Originally Published MX May/June 2004
COVERY STORY
Taking the LeadStryker Corp. chairman and CEO John W. Brown on innovation—in product development, marketing, and industry advocacy.
Interview by Steve Halasey
A diversified medical device giant and respected leader in the global orthopedic implants market, Stryker Corp. (Kalamazoo, MI) has enjoyed a long, successful run. The company has seen steady annual net earnings growth of more than 20% for the past two decades. Recent economic conditions have not hampered Stryker's progress, and prospects are bright. A key factor in this stellar, and widely admired, record of business success has been the long tenure of John W. Brown as CEO and chairman of the board.
Brown joined Stryker as president and CEO in 1977, and was appointed chairman in 1980. He wore all those hats until 2003, when a president and chief operating officer was named to carry some of the burden of leadership. But Brown is not slowing down. Besides leading Stryker, he continues to play a prominent role in the activities of AdvaMed, being instrumental in matters relating to medical technology innovation, government regulation of the device industry, and corporate ethics.
Stryker's own code of ethics, enunciated with charming—some might say alarming—simplicity by Brown, was not far to seek, as Brown explains when asked about its origin. No ethical shenanigans are tolerated at the company. However, that is more the result of a corporate culture that welcomes and encourages straight behavior rather than policing.
A company as decentralized as Stryker gives many executives the chance to lead and perform independently. No R&D budget is set; the various orthopedics, medical-surgical equipment, and physiotherapy divisions are charged simply with doing their part, by introducing product innovations and operating efficiently, to maintain the pattern of earnings growth. The system works. Stryker's revenues have increased by 73% over the past five years, and should top $4 billion in 2004.
In this interview with MX editor-in-chief Steve Halasey, Brown discusses the several ways in which his focus on innovating has kept Stryker in the medtech industry forefront and should maintain the company's position there. Through his participation in AdvaMed and his backing of a prominent direct-to-consumer orthopedic implant marketing initiative, the CEO has shown his continued willingness to lead.
MX: At the recent AdvaMed annual meeting you spoke about the Institute for Medical Technology Innovation, a project near and dear to your heart. How did this new institute come about? Who originated the idea?
John W. Brown: I do not know exactly whose idea it was. It is one of those things that, once it gets started and it turns out to be good, we all think it was our idea. My suspicion is that AdvaMed president Pam Bailey probably had more to do with this concept than anybody. I know that the cardiovascular guys in particular have long been apprehensive about how technology gets painted as being bad by the media.
Once the concept was presented to the AdvaMed leadership, the board felt it was a good idea and really endorsed it. It has gotten very good support from the board in general. At the meeting it was announced that initial contributions to support the institute total $11 million over a period of five years.
How will this institute be different from the Healthcare Technology Institute put together by the association in the 1990s?
I think that it is going to be a click further away from AdvaMed than the previous institute. Of course, you can talk to 10 people and get 10 versions. But, in general, the idea is to have a somewhat independent organization that tells the story of medical technology—that it is good for patients, it is good for business, and it is good for the general population.
Medical technology for too long has been seen as just a cost problem, particularly by the politicians and to a certain extent by the policy wonks. We are hoping that this will be independent research. It can be shown that medical technology is not just an expense, but is a good investment.
The institute is to be an educational arm of AdvaMed as well as a research enterprise. How will its educational activities be directed?
I think the main targets are politicians and policy people in general, whose research conclusions are where many of the politicians find the basis for making their decisions. The hope would be that we could get people of stature and independence to look at this issue and do research and publish it in public media where people would see it and gain a better appreciation of what medical technology is all about and why it is good for us.
Will the institute be conducting its own research or funding the research of others, or both?
I don't think it will do its own. Most of it will be contracted out. I believe we all have visions of the University of Southern California, the University of Chicago—the leading universities around the country that have very competent and capable medical policy departments—looking into this and coming up with some independent research and, one would hope, conclusions.
Corporate Governance
Corporate governance is another issue on which you have spoken. Does the medical device industry suffer from the same scrutiny and criticism as the pharmaceutical industry, either in fact or in perception?
I don't think the device industry suffers from the almost ogre-like image that the pharmaceutical industry has today. Part of it probably goes back to medical technology being usually an element of a one-time event as opposed to something that "happens to" a patient every day. Also, in the scheme of things, the cost of healthcare pertaining directly to medical devices is still a very, very small percentage of total gross spending on healthcare, some 4 or 5%.
