Zimmer’s Smooth Third Quarter

Zimmer Holdings, Inc. had $1.11 billion in sales during the third quarter of 2014. That’s up 2.9% over last year’s third quarter. The company beat Wall Street expectations by about $10 million.

After accounting for currency, the company expects reported revenue growth for the full year of approximately 1.50%.

David Dvorak, Zimmer’s president and CEO told analysts on October 23, 2014 that the results “reflect the ongoing execution of our operational excellence initiatives, as demonstrated by continued margin expansion and accelerated earnings growth during the quarter. Looking to future quarters, we believe that our pending combination with Biomet, which we expect to close in the first quarter of 2015, will enhance stockholder value through the creation of a leading innovator in the global musculoskeletal market.”

Recon Sales and Market

Recon sales were up 4% to $824 million. Knee, hip and extremity sales of $461 million, $316 million and $47 million were up 6%, 2% and 3%, respectively. Trauma sales of $78 million fell 1% and strong spine sales of $51 million were up 6%. It was the largest growth in spine in a few years. Spine sales had declined 4% and 10% during the third quarters of 2013 and 2012.

Knees, Hips and Spine

BMO Capital Market analyst Joanne Wuensch said the knee market appears to be particularly strong this quarter, which she estimates increased 4% (excluding currency), adjusted for days, with Zimmer’s share increasing to 26.9% from 26.6% year-over-year. “The markets strength is particularly impressive given the tough y/y comp (in 3Q13 it increased 4.2%), and it seems well positioned as we exit the year given normal seasonal trends.”

Wuensch said company management attributed the strong knee sales to NexGen sales in Europe, continued demand for its Persona Knee System (more than 100, 000 implantations since commercial introduction); and steady growth of joint preservation products, including Gel-One Cross-linked hyaluronate.

The hip market, according to Wuensch, appears to be up low-single-digits (up 2.8% adjusted, against a tough y/y comp). “We estimate that Zimmer share held relatively steady at 23.2% versus 23.3% y/y. Management called out its Vivacity-E Vitamin E Highly Crosslinked Polyethylene Liner (evaluated for more than 90 million cycles) its continuum Acetabular System, plus steady growth in its M/L Taper Lock system.”

Spine sales, said Wuensch, were above the Street’s $48 million estimate, with the second quarter launch of the company’s Virage OCT Spinal posterior fixation system, helping to penetrate customer accounts. “The Zimmer spine team has been working for several years to get a deformity and posterior fixation system to market, and management is gaining confidence in their execution.”

Needham & Company analyst Mike Matson estimates that based on actual results from Biomet, DePuy Synthes, Stryker, and Zimmer, the recon market grew by 4% (constant currency) in the third quarter, versus 3% in the third quarter of 2013. He estimates that, based on constant currency, global knee growth was 5% and hip growth was 4%

Biomet Update

Merrill Lynch analyst Bob Hopkins said “unequivocally positive” is how he would describe Zimmer management’s tone regarding the state of their Biomet, Inc. integration planning and their confidence level in hitting projected synergy targets.

“Our confidence in Zimmer’s ability to execute with Biomet is due in part to Zimmer’s very smooth integration of the Centerpulse deal (Zimmer’s current CEO and CFO led the integration of Centerpulse) and due in part to the fact that the medtech space is undergoing an unprecedented level of consolidation, which suggests less greener grass for a Zimmer/Biomet sales rep to consider, ” wrote Hopkins.

Regarding the FTC (Federal Trade Commission), Hopkins thinks clear lack of pricing power in the industry is such that the FTC would allow the industry to consolidate from 5 to 3 players. “Additionally, our direct conversations with the Agency suggest that if they are at the very end of a process with one deal in an industry (which they will be in December with Zimmer) at the time a second deal is announced, they would be highly likely to look at the first deal separately and then look at the other deal.”

He notes that the FTC does reserve the right to look at two deals together, regardless of timing, “but, given that FTC will be over 5 months into the 2nd request review for Zimmer by December, we do not think an announcement from Stryker would be a major problem.” He remains convinced that the deal “will go well.”