Biomet, Inc. (BMET)
Q3 2006 Earnings Conference Call
March 21, 2006, 10:00 a.m. EST

Executives:

Dane A. Miller, Ph.D., President and Chief Executive Officer
Bart J. Doedens, M.D., Vice President, Biomet, Inc., President, EBI, L.P.
Gregory D. Hartman, Senior Vice President and Chief Financial Officer

Analysts:

Taylor Harris, JP Morgan
Ashley Jarden, Bear Stearns
Bob Hawkins, Lehman Brothers
Katherine McNally, Merrill Lynch
Matt Miksic, Morgan Stanley
Jessica Gladstone, Harris Nesbitt

Presentation

Operator

Good day everyone and welcome to the Biomet Incorporated 3rd Quarter 2006 Earnings Conference Call. Today’s call is being recorded. At this time for opening remarks and introduction, I would like to turn the call over to President and Chief Executive Officer, Dr. Dane Miller. Please go ahead sir.

Dane Miller, President and Chief Executive Officer

Thank you Augusta. To address any forward-looking statements made during the course of this conference call, we refer you to the paragraph regarding forward-looking statements included in Biomet’s 3rd Quarter press release issued earlier this morning. The following discussion will focus on the company’s results on an as adjusted basis. Adjusted results exclude inventory stepdown from the March 2004 acquisition of Merck KGaA’s interest in the Biomet Merck joint venture and the June 2004 acquisition of Interpore. Net sales increased 5% to $506.3 million during the 3rd Quarter of Fiscal 2006, gross profit increased 3% to $363 million representing 71.7% of sales. Cost of goods sold was increased approximately $1.5 million during the Quarter due to the previously announced increase from the supplier of the company’s antibiotic delivery system in Europe. SG&A expenses increased 3% to $185 million, representing 36.6% of sales. Our national branding campaign increased SG&A expenses by approximately 60 basis points during the Quarter compared to the 3rd Quarter of fiscal 2005. R&D expenses increased 3% to $21.1 million or 4.2% of sales. Operating income increased 4% to $157 million with operating margins at 31% of sales. Net income increased 4% to $106 million while diluted earnings per share increased 8% to $0.43 per share.

Now looking at sales, excluding the impact of foreign currency, which did decrease 3rd Quarter revenues by approximately $13 million, net sales increased 8% worldwide. International sales for the Quarter increased 11% on a constant currency basis while domestic sales increased 6%.

Moving on to our core business reconstructive sales, we saw reconstructive sales increase 6% worldwide to $346.6 million during the 3rd Quarter with a 9% increase in the US. On a constant currency basis, reconstructive device sales increased 10% worldwide. Hip sales increased 11% in the US during the Quarter and 8% worldwide. The 3rd Quarter hip sales increased 11% worldwide, constant currency. If you would exclude the domestic sale of instrumentation, hip sales in the US increased 12%. Domestic sales of metal-on-metal acetabular systems increased 39% during the Quarter and currently represent 48% of Biomet’s hip articulation units. During the 3rd Quarter, the M2a-Magnum Biomet best selling metal-on-metal system in the US continued to experience excellent market demand. In addition, we now have 10 sites participating in the US clinical study for the ReCap Total Resurfacing System. During the 3rd Quarter, we received FDA approval for the C2-a Taper Acetabular System featuring a ceramic-on-ceramic articulation and our proven porous plasma spray coated technology. With this most recent edition to our alternative bearing line up, we believe Biomet currently offers the broadest range of hip articulation systems in the country.

During the 3rd Quarter, Biomet sponsored a live Internet webcast of the ASI, anterior supine intramuscular surgical technique. Dr. Roger Emerson from Dallas, Texas used the Biomet Microplasty Minimally Invasive Instrumentation designed specifically for this unique procedure. The webcast has received in excess of 12,000 hits. Observers witnessed a truly minimally invasive hip technique with no muscles being cut during exposure of the joint. In addition, a Microplasty ASI cadaver training lab opportunity has been scheduled for May 4th.

