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Once known for its conservative culture, Stryker has emerged in recent years as one of orthopedics’ most aggressive dealmakers. Bryant Zanko talks about Stryker’s change of direction and the strategy behind it.

by David Cassak

In a lot of respects, orthopedics represents a classic medical-device industry model. Despite a recent rocky patch, orthopedic companies have been, since the early years of this decade, among the device industry’s stellar performers, at least when measured in terms of investor confidence. Perhaps that’s because the segment’s underlying fundamentals are so favorable for growth and strong profitability: aging demographics provide a constant source of patients; new technology continues to expand the patient base among both younger and older patient populations; and the critical role of surgeon preference in product selection holds at bay pricing pressure and profit squeezes.

But those core dynamics may also explain why dealmaking in orthopedics has historically seemed so much less critical to companies’ long-term strategic interests, at least compared with the device industry’s other main segment, cardiovascular. If the underlying dynamics are so favorable, a conservative reliance on internal and organic growth is viable. Perhaps that’s why, note many industry observers, externally driven growth strategies—read, dealmaking--in orthopedics have in the past been much less aggressive than in other industry segments and what dealmaking has occurred seems smaller in scale and contributes much more incrementally to the companies’ product lines.

It could be argued, however, that the same industry dynamics that have driven an increased level of alliance and acquisition activity in other device segments have already begun to do the same in orthopedics, most notably consolidation, which creates larger players who find they can no longer rely exclusively on organic growth to achieve revenue targets, and technological innovation, as critical therapies increasingly draw on technologies outside the historic competencies of companies.

Certainly one company, Kalamazoo, MI-based Stryker Corp. seems to have made dealmaking a much bigger part of its long-term strategy in recent years. Not that Stryker hasn’t done its share of critical transactions in the past: the company’s early collaboration with biotech firm Creative BioMolecules Inc. (now part of Curis Inc. ) represented one of the first drug–device convergence deals and led to the development of its OP-1 BMP product. More importantly, the company’s 1998 blockbuster acquisition of Howmedica Inc. (now Stryker Orthopaedics) from Pfizer Inc. was a major part of the mini-wave of consolidation that orthopedics saw a decade ago.

But even Stryker officials acknowledge that the company’s approach to outside collaborations has been cautious and conservative in the past—and that such conservatism is changing. Stryker executives note that the company’s long-time veterans have played a major role in the increased dealmaking recently. But it can hardly be a coincidence that Stryker’s stepping up has come at the same time that it has brought in several key executives from outside orthopedics, first, the company’s CEO, Steve McMillan, who came to Stryker a couple of years ago from Johnson & Johnson , and more recently, VP of business development, Bryant Zanko who, coming over from food and beverage giant PepsiCo Inc., may be the ultimate industry outsider.

Today, small device companies and large from an increasingly broad array of technology segments have Stryker at the top of their list of potential partners. In the following interview, adapted from a session at this past June’s IN3 Medical Device Summit held in San Francisco, Zanko talks about how Stryker approaches dealmaking today, what it looks for in and how it works with potential partners, and the challenges and benefits of doing dealmaking with a non-orthopedics background.

Q: You came to Stryker from PepsiCo. What exactly did you do for Pepsi?

I was responsible for mergers and acquisitions for PepsiCo’s food businesses in the Americas. Frito Lay and Quaker Oats were the two largest businesses, and I was responsible for everything from external development strategy to deal execution for that part of the business.

Q: What were some of the deals you worked on?

We tended to work on the acquisition of larger, late-stage companies; deals that frankly weren’t that complicated from a structuring point of view, but were complicated from an integration standpoint.

Q: So the obvious question is, are there any obvious parallels or similarities between food and medical devices?

It’s interesting. When I got the call from Stryker’s recruiter, I kept asking, "Are you sure you have the right person? I do not have a medical device background, are you sure you don’t want to talk to somebody else?" He assured me that I was the right person and that started me thinking about similarities between food and medical devices.

