Durom: Why Zimmer's Loss Isn't Always Biomet's Gain
Full article reprinted from "The Gray Sheet" - July 21, 2008
Find out why Biomet's CEO Jeff Binder suggested his company could perhaps have done more in the U.S. to exploit the struggles of some of competitors like Zimmer's recent investigation into failures of its Durom hip implants.
Biomet Looks Abroad For Revenue Growth In Fiscal 2008
Biomet is highlighting growth overseas as a key driver of corporate revenues, and hip and knee reconstruction device sales in particular, reporting 16% top-line expansion for its fiscal fourth quarter (ended May 31).
"People wind up getting extremely hung up on the U.S. market as being the market that everybody wants to key off in terms of growth, but we put up a really outstanding quarter worldwide and on the international side," Biomet CEO Jeff Binder observed during the firm's July 10 earnings call.
For the quarter, Biomet's total sales were $635.6 million, up 16% from a year ago (or 10% on a constant-currency basis). Domestic sales were up 10% to $358 million while overseas sales advanced 24% to $277.6 million (11% in constant currency).
For the year, corporate sales were up 13% to $2.38 billion, with U.S. revenue up 7% and sales abroad growing 24% (13% in constant currency).
Knees And Hips Do Biomet's Heavy Lifting
Biomet's fastest growing unit continues to be its Reconstructive Products division, which includes hip and knee replacement implants.
In fiscal 2008, worldwide revenue for the division grew 16.9% to $1.8 billion and accounted for about 73% of Biomet's total revenue. In the fourth quarter, the division's worldwide revenues grew 17% year-over-year to $473.4 million, driven by a 26% increase in non-U.S. sales.
Within the reconstructive division, Biomet hip device sales were up 13% worldwide in 2008, but grew only 5% in the United States. Key revenue drivers included the ReCap Total Hip Resurfacing system, which is not available in the United States. Biomet hopes to earn FDA approval by the first half of 2009 (1"The Gray Sheet" Nov. 5, 2007, p. 15).
Biomet knee product sales were up 19% worldwide in fiscal 2008 (17% in constant currency), including 17% growth in the U.S.
Competitors also are reporting stronger growth overseas than in the U.S. for their joint replacement implant businesses. Johnson & Johnson, in its July 15 announcement of second-quarter results, reported that its DePuy orthopedic unit grew 12.2% outside the United States for the quarter, to $587 million, and 5.9% in the U.S., to $702 million.
Stryker reported July 17 that its worldwide Q2 knee sales totaled $310 million, up 12.5% in the U.S. and 24.5% abroad compared to a year ago. Hip sales were $282 million, up 3% domestically and 11.5% outside the U.S.
Based on the recent results from Biomet, DePuy and Stryker, "we estimate that the [reconstructive implant] market grew by 9%" for the three months ended June 30 compared to a year ago, on a constant currency basis, which is "up nicely from 5% or so in Q1 2008," Wachovia analyst Michael Matson stated in a July 17 report.
The "recon market appears to have rebounded," Matson said. The analyst believes slower growth last quarter "was primarily a result of fewer selling days and an earlier Easter holiday."
Competition's Loss Isn't Always Biomet's Gain
Binder acknowledged that his company could perhaps have done more in the U.S. to exploit the struggles of some of its competitors. For example, in May, Zimmer reported its investigation into failures of its Durom hip implants after well-known surgeon Larry Dorr reported a series of problems with the device to his colleagues in the American Association of Hip and Knee Surgeons. Zimmer is slated to report quarterly results July 24 (2"The Gray Sheet" May 19, 2008, p. 12).
Earlier in the year, Stryker also initiated a recall of some of its Trident PSL and hemispherical acetabular hip cups (3"The Gray Sheet" Jan. 28, 2008, p. 5).
