Zimmer Holdings (ZMH)

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Zimmer(NYSE:ZMH) is a leading orthopedic medical devices company with the top worldwide market share in both hip and knee implants. ZMH also competes in the spine, dental and trauma areas in the orthopedic industry. The company was spun off from Bristol-Myers Squibb Company (BMY) in 2001 and has grown significantly through organic growth and through acquisitions such as Centerpulse (2003), the leading European orthopedics company and Implex Corp (2004), a NJ based orthopaedics company .

Underpinning Zimmer, and other orthopedic implant manufacturers, is a market that is supported by favorable demographic trends for orthopedic treatments. Furthermore, the increase in Obesity and related health issues continue to drive demand for orthopedic implant related surgeries. Zimmer primarily competes with Stryker (SYK), JOHNSON & JOHNSON (JNJ)’s DePuy subsidiary, Smith & Nephew SNATS (SNN) , and Biomet (BMET).

[edit] Business Overview

Zimmer's products include joint and dental reconstructive orthopaedic implants, spinal implants, trauma products, and related orthopaedic surgical products.

[edit] Reconstructive Orthopaedic Implants

• Knees: represented 42% of the company’s revenue in 2006 and ZMH has the #1 market share. ZMH's knee implants are usually used in total knee replacement surgeries, where several parts must be replaced. Knee replacement surgeries include first-time joint replacement procedures and revision procedures for the replacement or repair of an implant from a previous procedure. ^[1]

• Hips: represented 34% of the company’s revenue in 2006 and ZMH has the #1 market share. ZMH's him implants are usually used in total hip replacement surgeries. Just like with knee replacement surgeries, hip procedures include first-time joint replacement procedures and revision procedures for the replacement or repair of an implant from a previous procedure. ^[2]

• Dental: is the fastest growing division at the company, posting 21% growth from 2005 to 2006. It makes dental reconstructive implants – for individuals who are totally without teeth or are missing one or more teeth; dental restorative products – provides a more natural restoration to mimic the patient's original teeth; and dental regenerative products – for soft tissue and bone repair. ^[3]

• Extremities: primarily shoulder and elbow products, which are designed to treat arthritic conditions and fractures. ^[4]

[edit] Spine

This division makes medical devices and surgical instruments that provide spine care products for patients with back pain, neck pain, degenerative disc conditions and injuries due to trauma. ^[5]

[edit] Trauma

Includes products such as plates, screws, nails, wires and pins which are used to stabilize damaged or broken bones and tissues to support the body’s natural healing process. ^[6]

[edit] Orthopaedic Surgical Products (OSP) & Other

Includes surgical products that support reconstructive, trauma, spinal and dental procedures, with a focus on blood, wound, and pain management. Products include tourniquets and wound cleaning systems. ^[7]

ZMH 2006 Annual Report^[8]

In 2006, ZMH had revenue of $3,496 million, an increase of 6% over the $3,286 million generated in 2005. This increase was driven by 21% growth in dental, 17% growth in extremities, and 11% growth in Spine. The two largest segments, knee and hip, grew at 7% and 4%, respectively. ^[9]Operating income for 2006 increased 10 percent to $1,165.2 million, from $1,055.0 million in 2005. ^[10]

ZMH 2006 Annual Report^[11]

The company has operations in more than 24 countries and market its products in more than 100 countries. In 2006, ZMH generated nearly 60% of its revenue in the US, with the remainder coming from Europe (27%) and Asia-Pacific (14%). ^[12]

ZMH 2006 Annual Report^[13]

[edit] Key Trends and Forces

[edit] Medicare coverage patterns

Health coverage is an important determining factor when patients and doctors choose among various treatment options. Medicare coverage is particularly significant in that it directly affects over forty million Americans, how much patients have to pay for Zimmer products, and how much Zimmer will receive in payments from Medicare. Currently, Medicare and other third party payors are emphasizing more cost-effective products and therapies, by limiting the reimbursement they will cover. Furthermore, even if a new ZMH impant or product is cleared by the FDA, Zimmer faces limited demand until Medicare and other payors approve it for reimbursement. Both of these factors can affect Zimmer's sales.

[edit] Government Regulation

Zimmer and its competitors are all heavily affected by government regulation, especially by the FDA, which is responsible for regulating food, dietary supplements, drugs, medical devices, and other products in the United States. Without FDA approval, Zimmer cannot sell any of its implants or most other products to the public. If any of Zimmer's devices fail FDA approval, it can adversely affect the company's sales.

[edit] Aging Demographic

The percentage of the US, European, Japanese and other regions population over age 65 is expected to nearly double by the year 2030. Zimmer and other orthopedic companies are benefiting from this aging demographic since knee and hip joints tend to wear out and need replacement with age. Also, older patients tend to have higher discretionary incomes and can afford expensive implant surgeries. This could drive sales for ZMH.

[edit] Obesity

In 2006, more than a third of American adults or about 72 million were obese. The hip and knee implant markets are in particular affected by the prevalence of obesity -- increased weight puts significantly more pressure on joints than they are designed for, making them wear out faster. This drives up demand for joint replacements and could benefit ZMH's sales.

[edit] Market Share

ZMH has top market share in the global knee and hip implant markets and Top 6 positions in all of its other product markets.

ZMH 2006 Annual Report^[14]

[edit] Competition

Zimmer faces competition from firms such as:

• JOHNSON & JOHNSON (JNJ) - the world's 2nd largest and most broadly based manufacturer of health care products, with a significant share of the consumer, pharmaceutical, medical treatment and diagnostic device markets.^[15]
• Stryker (SYK) - leading medical technology company with operations in Orthopaedic Implants and Medical/Surgical Products.
• Smith & Nephew SNATS (SNN) - British-based medical devices company with Orthopaedics division headquarters in Memphis, TN., with specialty in hip and knee implants and orthopaedic trauma products.
• Biomet (BMET) - medical device manufacturer based in Warsaw, IN, specializes in reconstructive products for hips, knees and shoulders, fixation devices, orthopedic support devices, dental implants and operating room supplies.

[edit] References

1. ↑ ZMH 2006 10k, Pg 5
2. ↑ ZMH 2006 10k, Pg 6
3. ↑ ZMH 2006 10k, Pg 8
4. ↑ ZMH 2006 10k, Pg 7
5. ↑ ZMH 2006 10k, Pg 9
6. ↑ ZMH 2006 10k, Pg 9
7. ↑ ZMH 2006 10k, Pg 10
8. ↑ ZMH 2006 10k
9. ↑ ZMH 2006 10k, Pg 26
10. ↑ ZMH 2006 10k, Pg 29
11. ↑ ZMH 2006 10k
12. ↑ ZMH 2006 10k
13. ↑ ZMH 2006 10k
14. ↑ ZMH 2006 10k, Pg 26
15. ↑ JNJ 2006 10k
16. ↑ ZMH 2006 10k
17. ↑ ZMH 2006 10k
18. ↑ SYK 2006 10k, Pg. 42
19. ↑ SYK 2006 10k, Pg. 42
20. ↑ MDT 2007 10k, Exhibit 13
21. ↑ MDT 2007 10k, Exhibit 13
22. ↑ JNJ 2006 10k
23. ↑ JNJ 2006 10k