC does sports procedures. They may not do shoulder, they may not do foot and ankle, they may not do spine, but they always do sports. And then they always do large joints.
Vijay Kumar
Understood. And switching back to supply chain, the comments you made an order books and backlog etcetera. Where are we in the — in the supply chain? And can you give us a sense on are things improving? Is the backlog being work? Or where are we on that front?
Kevin Lobo
Yes, we have not worked on our backlog. It’s actually built up over the course of this year, because the orders keep coming in. And we just are not under we are unable to ship out of the backlog in medical and instruments. So we have a backlog that’s well north of twice the normal size that we have. And it’s just it’s getting better. But at a rate that’s clearly not as fast as I would like. It’s slowly getting better, it’s the way I describe it. And we hope that we’ll start to be able to eat off our backlog going into next year. But our sales teams are continuing to win deals. If you think about procurement, the ProCuity bed is doing exceptionally well, from an order standpoint. I just can’t, I can’t get enough parts to ship it.
Same thing on the defibrillator side, where we’re having tremendous order strength, just an inability to get the product that we need. Either it’s the availability or the extortion pricing. Sometimes it’s so obscene, that we’re just like we’re not going to buy, we’re going to have to wait a little bit. We are taking it on the chin in the margin, as you see. And we’re willing to sacrifice some margin to be able to provide the product to our customers, especially lifesaving products that’s not something we want to sort of hold them hostage on. But we, that’s getting better just at a slower rate. I wish I could tell you when we’ll be out of the woods. I don’t know yet. But we’re not doing as much spot buying. So the spot buying that we’re still doing some, but we peaked around June, June, July. And that’s starting to come down which is which is great, because over six to nine months later, you’re not going to see those high costs in our P&L as they bleed through inventory. So the spot buying reliance on spot buying is definitely getting better. We’re still doing some I hope that we completely stop sometime in the first half of next year. That’s my hope. But we’re not there yet.
Vijay Kumar
Understood. And just one on this backlog Kevin, when you say it’s twice as large as historical cycles, right? I think, historically, backlog has given you a Stryker three to six months of visibility doesn’t mean you have now basically six months plus given the size of this backlog.
Kevin Lobo
Yes, I would say have visibility up to nine months easily because of the size of the backlog. And the backlog even it even includes the booms and lights in our industry division. So it’s really across a lot of our portfolio. Its supply chain is not the reason for Mako. But Mako stays stable from a supply chain standpoint, but virtually most of the other capital parts of our business are challenged from a supply chain standpoint, different degrees of challenge. I think endoscopy is a little less than and medical by far is the most. So even though we had great growth it would have been incredible growth. If we could have been able to supply more products. So looking forward to being able to start to eat into that backlog. But as I say, the orders keep flowing in. And we’re not getting any order cancellations. So all of our orders at Stryker have POs that are signed by hospitals, customers and sometimes we do require deposits, which are non-refundable.
So there’s, that tends to be a pretty strong commitment from a hospital. And we don’t have any history of orders being cancelled in our business. And we’re not seeing any signs of that so far. And the balance sheets are still pretty strong for hospitals, even though their margins are being squeezed. They can withstand tight margins or even slightly negative margins for a period of time. So as long as it doesn’t, it isn’t prolonged; I think we’re going to be fine. We’re largely a recession proof company, not no one, no one is completely recession proof. But, but we’re largely recession proof and we don’t have as our reliance on large capital is much less than it used to be as Stryker because of the diversification through our acquisitions over the past decade. Large capital is about 9% of our sales and, and even that large capital, Mako, for example, there’s still strong demand for that. And that’s one of the elements of our large caps.
Vijay Kumar
That’s actually helped a lot commentary Kevin. Just on the CapEx, some of your peers have, it’s been a mixed messaging to be honest. Some were cautious, other some cautious, but now we’re sounding positive. What differentiates Stryker, is this is across the board share gains for Stryker that’s driving these orders strength?
