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Takeaway: We added Zimmer Biomet to Investing Ideas on the short side on 9/4.

Stock Report: Zimmer Biomet (ZBH) - z 1 ZBH table 9 11 15


Zimmer Biomet (ZBH) is in the crosshairs of a number of our Healthcare themes. 

The first, and specific to ZBH, is our view that the demographic drivers of knee joint replacement are well past peak and in a secular decline.  We did what we believe is a thorough analysis of the contribution of aging and obesity to the population of people with severe osteoarthritis of the knee.  What we found was a market that peaked in 1990s and has likely drawn down the majority of eligible patients as implant rates per capita rose faster than the underlying patient population growth. 

Second, affordability of medical spending has peaked in the United States with deflationary pressures mounting and being expressed through policy changes alongside the broadening adoption of IT systems.  Better information systems and price transparency are likely to have an increasingly negative impact on device costs with orthopedic devices sitting at the top of the spending list.  

On a related note, Medicare recently initiated an aggressive global payment policy (CCRJ) which we expect to create a strong incentive for providers to pressure device costs. 

We believe the #ACATaper is emerging over the coming months as the newly insured revert to spending levels similar levels as seen with typical insured populations.  We’ve documented several instances where the newly insured consumed medical care at elevated rates during the initial rollout of this historic program, with evidence that knee replacement volume saw a dramatic increase.

Lastly, the Biomet merger (while accretive) is not the solution for ZBH shares.  Cost synergies are rarely a positive when organic growth is slowing.  


INTERMEDIATE TERM (TREND) (the next 3 months or more)

We do not expect fundamental misses of dramatic size in the intermediate term.  However, employment growth slowing and fears of a recession will certainly dampen investor appetite for what is viewed as an elective procedure.  

LONG-TERM (TAIL) (the next 3 years or less)

Our team's long-term view calls for slowing/declining unit volume and deteriorating pricing.  The impact to gross margins should be significant with very little spending flexibility within the organization. 


Stock Report: Zimmer Biomet (ZBH) - z 2 ZBH chart 9 11 15