Zimmer: Growing Older Gracefully

As more baby boomers need hip replacements, the company's joints will be hot sellers

Zimmer Holdings Inc. owes its industry-leading performance to a lineup of hot-selling products and an outsider CEO who brought with him a knack for marketing. But what may keep Zimmer on the fast track is something that began more than 50 years ago: the baby boom.

That's because Zimmer makes artificial joints, something many of these middle-aged folks will soon need. On average, people are 67 years old when their knees or hips give out and they get a replacement. But that age has been drifting lower as implant surgery becomes more common. Meanwhile, the oldest members of the post-World War II generation are now turning 57. So within the next decade -- and on till at least 2025 -- Zimmer's potential market will be swelled by the biggest generation in American history. "It's simple math," says J. Raymond Elliott, Zimmer's chairman and chief executive. "Our best years are still in front of us."

The past three years haven't been so bad, either. Zimmer's sales rose by 14% per year, on average, to $1.4 billion, while profits climbed 16% a year, to $283.4 million. That pushed the Warsaw (Ind.) company to No. 26 on the Hot Growth ranking. With surgeons and patients willing to pay $5,000 or more for top-quality replacement joints, Zimmer's gross margin is 75%. That helped boost its average return on invested capital over the past three years to 63.6% -- the best in this year's class.

Elliott isn't banking on demographics alone for growth. By pumping up research and development, Zimmer is introducing 10 times as many products as it did a decade ago. One big hit: a premium-priced hip that should last 20 years, twice the life span of previous prostheses. Zimmer also just opened its own teaching institute to train surgeons in new implant techniques -- while also marketing its catalog and services to them. Then, on May 20, Elliott made a hostile bid valued at $3.1 billion in cash and stock for Centerpulse, which would get Zimmer into the spinal-products market, the fastest-growing segment in orthopedics.

Spun off in July, 2001, from ailing pharmaceutical giant Bristol-Myers Squibb Co., Zimmer has the financial muscle to go shopping. Cash flow has been so strong that the company says it could pay down any takeover debt from a Centerpulse deal by 2006. And with the share price up 62% since it went public, Zimmer has an outsize market cap of $9.1 billion. Suey S. Wong of Robert W. Baird & Co. in Milwaukee predicts Zimmer's 2003 net income will surge 26%, to $325 million, with sales climbing 16%, to $1.6 billion, excluding Centerpulse.

Zimmer owes its Hot Growth status to Elliott. The 53-year-old Ontario native started with American Hospital Supply Corp. and over 15 years worked his way up from sales and marketing to become president of its Far East operations, based in Tokyo. In 1986, he returned to Canada, where his work included a gig with brewer John Labatt Ltd. He then came back to the U.S. and did a series of turnarounds through his own mergers-and-acquisitions firm before Bristol-Myers recruited him in 1997 to revive its prosthesis unit.

Elliott remembers telling his new bosses they had two options: build Zimmer into a core business through acquisitions or cut it loose. Either way, Bristol-Myers had to stop diverting Zimmer's plentiful cash into its pharmaceutical operations. Bristol chose to divest. By then, Zimmer was beginning to take market share from its big rivals, Stryker, Biomet, and Johnson & Johnson's DePuy subsidiary. Elliott's timing was fortunate, as Bristol was beginning its slow and painful decline. "Elliott talks a big game," notes analyst Gregory J. Simpson of A.G. Edwards & Sons Inc. in St. Louis. "But he not only puts up; he exceeds his numbers."

Zimmer's latest endeavor -- minimally invasive surgery -- should help the company maintain its growth pace. At places like Rush-Presbyterian-St. Luke's Medical Center in Chicago, surgeons working with Zimmer now replace hips on an outpatient basis, avoiding hospital stays. That, along with Zimmer's longer-lasting joints, could persuade more people to get an implant -- while lowering the tab for health insurers.

Zimmer has proved itself in the short run. Now it looks as if the company has legs for the long haul, too.

By Michael Arndt in Chicago

    Before it's here, it's on the Bloomberg Terminal.