Biomet ( BMET) has tripped up once again. The orthopedic-device maker on Tuesday missed revenue expectations for the second straight quarter and issued disappointing guidance as well. The company's third-quarter sales increased just 5% from a year ago to $506 million, coming up short of analysts' $516 million target. Net income grew at twice that rate, however, jumping 10% to $106 million. Earnings per share of 43 cents matched the consensus estimate. Performance by division proved mixed. The company's core reconstructive joint business saw revenue increase by 10% in the latest quarter, with hip growth actually outpacing knee growth this time around. Meanwhile, the company's troubled EBI division -- which sells fixation supplies and spinal devices -- showed only modest signs of progress. There, as the company was quick to point out, sales of internal fixation devices gained some momentum while sales of electrical stimulation devices finally increased after several quarters of declines. Overall, however, the EBI division posted only minor growth instead of the real advances some people had hoped for. "Fixation revenues increased 0.4%, while spine sales grew 2.5%," noted J.P. Morgan analyst Michael Weinstein, whose firm counts Biomet as a client. Thus, "the EBI franchise has yet to turn the corner, as growth remained at depressed F2Q levels." Meanwhile, Biomet has warned that currency effects will hurt fourth-quarter results. The company is now looking for earnings of 45 cents to 46 cents a share in the upcoming quarter on sales of $530 million to $540 million. Analysts, on average, were expecting earnings of 47 cents on sales of $546 million. The company's stock fell 2.5% to $36 early Tuesday.
Another MissWachovia analyst Michael Matson was bracing for a possible miss. Last week, Matson predicted that Biomet would fall short of revenue targets even if the company managed to meet profit forecasts for the quarter. He listed several reasons, including ongoing challenges in the company's EBI division, when explaining his cautious view.
Moreover, Matson warned of possible shortfalls looming ahead. First and perhaps foremost, Matson noted, Biomet continues to bank on price increases for orthopedic implants that may fail to materialize in the end. Biomet's optimistic outlook contrasts with that offered by competitors that are looking for flat pricing at best. "While we agree that BMET's strong product cycle supports the notion of less price deterioration and mix pressure than some of its peers, we still believe its pricing assumptions over the next year are optimistic, as we believe hospitals will focus on both price and mix in order to control orthopedic implant costs," Matson wrote on Thursday. "We continue to expect hospitals will work to control orthopedic-implant prices by sharing implant cost data, implementing capitated (per head) pricing programs and presenting cost data to appeal to physicians" going forward. Matson has a market-perform rating on Biomet's stock. His firm makes a market in Biomet securities and hopes to receive investment banking business from the company over the next three months.
The OptimistStifel Nicolaus analyst Gregory Simpson expressed more optimism about Biomet heading into the company's quarterly update and -- just as importantly -- the industry's big annual convention later on this week. Simpson predicted that Biomet would report in-line results for the recent quarter, avoiding some disappointments of the past, with improvements in the company's EBI division providing the potential for upside in the quarters that lie ahead. "BMET has the benefit of low expectations as they report fiscal 3Q results -- a dubious honor, to be sure," Simpson acknowledged on Monday. "We think the key to BMET's 3Q results, however, rests less with the potential for upside to consensus EPS estimates and more with the sign of progress at EBI. ... The days of sweeping EBI under the rug should be over, and we hope management highlights the progress made at EBI since the management change nine months ago, regardless of how subtle that progress is at this point."
Simpson foresees the possibility of additional catalysts for Biomet -- and the industry as a whole -- as the week wears on. He seems particularly upbeat about the giant convention being hosted this week by the American Academy of Orthopedic Surgeons. There, Simpson notes, major ortho players will roll out their new products and offer some comments on the future. Simpson himself sees no major blockbuster products coming out right now. However, he believes that both Zimmer ( ZMH) and Stryker ( SYK) could showcase impressive pipelines at the meeting. Meanwhile, he feels that Biomet simply needs to show some progress on the EBI front in order to gain some ground. Still, Simpson acknowledges, orthopedic pricing will no doubt remain a major area of concern among this week's crowd. "Given the hysteria surrounding pricing in 2005, and the many moving parts impacting the pricing outlook, this will be at or near the top of the watch list for most investors at AAOS," Simpson wrote on Monday. But "that being said, we think most everything is out on the table for now, and company comments at recent investor conferences would suggest that there shouldn't be any surprises on the pricing front. ... (So) with no unpleasant surprises expected on the pricing front -- and with sluggish growth expectations already discounted in the stocks -- we see little risk for the group this week." Simpson has buy recommendations on both Biomet and Zimmer. He has a hold recommendation on Stryker. Simpson's firm makes a market in Biomet securities and expects to perform investment banking services for Stryker over the next three months.