ArComXL continued to receive excellent market penetration as it represented 42% of our metal poly-articulation units in the US during the 3rd Quarter and have obtained a 46% penetration level for the month of February. Our second-generation highly cross-linked polyethylene ArComXL provides 47-64% decrease in volumetric wear rate over the standard ArComXL in lab studies with no measurable oxidation exhibited under accelerated ageing and the 30% increase in the tensile strength with similar wear particle shape and size. Additionally, Biomet submitted a 510(K) for E-poly-acetabular liners during the 3rd Quarter. E-poly uses vitamin E to quench the free radicals in polyethylene reducing oxidation, thus improving long-term viability of that material. As you may recall, we obtained rights to this technology through a licensing agreement with Massachusetts General Hospital. We believe this technology will further improve the work characteristics of machine polyethylene bearings as well as direct compression molding components.

During the 3rd Quarter, Biomet received FDA clearance for acetabular augments manufactured from Biomet’s new Regenerex ultraporous construct. As a result of our early efforts, titanium has now become a well-established material in orthopedics with a proven history of success. We believe this will support excellent market acceptance of our Regenerex product line. We are very excited about our strong hip pipeline and encouraged with Biomet’s industry leading hip growth during the 3rd Quarter.

Moving on to knees, knee sales increased 8% in the US during the Quarter and 6% worldwide against last year’s industry leading 3rd Quarter growth rate of 36% in the US and 31% worldwide. Knee sales increased 9% worldwide on a constant currency basis. Excluding this, domestic sales increased 10%. The 3rd Quarter growth for knees was driven by the continued strong market demand for the Vanguard Complete Knee System and the Oxford Unicompartmental Knee System. In addition, Biomet’s OSS System experienced solid sales growth during the Quarter. The Vanguard Complete Knee System continues to be the most comprehensive total knee system on the market providing for greater bone conservation and competitive hi-flex systems while allowing for up to 145 degrees of flexion. The full interchangeability of the Vanguard System’s 9-Femoral and 9-Tibial sizes offers precise matching of the implant components with the patient’s knee anatomy. During the 3rd Quarter, we initiated the launch of anterior stabilized components and instruments for the Vanguard Complete System.

In addition, we are currently scheduled to roll out 100 sets of Vanguard revision instruments during the 4th Quarter. As you recall, Biomet introduced the Vanguard Revision SSK, Super Stabilized Knee System on a limited basis earlier this year. Biomet was the first company in the industry to offer minimally invasive total knee instrumentation and continues to lead the market with this technology. Prior to the 2nd Quarter of this fiscal year, the Vanguard System has been offered only with Biomet’s Microplasty Minimally Invasive Knee Instrumentation. During the past three fiscal years, approximately 1250 sets of Microplasty Total Knee Instruments were released in the US with an estimated 1250 domestic surgeons having completed the microplasty total knee instrumentation training. The roll out of Vanguard Premier Instrumentation designed for implantation in the Vanguard System using a conventional open procedure was initiated during the 2nd Quarter and is ongoing through the remainder of the year with approximately 170 sets already in the field. Additionally, we initiated a limited introduction of the Vanguard Anterior Referencing Instruments during the 3rd Quarter.

The rollout of the Oxford Unicompartmental Knee System, the only free-floating meniscal unicompartmental bearing system, was approved for sale in the US during the 3rd Quarter. More than 260 surgeons completed Oxford specific training in the US during the Quarter, with the total now exceeding 850 domestic surgeons during the past six months. During the 4th Quarter, an additional 100 surgeons are scheduled to complete Oxford training in the United States. Excellent long-term clinical results have been demonstrated by the Oxford uni outside the US with a success rate of 98% at 10 years and 95% at 15 years. Contributing to 3rd Quarter knee growth, