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Following the recommendation of the U.S. Food and Drug Administration (FDA), orthopedic devices major, Stryker Corp. (SYK - Analyst Report) have added more products to its Neptune Rover Waste Management system product line recall. The FDA recommendation states that these offerings do not have proper regulatory clearance and therefore are not safe to be marketed.

In June, 2012, Stryker started a Class 1 recall of its Neptune Rover Waste Management system due to two reported severe injuries caused by the Neptune 2 device. One of the injuries resulted in a fatality. The Neptune system collects surgical waste fluids and evacuates smoke with minimal human interference during clinical procedures.

In addition to the earlier recalled products, the company recently recalled the Neptune 1 Silver, Neptune 2 Ultra (120V) and Neptune 2 Ultra (230V) as these devices do not have 510(k) clearance. FDA has not been able to determine the safety and efficiency of these products as yet. Stryker immediately stopped distributing these products in the U.S., Asia-Pacific, Canada, Japan, Latin America and the EMEA (Europe, Middle East and Africa) and is awaiting FDA clearance.

In the recent past, Stryker globally recalled the Rejuvenate and the ABG II Modular hip stem due to some product defaults which caused adverse local tissue reaction. This has resulted in a higher inventory which negatively impacted gross margin in the second quarter of 2012. Similar product recalls in future will negatively impact the company’s results.

Neutral on Stryker

We currently have a Neutral recommendation on Stryker, which carries a short-term Zacks #4 Rank (Sell rating). Stryker operates in a highly competitive industry and faces strong competition from players like Zimmer (ZMH - Analyst Report), Johnson & Johnson’s (JNJ - Analyst Report) DePuy and Smith & Nephew (SNN - Snapshot Report). Turmoil in international markets especially in Europe and Japan coupled with declining U.S. sales results remain a challenge for the company.  

Moreover, the strong U.S. dollar is affecting the company’s international revenues and it expects negative impact of foreign currency on net sales to be higher, given the euro volatility. Apart from macroeconomic headwinds, internal shortcomings related to executing organizational changes within the business have been hampering the business for quite sometime now.

However, we believe that Stryker is poised for growth on the back of new products, ongoing cost control measures and increasing operating efficiency. The company is expanding its product portfolio by acquiring complementary businesses and leveraging a solid balance sheet.

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