Zimmer announced last week (May 28, 2015) that its planned merger with Biomet will not close before mid-June—a month later than the revised date of the end of May, which itself was a revised date from the original estimate of Q1 2015.
It has been a year and a month since the board of directors of both companies approved and announced the deal (April 24, 2014). It’s even been seven full months since the new Zimmer/Biomet management teams were announced.
To put those time frames in perspective, the JNJ purchase of Synthes, which represented a larger combination than Zimmer / Biomet, took a year and two months from announcement to closing. Stryker, however, closed its MAKO deal in 2.5 months and Smith & Nephew closed its purchase of ArthroCare in four months.
So if the Zimmer Biomet deal closes in mid-June, it will have taken almost exactly as long as the JNJ/Synthes did to close but six times longer than the Stryker/MAKO deal and four times longer than the Smith & Nephew/ArthroCare deal.
Employees, vendors, shareholders and surgeon customers might be forgiven if they are thinking—So Merge, Already.
Why Is This Taking So Long?
Originally both companies expected that, even with the anti-trust work-throughs, this deal would close in the first quarter of 2015. Now everyone is working hard to wrap it up before the third quarter of 2015.
Blame it on the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the European Union Merger Regulations. After all, when the deal was announced, holders of approximately 95% of Biomet’s outstanding common stock had agreed to the deal.
Especially the European Union (EU) Commission.
The EU Commission assesses all mergers and acquisitions which sell product in the European Union. If sales are above a certain threshold amount, then they get actively involved. The Commission’s goal is to prevent concentrations of sales which could significantly impede competition in Europe.
The last time the EU Commission took a hard look at an orthopedic deal it was the Synthes/DePuy deal and that took one year to earn approval.
Zimmer filed its first notification with the Commission in June 2014—about 60 days after announcing the merger. It was an incomplete notification. Zimmer sent a revised notification in July. But it wasn’t until the end of August that the Commission formally accepted Zimmer’s notification.
From its investigation, the commission spotted potential anti-competition problems for three products and a group of EU markets:
- Partial (unicondylar) knee implants in Austria, Belgium (including sales in Luxembourg), the Czech Republic, Denmark, Finland, France, Germany, Greece, Italy, The Netherlands, Poland, Portugal, Slovenia, Spain, Sweden and the UK
- Elbow implants in Austria, Belgium (including sales in Luxembourg), the Czech Republic, Denmark, France, Germany, Italy, Norway, Portugal, Spain, Sweden and the UK and
- Total knee implants in Denmark (primary and revision) and Sweden (primary).
So Zimmer went to work to find buyers for its Zimmer Unicondylar Knee (“ZUK”), the Biomet Discovery Elbow (“Discovery”), both across the European Economic Area (EEA), and the Biomet Vanguard Complete Knee System for primary and revision implants (“Vanguard Knee”) in Denmark and Sweden.
Zimmer also agreed to give the purchaser of the Vanguard knee in Denmark and Sweden an EEA-wide, non-exclusive license to the rights and know-how that are currently used and are needed for the manufacturing, marketing and sale of an exact copy of the Vanguard Knee.
The Commission also wanted assurances that the buyers would be competitive against Zimmer / Biomet. So in the divestitures, Zimmer agreed to include instrumentation, any improvements and pipeline projects, intellectual property rights and know-how; all licenses, permits and authorizations, CE marks, customer contracts, leases, commitments, orders and records; key personnel, technical assistance and training.
In short, everything but the kitchen sink.
From Biomet’s perspective, to do this deal, the Commission was asking them to sell the Vanguard Knee, which is a major contributor to Biomet’s market share in Europe.
On March 30, 2015 the Europeans blessed this union.
Then came the U.S. FTC. Those regulators had their own set of requirements which, surprisingly to some Wall Street analysts, did not include any shoulder implant assets.
Then on May 28, two months after the EU approval, Zimmer announced that it had found buyers for the Zimmer Unicompartmental High-Flex Knee System assets, Biomet Discovery Elbow System assets, and Biomet Cobalt bone cement assets.
Are all the regulator’s done? Nope. The FTC staff is still working.
But to be safe, the new estimate time to closing is mid-June. Another two weeks.
