IBJNews

Zimmer-Biomet deal could stanch their bleeding at hospitals

Back to TopCommentsE-mailPrintBookmark and Share

The proposed $13.4 billion merger of Zimmer Holdings Inc. and Biomet Inc. could help slow the price cuts the two makers of orthopedic implants have suffered at the hands of hospitals the past few years.

Across the country, hospitals, including Eskenazi Health and Indiana University Health in Indianapolis, have focused on orthopedic implants as a way to save money. Rather than allowing individual surgeons to order products from any company, hospitals have created a central committee to limit the number of companies they work with and use their combined buying power to win lower prices.

Hospitals have had more and more power to do this because they have been consolidating and, in many cases, now employ the orthopedic surgeons that use Zimmer and Biomet products.

Prices for hip implants dropped 23 percent from 2007 to 2011, and prices for knee implants feel 17 percent during that time, according to a study by the Advanced Medical Technology Association.

No one expects that trend to end, but Zimmer's and Biomet’s combined heft should make their products harder to cut out entirely and make the combined company a stronger force in price negotiations. The combined Zimmer-Biomet would have 39 percent market share in U.S. sales of hip and knee implants, according to a report by Goldman Sachs. Their closest competitors, Johnson & Johnson and Stryker Corp. would have just 23 percent and 21 percent, respectively.

“This is important because although pricing headwinds in orthopedic implants are expected to continue, we believe that greater scale could mitigate some of those headwinds,” Cantor Fitzgerald analyst Jeremy Feffer wrote in a note to investors April 28.

About the Zimmer-Biomet deal, J.P. Morgan analyst Michael Weinstein wrote, “It further consolidates an industry that has been lacking in pricing power for the past decade. Zimmer is stronger as a result of the transaction—both competitively and relative to a customer base that continues to consolidate and gain leverage over the surgeon.”

Also, because Biomet has a stronger presence in the non-hip and knee areas—such as trauma, spine and shoulder implants—the combined company will have a broader portfolio that could also help when negotiating with hospitals, analysts noted.

Sales have been muted for orthopedic implant companies since a 2007 settlement with the U.S. Department of justice curtailed the companies' payments to surgeons that often juiced sales. After that, the prolonged recession caused many consumers—especially in the United States—to delay elective surgeries.

The two companies are expected to have combined sales of $8.4 billion next year, when the sale is expected to close.

Analysts do not expect the combined Zimmer-Biomet to retain every dollar of sales the companies have separately. As the companies thin combined sales forces, some of those lost relationships will lead to lost accounts and lost sales.

Also, the sheer disruption of combining two large companies can allow competitors to gain market share, as occurred after New Jersey-based Johnson & Johnson acquired Synthes Inc. in 2012.

“The company will try to minimize the loss of sales reps and is working to solidify contracts, but an integration of this magnitude could result in more dislocation than expected,” Jefferies analyst Raj Denhoy said in an April 25 note to investors.

But the savings Zimmer and Biomet expect to achieve from reducing sales forces, streamlining distribution and, not least, cutting redundant staff at their headquarters in Warsaw, are expected to more than offset any loss of sales.

The companies said they expect net savings of $135 million in the first year after the deal closes, rising to $270 million by the third year.

ADVERTISEMENT

Post a comment to this story

COMMENTS POLICY
We reserve the right to remove any post that we feel is obscene, profane, vulgar, racist, sexually explicit, abusive, or hateful.
 
You are legally responsible for what you post and your anonymity is not guaranteed.
 
Posts that insult, defame, threaten, harass or abuse other readers or people mentioned in IBJ editorial content are also subject to removal. Please respect the privacy of individuals and refrain from posting personal information.
 
No solicitations, spamming or advertisements are allowed. Readers may post links to other informational websites that are relevant to the topic at hand, but please do not link to objectionable material.
 
We may remove messages that are unrelated to the topic, encourage illegal activity, use all capital letters or are unreadable.
 

Messages that are flagged by readers as objectionable will be reviewed and may or may not be removed. Please do not flag a post simply because you disagree with it.

Sponsored by
ADVERTISEMENT

facebook - twitter on Facebook & Twitter

Follow on TwitterFollow IBJ on Facebook:
Follow on TwitterFollow IBJ's Tweets on these topics:
 
Subscribe to IBJ
  1. Only half a million TV Viewers? And thats an increase? I knew Indycar was struggling but I didn't know it was that bad. Hell, if NASCAR hits 5 Million viewers everyone starts freaking out saying its going down hill. It has a long way to before Indycar even hits NASCAR's bad days.

  2. IU has been talking that line for years with no real progress even with the last Dean, Dr. Brater. Why will an outsider, Dr. Hess, make a difference? With no proof of additional resources (cash in the bank), and a concrete plan to move an academic model that has been outdated for decades with a faculty complacent with tenure and inertia, I can count on IU to remain the same during the tenure of Dr. Hess. One ought to look to Purdue and Notre Dame for change and innovation. It is just too bad that both of those schools do not have their own medical school. Competition might wake up IU. My guess is, that even with those additions to our State, IU will remain in its own little world squandering our State's tax dollars. Why would any donor want to contribute to IU with its track record? What is its strategy to deal with the physician shortage for our State? New leadership will not be enough for us to expect any change.

  3. How do you think the Bridges got approved? I spent a couple days researching PAC's and individual contributions to some city council members during that time. My printouts were inches thick on the two I concentrated on. Finally gave up. Was disgusted with all the donations, and who they were from. Would have taken me days and days to compile a complete list. Tried to give it to the Star reporter, but he thought it was all just fine. (and apparently he was treated well himself) He ended up being laid off or fired though. And then of course, there was land donated to the dad's club, or city, as a partial payoff. All done in the shining example of "charity." No, none of these contributions are a coincidence.

  4. I agree what kind of help or if any will be there for Dr. Ley's patients. I was a patient myself.

  5. What about the hundreds of patients who sought this doctor for the right reasons, to quit drugs. what option do these patients now have, experience horrible withdrawl or return to heroin?? those are the choices. what about the children of these former addicts who's parent(s) WILL not b able to maintain their job, for @ least 2 weeks.. There needs to b an emergency clinic opened for these patients.

ADVERTISEMENT