Consolidation In The Orthopedic Market? (SNN, ZMH, SYK, JNJ)

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The company stated that "it is not engaged in any discussions which
could lead to a merger or a takeover involving the company", yet
speculation remains high. And on Sunday, the news media reported that
rival *Johnson & Johnson* (NYSE:JNJ) is considering making a formal
offer for the company. This offer follows a reported tentative offer
from JNJ which was rejected last year. At the heart of the market
speculation lies an industry that has several strong players and many
barriers to entry, but one that also faces significant headline and
regulatory risk related to changes to reimbursement.

*The Players and the Market*
The orthopedic technology market consists of makers of artificial
joints, such as knees and hips. The largest players in are *Zimmer
Holdings* (NYSE:ZMH)*,* *Stryker* (NYSE:SYK), JNJ, Biomet and SNN.
These companies have faced many challenges in the past, from lawsuits
related to their relationship with physicians to reimbursement cuts in
Medicare to the latest economic downturn.

The economic environment hit these companies hard because the products
manufactured by these companies are used in elective surgeries.
Customers have been putting off these surgeries for various reasons
such as fear of missing work and losing their jobs, or due to
loss of jobs and insurance coverage. As a result, these companies
have come under increasing pressure to achieve more profitable
economies of scale, increase share and broaden product suites. 
As hospitals continue to narrow their suppliers in order to rein in
costs, companies with the most expansive product line-up will likely
be the ones chosen. As such, orthopedic companies are feeling
increasing pressure to consolidate to achieve scale. The stocks have
come under similar pressure and have yet to return to the pricing
levels of March 2008. SNN, despite the recent run-up associated with
the merger talks, is still selling 15% lower than its highs two years
ago. Similarly, larger peers, those considered the acquirers like ZMH
are selling at 40% below 2007 highs and SYK down over 25%.

*The Bottom Line*
The U.S. healthcare industry continues to be in upheaval and the
economic climate remains challenged. Consumer confidence measures,
while improving, do not register the impact of the elasticity of
demand on healthcare choices. As such, orthopedic companies need to
ensure that they will be the choice when the demand picks up.

Source: Investopedia.Com