By Sarah Very
The hub of orthopedic innovation exists in Lilliputian, quaint Warsaw, Ind. — where news of corporate mergers and artificial joints fills radio broadcasts and coffee shop smalltalk.
On June 24, 2015, Zimmer Inc. acquired crosstown rival Biomet Inc. for $13.35 billion — positioning Zimmer Biomet Holdings Inc. as the second largest company by revenue in the $45 billion musculoskeletal industry. Despite sluggish third quarter revenues, analysts expect solid growth for Warsaw’s newest amalgamation in 2016.
A majority of analysts surveyed by Bloomberg — 21 out of 30 — rate Zimmer Biomet stock a buy based on expected merger synergies and an increasingly aging and overweight population in need of artificial limbs and implants. In a press release, the company reported anticipated net annual synergies of $135 million in the 12 months post-acquisition.
Zimmer Biomet’s stock has been relatively stable over the past year, closing at $101.74 on Jan. 26, 2016. According to analyst Jeffrey D. Johnson of Robert W. Baird & Co. Inc., “the market has been too worried about sales force integration risks” following the Biomet acquisition.
“The integration of Biomet has been proceeding well over the past six months,” said Johnson in an e-mail. “We have a target price of $123 on Zimmer Biomet” — only slightly up from the 52-week high of $121.84, but well above the current price of $101.74.
The company reported net sales of $1.76 billion in the third quarter — its first quarter as a joined entity. This was up 59.3 percent from Zimmer’s $1.11 billion in the year-earlier quarter, but only a 0.7 percent increase on a pro forma basis.
Quarterly Sales of Zimmer and Zimmer Biomet (in billions)
On the other hand, earnings were slashed by acquisition expenses. Net income dropped 87.2 percent to $22.2 million from $173.1 million. The company reported 11 cents diluted earnings per share, down from $1.01.
According to Zacks most recent research report on Zimmer Biomet, the merger will contribute 95 cents to $1.05 to post-acquisition earnings per share in the first year. Analysts at Baird see the company achieving 14 percent earnings per share growth in 2016, with the firm’s $7.84 projection just above the current consensus estimate of $7.82.
Key Financial Statistics for the Quarters Ended Sept. 30, 2015 and 2014
Analysts predict that rising 2016 revenues will come in part from salesforce cross-training and an expanded product portfolio, including four legacy Zimmer product categories — knees, hips, spine and dental — and a newly defined product category, S.E.T., devoted to sports medicine, surgical, extremities and trauma products, the last a Biomet strength.
The trauma product category comprises medical plates, screws and nails to aid traumatologists and general orthopedic surgeons in addressing a wide variety of fractures. The Zimmer Natural Nail Cephalomedullary Nails, for example, are available in different diameters and shapes anatomically similar to bones in the human skeleton to restore bone shape.
Before the acquisition, Zimmer’s most competitive offerings included the legacy Zimmer Persona Knee and the APEX Spine System. Biomet’s product portfolio focused on extremities and trauma products, one of its key devices being the Vanguard XP Total Knee System. According to a report by Morningstar analyst Debbie Wang, “more than half of Zimmer Biomet’s revenue is expected to yield from more mature hip and knee implants,” though spine products have contributed the largest percent increase.
Net Sales by Product Category for the Quarters Ended Sept. 30, 2015 and 2014
Despite optimism arising from Zimmer Biomet’s acquisition synergies and product innovation goals, analysts attribute the company’s slow revenue growth to negative pricing trends in orthopedics and unfavorable currency translations due to the strong dollar.
“Pricing is particularly challenging for orthopedics because there are few high-quality studies to demonstrate improved outcomes stemming from technological innovation, which is what payers now demand to secure premium pricing,” wrote Wang. “As an orthopedic pure-play, Zimmer Biomet has less flexibility to rely on other sources of growth and must face this challenge squarely.” Wang added that this dynamic could be the source of Zimmer’s relatively flat quarterly sales of hips and knees.
Analysts at Zacks state that Zimmer Biomet will need to “constantly introduce or acquire new products to withstand the competitive pressure and retain market share” in the increasingly tight orthopedic industry, with competitors like Johnson & Johnson’s DePuy Orthopaedics Inc. just down the road in Warsaw.
Zimmer Biomet’s extensive global business operations have had both a positive and negative tug on the company’s bottom line. Zimmer Biomet has operations in more than 25 countries around the world and sells products in over 100. According to a company press release from a recent J.P. Morgan Healthcare Conference, 60 percent of Zimmer’s sales stem from the Americas, 14 percent from the Asia-Pacific region and 36 percent from Europe, the Middle East, and Africa.
Zacks most recent research report states that 43 percent of Zimmer Biomet’s sales came from the international market during the third quarter. “The recent strengthening of the dollar had a negative impact of 6 percent on revenues, or $113 million,” the analysts wrote. “Zimmer Biomet expects this headwind to lower revenues 4.5 percent on a reported basis in the fourth quarter.”
Despite currency adversity, the majority of analyst and company forecasts are hopeful. “We are pleased with the achievements of our global teams during Zimmer Biomet’s first quarter as a combined company,” said David Dvorak, president and CEO of Zimmer Biomet in a press release. “As we exit this year and progress through 2016, we are well positioned to continue improving revenue growth and delivering on our synergy commitments.”
Zimmer Biomet will release fourth quarter and full-year financial results on Jan. 28, 2016.