Kevin Lobo
Well, I think our portfolios are a little different. First of all, if you think about something like Mako, we’re still in the early stages. If Mako was maybe more mature, in its robotics was more mature, then the notion of replacing or upgrading, you could probably delay that. There’s still words earlier in our cycle. So that’s let’s put that Mako thing to the side. And the other areas, for sure, in medical, it’s there’s a lot of share gain. And there’s a bit of I would call it pandemic induced demand. So something like defibrillator is there, you go through COVID. And you want to make sure you don’t have you run out of things. You want to make sure you have the number of defibrillators you need.
So we were getting a lot of new demand plus our sales force has done an exceptional job of creating new demand. So, having defibrillators in every single NYPD car, that wasn’t the case a year or two ago. So they’re winning big orders and new orders. And the demand is just extremely strong. So a little bit of the safety is focused on safety is a bit of a tailwind.
For Stryker, we have a lot of products in our safety portfolio, whether it’s defibrillator or whether it’s smoke evacuation in the operating room. So that’s provided a bit of a tailwind for us. And something like ProCuity that’s pure share game, where we have a fantastic product that’s winning in the marketplace. We are winning in accounts that we never sold beds in before. And so that will continue. It’s year two of the launch and a bed launch, typically year or three or four is where it takes time to use our big sales that the sales cycle is longer for event than it is in other product categories. But pretty excited about that being able to win new business.
Vijay Kumar
That’s the key we have — on the ProCuity comments here. Is there any way any historical context here and what those share [Indiscernible] is that a five point shared gain or any way to quantify what it means?
Kevin Lobo
Well in unlike stretchers, in beds, we’re number two, right. And we have been closing and gaining share and closing on the number one player. So we have plenty of share to gain. It’s not like power tools or some other categories where we have very, very high market shares. In this case, we look forward to one day becoming number one in this category, but we have plenty of room to gain share, not just in the MedSurg category, but also in the ICU area where we were kind of a distant number two and ICU part of the ProCuity launch, there’s multiple models, and then the high end model of ProCuity does play very well in the ICU, where we’ve historically been a very small player. So we’re pretty excited. There are there’s a plenty of market share that we can go after, given that we are number two in that category.
Vijay Kumar
And how large is this category? Kevin, when you look at surgical beds, now across the different settings?
Kevin Lobo
Well, we don’t really sort of give out all these sort of micro numbers. But it’s a big category, no question, not just in United States, but also globally. And we are also not a very strong player historically, in the international markets. And so this is this is very, very, very, very big market. I don’t think I’m going to give out numbers unless Jason wants to jump in.
You want to jump in Jason?
Jason Beach
No, I think what you said is, is well said there, Kevin.
Kevin Lobo
Okay, thanks.
Vijay Kumar
Jason was in the hot seat out there for a second. But back on U.S. instruments, that’s another one area which was impacted along with Mako. But some of these products that you call Kevin, like smoke evacuation, Steri-Shield, these seem to be like that secular trends that could last for a while.
Kevin Lobo
Yes, smoke evacuation for sure is going to be a giant market, right. You have nine states that are now mandating legislation for smoke evacuation. And already seven more states have it pending legislation to mandate smoke evacuation. So that’s an enormous tailwind. And this is a business that’s been growing very strong double digits for Stryker and will continue. And it’s just market. It’s just new market growth, which is pretty exciting. And even some of the European countries are starting to really look into this. It’s I’m not saying they’re mandating it everywhere yet. But it’s starting to happen. So we’re really excited about being well positioned in this space.
Vijay Kumar
And any sense on what that opportunity could mean, either from a market perspective or for a Stryker?
Kevin Lobo
Well, I mean, this is all new market growth, right. So it’s this 20%, 30% growth in smoke evacuation. I see that continuing for the next five years. It’s not a giant piece of our overall portfolio. But it’s exciting. And, you’ll see the instruments business, it’ll start to become a much more meaningful part of instruments. And instruments, everyone thinks power tools, well, things like Steri-Shield, things like smoke evacuation are going to start to really provide a great tailwind for growth within instruments. And just since I mentioned power tools, just wanted to let you know, I don’t know if we’ve announced this all publicly yet. But we have launched system nine in the U.S. just about a week or two ago. So it’s in the early stages, obviously, but a little bit ahead of schedule.
