Zimmer’s Disappointing Second Quarter

Zimmer Holdings, Inc.’s second quarter revenue of $1.18 billion disappointed some Wall Street analysts, missing consensus by about $25 million. Revenue for the quarter only climbed 1% on a reported basis. Reported sales in the Americas were particularly weak, declining by 2.7%. Sales in Europe were up 4.9% and up 7% in Asia/Pacific.

Respectable Knees, Weak Hips

Knee sales held their own, climbing 4%. Hips were weak, growing only 1%. Trauma and extremities rose 7% and 6% respectively, while spine dropped 4%.

Joanne Wuensch, BMO Capital Markets’ analyst, said that in a hip market increasing in the low-single digits, it looks to her like Zimmer continues to be a share contributor, likely declining to 23.9% from 24.2%.

While knee sales were up “likely better than the market, ” analysts on the quarterly call with company management on July 24, 2014, asked whether Persona is losing its momentum. Wuensch reported that the answer was no – it was legacy NextGen Knee products that were more of a drag. “So far, it looks like Zimmer gained a bit of Knee market share, increasing to 28.1% from 27.6% year-over-year, wrote Wuensch.

Wuensch noted extremities were also a drag, increasing just 5% on a constant currency basis, versus the high-single-digit/low double-digit rate that this segment has seen for some time. “There was a vast geographic disparity on this metric: in the U.S., extremities sales were up low-single digits, while OUS they were up high-teens (up 18% EMEA and 19% Asia/Pacific). The explanation here was that increasing shoulder competition is making it tougher – Integra, Stryker, and Tornier are all launching new shoulder products. In Zimmer’s toolbox is its PSI offering for upper extremities, a trabecular metal reverse shoulder offering, and management highlighted “some other things in the pipeline.”

Piper Jaffray analyst, Matt Miksic said while Zimmer’s ortho growth was “not where we would like it to be, ” he takes some comfort in the strength hip and knee growth outside the U.S., and expects the company’s U.S. knee business to begin more closely reflect the positive feedback his analysts have received from their field checks over the next several quarters.

Dvorak: “Solid Sales Growth”

David Dvorak, the company’s president and CEO said the quarter was marked by “solid sales growth in a number of product categories and geographies, as we continued the ongoing commercialization of innovative new solutions and made further progress on our operational excellence programs. Our confidence in the opportunity to create value in the musculoskeletal market remains strong. In addition, we are excited about the progress we are making in working with the Biomet leadership team to plan our combination, and we continue to anticipate closing the merger in the first quarter of 2015.” He also said the regulatory requests for the planned Zimmer/Biomet merger are in-line with management’s expectations.

“By no stretch would we call this a ‘solid’ quarter; in fact, in many ways it was disappointing, ” wrote Wuensch.

Lowering Expectations

In fact, company management lowered expected full-year revenue growth estimates to 2.0% and 3.0% from previous 3% to 5% constant currency growth. Dvorak told analysts the company remains constructive on the stability of the global recon market, and, like his competitors, remains confident in second half acceleration in volumes that they expect to see again this year.

Stable Recon Market

With about 80% of the recon market reporting quarterly results, analysts generally agreed that the recon market remains stable and second quarter growth was consistent with the first quarter, growing about 3.3% so far in 2014.