Biotech Values

[DewDiligence]

ZMH Reports Tepid 3Q10 Results

[Orthopedic implants, which comprise 75% of ZMH’s sales, are not a good business to be in these days in spite of The Global Demographic Tailwind. The procedures are elective—and hence easy to defer—and the ticket is high, which has led to considerable pushback from government and third-party payers. Despite all this, ZMH is chugging along, but investors no longer view it as an above-average growth vehicle. The stock was down 5% today.]

http://www.reuters.com/article/idCNN2810441620101028

›Thu Oct 28, 2010 11:38am EDT
By Lewis Krauskopf

NEW YORK, Oct 28 (Reuters) - Orthopedics maker Zimmer Holdings Inc (ZMH) reported lower-than-expected quarterly revenue on Thursday on weak sales of its knee replacement products, sending shares down 4.8 percent.

The company, which posted third-quarter profit slightly ahead of estimates, also cut its full-year revenue forecast on Thursday.

While the quarter was "pretty poor," Zimmer's commentary about patients delaying procedures and pricing pressures in the United States and Europe was also concerning, Jefferies & Co analyst Raj Denhoy said.

"You've got near-term procedure volume slowdown, which is being driven largely by the economy," Denhoy said. "The second level is the pricing dynamic -- what hospitals and governments are willing to pay for these implants. The pricing environment has deteriorated."

Indeed, Zimmer's disappointing results came as rival Stryker Corp (SYK) moved to diversify away from orthopedics, striking a deal to buy Boston Scientific Corp's (BSX) neurovascular business for $1.5 billion.

Zimmer's third-quarter net income rose to $191.1 million, or 96 cents per share, from $149.9 million, or 70 cents per share, a year earlier. Analysts on average had expected 95 cents per share, according to Thomson Reuters I/B/E/S.

Revenue slipped 1 percent to $965 million. Analysts had looked for $994.7 million.

Sales of knee replacement products fell 3 percent to $403 million. Knee revenue missed consensus analyst estimates by $22 million, according to JP Morgan analyst Michael Weinstein.

Sales of hip replacement products were flat at $287 million.

"The initial impression is they missed on reconstruction pretty badly and also spine," Noble Financial Capital analyst Jan Wald said. "It looks as if they've had more problems than their competitors."

Lower administrative costs helped boost the bottom line, said Goldman Sachs analyst David Roman.

He said he sees that as discretionary cost containment measures and worries more about a further decline in prices than the continued drop in procedure volumes.

"It's getting worse, and I think we are in the early stages of what will be multiple years of price compression," Roman said.

Zimmer projected full-year earnings, excluding one-time items, of $4.24 per share to $4.29 per share, versus a range of $4.15 to $4.35 previously.

The company expects 2010 full-year revenue to rise about 2 percent on a constant-currency basis, compared with a prior forecast for 3 percent to 5 percent.

A lower share count boosted per-share earnings.

"Zimmer is doing everything a mature company should be doing; they're buying shares. But it's not rewarded when it's done defensively," Roman said, noting that Zimmer is in a tough spot since about three-quarters of its revenue is generated in the orthopedics market. "For Zimmer to get that down to 50 percent, they'd need ... a $7 billion deal. They're not going to do it," he said.‹