So we were initially planning for that to be a Q1 launch, it is now launched, it’s been launched in Europe, and now launched in the United States. So that that’s it’s nice when the launch is a little bit ahead of schedule. And then the camera, we’re slated for Q2, and then the LifePak defibrillator end of the year. So we’re not going to see a lot of benefit in 2023 will launch in Q4 outside the United States. And then inside the United States, hopefully, the beginning of 2024. It’s it’s a little harder to predict because it’s a PMA. And it goes through a different FDA process. So it’s less predictable than the 510-K tech products.
Vijay Kumar
That’s that’s helpful commentary. On this System 9, is there some historical analogy, Kevin on what a new launch would look like and what the curve would look like?
Kevin Lobo
Well, certainly, we have high adoption, customers are used to it, they’re used to moving from System 6 to 7 to 8 to 9. And typically, year two tends to be the largest spikes. You get, you get a nice lift in year one, and then a, an even bigger lift in year two, that’s kind of typically how our, how our two launches have gone. Customers are able to switch pretty quickly. What’s a little bit different this with this launch is, as you as you launch this product, you need to buy new batteries? So in the past, you’ve always had been able to use the old batteries. And so this is a little bit like Apple when you buy an Apple phone, and you have to get a new charger. And that’s because we have a fantastic solution for batteries now, with incredibly important data for customers coming out of the batteries and preventative maintenance. And, and so it’ll be there, there’s value provided, but it does provide a little bit more of a lift, probably on the top line than we’ve had historically, because historically, you could buy the handsets, but still use the old batteries, this time, you’re going to have to buy a new battery set as you buy the new hand pieces.
But so we’re excited about it. It’s going to provide really good benefits to customers. They’re used to it, then they know that changes are going to happen that it’s going to be lighter, it’s going to be better to use, it’s now in terms of battery life, and, and even autoclaving better capabilities than we’ve had before. So it will be a very successful launch as they have been in the past instruments. This is their bread and butter. They know how to do this.
Vijay Kumar
Any way to quantify what backyard — what’s your install bases for us to get our arms around this opportunity.
Kevin Lobo
That’s a level of detail we don’t you don’t normally provide. I — you know that power tools is the largest portion of instruments. And when instrument says their power to launch go back in history there that division typically will get double digit growth. They’re normally either a high single digit or low double digit grower. When you have a launch here, we tend to like to, expect kind of that low double digit growth for the division. It carries — it will carry the growth for the division. So that’s a little bit of color I can give you.
Vijay Kumar
That’s helpful context for sure. On the camera, again, I think the last time you launched a camera that’s like we brew like — I think if I’m not mistaken. Should we think about the current camera is as in line with historical launch cadence is anything different about the new camera.
Kevin Lobo
Now just think about it like another terrific new product, it’ll be higher priced. Obviously, I’m excited, the faster we can switch on cameras, the better because the product, availability of chips is much better. And our margin profile, because right now we’re, we’re getting squeezed on our margins because of the high price of components. So our margin profile return to a healthier margin profile, the faster that we can switch customers, but the customers are going to get terrific benefits and amazing resolution, better lighting for some procedures, like sports and neuro where our prior camera was fabulous for general surgery, but not as fabulous in some of the other procedures. We’ve addressed those issues. So the customers are going to love this new camera, there’s no question on that.
