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Boomers' Pains Can Mean Profits: Firms Poised to Help Ease the Aches

Posted on: Monday, 19 June 2006, 03:00 CDT

By Kathleen Gallagher, Milwaukee Journal Sentinel

Jun. 19--Increasing numbers of baby boomers are finding that aching hips and knees and osteoporosis-related fractures are a factor to be reckoned with.

For investors, though, they present an opportunity.

Hips and knees that need replacing torment all kinds of boomers: from those who for years kept themselves fit with high-impact activities like jogging, to those who put strain on their joints by skipping exercise and putting on excess weight. As for osteoporosis-related fractures, like those that cause the so-called dowager's hump, half of all women over the age of 50 are susceptible to the bone disease -- and there are more of them in the U.S. every day.

There are about 36 million adults who are over age 65 in the U.S., said Michael Wilson, a portfolio manager at Holt-Smith & Yates Advisors in Madison.

He expects that number to swell to 70 million by 2015. And he and his fellow portfolio managers at Holt-Smith & Yates have investment ideas for dealing with it. They own two stocks in client portfolios that address aging baby boomers' aches and pains.

Kyphon Inc. (KYPH, $34.56), Sunnyvale, Calif., has a unique technology for treating vertebral compression fractures that actually allows patients to gain back height lost to the "dowager's hump."

As the population ages, more people -- it's now 1 of every 3 women and 1 of every 8 men -- will be diagnosed with osteoporosis. One of the results of osteoporosis is vertebral compression fractures, which happen when the spine becomes brittle and porous and begins to be crushed under the weight of a patient's head and shoulders.

Kyphon's solution is a minimally invasive procedure that involves putting a balloon into cavities in the vertebrae through small tubes to inflate them. Doctors can then fill the vertebrae with surgical cement that fixes the bone fractures and gets rid of the hump in the spine to restore height.

"Patients' pain when they go in is an eight or nine on a scale of one to ten -- when they come out it's a one or two," said Jason Joanis, who is also a Holt-Smith & Yates portfolio manager.

Kyphon's system is unique because the other options that patients and doctors have consist of using traditional methods, like fusing the spine or replacing discs, or using competitors' systems, which stop the progression but don't restore height, Joanis said.

Kyphon's system is being used in the U.S. and is being tested in Japan, a country with one of the highest vertebral compression fracture rates in the world, he said.

The biggest risk Joanis associates with this stock is that the vertebral compression fracture system is Kyphon's only product. But the company's technology has potential applications in other areas.

Medical device maker Medtronic Inc. is planning to come out with a competing product in the next few months, but analysts' surveys of surgeons suggest Medtronic's offering isn't as good as Kyphon's, he said.

Over the last two years, Kyphon has been building its sales force and is expecting revenue growth of more than 20% and earnings growth of more than 30% annually for the next three to five years, Joanis said.

"This is a smaller company that's higher risk, but their product works -- it restores height," he said.

Zimmer Holdings Inc. (ZMH, $65.94), Warsaw, Ind., makes and markets orthopedic reconstructive implants, primarily hips and knees. The company, spun out of Bristol-Myers Squibb Co. in 2001, has been increasing its share of the market for several years, Wilson said.

Zimmer is the biggest orthopedic implant company in the world, a position it clinched with its 2003 acquisition of Centerpulse AG, then Europe's leading reconstructive orthopedic company.

Doctors used to want to wait until seven or eight years before they thought someone would die to do a hip or knee replacement because of the long recovery and difficulty in doing it again, Wilson said. That has changed with new tools and techniques for less invasive surgery.

Zimmer has been a leader in coming up with techniques for less invasive surgery, and has an institute in Indiana that trains doctors and surgeons to use its tools and implants. It is continuing to innovate with products like its soon-to-be introduced gender-specific knee implant that is designed to better fit women's physiological differences.

The industry five years ago was seeing double-digit price growth for its products. Prices now are flat to slightly down -- a fact that has made some investors wary.

The weak pricing environment is the biggest risk for this stock. But Zimmer still hopes to increase gross margins to 80% by the end of the decade by continuing to increase market share with innovative products like the gender-specific knee, and implants made from a new material called trabecular metal that allows better blood flow, Wilson said.

There are concerns that Zimmer suffered as the dollar strengthened because about 40% of its sales come from outside the U.S., but the dollar has been weakening recently.

Wilson and Joanis hold Zimmer shares for clients and are still buying them in new accounts. The stock could go as high as $80 a share in 12 to 18 months, they said.

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Copyright (c) 2006, Milwaukee Journal Sentinel

Distributed by Knight Ridder/Tribune Business News.

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NASDAQ-NMS:KYPH, NYSE:MDT, NYSE:ZMH, NYSE:BMY,

Source: The Milwaukee Journal Sentinel

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