Q: Did you know anything about Stryker at the time?

I didn’t. It might be sacrilege to say that, but I didn’t know Stryker at all. It only took a few hours of research before I began to understand the company, its outstanding track record and its tremendous potential.

Q: To go back to the question about similarities between your Pepsi experience and what you’ve found at Stryker, has it felt very different or pretty much the same?

Medical devices is a much more dynamic industry than food. The food industry has gone through its early growth stage and its consolidation. PepsiCo will probably continue to make add-on acquisitions, but the industry isn’t as dynamic as the medtech industry, especially the universe in which Stryker competes. And that was one of the things that made Stryker so attractive to me—the opportunity came at a time when it seemed that I could take skills I had developed at PepsiCo and leverage those in a much more dynamic industry. I would also be part of a management team built by Stryker’s new CEO Steve MacMillan. The company had an unleveraged balance sheet and the desire to grow—the ability to bring my perspective on dealmaking to Stryker was, I thought, a tremendous opportunity.

Q: I know that in Steve’s background at J&J was a stint working on consumer products. Do you think your background in a more consumer-oriented industry was part of the reason Stryker chose you?

I don’t know. It would be interesting to ask Steve that question. I think there’s a certain way you look at the market if you’ve worked in consumer products—to a degree, we spoke the same language. But I think there were other reasons as well that we connected.

Q: You joined Stryker two years ago. What was the first deal you participated in? And have you learned a lot about medical device dealmaking over the past two years? Or is dealmaking pretty much the same, regardless of the industry.

In some respects, dealmaking is dealmaking. But there are some important differences in medical devices. SpineCore was the first transaction I worked on and it provides a great example. It was an emerging technology, still in clinical trials and not yet approved for sale. That’s very different than the kind of product and company profile that you find in a food transaction. In medical devices there’s a series of important, very different issues in deal structure, due diligence and intellectual property. Early-stage company acquisitions require a different mind-set. That’s where I’ve really been able to leverage the expertise of our business development team. With SpineCore, Lisa Smith from our Spine division was essential in bringing the knowledge of the marketplace and her relationship with the sellers. Leveraging her expertise, there were other deal-making skills that I could bring to the table.

Q: It would seem to me that one big difference between medical devices and food is simply that the deals that PepsiCo does are much larger than the typical medtech deal—just because PepsiCo will sell more Fritos corn chips than Stryker will sell in total hip implants. Is that true? Are there small deals in the food industry? For Stryker, a $300 million acquisition is a big deal. Would it be a big deal for PepsiCo?

There are small deals in the food industry, though they tend to be for emerging brands or a packaging technology. But you’re right: the deals that PepsiCo is going to do are larger, though in some ways simpler. In end, the size doesn’t matter much. I think PepsiCo or Stryker, or any public company, is under the same constraints when they do deals.

Q: Let’s focus on Stryker then. Give us a description of how the business development function at Stryker is organized and what its component parts are.

We have eight divisions that produce products at Stryker and the individual divisions have historically led the business development activities. We have had more limited business development activities at our distribution divisions, which are international in scope. Until I came on board, we really didn’t have one particular person who was looking at the broader scope of Stryker and its external development strategies. That’s the role that I play. Each division has its own business development function; my role is to look at those opportunities that either fall across multiple divisions or are larger plays.

Q: Stryker is probably best known as an orthopedics company. When you say you have eight manufacturing divisions, how do those break out?

In addition to Orthopaedics, we have Instruments, which is largely power tools, Medical, which is the legacy beds and stretchers business, Endoscopy, Osteosynthesis, Spine, Biotech and Physiotherapy.

Q: When you look at a company for a potential acquisition, where is the decision to target that company made? Is it your responsibility in the business development department to tee up opportunities for the individual businesses? Or do the individual businesses lead that decision making process and then you execute on their decisions?

