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Orthopedic and Dental Industry News Complete Archive »

Orthopedic Stocks Decline: Our Thoughts BY JOHN CHOPACK, SEPTEMBER 30, 2005

The decline in the valuations of the orthopedic stock prices has reached epic proportions. The 7 leading orthopedic companies which derive a majority of their revenues from hip and knee sales are on average 30% off their 52-Week Highs. Biomet is off 42% its 52-week high and trading at 22.6x trailing earnings. These stocks are now trading on average at 30x their trailing earnings which is down from approximately 40x a year ago. We ask why?

  Price 52-Week
% Decline TTM PE
BMET 35.03 49.64 42% 22.63
ENMC 4.78 7.18 50% 37.94
EXAC 14.8 21.15 43% 25.83
SNN 42.65 53.79 26% 29.15
SYK 49.66 56.32 13% 38.17
ZMH 68.46 89.1 30% 24.63
WMGI 24.99 30.1 20% 34.19

We realize that there has been a significant amount of press lately regarding potential pricing pressure from hospital administrators towards these orthopedic companies. We agree that it is unlikely that these manufacturers will be able to continue to increase their prices 3-5% a year like they have in the recent past. But we don't believe this will be the downfall of the orthopedic sector. Lets examine how orthopedic companies have increased their average selling prices (not their list prices) during the last several years.

The chart from Orthopedic Network News clearly shows that between 1991-2000 implant average selling prices declined each year. That's 10 years of declining prices. You know what, the public orthopedic sector didn't crumble.

In fact, Biomet stock produced a 25% CAGR during this time period and an 11x return on investment and Stryker's stock produced a 35% CAGR and a 27x return on investment. (These were the only two companies out of the above that were public during that time).

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