What Will a Zimmer/Biomet Combination Look Like?
We already know who the 13 new senior executives will be. The line-up is:
- Adam R. Johnson will be Group President for Spine, Microfixation, Bone Healing and Dental. He comes from Biomet.
- David A. Nolan will be Group President for Sports Medicine, Extremities, Trauma, Biologics and Surgical. He comes from Zimmer, but has also worked at Biomet.
- Daniel E. Williamson will be Group President for Knee, Hip and Bone Cement. He comes from Biomet.
- Stuart G. Kleopfer will be President, Americas. He comes from Biomet.
- Katarzyna Mazur-Hofsaess, M.D., Ph.D. will be President, Europe, the Middle East and Africa. He comes from Zimmer.
- Sang Yi will be President Asia Pacific. He comes from Zimmer.
- Robin T. Barney will be Senior Vice President, Global Operations and Logistics. He comes from Biomet.
- Audrey M. Beckman will be Senior Vice President, Strategic Quality Initiatives. She comes from Zimmer.
- William P. Fisher will be Senior Vice President, Global Human Resources. He comes from Zimmer.
- Daniel P. Florin will be Senior Vice President and Chief Financial Officer. He comes from Biomet.
- Emmanuel O. Nyakako will be Senior Vice President, Global Quality, Clinical and Regulatory Affairs. He comes from Zimmer.
- Chad F. Phipps will be Senior Vice President, General Counsel and Secretary. He comes from Zimmer.
(Score: Biomet 6, Zimmer 7)
And we have a pretty good idea of what the financials and market share stats will look like.
Combined, Zimmer/Biomet will be the #2 orthopedic company in the $45 billion musculoskeletal market, behind Johnson & Johnson (DePuy/Synthes). But the real story will be in specific markets:
- Knees: Pre-merger Zimmer had a 27% market share and Biomet had a 13% market share. Combined, accounting for divestitures and some integration distractions, market share will likely come in around 40%. JNJ will be a distant #2 at 23%. The new Zimmer/Biomet will dominate in knees.
- Hips: Pre-merger Zimmer had a 24% market share and Biomet had an 11% market share. Combined, again accounting for divestitures and some integration distractions, market share will likely come in around 35%. Again, JNJ will be a distant #2 at 25%.
- Non-Recon: Pre-merger about 30% of Zimmer’s sales came from non-large joint recon products. By contrast, nearly half of Biomet’s sales are non-large joint recon. These markets include sports medicine, trauma, extremities, spine, biologics, bone healing, dental and micro-fixation. In this group there will be some nice synergies and likely pleasant surprises—after the first year or two of integration.
Financially, the new company is expected by Wall Street’s analysts to be able to post up revenues in the $8.0 billion – $8.4 billion range and earn about $1.5 billion – $1.7 billion.
Zimmer is paying $13.35 billion, not counting legal and other expenses (which probably push the real purchase price much higher). To give that purchase price some context, it is 3.9x sales, which is less than the current average 4.11x PSR (price-to-sales ratio) for orthopedic companies and also less than Zimmer’s PSR, which is 4.18x.
In terms of a price to earnings, the $13.35 billion Zimmer is paying is about 14x operating income. The average orthopedic equity is currently trading at about 22x earnings (net earnings, not operating income) and Zimmer is trading at about 17x earnings.
Patience Will Be Rewarded
Although the specific business plans from a year ago may need dusting off and updating, this merger is happening. As we write these words it would appear that June 2015—mid or late—will be the final weeks of an independent Biomet.
To the great relief, we suspect, on the part of both companies’ employees, vendors, physician customers and shareholders.
To merge these two longtime rivals and great corporate cultures has been an absolutely monumental task. When it is done, when the mountain is scaled, there will be a sense of near euphoria. And it will be hard earned and well deserved.
It’s a fact. Progress is more perspiration than inspiration.
But as they stand at the pinnacle, having doggedly made it up despite fierce regulatory winds and adverse conditions generally, and they gaze at the inspiring view from such lofty heights, they will see yet another mountain ahead of them. An even higher peak.
No, not Everest. The name of this mountain is “Integration.”
Now the fun begins.