There’s no single formula. It’s really a collaboration. Sometimes a deal comes from an idea put forth by a product line manager; sometimes the idea comes from someone in Kalamazoo [Stryker’s headquarters]. It’s the responsibility of everybody at Stryker to look for expansion ideas and new ways to grow our business. Regardless of where the idea comes from, business development gets involved very early in helping to craft the business plan and even the integration strategy, and in driving the deal from due diligence all the way to closing.

Q: When you or the divisions scope opportunities, do you look at areas that Stryker isn’t in today, or leading edge technologies in industries where you already play?

Both. They could be leading edge opportunities in businesses that we’re in today, or they could be in adjacent spaces that we think are potentially interesting long-term.

Q: So what are the kinds of considerations or criteria that make Stryker excited about a certain technology? What kinds of things get a lot of attention at Stryker?

The same kinds of things that get attention at all companies. When we have gaps in our core businesses that we want to fill, we work proactively to fill those gaps. If it’s something that is an add-on to our core businesses, we look at how large and profitable the business can become. In that case, we’re looking for something that’s going to be a platform and of a size to really drive future sales. And certainly, we are looking for technology that is unique. We want to make sure it will get traction with our customers and is sustainable and profitable.

Q: When I talk to the CEOs of large companies, the one question they all have when it comes to companies like Stryker is, How do I get an audience? How do I get to the right person there? Do you welcome pitches from companies? Would you rather have your business development executives find those opportunities on their own and initiate discussions form Stryker’s end?

We absolutely welcome inquiries from outside the company. In fact, we encourage them. Those inquiries can either come to me or, if there’s a clear fit with one of our divisions, I’d rather that they contact a BD person there. All of us would be pleased to talk to someone from an early-stage company. I should also make the point that from our perspective, companies really can’t be too early-stage. We like to see companies and ideas as early as possible because within Stryker, we now have multiple places to assess those early ideas and find a home for them.

Q: That strikes me as something of a new approach for Stryker. After all, the company was best known for years for a very mature, focused performance that generated 20% earnings and revenue growth year after year with a lot of that coming from organic growth. Is this enthusiasm for early stage technologies something new at Stryker?

Innovation is one of the core imperatives that Steve and the senior management team have been driving and it’s obviously one that I embrace as the business development person. In the past, when Stryker did a deal, it was usually for a late stage company, such as our Howmedica acquisition. But over the last two or three years, we’ve acquired early stage companies, SpineCore being a good example. Stryker has now evolved to the point where we can not only acquire early stage companies, but, on a highly selective basis, can be an investor as well. And that is somewhat new for Stryker.

Q: As I said, Stryker is best known as an orthopedics company, embracing spine and trauma, and a power tool company. When you look at something that doesn’t neatly fit in one of those areas, that isn’t a gap filler, as you described it, do you assess those differently? What kinds of things would be too far outside of your core competencies?

We would rather err on the side of looking at opportunities perceived to be out of our core than dismiss them out of hand. We can make a quick assessment and be frank and candid with a target company early in our discussions. It’s important to us that people understand Stryker and our capabilities so that we are seeing a wide range of ideas. You’ve mentioned that we’re perceived as an orthopedics company, and we do have a strong orthopedics focus. But we’re more than that. We’re really a medtech company with an orthopedic focus, and that’s an important distinction. If you look at our revenues, our profitability and, frankly, at our growth, some of our strongest performing businesses have been in our MedSurg Group. So while we have an orthopedic focus, we compete much more broadly in the medtech universe and have a growing presence in areas outside orthopedics.

Q: Such as?

Endoscopy is a great example. Originally, that business was built around orthopedic-related procedures. But now with the acquisition of Sightline and its flexible scope technology, we will be expanding from a pure orthopedics focus into GI and eventually general surgery. Already, our Endoscopy division is being pulled into other specialties because of our visualization technology. That’s one obvious area where we can quickly broaden beyond orthopedics, and there are other opportunities in our portfolio as well.

Q: And in fact, Stryker has always been a major player in minimally-invasive surgery because of your visualization business. That could make you a natural candidate for minimally invasive technologies that aren’t only in the orthopedic space. Could you, for example, see yourself getting into cardiovascular devices?