AdvaMed has recently adopted a code of ethics specifically to guide company interactions with clinical professionals. Is this code preemptive? Or have there been issues in the medical device industry similar to the problems in pharma?
This is frequently referred to as AdvaMed's code of ethics, but there is a story behind it. The truth of the matter is that the Department of Health and Human Services Office of the Inspector General (OIG) came to AdvaMed over a year ago and said it would like to see the medical device industry adopt the same code of ethics that the pharmaceutical industry has.
Some of the leaders at AdvaMed said that we are not the same as the pharmaceutical industry, that there are unique things about the medical device industry. That led to interplay between the OIG and a number of compliance officers and legal representatives from several major companies in the device field. Drafts were prepared and submitted to the OIG folks, and they commented on them. They don't approve or disapprove; they just comment on proposals. Eventually, they had no more comments. So I think the conclusion was that the code is okay but that the OIG will never say it approves it.
So that is how that evolved. It was something that the government was looking for to cover the whole industry. Although it has been tagged as the AdvaMed code of ethics, it is really one that AdvaMed was involved only in preparing, and that most of us in the industry think must pass muster with the OIG people.
You have enunciated a very simple approach to ethics for Stryker. How does it work in practice?
Yes, I have been quoted a number of times, and accurately. Our code of ethics is fairly simple: don't lie, don't steal, don't cheat. The ethics we practice are those that we learned at our mother's knee, so we think they are good.
Now, I realize I am oversimplifying it a little bit, but not a whole lot. Because if you follow the spirit of this, you are not going to find individuals getting into trouble with their company, or companies with their shareholders or with the legal profession or with the government regulatory group.
What do you think about new laws and regulations like the Sarbanes-Oxley Act and new requirements for the stock exchanges? Will they really have an effect on keeping people in line?
They will have some. There is no question that the intent behind the legislation was good. I would not question the motives of the legislators regarding what they were trying to achieve. On the other hand, I think that coming up with more-stringent regulatory standards does not necessarily mean that we are going to run better businesses—despite their goals and their efforts.
The thing that I worry about is that American industry down the road might get so occupied with what I would call babysitting—that is, complying with all the regulations to the point where, as now, audit committees are meeting quarterly for one and two full days. I am not sure that is good for the companies, and I am not sure if it is good for the investment community, if it takes that amount of time. The chief financial officers and senior managers are probably spending days answering questions asked by committees that are being driven by SEC's demands for additional information.
Again, I am not questioning the motive. I just think that somebody needs to be looking at this down the road, to make sure that we don't cast a huge iron net over American industry with the idea of making businesspeople a more compliant group. Doing that, we run the risk of also cutting down on necessary risk taking.
Market Drivers
How does the aging of the world's populations influence your priorities in terms of what new products are in the pipeline?
We are a medical device company with a strong orientation toward orthopedics. Hence, we are interested in any new designs and any new materials that could be utilized in hip and knee replacements. We are interested in power instruments and in technologies, endoscopy technology, anything that will help us produce better instrumentation, better auxiliary products for use by surgeons performing orthopedic surgery, or any bone-cutting procedures, or any particular endoscopy procedure. So, we monitor technology developments and we monitor improvements in product design.
In the orthopedics and invasive surgery areas, is the advance of technology and ongoing improvement of biomaterials itself a driver of product enhancement, apart from the general population aging and other influences?
Absolutely; because if they were not getting good results, surgeons would not be inclined to put implants in younger patients, nor would the patient population be demanding them. The story would soon be out that you get some benefit from an implant but it has to be replaced in two or three years. That would not be good.
What about the minimally invasive surgery (MIS) field? That is not specifically an age-related area. Does it have drivers that are separate from the technology drivers?
It is a clinical fact that if you can achieve the same result by performing an implant procedure—or any procedure; for example, gall bladder removal—with an endoscope as by making a three- or four-inch incision, you have cut down on the surgical recovery time and the amount of trauma and pain the patient has to endure. The idea of minimally invasive surgery is not unique to orthopedics; it is in practically every one of the clinical specialties. It is here to stay, and it will continue to grow.
The counter to it is always, however, we do not want just quicker recovery, but we want to maintain if not improve the quality of long-term results. That is the issue being debated right now in orthopedics.
Here, again, you are in very close contact with clinicians, devising not only the implant and the material but the instrumentation that is being used, and even, to a certain extent, the procedure itself. Do you work constantly with a scientific or clinical advisory board?