And again they’re used to the upgrade cycle and the ICG visualization is tremendous. I had a chance to see the cameras out in San Jose recently to see the camera, it looks awesome. So we’re very, very excited. And then even the cabling of the — the cameras makes it even more reliable than prior cabling. So this is just going to be a great solution. And as you say, the double digit growth kind of expectation, when you launch something, is something that we that we’ll look forward to. Again, a year or two tends to be a little bit bigger than year one, but our sales teams know how to do this upgrade cycle. And we’ve been gaining share, frankly, in cameras, especially in Europe, where our endoscopy business tended to be more of a sports business. It’s now fast becoming a very strong business. We’re actually we were not number one in cameras. Five years ago, we’re now number one, and really starting to pull away. So we’re very excited about it. It’ll be good.
Vijay Kumar
That’s, that’s fascinating. And why should the margins improve? Sorry, I was…
Kevin Lobo
Because right now, right now we’re paying high prices for the components. And we’ll go back to paying more normal prices. So 1688 margins have been squeezed, based on the supply chain, the unfortunate reality of today’s supply chain. When you launch something new, you you get sort of you get back to normal pricing for your input costs. And so that margin profile will improve. Now you won’t see it in the price, but you’ll see it in the gross margin.
Vijay Kumar
Understood. That’s helpful. And then, one on the last one here and you didn’t bring up LIFEPAK. But that’s a newer segment. And I haven’t really focused on it. How big is the product line and how should we think about the launch year?
Kevin Lobo
Yes, again, we don’t disclose that the different categories, but I would tell you physio control. When we bought physio controls, a physio control LIFEPAK was the biggest piece of physio control. It also had the LUCAS product for automatic chest compression, and then the lower priced defibrillators, right. So like when I say LIFEPAK, I’m talking about the big LIFEPAK defibrillator that’s used in the back of the ambulance, and a little bit in hospitals, not the ones that are on the walls, in gyms. And those are also defibrillator, but those are lower priced ones. And we do sometimes use the LIFEPAK brand on those, but the one I’m talking about is the big professional defibrillator that was the largest portion of physio control. Physio control and we bought it was about $500 million of revenue. And we have grown at double digit since we’ve owned it, which I know surprises people, because when we did the deal, it wasn’t so popular. But it really fits beautifully within the Stryker portfolio. And so take the $500 million at double digit growth since we’ve owned it. LIFEPAK, that professional is the largest portion of that $500 million. So I’m not giving you specifics, but hopefully that helps a little bit.
Vijay Kumar
Now that’s certainly helps. And I remember physio control, and certainly, I was one of those, I would call it skeptics, but certainly it seems outside your comfort zone but it’s fascinating to see double digit growth in that.
Kevin Lobo
And I think the way to think about you know, when we do deals the technologies we’d like to solve customer problems. And we’d like to be providing technologies into our existing call points as much as possible. And we were already selling in the back of the ambulance. We were already selling in the in the ICUs and in the hospitals. And so it’s just a new technology to the same call point and we merged our emergency sales force. So the sales force that was selling power cots, we merge that with the physio control sales force, and that’s the largest portion of the sales are made in the emergency. So think about it, it was really an emergency product, an emergency medical technician product. And that’s what Stryker does very well as our distribution sales force network is they know how to perform, and they know how to sell. And so we just brought new technologies to an existing call point. And maybe we didn’t explain that as well, when we first did the deal. But that was the deal logic for us. And why we felt we were uniquely positioned to be able to grow this faster than just your average for each other med tech company, because we’re already in the call point.
Vijay Kumar
That makes total sense. And in a segway nicely — this recent acquisition of Vocera, what was the call point synergy here, Kevin. And again, there was some transition here some impact, you called out? You know, what changed?
Kevin Lobo
Yes, so that’s one where we’ve known this company for a long time. And they run side by side with our medical sales force. So that same sales force that sells ProCuity as well as the warming products no hospital as surfaces in the hospital. So that sales force this is a business that’s in that’s been put together with medical run by Jessica Matheson, who’s a phenomenal leader, our entire medical division is just loaded with just a great talent. But anyways, so they – we run alongside the Vocera team. We’ve now connected Vocera to our ProCuity bed and we are showing customers. So if you lower the bed rail for example, the batch of the nurse get’s an audible warning that a voice warning to the nurse telling them that the bed rail has been lowered at patient number – in this room, which is pretty amazing.