In general, cardiovascular devices is probably one area that we might not consider. If you survey adjacent markets, there’s enough opportunity for Stryker without trying to get into cardiovascular devices. That’s not to say that there aren’t some tremendous opportunities and great companies in that marketplace. But as we look at businesses we’re not in right now, I don’t see cardiovascular as a top priority.

Q: Even within areas that are core to Stryker or closely related, you must get hundreds of pitches a year and can only meaningfully act on a handful. Obvious technology fits aside, what makes a company pitch or presentation resonate within Stryker?

The most important thing is for the company to focus on what makes it or its technology unique. As you said, we get hundreds, if not thousands, of inquiries every year. The companies with unique technologies that have a clear business proposition really resonate with Stryker. Oftentimes, companies end up taking a half hour to describe themselves, then we still have to tease out their uniqueness. If they can get to that quickly, that’s really helpful.

Q: What happens when you talk to an early-stage company and wind up not doing a deal? I was talking to one start-up CEO a while ago and he held the view that he got one shot when talking with any particular big company. If the two didn’t click, he said, it was a waste of everyone’s time to keep talking, so he was on to the next big company. When you talk with a company that you won’t, for one reason or another, wind up doing a deal with, would you rather move on to the next opportunity? Or do you encourage that company to keep in touch?

I really encourage companies to continue to revisit us. The world is not static. Stryker is always changing and perhaps, even more importantly, the companies that we talk to are changing even faster. They’re often going through tremendous growth in terms of their own capabilities, understanding their technology and product development. Opportunities not of interest today might very easily be of interest in a year or two. Our business development people often periodically reconnect with target companies over a long period of time. It would be disingenuous to say that we don’t establish an initial point of view about those companies, but we’re always challenging ourselves to be sure we haven’t missed something the first time around.

Q: How do you assess or vet new technologies? Do you rely on your internal team of business development executives? Do you have a network of physicians or advisors that you work with?

Both. We have a tremendous amount of knowledge in the business development group. We also partner with our R&D teams at each of the divisions. And we work with outside advisors, such as surgeons and other third parties, in generating and vetting ideas. By bringing all of these capabilities to bear, we believe we can conduct solid due diligence and understand what we might be buying.

Q: You said you’re doing more and more early stage deals. But what’s your take on dilutive versus accretive deals? How much pressure is there on Stryker because it’s a public company to do deals that are accretive? Or are dilutive deals acceptable? And do you look at dilutive deals differently?

As you mentioned earlier, Stryker is a performance driven culture. 20% annual earnings growth is part of our DNA. We also have a track record of top performance over a long period of time. Our investments need to be a balance in terms of stage of development and financial impact. We’ve done some dilutive deals—SpineCore was dilutive, so was Plasmasol. We are willing to accept dilution for opportunities that require longer investment but have a big payback for our shareholders. In medical devices, everyone, from J&J to the smallest companies, execute dilutive deals when appropriate. Whenever we consider an early-stage company that will be dilutive we test whether to buy early and suffer the dilution, or wait and buy the company at a later stage. And the answer always depends on a specific set of facts and circumstances.

Q: But are those decisions always done on a case by case basis, or do you have strict guidelines that require a technology to come to market in, say, the next three or five years?

It’s always case by case. People argue that you should have strict guidelines. But I believe that each opportunity is different; each has a unique role to play in our overall growth strategy. Each company is at a stage of development that has a different risk profile. For all of those reasons, the rules need to be flexible while being absolutely disciplined in delivering value to our shareholders.

Q: When you think about Stryker’s product lines—beds and stretchers, total joint replacements, power instruments—there’s a lot of hardware there. But I know you have a very active biotech program. How is dealmaking in biotech different than dealmaking in more conventionally defined device segments?

