Third Quarter Large Joint Recon Market Share Shifts

For the third quarter ended September 30, Zimmer Holdings reported that sales of large joint reconstruction products rose 7% to $703 million.  Our forecast was for a 9% Q3 growth rate.  That 200 basis point difference meant that Zimmer’s reported results were $18 million below our estimate of $721 million as well as below Wall Street’s consensus estimate of $719 million. Three of the five major orthopedic suppliers have reported and it now appears likely that overall, industry-wide third quarter large joint revenues will be $2.56 billion, which is slightly less than both PearlDiver and Wall Street consensus estimates. In addition, it appears almost certain that Zimmer’s large joint reconstruction growth rate will be the lowest of the big five, resulting in a change in relative market share.

Prior to the release of third quarter actual results, the consensus Wall Street revenue estimates for the top five manufacturers within the large joint reconstruction market were $2.584 billion and PearlDiver forecasts were slightly higher at $2.588 billion.  Now with only Smith & Nephew Inc. and Wright Medical Inc. left to report, we are now estimating that overall revenues for the top five firms will be approximately $30 million below our original estimates at $2.563 billion.  Zimmer’s third quarter revenue shortfall accounts for over half of this decrease.  Furthermore, DePuy’s report also contributed to our lowered Q3 outlook. DePuy reported revenue of $623.3 million which was $16 million below our forecast for the quarter and $18.7 million below Wall Street consensus expectations.

As the largest revenue producer of the five major manufacturers, Zimmer experienced the lowest level of growth for the quarter.   While total revenue growth of these five manufacturers averaged 10.6%, Zimmer lagged significantly behind.

Through fiscal year 2007, Zimmer’s market share in large joint reconstruction was 27% of the total market as measured by revenue.  For the quarter ended September 30, we estimate that market shares have changed as follows;

• Zimmer’s market share has fallen to 24.6% of industry revenues
• Biomet increased market share by 1.1% to 11.5%
• Stryker increased share by 0.6% to 19.8%
• DePuy increased share by 0.5% to 21.8%.  

Table 1: Market Share Distribution

Knees

Zimmer’s total knee reconstruction sales for the quarter were $411 million, up 8.7% from the third quarter of 2007.  These results are below both the Wall Street expectations ($422 million) and PearlDiver forecasts ($419 million).  Contributing to Zimmer’s knee implant sales in the quarter was a slow but steady growth in shipments of the Gender Solutions™ High-Flex Knees, which accounted for 54% of unit sales on a global basis. Other growth products within the knee product line were Natural Knee® sales (+40%) and hinge knees (+15%).
Zimmer’s U.S. sales for knee reconstruction products increased 6.5%, accounting for $264 million in revenue --  again, less, than Wall Street’s consensus estimates of $273 million.  However, Zimmer’s largest competitor, DePuy Orthopedics Inc. actually reported slower growth with their domestic knee revenues increasing only 2.9%.  Stryker Inc., the third largest player in the large joint reconstruction market gained considerable market share in knees and reported a third quarter domestic knee sales increase of 18%. 
Internationally, including both Europe and Asia-Pacific, the Zimmer knee product line faired very well against competition but, again, did not meet PearlDiver or Wall Street expectations.  Reported revenues for knees abroad were $147 million, an increase of 13.1%.  The consensus Wall Street expectations were for $149.5 million. Yet Zimmer did not lose ground to DePuy or Stryker who posted international gains of 8% and 12 % respectively.

Table 2: Competitive Revenue Growth Comparison

Hips

Total hip reconstruction sales for the quarter grew 4.7% amidst significant problems with the Durom® Acetabular Cup.  Zimmer reported $292 million in hip shipments for third quarter. This also fell short of Wall Street’s consensus expectations of $296.5 million and PearlDiver forecasts of $302 million. The problems associated with Zimmer’s Durom Cup were, according to the company, expected to result in a $20 – $30 million revenue reduction for 2008 – which was actually less than Wall Street’s consensus $38 million. Durom is back on the market but, we expect, it will likely be the first quarter of 2009 before Durom sales start to recover. As of October 23, 230 surgeons had completed Zimmer’s Durom training program, equaling more than 50% of the product’s active users.

Looking past the problems of the Durom Acetabular Cup, positive growth in revenue was attributed to the increased product portfolio which now includes the M/L Taper with Kinectiv ™ Technology and the Fitmore ™ bone conserving stem. Yet in comparison to two primary competitors, Zimmer’s future revenue may decreased by one chief product not included in their portfolio, hip resurfacing. 

The hip resurfacing market is one that has been slow to catch on in the U.S. However, the market potential is significant and is currently being capitalized on by competitor Smith & Nephew with the BIRMINGHAM HIP™ Resurfacing System (BHR™) and to a lesser extent by Stryker which markets the Corin Group’s Cormet™ Hip Resurfacing System. According to PearlDiver Patient Records Database research, of all patients who received an orthopedic hip implant, only 7.8% of patients who qualify for hip resurfacing are receiving one. The rest are opting for the total hip replacement.

Zimmer’s U.S. hip sales grew by a modest 2.6% in the quarter to $138 million.  Among the top three hip reconstruction manufacturers, Zimmer reported the lowest rate of growth for the quarter.  Competitors Stryker and DePuy grew their hip sales by 4.0% and 13.1% respectively.

Sales outside the U.S. grew 6.6% to $154 million.  However, the trend remained similar to domestic sales with Zimmer lagging behind its chief competitors in revenue growth. 

Considerations and Forecasts

Table 3: 4Q08 Through Fiscal Year 2010 Large Joint Revenue Forecast

Source: PearlDiver Reasearch

Knee Revenue expectations for fourth quarter 2008 remain unchanged. PearlDiver research estimates total revenue for Zimmer’s knee product line to be $480.8 million for the fourth quarter of 2008, a year-over-year growth rate of 8%. This rate is lower than the 11% to 12% growth Zimmer has enjoyed over the fourth quarter of the previous two years primarily due to the success of the Gender Solutions™ product line. The Gender Solutions™ High-Flex Knees accounted for 54% of the unit sales in the third quarter and there is currently not enough evidence to suggest the substantial increase of this product over the next quarter to reach past growth levels. 

Further analysis also indicates that domestic knee sales in the third quarter were affected by surgeon reaction to the company’s new and stricter compliance program. This issue will undoubtedly carry over into the fourth quarter of 2008 as well, thus limiting domestic growth to 6%. Slow growth of unit sales for the Gender Solutions™ product line, potentially decreased customer base, and decreased demand due to outside economic pressures are all factored in to the fourth quarter forecast and the 2009 – 2010 fiscal year domestic forecasts.

For the fourth quarter of 2008, Hip revenues have been revised downward to reflect a decline in year-over-year growth by 4%.  Zimmer, we think, is still recovering from the problems related to the Durom Cup and, at best, will be fully recovered by mid-2009.  Durom sales make up 5-10% and with currently only 50% of the surgeons having completed the training program.