Written by Edward Mtsweni – Associate Analyst
With populations rapidly ageing in developed economies and China, there is a growing need for orthopaedic medical treatments as bones and joints deteriorate in old age. Through significant investment in research, development and innovation, Zimmer Biomet (Zimmer) stands out as a global leader in the orthopaedic products field. We discuss the history of the company and, specifically, the burgeoning market opportunity in robotics that is a key differentiator for Zimmer relative to its competitors.
Innovation underpins steady growth
Zimmer was founded in 1927 as a breakaway from DePuy Syntheses, a producer of fibre splints used to set bone fractures. At the time, Zimmer’s aluminium splint product was more versatile (it could be shaped to suit specifications) and started outselling DePuy’s after a year. During the Great Depression of the 1930s, Zimmer’s approach remained defensive, with growth through product innovation. Fabricated braces were an important example of such and saw the business becoming a key market player during the polio epidemic (1949-52).
The first hip prosthesis was marketed by Zimmer in the 1950s, along with the release of their Harrington Instrumentation used to treat scoliosis1. In the following decades, and in line with the maturation of the baby boomer generation, the demand for Zimmer’s products continued to grow – culminating in its listing on the New York Stock Exchange in 2001. At this time, products ranged from knee and hip implants to blood management systems.
Zimmer has built a strong reputation as a trusted brand over the years. For example, the term ‘Zimmer frames’ originated in the UK around the 1950s and is still used today as a genericised term for supportive walking frames, much the same as ‘Hoover’ did for vacuum cleaners in the 20th century or ‘Aspirin’ for pain medication.
1Lateral curvature of the spine.
In 2014, Zimmer merged with rival orthopaedic firm, Biomet, but supply chain and regulatory issues (relating to large joint implants) initially impeded sales growth, resulting in market share losses in key knee and hip product segments. From 2018, new management again focused on innovation and growth as a larger, more diversified company.
The Americas currently constitute the bulk of Zimmer’s operations, contributing 61% of sales in the 2021 financial year. Asia Pacific (including China) and EMEA (Europe, Middle East and Africa) combined, contributed 39% of sales.
The company focuses on three core categories within orthopaedics:
• The knee division manufactures partial and full knee and joint preservation products. The use of robotics is an emerging trend in knee replacement surgeries, assisting surgeons with the accuracy of implant positioning. Zimmer aims to grow in this market through its Rosa and Persona knee systems.
• The hip division covers an assortment of products including total hip replacement and revision systems, hip preservation devices (that protect the natural integrity of the hip joint) and cementing materials used in implant installation.
• The sports, extremities and trauma (SET) division houses Zimmer’s surgical (supporting various procedures) and sports medicine products used primarily for the repair of soft tissue injuries, commonly experienced in knees and shoulders.
Servicing multiple sectors of the population
General increases in life expectancy and changing demographic profiles of patient populations, together with surgical advances, have led to steady growth in the orthopaedic products market. As indicated below, the US population aged 65 years and older is expected to reach 73 million by 2030 (up from 55 million in 2020) as the last of the baby boomer cohorts reach age 65. With an ageing population comes an increasing need for orthopaedic related healthcare as older populations tend to exhibit more chronic health problems, such as osteoarthritis.
In addition, sports medicine represents an important growth segment for orthopaedic companies. The global market for sports medicine is expected to expand by 4%2 over the next four years, given an increasing prevalence of sports injuries within the sector of the population that participates in sports and regular physical activity. With implant technology now allowing for customisation to suit a patient’s unique anatomical and lifestyle needs, the potential to improve mechanical alignment and implant fit has increased demand twofold – meeting the needs of the younger, active sector of the population. Younger patients are also opting for implants sooner to minimise physical restrictions on lifestyle – a positive for innovators such as Zimmer.
2Compound annual growth rate.
Robotics are a key differentiator
The employment of robotics in orthopaedics has many benefits. It allows for greater surgical precision than standard tools, which results in less invasive surgery and, consequently, shorter patient stays. Improved efficiency enables surgeons to treat greater volumes of cases and furthermore, studies have shown that robotic surgery can improve patients’ pace of recovery.
Zimmer was the first to launch a robotic knee replacement system in 2012, however Stryker was the first to gain significant market presence in this segment through its 2017 acquisition of the Mako knee replacement system. Featuring robotic arm assisted surgery, Stryker’s system enjoyed considerable early success and contributed to market share losses for Zimmer.
Zimmer then launched the Rosa Knee System in 2019, in direct competition to Stryker’s Mako system, with the key differentiator being that it is less cumbersome. In addition, pre-operation CT scans are not required for the Rosa system, saving on cost and time.
As illustrated below, Zimmer is again commanding a strong market share – particularly in knee-related products (38% versus 32% for Stryker) – in a concentrated market dominated by four companies.
The training of surgeons is the most significant constraint to growth for Zimmer’s Rosa system at present. However, the demand pull from patients is forcing surgeons to upskill (or risk losing patients to other skilled surgeons) and pressing hospitals and ambulatory centres to invest in the Zimmer machines. The improved outcomes for patients, lower costs and increasing surgeon education should grow adoption across the field.
Persona IQ – a smart move
Zimmer Biomet will be the first orthopaedics company to launch a Smart Knee implant through its 2021 partnership with Canary Medical (medical devices data analytics operator). The Persona IQ implant (pictured below) is embedded with tiny sensors inside the patient’s knee that measure step count, walking speed and other metrics. This data is more reliable and richer than that communicated via wearable devices (eg smart watches).
The availability of comprehensive data transmitted by implants can provide valuable insight on the status of the implant and act as a guide for potential treatment (ie regarding the negatives associated with implants such as pain, swelling and implant rejection). This leads to better outcomes and ultimately guides the development of future products, as well as representing a significant market opportunity for Zimmer.
Underappreciated scale determines future growth
Zimmer Biomet’s dominant market shares in the concentrated orthopaedic devices market (particularly knee- and hip-related) is a competitive advantage that should enable fast future adoption of its robotics and Smart systems. With the ageing population dynamics outlined herein and the promise of innovations leading to improved patient outcomes, larger players that can innovate and invest at scale in product development and robotic surgery, should outperform.
With an underappreciated operational turnaround underway (that has stabilised market share and is leading to increased margins) coupled with temporary COVID-19 headwinds (delays in elective procedures that are expected to return), the company should be on track to generate solid future returns on capital and grow cash flows. Our global client portfolios have exposure to this unique long-term investment opportunity.