Biotech really is important to Stryker, and it’s very much a story of an early-stage acquisition, followed by product development and organic growth. We first invested in biotech with our then partners Creative BioMolecules almost 15 years ago. We eventually bought them out and solely funded development and clinical trials. The key to this business is now to continue to invest in clinical trials, sales and marketing to drive that business.

Q: Biotech is such a different business than medical devices. I know other companies have wrestled with a wide range of issues, including, for business development folks, the whole issue of how to put a value on biotech companies. When you take a biotech deal to the senior executives at Stryker, is it a harder sell because biotechs don’t fit the conventional valuation models that device companies use?

Stryker’s senior management team, since the first investments John Brown made in biotech, understands that biotech has a different investment profile. I’m sure we wrestled with the investment profile and valuation back then. But it’s really been the hallmark of both John and Steve that they take a longer view of business opportunities. And as I said, that makes Stryker a great place to work for a business development person.

Q: Yes, the deal Stryker did with Creative BioMolecules to get what would eventually become OP-1 was hardly a conventional device deal at that time. And Steve MacMillan has a background in pharma at J&J, which must shape his perspective.

Q: Yes. But, that being said, I don’t want to leave the wrong impression. When we buy businesses to strengthen the core, we do require and will continue to require very short paybacks and high returns because of the strengths that we bring, especially our tremendous distribution engine. If we, as Stryker, can’t drive value for those new businesses, then we probably shouldn’t be acquiring them. So those deals need to be accretive, have short paybacks and generate meaningful value.

Q: As mentioned, you’ve done a lot of different types of deals, from outright acquisitions like SpineCore and Sightline to distribution deals like the one you have with Inion on bioabsorbable implants. Do you have a preferred type of deal? Some companies like to do distribution deals to see how the market is evolving and the technology is accepted before doing an acquisition. Others prefer to just do an acquisition right away. Do you have a philosophy about that?

Q: We don’t really prefer one type of deal or another, it depends on the opportunity. There are some companies with whom distribution deals are very attractive and we have completed a number of them. That being said, we’ve ultimately acquired many of our distribution partners. In business development, we don’t have one particular structure or cookie cutter approach, but can consider multiple deal structures to meet the objectives of both parties. Whether it’s a development deal, a distribution agreement or an outright acquisition, we want to be in a position to consider all kinds of structures.

Q: Maybe you’ll have the same response to this question, but some companies say they only want to buy products; they don’t want all of the infrastructure that comes with acquiring a company, particularly a small one, because they’re just going to integrate it into their existing operations. Others specifically do want the infrastructure because they want the expertise and other things that lie behind the technology. Do you have a feeling about buying products versus buying companies?

Again, it depends on the facts and circumstances of each deal. With an early-stage company like SpineCore, it was very important to retain the management team as we drive toward FDA approval, commercialization and future development. In other cases, where the product has been developed and approved, keeping the management team may be less critical. The key is finding the best way forward for the parties involved and to maximize our potential for success.

Q: How do you assess the success of a deal? At the recent Wilson Sonsini device meeting, John Brown commented that he thought that, broadly speaking across all industries, two-thirds of all acquisitions ultimately proved failures. How do you know when the deal was a good one? And is a high failure rate acceptable given how inherently risky dealmaking is?

In terms of metrics, we’re a cash-flow driven company. We conduct a DCF [discounted cash flow] analysis with every deal, looking at multiple scenarios. We look at NPV, the value to shareholders, time to payback, and at how long it takes for the deal to be accretive.

In terms of success rates, I’ve heard a lot of different statistics, from two-thirds to three-quarters of all deals wind up being failures. Fortunately for Stryker, through some skill and perhaps some good luck as well—our batting average has been higher. But it’s imperative to me, everyone on the business development team and the integration teams that we continue to push toward a high success rate.

Q: So take one example, SpineCore. Everybody’s struggling to get artificial disc technology to the marketplace. When will you know whether that deal was successful?

Not for another two or three years. Given our progress in product development and clinical trials, we feel very good about our investment. But we’ll only be able to rack and stack the numbers a few years from now, and only then will we really know how much value we have created for our shareholders.

