Zimmer, Regeneration and Kyphon Leave Analysts Reeling. The others are merely excellent.
BY EDITOR, JULY 28, 2003
Zimmer: There is no doubt in our mind that Zimmer is grabbing market share – quickly. It is clear that MIS at Zimmer is bigger than instruments and implants; it is really about (aside from improving patient outcomes) reimbursement. CEO Ray Elliott stated that one of the private insurers has decided to double its reimbursement rate specifically for Zimmer's MIS Two Incision Total Hip procedure. Forget about implant premiums, technological innovation, pricing etc... This could be the most effective strategy to garner market share in the long run.
If Zimmer is able to brand its procedures as well as to obtain a separate DRG code specifically for these procedures which offer higher doctor reimbursement, Zimmer will dominate the large joint market.
In the just reported quarter, ZMH reported a 19% (constant currency) jump in sales to $411.1 million. Earnings rose 36%, $0.45 per diluted share. Wall Street was expecting $0.42.
Reconstructive revenues grew by 17% (on a constant currency basis). Zimmer's knee revenues increased 18% on a constant currency basis, which is significantly higher than its three major competitors, Stryker, Biomet and DePuy. Zimmer increased its gross margins by 90 basis points while reducing its operating expenses by 80 basis points sequentially; from the 1Q:03. It is obvious that these improvements were the key driver of the surprising $0.03 upside to our EPS estimate.
How does Zimmer do it? We believe that Zimmer is masterful at shifting customers to higher end products. Although conversion of surgeons to porous from cemented hips and to cross-linked polyethylene hip liners from traditional liners appears to have topped out, closer examination reveals that that actually is not the case. Two percent of ZMH's surgeons converted to porous hip stems since 2002, this figure represents 59% of total hip stems now being sold. We estimate that the current hip market is approximately 65% porous versus 35% cemented and that Zimmer is likely to reach the market split by 2004. Since porous stems are running at an approximately 40% premium to cemented stems, a 6% increase in porous stem surgeons could add significant revenues.
Kyphon: Wall Street was looking for $27 million in quarterly revenues. Kyphon reported $31.1 million, up 72% from the previous year... and raised full year 2003 sales and earnings expectations to $122-125 million and $0.20-0.25 per share. Well above analyst's expectations. With 145 direct sales people in 100 U.S. territories (its goal was 95 by year end)
Kyphon is treating, we estimate, 8,500 vertebral fracture patients. In comparison, Kyphon's closest competitor is maybe 900 patients. Kyphon is lapping the competition. International sales rose 200%.
While the current indication is vertebral compression fractures, conceptually, Kyphon's products are minimally invasive ways to access the spine. While the first indication is vertebral fracture and its first disease state is osteoporosis. Soon, we expect, Kyphon will attempt to leverage its sales force to market into spinal fracture repair for Trauma patients – a massive world wide market. Then oncology. Then new biomaterials. Then drug/biologics delivery. Kyphon's initial market is $2 billion in potential sales and it remains dominant in that market, on all fronts. Wall Street is just trying to figure out how high is high with this company.
Regeneration Technologies: Overall revenues jumped 59% to $23 million for the June quarter. Earnings, which were expected to be $0.05-0.06 – were $0.07. Sales in the spinal market (through Sofamor Danek) rose 124% over an admittedly low quarter last year. On a more comparable basis, core spinal implant sales rose at roughly twice the rate that Sofamor Danek's own implant sales increased. And this growth was without the benefit of new products. Management also raised its outlook for the rest of the year to a top line growth rate of 33%. Ironically, RTI is only hitting on two of its four cylinders. Sports Medicine and General Orthopedics posted declining revenues but, with deals with Stryker and Exactech starting to build, those two will very likely start posting YOY growth in 6-12 months.
Does CryoLife hear RTI's footsteps? By the end of this year RTI's homograft processing capability will begin to actually rival CryoLife's – and in a fraction of the space. RTI's cardio sales are still much smaller than CryoLife's, but they are growing rapidly. For the quarter RTI posted $1.3 million in CV sales and, we expect, will be running at $8 million annualized rates by the end of the year. We're expecting CryoLife to post $35-40 million in cardio sales. But, RTI's capacity will be, we think, over $20 million by the end of this year – about half CryoLife's. Add in an aggressive LifeNet – distributing via St. Jude Medical – and we can begin to see the end of CryoLife as a market leader for allograft cardiovascular tissues.
Exactech: The clear revenue drivers during the 2Q:03 were knees and tissue services which increased 22% and 49%, respectively over the 2Q:02. The strong performance in these segments compensated for flat growth in hips. Overall sales reached $17.8 million for the quarter which was 19% over
2Q:02 levels $15 million. Strong sales drove a 36% pop in net income bringing reported EPS to $0.14. While the second half revenue growth rate is expected to be slightly slower than the first half, overall Exactech is posting among the industry's best knee growth rates.
Osteotech: Revenue growth was really pretty low – 8%, but sharply higher profit margins drove a spectacular earnings increase. On the basis of a 620 basis point jump in gross margins (to 61.6% from 55.4%) and industry leading operating margins (18.6% of sales), OSTE reported $0.15 EPS up from last year's $0.02 and Wall Street's guess for the quarter of $0.10. Most notable in the quarter was OSTE's very strong international performance. Eventually, particulary in Europe, the allograft industry can begin to resemble the U.S. Osteotech's international sales rose 96% in the quarter reaching $2.3 million and now account for 9% of total sales.
Orthofix: Orthofix has now joined the $200 million club – posting its first $50 million in quarterly sales. Sales rose 13% in the quarter reaching $51.6 million - which was boosted by about $2.2 million in positive foreign currency swings. Earnings were down slightly to $6.5 million, or $0.44 per share and were adversely effected by litigation expenses. OFIX's bone stimulation business (long bone and spine) appears to gaining market share and posted 16% rates of revenue growth in the quarter. OFIX's innovative spinal bracing system, OrthoTrac, continues to gain adherents and should post $4-6 million in sales in 2003.
AOSSM: Nearly 100 companies and well over 1,000 physicians and professionals were present at this year's well-attended American Orthopedic Society for Sports Medicine (AOSSM) Annual Meeting in San Diego. Doctors were taking copious notes during the wide variety of presentations, workshops and instructional courses while companies were in high gear putting their best foot forward to show their wares and to demonstrate how their product was better than the next guy's.
Nearly half of the companies we saw at the conference were all about bracing. Despite all of the air pumps, new materials, exciting paint jobs and the like, we still couldn't help thinking “a brace is a brace is a brace” and the name of the game in the bracing business is product breadth and distribution. Numerous arthroscopic tools companies were well represented particularly Arthrex, Inc. which had a notably crowded booth at any given time. While were intrigued by the endoscopic systems on display and took our fair share of demonstrative extracorporeal shock waves, the real innovation in sports medicine, it seems, was located at the biologics booths at this year's conference.
