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Zimmer Biomet: Merger Synergy Lifts Hope amid Currency Woes

On Jan 15, 2015, we issued an updated research report on Zimmer Biomet Holdings, Inc. ZBH – a major player in the musculoskeletal industry. The consolidated company, formed post merger of the legacy Zimmer Holdings and Biomet, reported a better-than-expected third-quarter 2015 with respect to earnings.

Net synergies from the $13.35 billion merger are currently anticipated to exceed $350 million in pre-tax by the end of the third year, post-transaction. The company also expects the merger to contribute 95 cents to $1.05 to adjusted earnings per share with $135 million of pre-tax, net synergy savings in the first year of the acquisition. Moreover, the growth rate of adjusted earnings per share is likely to accelerate beyond 2015. According to the company, 2016 adjusted diluted earnings per share should grow in mid-teens or at a higher rate compared to the 2015 guidance.

Zimmer Biomet, post integration, will operate on a more comprehensive and diversified musculoskeletal portfolio commanding 17% market share and attractive cross selling opportunities. The combined company will be supported by a research and development (R&D) spending capability of approximately $360 million.

Moreover, it will immediately benefit from a joint portfolio of innovative solutions as well as efficiencies gained from merging the two companies’ respective R&D efforts. According to Zimmer Biomet, the combined R&D spend will allow it to more rapidly bring to market a broad portfolio of musculoskeletal products, technologies and services over the longer term. The company also believes this acquisition is perfectly in line with its strategic framework that focuses on growth, operational excellence and prudent capital allocation.

However, macroeconomic uncertainties, pricing pressure and unfavorable currency adversely impacted sales in the reported quarter. As expected, currency headwind continued as a major threat accounting for the sluggish top line worldwide. The huge margin contraction also posed hurdles. Above all, the lowered 2015 revenue forecast indicates that the company does not expect a turnaround in the bleak scenario over the near term either. In addition, intense competition in the orthopedic market continues to raise concerns.

The stock currently carries a Zacks Rank #3 (Hold).

Key Picks in the Sector

Some better-ranked medical products stocks are Abaxis, Inc. ABAX, Capricor Therapeutics, Inc. CAPR and LeMaitre Vascular, Inc. LMAT. All the three stocks sport a Zacks Rank #1 (Strong Buy).

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Josh Sandberg

Josh Sandberg is the President and CEO of Ortho Spine Partners and sits on several company and industry related Boards. He also is the Creator and Editor of OrthoSpineNews.

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