Zimmer Hip Issue Delays Res...

July 23, 2008

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Zimmer Holdings Inc.'s (ZMH) U.S. sales suspension for "Durom" replacement hip parts will further delay progress in bringing a bone-sparing hip system to the U.S. market, which could benefit smaller competitors.

Zimmer announced Tuesday that it has temporarily stopped selling Durom parts - which are cups used to make replacement hips - because U.S. surgeons need retraining to avoid problems. Since Durom is part of a so-called hip resurfacing system Zimmer is studying now, and hoped to bring to the U.S. in a few years, Zimmer also halted the U.S. resurfacing study. "We are suspending enrollment until further notice," said Cheryl R. Blanchard, senior vice president of research and development and chief scientific officer at Zimmer, during a conference call with analysts Wednesday.

Due to the Durom suspension, "there will be some delay beyond that 2011 period that we earlier referenced" for a hip-resurfacing rollout, added James T. Crines, Zimmer's chief financial officer.

By preserving bone for potential future surgeries, hip resurfacing is seen as a market-expanding technology that could bring younger patients into the nearly $5 billion global replacement hip market. Thomas Weisel analyst Raj Denhoy believes resurfacing sales could represent 10% of total replacement hip sales in the U.S. by 2012.

Smith & Nephew PLC (SNN) won Food and Drug Administration approval in May 2006 to bring the first modern resurfacing system to the U.S. Corin Group PLC ( CRG.LN), another U.K. firm, won FDA approval for its system last summer, but uptake has been slowed by issues at Stryker Corp. (SYK), which is marketing Corin's device in the U.S.

The Corin product slowdown has benefited Smith & Nephew, and signs that industry heavyweight Zimmer won't be marketing a competitive product as soon as hoped is another positive development.

Shares of Smith & Nephew, which Piper Jaffray upgraded to buy from neutral on Tuesday, recently traded up 1.4% to $57.74.
Zimmer officials did not estimate a new timeline for when a resurfacing system might roll out in the U.S. On the company's first-quarter earnings call in April, Crines said 2011 was the earliest date, following some other delays in the program. He also said that Zimmer's sales, marketing and product development efforts would remain focused on the other 90% of the replacement hip market in the near-term.

He reiterated that plan on Wednesday's call.

Wright Medical Group Inc. (WMGI) is another potential beneficiary from Zimmer's delay if it can finally secure approval for its resurfacing product. Wright has been in regulatory limbo at the FDA for years and hasn't explained the reason, although management has said the company still expects approval.

Wright has a better chance to capitalize in the near term by seeking to capture some lost Durom business from Zimmer, because Wright has similar technology. Shares of the company recently traded 3% higher to $31.10.

Zimmer shares, hurt by the Durom issue and a cut to 2008 guidance, recently traded down 5.5% to $66.94.

-By Jon Kamp, Dow Jones Newswires