Biotech Values

[DewDiligence]

Demographic tail wind: Zimmer not shooting from the hip:

[The orthopedics business is white hot, thanks to hip and knee replacements for baby boomers. This is the same demographic tail wind that will drive the market for AMD drugs for many years to come.]

http://biz.yahoo.com/djus/040211/1327000984_1.html

>>
Zimmer CEO Elliott Says Best Times Still Ahead Of Co

Wednesday February 11, 1:27 pm ET
By Daniel Rosenberg, Of DOW JONES NEWSWIRES

CHICAGO (Dow Jones)--Zimmer Holdings Inc. (NYSE:ZMH - News) Chief Executive Ray Elliott said the orthopedic products company finds itself in the midst of "our own perfect storm" as demographics could keep business strong right through the year 2020.

Speaking in an interview with Dow Jones Newswires late Tuesday - one day after reporting higher-than-expected earnings and sales for the fourth quarter - Elliott noted that the baby boomer generation is entering its peak years for hip and knee replacement surgery.

"I was born in 1949, so I'm four to five years away from the prime years for arthritis," Elliott said. "I often tell people that everyone starts the math in 1945, when the war ended. But the big birth years were between 1951 and 1953, and the next 10 years after that were pretty strong. That gets us to the 2015 to 2020 era. The baby boomers are still in front of us."

Zimmer's fourth-quarter revenue of $702 million was slightly above Wall Street's expectations. And earnings per share - excluding the effect of last year's $3.2 billion purchase of European orthopedics company Centerpulse AG - was 51 cents, up 38% and well ahead of the 48-cent mean estimate. Worldwide hip sales increased 22% and worldwide knee sales rose 20%.

Hip and knee sales are soaring industrywide, helped by the aging of the baby boomers and also by the increased incidence of obesity, Elliott said. Osteoarthritis is also a growing concern as more people stay active longer. The disease is frequently caused by sports injuries.

"We're thrilled with the quarter and the EPS results," Elliott said. "The market is going well and we're executing well."

Elliott's optimism is clear in Zimmer's long-term guidance, which calls for 20% to 25% earnings per share growth in 2005 and better than 25% EPS growth in 2006.

For this year, the Warsaw, Ind., company expects sales to be between $2.85 billion and $2.9 billion, with adjusted diluted earnings per share of between $ 2.07 and $2.10.

Zimmer is already seeing benefits from the Centerpulse buy, which closed in October.

"We're getting to the synergies earlier" than expected, Elliott said. "We're jumping on things quickly."

The company has more than 100 full-time integration team members working on more than 250 integration projects.

Challenges that remain as the company continues to integrate Centerpulse, Elliott said, include cross-training sales representatives about the respective companies' products and pulling together the two companies' information technology systems - something which "always slows you down," Elliott said.

The company started training Centerpulse sales representatives in November, teaching them how to sell products made by Zimmer. Getting the sales force trained isn't as difficult as it may sound despite Zimmer's huge product list, because the sales team isn't starting from scratch. "They have fundamentals in orthopedics and are in surgery every day," Elliott said.

A few sales representatives have left since the merger, but not many, he added.

No Plans To Hire Celebrity Spokesperson

Recently, Zimmer got a shot of publicity as a number of major news publications featured its minimally invasive surgery techniques, which in some cases allow a patient to get a hip replacement with no overnight hospital stay. The New York Times, U.S. News and World Report and even the National Enquirer had stories.

While the publicity helped, Zimmer doesn't have any plans to follow in the footsteps of its rival, Stryker Corp. (NYSE:SYK - News) , which has enlisted the help of golf legend Jack Nicklaus in an advertising campaign for its ceramic-on-ceramic hip.

"We don't do that," Elliott said. "We've talked about it many, many times. I don't like doing it and it's not a reflection or criticism of Stryker at all, and Jack Nicklaus is a very credible person. But I think it's a high risk scenario because if anything happens you can get hurt badly. Also, there's a feeling that it circumvents the surgeon. We have to continue working with surgeons - we can't go around them."

While Zimmer is working on its own ceramic-on-ceramic hip, the company doesn't feel Stryker's product has hurt its hip sales. Indeed, Elliott said, Zimmer appears to have gained some market share even in the face of Stryker's competition.

He called the ceramic-on-ceramic hip "a good niche product" but not on the top of Zimmer's list of key pipeline initiatives.

Elliott is more excited about Zimmer's minimally invasive knee surgery technology. The Zimmer MIS Quad-Sparing Knee procedure will be formally launched next month at the annual American Academy of Orthopedic Surgeons meeting.

Another key pipeline product is Zimmer's Trabecular metal technology, which can be used in a range of implants and allows for bone regrowth.

Some on Wall Street want Zimmer to make a move to bulk up its $100 million Spinal business, which ranks about fifth or sixth in size behind several competitors. But Zimmer doesn't have plans to make any major moves.

"We're busy cleaning that business up, looking at new product opportunities," Elliott said.

Zimmer will consider smaller purchases in the $50 million to $200 million range if it can acquire products it can "bolt on" to its spinal business, Elliott said. But it's not looking to make any purchases larger than that.

With Zimmer's stock price recently at $77.66 and the mean estimate for 2004 earnings per share at $2.12, according to Thomson First Call (News - Websites) , the company has a price-to-earnings ratio of 36.6 That puts it among the most expensive names in the large-cap medical device sector, and some on Wall Street think this makes Zimmer too expensive to recommend.

That doesn't bother Elliott.

"There's a reason why we have that multiple - because people look at our earnings, our working capital management, our future and say, 'Hey, this is a really good company,' " Elliott said. "Would I rather be at 45 or 25 (price to earnings)? I'd rather be at 45. A lot of people really like us and will buy on pullbacks."
<<