ZMH - Zimmer Holdings Inc.

[LC]

Zimmer Holdings is the leading manufacturer of orthopedic implants (hip, knee implants, etc.) worldwide. Here's the breakdown of their market position:

 

http://i.imgur.com/kj95EWu.png

 

There is a VIC writeup from 2009 (http://www.valueinvestorsclub.com/value2/Idea/ViewIdea/15033) which outlines the majority of the thesis.

 

Surprisingly it hasn't changed much in the last three years. Over that time they have repurchased about $2b worth of shares and in 2012 instituted a small dividend of $94m annually.

 

They have a relatively conservative balance sheet. About $2b worth of debt against $1.5b of cash/securities.

 

Revenues averaging around $4-4.5b/year and they have excellent margins. Majority of their expenses are selling related. They have quite a patent & product portfolio which I would assume is protecting their margins:

 

We own or control through licensing arrangements more than 4,500 issued patents and patent applications throughout the world that relate to aspects of the technology incorporated in many of our products

 

As to what could disrupt their business, I think it falls into two categories:

1. Their products falling behind: Their R&D spending seems low for a company of its size. I am not sure what to make of this. Additionally, they don't really delve into their patent expiration risk in the 10-k and what effect that might have.

2. Sales/Market share slipping. In the 2009 VIC write-up, Zimmer was the #1 provider of hip implants, per their latest 10-k they have fallen to #2. Also this is taken from the VIC writeup:

As discussed above, physicians are reticent to change their implant supplier, but Zimmer gave some an opening last year. Zimmer, under the previous CEO, had been the most aggressive in signing consulting agreements to physicians. Under the DPA and their government overseer, who happened to be former Attorney General John Ashcroft, Zimmer shut down all communications with physicians, and some of the more aggressive (i.e.: pissed off) physicians took the opportunity to shift to competitors. However, starting in Q3 2008, Zimmer starting paying appropriate royalties again and began communication with physicians. As of now, the share losses have largely stopped because the vast majority of physicians make their implant decisions based on product quality and their own comfort level rather than kickbacks. In any case, Zimmer is now investing heavily in compliance, quality, and medical education and physician training.

 

So there is the issue of losing relationships with physicians, although given Zimmer spends about $1.8b/year on SG&A, I think this issue may have passed.

 

 

I think the industry dynamics are favorable to whomever offers the best products. By Zimmer's marketshare, they appear to do so. Physicians will use the most reliable products and will be discouraged from switching from what works. Due to the complexity and personal nature of the product Zimmer can maintain their impressive margins.

 

As to valuation, they are trading at what looks like a fair price. 17x earnings and about 14x FCF. Management also has a history of buying back stock, and I believe their decision to initiate a dividend shows they believe their cash flows are relatively secure.

 

Criticism is always welcome!

 

[RichardGibbons]

On this one, I wonder about the impact of computer-assisted surgery (CAS) on the market.  It seems to me that the transition to CAS has the potential to upset the market share of the various participants, and could impact Zimmer.  Once surgeons are trained on a particular CAS system, it seems to me that it should act like a moat.

 

On the other hand, Zimmer does have a CAS solution, so maybe they'll keep their market share through this transition, or even gain.

[Guest ajc]

For Medical Tourists, Simple Math - Paying Till It Hurts: A Trip Abroad

 

"As the United States struggles to rein in its growing $2.7 trillion health care bill, the cost of medical devices like joint implants, pacemakers and artificial urinary valves offers a cautionary tale. Like many medical products or procedures, they cost far more in the United States than in many other developed countries.

 

Makers of artificial implants — the biggest single cost of most joint replacement surgeries — have proved particularly adept at commanding inflated prices, according to health economists. Multiple intermediaries then mark up the charges. While Mr. Shopenn was offered an implant in the United States for $13,000, many privately insured patients are billed two to nearly three times that amount.

 

An artificial hip, however, costs only about $350 to manufacture in the United States, according to Dr. Blair Rhode, an orthopedist and entrepreneur whose company is developing generic implants. In Asia, it costs about $150, though some quality control issues could arise there, he said."

 

http://www.nytimes.com/2013/08/04/health/for-medical-tourists-simple-math.html?_r=0