Zimmer’s Solid Quarter, Excise Tax Lesson

By virtue of being one of the last and largest orthopedic companies to report quarterly results, Zimmer Holdings, Inc.’s sales numbers give the clearest picture of where the market has been for the last quarter.

The company reported a 3% increase in revenue, on a constant currency basis, for the third quarter of 2012. On a reported basis, total revenue declined 1% while reconstructive sales fell 2%. Also on a reported basis, knees and hips each declined by 2%; trauma climbed 8%, spine fell 10% and extremities rose 10%.

Sales
($ in millions)

% Change

Total Reported Sales

$1, 026

down 1%

     Reconstructive

$756

down 2%

          Knees

$407

down 2%

          Hips

$309

down 2%

     Trauma

$74

8.0%

     Spine

$50

down 10%

     Extremities

$40

10.0%

Source: Zimmer Holdings, Inc.

Analysts noted that U.S. performance should improve as the company rolls out its Persona Knee, currently in limited release, and building to a full launch in 2013.

Recon Market Growth

Mizuho Securities analyst Mike Matson said with Zimmer’s report he estimates that, on a constant currency basis, the recon market grew by 1% in the third quarter. He also estimates that, on a constant currency basis, the 1% recon growth during the quarter was worse than the 2% growth in the second quarter. According to Matson, global knee and hip growth was 2% and 0% in the second quarter.

“Zimmer’s third quarter performance was highlighted by strong operating margins, as well as above-market sales growth in our Europe, Middle East and Africa business, ” said David Dvorak, Zimmer president and CEO.  “Our focus continues to be creating value for our stockholders.  We will achieve that goal through the successful commercialization of innovative new products across the portfolio, ongoing progress in our operational excellence programs, and disciplined capital deployment.”

Medical Device Tax Impact

Company management also had something interesting to say about the upcoming 2.3% medical device tax. They said the tax won’t impact Zimmer as much in 2013 as previously expected.

Executives said accounting for the tax as an inventory cost may give the company a leg up over some of its competitors. That treatment would allow Zimmer to put off the impact of the tax until later in the year as inventories turn.

Jim Crines, Zimmer’s CFO said the excise tax is imposed on the first sale in the U.S. by the manufacturer, producer or importer of the medical device through either a third-party or an affiliated distribution entity. “Since we distribute the majority of our musculoskeletal products through a distribution entity, the tax generally represents an inventoriable cost for us. As such, we expect the excise tax expense recognized in 2013 to be lower than prior estimates and we’ll report the expense in cost of goods sold on the phase of our consolidated income statement.”

Full-Year Guidance

Full-year revenues for 2012 are expected to increase approximately 2% on a constant currency basis from 2011. Previously, the company had estimated full-year revenues would increase between approximately 2.5% and 3.5% constant currency.  Company officials now estimate that foreign currency translation will decrease revenues by approximately 2% for the full year 2012, resulting in flat revenue growth on a reported basis.