Stryker Recalls Sage Unit Products, Guidance Takes A Hit

Kalamazoo, MI-based Stryker Corporation (NYSE:SYK) , one of the largest medical device companies in the global orthopedic market, recently announced the voluntary product recall of the Oral Care lineup, which was offered by the company’s Sage-Products unit.

Added to the voluntary recall, Stryker has placed a temporary hold on certain cloth-based products. The decision followed complaints of minor irritation and allergic reactions from consumers. However, management expects to reinitiate product shipment by September and expects to begin full supply capacity by the end of the year.

The share price of Stryker slipped 1.9% to close at $138.36 following the news release.

What Led to the Recall?

The recall pertains to a cross-contamination issue in the Oral-care solutions which were manufactured for Sage by a third-party supplier. Notably, these solutions were distributed in markets between July 2015 and August 2017.However, Stryker affirmed that it has closed its business with the third-party supplier. In fact, Sage has resumed production of the oral care solutions.

Coming to the temporary hold decision of the cloth-based products, the FDA expressed concerns regarding the ongoing microbiological testing methods for all products under the Sage platform. Now the FDA has instructed Stryker products to be verified using a new ‘compendial microbiological method’. Undoubtedly, the new method is more time consuming and complex than the one previously used at Sage.

Notably, the FDA had warned Stryker about these issues in July.

Product Recall Hurts Guidance

The recall is likely to adversely impact the company’s sales and operating income. For the full year, Stryker now expects organic sales growth at the low end of its previously issued guidance band of 6.5% to 7.0%. Added to this, the company announced that net earnings per diluted share are expected at the low end of the $6.45-$6.55 range.

For the third quarter, Stryker estimates adjusted net earnings per diluted share at the low end of its previously issued $1.50-$1.55 band.

Stryker has been grappling with supply issues in the spine business for long which may prove to be a major drawback in the quarters ahead. In fact, international growth of the company’s Spine segment in the second quarter of 2017 was partially affected by these supply headwinds.

Stock Performance at a Glance

Stryker's share price movement over the past one year has been favorable. The company yielded a return of almost 22.1%, better than the broader industry's only 8%. Solid performances by the MedSurg and Neurotech segments in the last reported quarter hold promise. Strength in the international segments on strong momentum in Europe and China also buoys optimism.

Zacks Rank & Key Picks

Stryker has a Zacks Rank #3 (Hold).

A few better-ranked stocks in the broader medical sector are Edwards Lifesciences Corp. (NYSE:EW) , IDEXX Laboratories, Inc. (NASDAQ:IDXX) and Cogentix Medical, Inc. (NASDAQ:CGNT) . Notably, Edwards Lifesciences sports a Zacks Rank #1 (Strong Buy), while IDEXX Laboratories and Cogentix Medical have a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Edwards Lifesciences delivered an average earnings beat of 10.8% over the trailing four quarters. The company has a long-term expected earnings growth rate of 15.2%.

Cogentix Medical registered a positive earnings surprise of 200% in the last reported quarter. The stock represented a stellar return of 100.9% over the last one year.

IDEXX Laboratories delivered an average earnings beat of 9.3% over the trailing four quarters. It has a long-term expected earnings growth rate of 19.8%.

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