One of the traits that often separates the great companies from the average is a willingness on the part of management to quickly identify, isolate and ameliorate mistakes. Instead of allowing doomed products to fester, sucking up cash and eroding morale, dynamic companies pull the plug, take their lumps and move on to better uses of capital.

IN PICTURES: How To Make Your First $1 Million

That makes last night's decision by Stryker (NYSE:SYK) to sell its OP-1 orthopedic product line to Olympus a bit curious in retrospect. While OP-1 was arguably never big enough to be an albatross around the company's neck, it was at the very least a smelly pigeon that was just never going to amount to anything positive. So it is fair to wonder just why the company kept trying to coax growth and success out of a dead-end product.

Good Riddance To a Bad Product
Stryker announced that it's selling its OP-1 orthobiologics product line (and a manufacturing plant) to Olympus for $60 million in cash. Even with that amount in hand, Stryker will have to recognize between $75 million and $80 million in a non-cash accounting loss to mark down the value on the balance sheet.

Although Stryker has been working on OP-1 for years, it has never really amounted to much. Although the products carry an FDA humane device exemption (HDE) for lumbar spinal fusion and long bone nonunions, the company could never get the FDA to sign off on broad usage. An FDA panel resolutely rejected broad approval of OP-1 putty about 18-months ago with a 6-1 vote. That vote was not very surprising at the time, as the results were pretty ugly and Styker really had to go to some length to find an interpretation of the data that was favorable.

It was bad enough that the OP-1 line never delivered from a clinical or financial perspective, but that is not the limit of the problems its caused. Stryker got some decidedly unwelcome legal attention more than a year ago due to allegations that the company (and/or its sales representatives) had been illegally promoting off-label usage of the products and going beyond the boundaries of the HDE. All in all, that was quite a lot of grief for a product that was not producing meaningful profits for Stryker.

On To New Business
This is not necessarily the end of Stryker's efforts in bone morphogenic proteins and orthobiologics. The fact remains that there is still a meaningful clinical need for biologic products that encourage or stimulate bone growth. Moreover, Medtronic's (NYSE:MDT) InFuse pretty much has the market to itself these days, and orthopedic companies do not easily concede entire markets.

Stryker still has some research programs based on its BMP-7 platform, and there could be products coming out of this in areas like osteoarthritis - but not for quite some time (at least five years by the company's own estimates). In the meantime, Stryker may look outside itself for an answer.

An orthobiological company by the name of BioMimetic Therapeutics (Nasdaq:BMTI) has its Augment product line in clinical development, and the trial results have been encouraging. BioMimetic uses a different approach (recombinant human platelet-derived growth factor) that may useful not only in traditional orthopedic applications like fractures and spinal fusion, but also in sports medicine applications as well. With a market capitalization under $350 million, Stryker could certainly afford to make a bid here if the company still believes in the potential of orthobiologics.

The Bottom Line
A potential buy of BioMimetic is far from being Stryker's only move. Stryker is buying Boston Scientific's (NYSE:BSX) neurovascular business for $1.5 billion, giving the company a third separate line of business to complement the orthopedic and hospital equipment segments. Moreover, given the pace of IPOs and the general malaise in small and mid-cap medical technology stocks, Stryker may well have other targets in mind.

With investors turning their back on health care and Stryker muddling through a period of below-trend growth, these shares are not expensive. Stryker management may need to reprove itself to the Street and reestablish its growth credentials, but there are definitely signs that the company understands that it needs to change and adapt. Patient investors might want to give these shares a serious look before these changes start to bear fruit and move the stock. (For related reading, take a look at A Checklist For Successful Medical Technology Investment.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  2. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
  3. Stock Analysis

    Analyzing Google's Return on Equity (ROE) (GOOGL)

    Learn about Alphabet's return on equity. How has its ROE changed over time, how does it compare to its peers and what factors are driving ROE for the company?
  4. Investing News

    Is Buffett's Bet on Oil Right for You? (XOM, PSX)

    Oil stocks are getting trounced, but Warren Buffett still likes one of them. Should you follow the leader?
  5. Investing News

    Chipotle Served with Criminal Probe

    Chipotle's beat muted expectations and got a clear bill from the CDC, but it now appears that an investigation into its E.coli breakout has expanded.
  6. Stock Analysis

    Analyzing Sprint Corp's Return on Equity (ROE) (S)

    Learn about Sprint's return on equity. Find out why its ROE is negative and how asset turnover and financial leverage impact ROE relative to Sprint's peers.
  7. Stock Analysis

    Why Alphabet is the Best of the 'FANGs' for 2016

    Alphabet just impressed the street, but is it the best FANG stock?
  8. Investing News

    A 2016 Outlook: What January 2009 Can Teach Us

    January 2009 and January 2016 were similar from an investment standpoint, but from a forward-looking perspective, they were very different.
  9. Mutual Funds & ETFs

    3 Vanguard Equity Fund Underperformers

    Discover three funds from Vanguard Group that consistently underperform their indexes. Learn how consistent most Vanguard low-fee funds are at matching their indexes.
  10. Investing News

    Alphabet Earnings Beat Expectations (GOOGL, AAPL)

    Alphabet's earnings crush analysts' expectations; now bigger than Apple?
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
Trading Center