Tides Turn for These Orthopedic Firms
Industry dynamics are shifting in the wake of Zimmer's Biomet acquisition.
With the announcement that Zimmer (ZMH) plans to acquire Biomet, the competitive dynamics in the orthopedic implant market have shifted. In general, we expect the reduction in competition should help the large, top-tier firms, including Johnson & Johnson (JNJ), Zimmer, and Stryker (SYK). However, this dynamic will make it even more challenging for smaller midtier companies, such as Smith & Nephew (SNN) and MicroPort, to hang onto their hospital customers. We see this shift as the industry's countermove to health-care provider consolidation and hospital efforts to reduce the number of vendors in return for greater volume discounts.
Some things have not changed, including the sources of economic moats for orthopedic implant makers. These moats remain grounded primarily in very high switching costs for surgeons, and secondarily in intangibles, such as intellectual property and close relationships with orthopedic surgeons. Zimmer's acquisition of Biomet removes one midtier competitor from the mix, and we think this consolidation ultimately moves the orthopedic industry one step closer to the rational oligopoly that characterizes the highly consolidated cardiac device industry, where three rivals virtually control the entire market.
Debbie Wang does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.