"One could posit that we took more advantage of those issues outside the United States and maybe executed a little bit better commercially outside the United States than we did in the U.S. That's real business," Binder said. However, he pointed out that market share in joint reconstruction tends to be "sticky," because orthopedic surgeons do not usually switch to another manufacturer just because one device from a preferred supplier has a problem. Binder speculated, for example, that Zimmer has been able to keep most of its Durom customers by switching them to other Zimmer products.
"We do see some share movement in this business, of course, but it doesn't tend to be the kind of share movement that you see in some other spaces because of the level of training and learning curve and how surgeons become reliant on both the products and the service [from one company]," Binder explained.
Partial Knees Will Be A Bigger Part Of Market
During the earnings call, Biomet cited the success of its Oxford partial knee system and Vanguard total knee system as key revenue growth drivers. The firm touts Oxford as the only free-floating mobile-bearing partial knee approved by FDA. Vanguard is the only total knee implant that allows the surgeon to independently size the femur and tibia, according to Biomet.
Partial knee devices, which require less bone removal than a full knee replacement, are poised to take a bigger share of the overall knee replacement market, Binder said. Currently, only about 10% of knee reconstruction patients are getting partial knee replacements, but he thinks about twice as many are suited to the partial approach.
"Will it ever get to that theoretical proportion? I don't think so. But we certainly think that partial knees will gain a greater and greater share of the market over time."
Some of the surgeons who are especially proficient in partial knee replacements report that 20%-25% of their volume is now partial knees, according to the CEO, who believes the trend bodes well for Biomet. "We have a significant market share in partial knee replacement and, we certainly believe, the best product," Binder said.
Firm Says Weak Economy Hasn't Yet Slowed Sales
Binder does not foresee the general economic slowdown compelling many patients to put off needed orthopedic surgery. "The overall economy does not have a significant effect on demand for our products," the exec said.
However, analysts are scrutinizing the effect of rising commodity prices on the orthopedics industry. In a July 15 report, Wachovia analyst Matson suggested that while the orthopedics industry has historically been insulated from inflation, the recent "unprecedented" price increases in critical commodities may compel orthopedic device companies to raise prices and/or reduce margins.
Matson reports that cobalt chrome prices have risen 66% in the last year due to increased demand from the aerospace and battery industry. For orthopedic device makers, the spike is partially offset by a 24% drop in the price of titanium. However, the average cost of metal used in a joint reconstruction device has risen just over 30% from $56 to $74, Matson estimates.
Unless offsets are found elsewhere, the cost-of-metal increase could reduce earnings of reconstruction device makers like Biomet by one to four cents per share, the analyst says. Furthermore, the rising cost of oil, which has led FedEx to increase its charges 19% in the last year, could reduce earnings by an additional two to eight cents per share, according to Matson.
Biomet says the impact of increased supply costs, especially cobalt chrome, will have a non-significant impact of a few million dollars in 2008 and that it has offset plans in place to handle the more significant impact anticipated for 2009.
Significant price increases are not the way to go, however, Binder suggested. "I really don't see our business as being the kind of business where we pass on costs to the customers. We participate in a market where our products are priced to their value to the customers," the exec explained.
Similarly, J&J said that increased costs were having an immaterial impact on its medical device businesses, including DePuy Orthopaedics. However, Stryker noted that increased costs, along with a major investment in improving quality, will reduce annual gross margins 20 to 40 basis points compared to a year ago.
Biomet Continues Training Despite New Rules
Some orthopedic surgeons are concerned that 2007 federal anti-kickback actions against the major reconstructive implant makers will reduce opportunities for surgeons to learn about new devices and techniques from manufacturers (4"The Gray Sheet" June 30, 2008, p. 10).
Biomet acknowledges that the requirements imposed by the deferred prosecution agreement it signed with the government has made it more difficult to organize training courses in general, although the situation is improving. "It has become easier and easier for us to be able to do that, but it is still a challenge for us and probably we wind up scrambling a lot more to get those courses organized," Binder said.
- Reed Miller
Contents copyrighted © F-D-C Reports, Inc. 2008; protected by U.S. Copyright Law.
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