First Combined Zimmer Biomet Quarter Rocks

Investors and the orthopedics industry have been holding their collective breaths waiting to see how the Zimmer Biomet Holdings, Inc. merger is going to work out.

Revenue Rises

On October 29, 2015, company President and CEO Dave Dvorak put fears to rest. He announced that in the first quarter as a combined company, revenue, on a pro forma, constant currency basis, rose 0.7%. Investors practically swooned, driving the company’s share prices up by over $10 per share. Wells Fargo analyst Larry Biegelsen said the revenue was in line with consensus.

Due to the merger, net sales of Zimmer Biomet increased 59.3% over the past year on a reported basis. “In an operating period marked by significant progress in the execution of our sales channel integration, we generated sequential top-line improvement and strong earnings growth. As we exit this year and progress through 2016, we are well positioned to continue improving revenue growth and delivering on our synergy commitments, ” Dvorak told analyst.

This wasn’t Dvorak’s first big merger, having successfully guided Zimmer through its $3.2 billion merger with Centerpulse AG (formerly Sulzer Medica) in 2003.

Hips and Knees Up

On a pro-forma, constant currency basis, knee sales did best, climbing 1.7%. Hips rose 0.3% and spine & CMF were up 0.3%. S.E.T., a new reporting category formed after the merger with Biomet, including surgical, sports medicine, foot and ankle, extremities and trauma, rose 1%.

The rise in knee sales was attributed to the company’s Persona Knee, with management also citing its Vanguard Complete Knee System, as well as its Vanguard 360 Revision Knee System and bicruciate options, such as the Vanguard XP Total Knee System. In hips, Dvorak said he is “encouraged” by a quarter-over-quarter improvement and cited solid growth of the company’s G7 and Continuum Acetabular Systems, as well as its Taperloc Complete Hip System and Avenir Hip system adding to the portfolio effort.

Third Quarter Ortho Winners and Losers

Now that all the large orthopedics companies have reported, BMO Capital Market analyst Joanne Wuensch estimates that worldwide knee market increased 2.1% ex-fx, against a tough 8% comp last year, and that Zimmer’s share decreased to 38.9% from 40.1% year-over-year. She said DePuy Synthes also showed a decline to 23.8% from 24.1% year-over-year, while Smith and Nephew gained share to 12.6% from 11.7% year-over-year as did Stryker Corp. to 20.4% from 19.9%.

In hips, Wuensch estimates that the global hip market increased 1.0% ex-fx (versus 2.5% in the 3Q14). As in knees, Wuensch says Zimmer’s hip share decreased to 33.9% from 34.7% year-over-years, and Smith & Nephew’s slid to 10.7% from 11.2%.

Share gainers were Stryker Corp. (to 24.0% from 23.3%) and DePuy Synthes (to 26.9% from 26.6%).

Fears of the merger can now be put to rest, said Wuensch. “Expense synergies appear to be ahead of schedule, with management increasing its expense synergies by $20 million to $155 million in the first 12 months. On the expense side, early leverage can be seen, with gross margins improving to 76.2% from 75.5% year-over-year.”

Management revised 2015 guidance, moderating revenue growth to 1.0-1.5% ex-fx from the previous guidance of 1.5-2.0%.