Business segments facing pricing pressure
Zimmer Holdings, Inc. (NYSE:ZMH) reported sales of $471 million for its knees segment in the first-quarter, which was almost flat on a quarter-over-quarter basis. In an attempt to improve its revenue, the company launched a new personalized knee system earlier this year.
It is estimated that more than 600,000 knee replacements are performed every year in the U.S. However, any new launch in the orthopedics market generally takes three to four quarters to fully materialize and to educate surgeons about the implant. As such, the company will start generating revenue from this product in 2014 and onward. Moreover, this new system is expected to contribute significantly to the company’s overall revenue of $1.91 billion in 2014, which is an increase of $60 million from 2012.
Additionally, Zimmer Holdings, Inc. (NYSE:ZMH) registered sales of $331 million in its hips segment in the first-quarter, which was a decline of 2% on a quarter-over-quarter basis. This decline was primarily due to the weakening demand of its products in Europe and the Americas. Further, as consumer spending on healthcare is expected to diminish in these regions, it is unlikely that Zimmer will be able to recover the declining revenue from its existing products. Analysts expect the pricing pressure to drag the revenue margin of the company by approximately 2% in the current year. Therefore, the company’s revenue from the hips segment is expected to decline to $1.3 billion in 2013 from $1.35 billion in 2012.
Conclusion
The Accent MRI pacemaker and the heart failure monitoring system will increase St. Jude Medical, Inc. (NYSE:STJ)’s presence in the CRM market, and will also be a major contributor to the company’s top line. Therefore, I recommend to buy this stock.
I do not see any major contribution flowing to Boston Scientific Corporation (NYSE:BSX) from the acquisition of C.R. Bard, Inc. (NYSE:BCR)’s electrophysiology business for the time being due to increased pricing pressure. Also, the absence of any major current catalyst to the company’s profit margins makes me recommend investors hold the stock.
The knees and hips segment together contribute almost 70% of Zimmer’s total revenue. Though the knees segment will marginally improve its revenue from the launch of a new personal knee system, I expect this improvement to be offset by the declining revenue from the hips segment. Thus, a Hold is recommended on the stock.
The article Does the Decline in Health Care Spending Spell Trouble for These Companies? originally appeared on Fool.com and is written by Madhukar Dubey.
Madhukar Dubey has no position in any stocks mentioned. The Motley Fool owns shares of Zimmer Holdings (NYSE:ZMH). Madhu is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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