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Gains in Knee Replacement Driving Zimmer Biomet Growth


After a more than 30% run-up in its share price this year, analysts think Zimmer Biomet (ZBH) is right where it should be at about $134.50. A big chunk of the gain occurred last week, when the stock jumped more than $10.50 after the company beat earnings estimates for the second quarter by 2 cents.

That number may be upped by analysts after the better-than-expected quarter, giving investors a chance to still catch the Zimmer wave.

Although the Warsaw, Indiana-based medical device company's second-quarter sales of nearly $2 billion were just below those for the same period a year ago, they were up 1% on a constant currency basis, pretty much what analysts expected. For the full year, Zimmer expects sales growth to be flat to up fractionally.

Knee replacement devices continue to be the biggest part of Zimmer's business, with sales reaching more than $700 million in the second quarter, a $10 million jump from the first three months of 2019, and up slightly from the same period a year earlier.

The knee replacement business is a healthy one to be in. It's forecast to reach more than $12 billion by the end of 2025, according to a report by Research and Markets. Approximately 40% percent of the global population over age 55 experiences chronic knee pain, according to June article in Orthospinenews. More than half of the group have disabling pain and about 2.6 million turn to knee replacement surgery each year. That doesn't count younger athletes and weekend warriors trying to re-live their glory days on the basketball court and football field. Jeff Auxier (Trades, Portfolio) added in a May 9 article in GuruFocus that with the obesity rate in the U.S. is over 30% and the number of Americans over 65 is nearing 50 million, the demand for joint replacements looks solid.

A rising knee implant tide should also lift the other major players in the business: Four firms, including Zimmer, account for 85% of all sales, according to the Orthospinenews piece. Other members of the Big Four are Stryker (SYK), Johnson & Johnson's (JNJ) DePuy Synthes and Smith & Nephew (SNN).

The next big innovation in the orthopedic market is robot-assisted surgery. Here, Stryker has taken the lead, five years after spending $1.7 billion to acquire Mako Surgical. The Kalamazoo, Michigan-based firm already has placed more than 650 Mako robots around the world, said The Robot Report in a May article. The machines have assisted with nearly 77,000 knee and hip replacement procedures performed in 2018 and installations in 2019 should be double that figure.

Zimmer has its own robot program featuring the Rosa knee system that assists in total knee replacement surgeries. The technology was acquired with the purchase of French manufacturer Medtech for $132 million in 2016.

Even without the robotics technology, Zimmer's knee business is booming, the company said on its second quarter earnings call. It will boost its R&D investments in robotics during the second half of the year, according to CEO Bryan Hanson.

Amanda Pederson of Medical Device and Diagnostic Industry predicated in an April article that 2019 would be Zimmer's comeback year. Among the reasons she cited were accelerated integration of Zimmer with Biomet and the company becoming more agile and results driven.

Could an acquisition be in the offing, too? One analyst thinks it's a possibility. Mike Matson, a medtech analyst at Needham, said in a note that Utica, New York-based Conmed (CNMD) might be a nice add-on, although Zimmer management has said nothing about it.

Disclosure: The author holds a position in J&J.

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This article first appeared on GuruFocus.