Q: Like most of the deals done in the artificial disc space, SpineCore was a huge deal for Stryker, over $300 million. Was that an exceptional deal for Stryker in terms of its size? f you look at the device industry, generally, most deals are in the $150-250 million range. Where do you think valuations are heading these days?

Most of the deals we’ll do are not very large transactions from a Wall Street perspective but significant to us nonetheless; many of our investments are in the $5-15 million range. Certainly, deals the size of SpineCore get a lot of headlines, but they’re not really typical.

That being said, Stryker will generate more than $5 billion in sales and the bottom line is growing 20% per year. We have close to a billion dollars in cash and tremendous debt capacity. That gives us the ability to consider much larger transactions. Does that mean we have anything imminent or that we’re definitely going after bigger deals? No, but we have the capacity.

Q: There is this perception that the orthopedics industry is one driven by smaller deals, perhaps because there’s been relatively little high level consolidation. But aren’t small deals harder to do when you’re a $5 billion company, only because you have to do so many deals to have any kind of impact on Stryker? Or is it perfectly reasonable that, given all of the other characteristics and dynamics of the industry, small deals predominate?

Deal size is a function of the approval pathway and commercial opportunity. As a result medical device deals tend to be smaller than pharma or biotech. However when you find an emerging company with a potential game changing technology or product, like disc arthroplasty, the industry has shown that transactions will be large and valuations will be more robust.

Q: You weren’t at Stryker a decade ago, but as we said before, in the 1990s Stryker was, like a lot of orthopedics companies, conservative in its approach both to new technology development, and dealmaking generally. Then it did the acquisition of Howmedica which was a huge deal on a number of levels. There’s been some turnover at Stryker since then, a lot of people now running Stryker who weren’t there in 1998, but does the Howmedica deal still resonate? Does it have a kind of legacy within Stryker?

You mentioned the turnover at Stryker, but there’s actually a tremendous longevity in our senior management team. Certainly, Steve [MacMillan] is relatively new to the company, but if you look at the next level of management, our group presidents and division presidents, there are a lot of veterans here, a lot of very talented people who’ve been at Stryker for a long time.

Q: So is there a legacy from the Howmedica deal? Did it transform the company in some way?

Absolutely. Unlike other companies, you don’t hear, "Are you an Osteonics person or a Howmedica person?" Everyone feels part of Stryker Orthopaedics, which says a lot about how the two businesses have come together. We all know of companies where, decades after a big deal, people still feel badged by the legacy company. And because we’ve been able to achieve that common culture, there are a number of positives that came out of the transaction. First, there were immense complementary capabilities between Osteonics and Howmedica. The two organizations really fit each other well—where one had strengths, the other wasn’t as strong and over time we have captured the best of both. Second, the deal was clearly a watershed in driving us to become the industry leader with $4 billion in orthopedic sales and a total of $5 billion. We wouldn’t have gotten there without Howmedica. The deal brought capabilities and scale and it’s our job to build on those benefits and drive the business even further.

Q: But I wonder if there wasn’t a more fundamental, almost psychological change. It seems as if Stryker went from a relatively conservative deal maker to one of the most active in the orthopaedics industry. Post-Howmedica, did the senior management team come to believe in the importance of doing acquisitions? Or, conversely, was there an attitude that, this was such a big deal that Stryker would have to stop doing deals while it digests and integrates Howmedica?

Although Stryker has been known for its organic growth, there were periods of time when we have been acquisitive, but certainly not as active as we are now. The quiet period after the Howmedica acquisition—we were virtually out of the M&A market for about three or four years, post-closing—was more of an anomaly. Some of that quiet period was due to integration, but you have to remember that the Howmedica deal left us pretty leveraged. For the last two years we have been ramping up our acquisition activity to fuel innovation and growth. Today we have a different mindset in driving the organization to look aggressively at innovation, and not just internally-driven innovation, but externally-driven as well.

