Stryker Corp (SYK) has completed the divestiture of its bone growth product franchise (the “OP-1” product line) to Tokyo-based optical, medical and communication equipment maker Olympus Corporation for $60 million. The transaction includes the Michigan-based company’s manufacturing plant in Lebanon, New Hampshire. Stryker forged a definitive agreement to jettison these assets in December 2010.
The OP-1 product line includes OP-1 Implant and OP-1 Putty for use in orthopedic bone applications such as lumbar spine fusion and the treatment of long bone fractures. The active ingredient in these products is the OP-1 bone growth factor that induces the formation of new bone when implanted into a bone.
OP-1 products (Implant and Putty) are currently approved in the U.S. under the Humanitarian Device Exemption (“HDE”) having provided treatment to roughly 40,000 patients globally. HDE allows a medical device to be marketed whose effectiveness has not been fully proven and is intended to benefit patients with rare disease or condition that afflicts less than 4,000 people in the U.S. annually.
Stryker faced a federal probe for the illegal promotion of its OP-1 products. The company, in August 2010, settled a lawsuit filed against its biotech division by the Massachusetts attorney general accusing it of illegally promoting the combination of a pair of its OP-1 products not approved by the U.S. Food & Drug Administration (“FDA”). Stryker ended up paying $1.35 million for the settlement.
Stryker’s fourth-quarter fiscal 2010 profit was hit by a hefty charge associated with the OP-1 divestiture. The company booked an impairment charge of roughly $124 million ($77 million net of tax) in the quarter to reflect an anticipated loss in connection with the transaction.
With the sale of OP-1, Stryker will redirect a part of the related R&D spending to other internal projects, which could deliver better returns — representing a positive step.
We believe that Stryker remains well placed for growth across its Orthopedic and MedSurg units driven by new product launches, acquisitions and an improving hospital capital spending backdrop. However, the company contends in a still soft and fiercely competitive orthopedic industry along with its peers Zimmer Holdings (ZMH), Smith & Nephew (SNN), CONMED Corp (CNMD), Biomet and DePuy, a division of Johnson & Johnson (JNJ).
Moreover, the company remains exposed to pricing and procedure volume pressure on its hip, knee and spine products. Our long-term Neutral recommendation for Stryker is supported by a short-term Zacks #3 Rank (Hold).
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