UPDATE 2-Stryker profit in line, but ortho sales weak

Tue Jul 20, 2010 7:42pm EDT

* Q2 EPS of 80 cents a share meets average estimate

* Q2 sales rose 7.6 percent to $1.76 billion

* Shares slip 2.5 percent after hours (Adds earnings details, analyst comments, share activity, byline)

By Susan Kelly

CHICAGO, July 20 (Reuters) - Stryker Corp (SYK.N) on Tuesday reported second-quarter earnings that met analysts' expectations as strong demand for medical and surgical equipment offset sluggish sales of hip and knee devices.

"While U.S. implants were still in positive territory on a year-over-year growth rate, the low-single-digit increase was disappointing," Stryker Chief Executive Stephen MacMillan told analysts on a conference call.

Shares of the orthopedic device maker fell 2.5 percent in after-hours trading.

Earlier on Tuesday, Johnson & Johnson (JNJ.N) also posted weaker-than-expected results in its DePuy orthopedic division, leading some analysts to surmise that hospitals are becoming more successful in negotiating price concessions from manufacturers of hip and knee joints.

"We believe domestic hospitals are becoming somewhat more successful in gaining pricing concessions from the large joint manufacturers, which should restrain overall market growth," said William Blair & Co analyst Ben Andrew in a note to clients on Tuesday.

"Stryker's results represent the second negative data point in less than a day on the U.S. ortho market," J.P. Morgan analyst Michael Weinstein said in a note to clients.

Stryker also said unfavorable foreign exchange rates could shave 1 percent to 2 percent off of its third-quarter sales and up to 1 percent from full-year sales. But it said it remains on target to achieve its full-year earnings targets.

Second-quarter net income rose to $319 million, or 80 cents a share, from $291.3 million, or 73 cents a share, a year ago.

Per-share earnings matched the average analyst estimate according to Thomson Reuters I/B/E/S.

Kalamazoo, Michigan-based Stryker said sales rose 7.6 percent to $1.76 billion in the second quarter from a year ago. Orthopedic implant sales rose 2.2 percent, while sales of medical and surgical equipment in the company's MedSurg division climbed 16.4 percent.

"A large piece of their good numbers is coming from MedSurg," said Jan Wald, analyst with Noble Financial Capital Markets. "I think what we're seeing in ortho is kind of a stabilization."

Weak sales of spinal implants, which fell 3 percent in the quarter, reflected strong competition from rival manufacturers and delays in new product introductions, Stryker said.

International sales, up 1.8 percent, were dampened by discontinued product lines and increased pressure on prices in European markets.

Stryker said it expects strength in the MedSurg unit to continue through 2010, but its spine division to remain under pressure.

It reaffirmed its forecast for 2010 net earnings of $3.20 to $3.30 per share on sales growth of 5 percent to 8 percent, excluding the impact of foreign currency translations.

The company said it resolved two remaining warning letters from U.S. regulators during the quarter, which will allow it to redirect resources into more traditional research and development activities and focus less on remediation.

Stryker shares fell 2.5 percent in after hours from a close of $51.29 on Tuesday on the New York Stock Exchange. (Reporting by Susan Kelly and Bill Berkrot; editing by Carol Bishopric)

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