And so we’ve been able to do that pretty quickly. We’ve only did close the deal in earlier this year and to make that connected already with ProCuity is pretty exciting. But we see this as a really amazing platform that we are going to attach much more products to, not to expect the products, but even categories we don’t play in, we’ve been approached by one outside company to actually attach their product to Vocera which is really exciting happens sooner than I would have expected. But we want this to be an automated workflow, technology play for our customers.
As I mentioned before, we like to solve customer problems. This takes cognitive load off nurses, this reduces errors, that’s another safety play in the hospitals, the retention rates extremely strong. Yes, we had a little bit of a hiccup on sales. So we had flat sales growth versus the prior quarter because we really want to move more of the business to the cloud. It’s better for us, it’s better for our customers, it’s better for cyber security. It’s better for a lot of reasons. Long-term, so sometimes when we do deals, we take a little bit of a short term pain that benefits us longer-term as you saw with Mako, as you’ve seen with some other deals. We’re still going to grow the business overtime. It will – we still feel largely positive on the technology. But I think fourth quarter and first quarter will be flattish sales, and then we’ll get back to the double-digit growth that we had.
The order book still strong – moving to the cloud requires a – to go through more paces with the IT departments and hospitals. And if they insist on staying on premise, then of course we have an on-premise solution, we’ll do that. But it’s easier to manage from an updating from an on-going maintenance, cost to serve and frankly benefits the customers; it helps them as well as us if we can do this migration to the cloud. And the cloud offering is a strong offering.
Vijay Kumar
And that migration I think could take six months; I think is what you’ve said?
Kevin Lobo
What we’ve said, is look, we are still selling Vocera. We’re still, we’re not sales growth is negative, but it will be flattish rather than the 15% to 20% growth that what you’re accustomed to seeing and that’s – it’s an intentional sort of effort on our part.
Vijay Kumar
Understood. And then on an U.S. neurovascular, I think that’s not an area where you…
Kevin Lobo
You like to pick the soft spots, Vijay?
Vijay Kumar
No we went through a lot of positives.
Kevin Lobo
No, look it’s been a challenging year. No there’s no two ways about it. And the biggest part of the challenge frankly is that ischemic, it’s all been ischemic by the way. Hemorrhagic has been very steady. So the growth in hemorrhagic and you know we’re the market leader in hemorrhagic has been strong. It’s the ischemic segment that has been surprising. So the market has slowed down. Can’t put a finger exactly as to why the market has slowed down. We think it has to do with just the patient profiles or the people who passed away during COVID, that a lot of those patients potentially could have been candidates for stroke as they were with [Indiscernible] just looking at the demographics and patient profile.
So that probably explains it, I’m not sure, but that’s our best guess. And then you have new competitor entrance as well, companies like [Indiscernible] who are coming into the market for mostly for aspiration, a little bit for achieving because FDA relaxed their requirement. So that’s the other factor, but it’s secondary to the market. It’s like where do this market go. And it’s a market where we’re still treating a fraction of patients and it should come back. I’m bullish a long term on neurovascular, it was our fastest growing division from my 10 years as CEO for the entire time and it’s still growing extremely well outside the United States, both ischemic as well as hemorrhagic. So I’m still bullish long-term on neurovascular. But yes, it’s been a more challenging year, a little bit of a puzzling year in some degree related to the market.
Vijay Kumar
I have a portable MRI company who thinks they might extend the stroke treatment window. Maybe I’ll send the details, Jason. Post this.
Jason Beach
Yes.
Vijay Kumar
And if I wrote all of this in that, Kevin, how are we thinking about that festival [ph] 22? I mean, the comps matter. I know this year was really, really strong. Would that be a concern. Any other variables we should be thinking about for fiscal 2023?