Q: One of the hallmarks of the Howmedica deal was the widely acknowledged success of Stryker’s integration efforts. Putting two organizations of that size together couldn’t have been easy, but even executives at other orthopedics companies credit Stryker for making that transition smooth. From your perspective in business development, do you take into consideration integration issues? Or do you take the attitude that that’s an issue for the individual businesses?

Q: If business development doesn’t take integration into consideration, that’s when failure rates start to increase. We start thinking about integration from day one, asking how the acquired business will fit into our existing operations. That thinking goes into everything from due diligence to post-closing activities; it even impacts our negotiating strategy in terms of valuation and deal structure.

Q: You mentioned the choice between internal and external development of technology. What’s the trade-off between deal-making and R&D? If you do a big deal, will Stryker cut its R&D investment? If you have a big R&D project, are there fewer funds available for acquisitions?

From the larger perspective, the two aren’t related. An acquisition doesn’t generally cause us to reduce our R&D investment. But obviously, in specific areas, there’s an impact. When we bought SpineCore, we committed to disc arthroplasty R&D. So it’s within specific business opportunities or technology areas that the tradeoffs are made.

Q: It seems as if a lot of the deals Stryker is doing these days are in orthopedics. You talked before about being a device company with an orthopedics focus. How active is your deal-making in your other areas, such as power tools or beds and stretchers?

That’s a good question because our acquisition activity in those areas is less well-known. Our Instruments division is a great example. We closed a transaction the end of last year for Plasmasol, a development stage company with a decentralized, room-temperature sterilization system. Our newly formed OR Solutions sales force will bring Plasmasol to market when development is completed. It’s a great example of an early stage technology play. Plasmasol’s product wasn’t fully developed when we did the deal.

Q: As you look to do earlier stage deals, to what extent are you talking directly with venture capitalists? I know some VCs who like to talk to big companies; others take the view that by the time those talks are appropriate, the company is really a stand-alone.

We actively encourage all of our business development people to talk to venture capitalists. In the past, we’d talk to them only when they were looking to sell a company in their portfolio. Today, we’re having conversations with them as they’re investing and creating that portfolio. We can begin to see the emerging trends that are driving their investing decisions.

Q: These are pretty hot times for device investing, particularly for VCs, which is a striking contrast to the late 1990s when there were relatively few VCs interested in the space. Do you share the implicit enthusiasm of the venture community? The companies they invest in are the ones you’ll buy to fill your pipeline. As you look at the landscape, do you see a lot of great technology out there? Or do you worry that a lot of the companies VCs are backing just won’t have the technology that companies like Stryker need or that there won’t be enough small companies to satisfy your needs?

Q: It’s pretty clear when you talk to venture capitalists who’ve been in medtech for a while that after going through some peak times and then a trough, we’re back in a peak period again. I think everyone agrees there’s a little frothiness right now, a lot of money chasing too few good ideas. There is also a concern that companies are going to be over-funded by the VCs leading to inflated expectations of exit valuations. When that happens, companies and VCs either have to adjust their expectations or we’ll go through a cycle where fewer deals are completed until those expectations are adjusted. I do think that the VCs who’ve been in medtech for a long time are aware of this danger and they tend to be much more prudent about where and how they invest.

Q: That’s interesting. On the one hand, a frothier venture climate for medical devices is good for Stryker because if VCs don’t make those initial investments, the companies won’t be nurtured. By the same token, that frothiness can complicate things later because if it drives up valuations, it also ramps up what the companies and their VCs will want in terms of an exit.

Right, and that’s when a company like Stryker needs the discipline to step back from those transactions. That’s why we have to be objective and do our homework. Only through disciplined acquisitions and communicating clearly with the venture capitalists and their companies can we play the role that we should be playing in the marketplace.

Q: But the other angle to that is, is there a concern on your part that, particularly as Stryker gets bigger, it’s hard to find small companies that can really have an impact on the company’s growth, either because there’s a lot of venture money but it’s all going into me-too technology—the next generation artificial disc, for example—or because Stryker’s just too big to get anything meaningful out of an early-stage, niche technology?

