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Current & Critical

Zimmer Announces Acquisition of Biomet

To build a more comprehensive and scalable portfolio of products, Zimmer announced its intention to acquire Biomet for $13.35 billion. With combined revenue of $7.8 billion for calendar year 2013, the finalized deal, expected to close in 1Q15, would allow the merged company to leap Stryker and become the second largest orthopaedic manufacturer with an estimated market share of about 17 percent.

During a conference call, David Dvorak, Zimmer President and CEO, cited the company’s ability to diversify its revenue mix, create cross-selling opportunities and improve global distribution channels as benefits of the acquisition. Specifically, the acquisition gives Zimmer an edge in the knee and hip markets, as it reduces the top five competitors to four and takes the majority of the market share. The acquisition accelerates Zimmer’s growth—and market position—in the sports medicine, extremities and trauma segments by expanding its presence in emerging markets along with its upper and lower joints portfolio. Finally, the purchase of Biomet would allow Zimmer to double its share of the spine market. Exhibit 1 illustrates both companies’ combined revenue breakdown by category, while Exhibit 2 shows analyst estimates of pre- and post-transaction market share for Zimmer.

Exhibit 1
Zimmer and Biomet Individual and Combined 2013 Revenue by Market Segment

Exhibit 2
Zimmer Worldwide Market Segment Share

A principal point is that the customer—hospitals, private practices—is consolidating and will continue to do so as it faces its own pressures. “They’re going to be looking for savings as well by partnering with fewer vendors that can offer a fuller portfolio of solutions, and that’s going to be an advantage along with these integrated services,” Dvorak said.

Consolidation speaks to the larger picture of the orthopaedic industry. Reimbursement pressure, price sensitive customers, tighter FDA standards and the simple costs associated with doing business globally are expected to lead to more acquisitions amongst device makers.

“With consolidation happening across the healthcare industry, management teams seem to believe bigger is better,” Mike Matson, CFA, Senior Research Analyst of Needham & Company’s Medical Technologies & Diagnostics division wrote in his analysis of the acquisition. “Bigger med tech firms have cost advantages and are able to bundle products putting smaller companies (particularly those undifferentiated technologies) at a disadvantage.”

Among the industry’s larger players, Stryker and Smith & Nephew may also be impacted as Zimmer surpasses them both in the ortho recon market. (See Exhibit 3.) The deal could also pressure them, and others, to get larger.

Exhibit 3
Top Musculoskeletal Players by 2013 Revenue and Market Share 

How does this announcement rank amongst previous acquisitions in the orthopaedic industry? A complete list of M&A activity dating back to 1997 can be found at www.ORTHOWORLD.com.