Kevin Lobo
For 2023? Well, I let me give it in two ways. So on the top line, I feel bullish, I’m feeling we’re going to continue to have a really good year next year. Our order book is very strong. We have this sort of gentle tailwind of procedural benefit and then we have new launch cycle of product. So I feel very bullish on the top line.
As it relates to gross margin, I think you’re going to see stress in the first half of the year for sure, and it will get better in the second half of the year. Recall that the real impacts for us started more in Q2, so Q1 was not a terrible year for gross margin. So if you think about your comps, look a few ones are not going to be pretty from a gross margin standpoint we have all these high prices spot buyers that are going to believe through the P&L. It will get a little bit better in Q2 and then Q3, Q4 will be healthier. So kind of think of gross margin stepping up over the course of the year and we’re not out of the woods on the margin squeeze. It’s going to be a bit more challenged again next year, but certainly a lot better here on the bottom line we mentioned, we expect to have stronger earnings growth. How do I define strong? Well stay tuned, we’ll tell you at the end of January, what we mean by strong but certainly not looking to – it won’t be like 2019, but it will be a heck of a lot better than this year.
Vijay Kumar
Understood. And how we should be thinking about FX impact?
Kevin Lobo
Yes, look I think you saw the negative impact this year. I think $0.35, $0.40 something like that. Look, if rates it depends how rates move between now and January, but right now just looking at the way it is right now. You’d probably have a similar kind of negative effect, more pronounced in the early part of the year. Again, so a little bit more bad news for the first half year-over-year when you think about the comp, but then obviously if the rates have been pretty negative the second half of the year. So the second half of the year would be more flattish from an impact next year versus this year.
Vijay Kumar
Understood. And then maybe the last few minutes here Kevin. If I had to sort of look at the Stryker spend here, it’s maybe but not remarkable. But as you think about those adjacencies for Stryker [Indiscernible] how is the deal funnel pipeline looking like is that, again, asset valuations being where they are? Is this a more conducive environment for M&A activity?
Kevin Lobo
Well, look, we like the fact that valuations have come down in potential targets. Now, whether those owners believe this is reality yet or not to be determined. So we, obviously this timing of this drop, and the fact that the assets haven’t really traded too much has been good for us because we’ve had to pay down in debt that the $3 billion that we purchased for Vocera as well as $5 billion for Wright Medical. So we’ve been in debt paydown mode. Obviously we announced service endovascular, so that’s, that’s one deal we’ve announced hasn’t closed yet. But we announced that kind of smallish deal. But, but we want to get back to doing deals.
Once we get the debt levels to a better place, and we’re on, we’re on target right now, in terms of our debt pay down. So going into next year, certainly we’d like to get back to doing deals at some point next year, getting back towards a normal, more normal rhythm. And as you say, if the assets values stay in a lower mode, then certainly some assets that we liked, that were unaffordable, may be affordable. So we’re hopeful we don’t like the fact that the market evaluations have hurt us. But we but there it is good. From the standpoint of some of the companies, especially the ones that are not making money, high growth not making money, those were those who have been hit harder than the people who are high growth and profitable.
So stay tuned. We certainly have our list of – our divisions are all still working on deal. They didn’t slow down in their efforts, pursuing targets. There are tuck-ins at every business has a list of deals they want to do and then we already talked about there’s a few adjacent spaces that we like that we continue to survey and hope that we can land the plane in the next year or two with one of those other adjacencies.
Vijay Kumar
I can hear that Jason now bringing out his Christmas shopping list in the background I think. In the last quick 30 seconds, I know you guys made strategic investments on the balance sheet and the inventory levels. Should we catch them or should we pass them down. When should we expect that to get back to that 80% level?
Kevin Lobo
I think we’re going to give our guidance in January obviously, but we’re pretty committed I think. Next year you’ll see us back in that normal kind of cash flow range, free cash flow range.
Vijay Kumar
Fantastic. I think with that we’re at the end of time. Kevin, this is extremely helpful. Have a wonderful holiday season.
Kevin Lobo
Okay, great. Thank you Vijay.
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