I don't. But we are a highly decentralized company. So, the folks that are doing the hip and knee business, yes, they have a board. The folks that are running the endoscopy business work with a group of physicians and surgeons. Even our medical group, the folks that make beds and stretchers, deals with a group of ICU nurses in developing the intensive-care beds. Each particular division will work with leading clinicians in its specialty.
Developing Technology
What percentage of revenues does Stryker spend overall on R&D?
I think last year it was about 5%, but we do not have a set number. We do not say it has to be 7% or 5%. To my knowledge, we have never cut an R&D budget in the 27 or 28 years I have been with the company.
What we do, though, is tell everybody, all the divisions: make sure that you have enough new products coming that we can sustain our 20% profit growth and that you can sustain your portion of that 20% profit growth year in and year out. This puts a lot of responsibility on the shoulders of the individual R&D groups, who have to make sure they have plenty of new ideas coming.
Are there synergies between the orthopedics division, the medical-surgical products division, and the endoscopy division, where each benefits from the activities of others?
Navigation is the classic case where the answer is yes. Early on, the orthopedics group was trying to drive navigation themselves. But they could not, because they got mixed up between selling implants and selling navigation systems. By pulling navigation out and putting it under our instruments group, we have enabled it to get much broader emphasis. Our instrument folks really don't care whose implants a customer uses; they just want to give the institution, the hospital, or the surgical staff the equipment necessary to perform the procedures. So our instrument group has a very broad appeal to everybody that is performing surgery.
In addition to navigation, what big trends in orthopedics or endoscopy are going to hit in the next couple of years? Is it going to be a big leap forward in the materials that are being used, the techniques, or the communications?
There are probably three big trends in orthopedics going on right now. One is navigation–minimally invasive surgery. I think that combination will be going forward.
Two is the whole ceramics movement. We are going to have more competition in that field in the next few months, so that market is going to heat up. The acceptance of ceramic material as an implant material for orthopedics has been particularly good for Stryker, and I think that acceptance is going to continue.
Third, I think that orthobiologics—bone growth factors—are going to play a very important basic role in orthopedics down the road. Not so much in the next two or three years but by the end of this decade, I think we are going to see a lot more use of bone growth factors than we are seeing today, and with good results.
How would you gauge Stryker's leadership in those three areas?
In ceramics, I would say we are at the forefront. Navigation, I would say we are at the forefront. With bone growth factors, I would say we are right now behind Medtronic and Wyeth. But I think we are very much on the dance floor there, and will be a participant going forward. Medtronic and Wyeth chose to pursue the spinal market, which we were slow to get into. We are going after the trauma market. They were smarter than we were—smarter than me, I guess.
Positioning for Growth
The general economy has had a freezing effect on a lot of companies lately. Medical technologies always do well in a down economy, but nobody did as well as they would like. How did Stryker fare over the past few years relative to goal?
We have just had a phenomenal run, and this year is going to be another good year.
You have reported revenue growth of 73% over the past five years.
Revenue growth has been accelerating for the last three or four years. Every year it has been a little better. Our goal this year is revenues of about $4.3 billion.
What business moves has Stryker made that you think will have the greatest impact on the company's growth?
Brown: The decentralized management that we have in this company will have an enormous impact going forward, as it has for the past 20-some years.
The first three or four of my years with the company, I ran it with an iron fist. There is no question about that. There is nobody who loves detail more than I do. But then it became painfully obvious that I was the biggest problem in the company. Out of that grew the concept of divisions and then from that grew decentralization.
What happened was that the officers running the divisions got to enjoy the same excitement and pleasure of running their own business that I did, because we gave them an awful lot of autonomy. That has really paid huge dividends over the years. People know now that if they are president of a division or in charge of sales for a division, it is a big responsibility. People are not going to tell them how to do it, but they are expected to meet the goals. The expectations are high. So that has worked exceptionally well for the company.
You mentioned earlier the reputation that Stryker has with the peer group as well as with investors. But is it more difficult for you to represent to investors what all of your units are doing when the company is decentralized in that way?
It is. With a 20-minute presentation to investors, it is a challenge to pull it all together and provide a coherent study. There is no question about that. But I would say that most of the investment public today has a pretty good fix on who we are and what we do. Certainly, the analysts who are following the industry do.
Photo by Dwight Cendrowski
Copyright ©2004 MX