Q: I guess that’s a potential concern, though we haven’t really experienced it. I think Stryker has a unique ability to get a big impact out of early-stage technologies because of our understanding of technologies and markets and our sales force execution.

Q: Are you influenced at all by your competitors’ dealmaking strategies? SpineCore was the third deal in the lumbar disc space. Did you just wait until the right technology came along, or did you feel some pressure that the number of good companies was shrinking because of the earlier deals and therefore had to do something?

We had been looking at disc arthroplasty for some time. We knew that if we wanted to be a player long term and eventually a leader in spine, we’d need to make an investment in discs.

We do believe that we bought the best of the artificial discs for a number of reasons. The Spine team really embraced the product’s design and understood the benefit of the progress SpineCore had made in its clinical trials. As important, we really liked their team--Tom and J.P. Errico--and the ability to partner with them and drive the device’s success. More broadly, it would be naïve to say that we operate in a vacuum and that we don’t watch our competitors. But we first look strategically at our own business and plan accordingly, deciding where to place our bets based on our strengths and weaknesses. We won’t do a deal just because another company has done a similar deal in that space.

Q: So much of this discussion has been about technology acquisition—either to fill gaps or to do an early stage deal. But do you ever buy a company to get market share, to get critical mass rather than technology per se? There seems to be some debate in the marketplace today about the future of consolidation in this industry.

I can't speak for the rest of the industry, but our own perspective at Stryker is that we don’t see the need to do a consolidation-driven deal. Our market position is strong. We’re a market share leader, we have proven products, a remarkable sales force and a strong pipeline of innovative new products. Because of our broad line of business, we are well positioned to work with everyone from the biggest groups to the smallest community hospitals.

Q: Orthopedics is such a technology-driven business. Companies succeed because individual surgeons get to use the products they like. But is there a critical mass play? When you bought SpineCore, you obviously weren’t buying market share because they didn’t have any. At Stryker, do you ever debate whether you wouldn’t be better served buying some market share?

That’s a good question. Orthopedics is different from much of the medical device industry because of the long product life span. When a surgeon implants a hip, he expects it to last 15 or 20 years and he wants a company with a track record, a history of successful products—a company that is going to stand behind him. Clearly, we think we offer that. As an example, our Exeter hip has decades of strong clinical data. Critical mass is important, but only if it brings with it the ability to offer products that deliver better care for patients and can stand the test of time.

Q: You’ve been at this now for two years. Personally, how far along the learning curve do you think you are in understanding the medical device industry?

Oh, maybe the 5th or 6th grade, if that. I’ve got a long way to go before I graduate.

Q: How do you get your arms around all you have to know?

We have a tremendous team at Stryker. Each of the divisions has outstanding business development people that I’m able to interact with every day. I also work closely with our group and division presidents and our R&D team. Those resources offer an incredible opportunity to learn. At the same time, I’ve also tried to draw on my prior experiences, to find some analogies where appropriate.

Q: So that gets us back to our original question: how relevant was your PepsiCo experience to Stryker? Could you bring something of value? Or was it really an issue of jumping into an entirely different industry?

While initially concerned, my PepsiCo experience has proven to be relevant. PepsiCo was a great place to transition from investment banking to business development—PepsiCo taught me to think more strategically and about the broader implications of a deal. That’s a different mindset than a banker typically brings, and PepsiCo was helpful in broadening my abilities and thinking.

Q: Being an outsider of the device industry, do you have a sense of what made Stryker willing to take a chance on you?

I think it was precisely because I was an outsider that Stryker was interested in me. There were many candidates with a long history in the medical device industry that they could have chosen, but Stryker was looking for someone with a different perspective, someone free of preconceptions about what might be achieved. I think that medtech generally and orthopedics in particular is going through a transition. Some of the paradigms about how to invest in innovation are changing. I think Stryker’s leaders understood that transformation and were looking for someone with a different perspective.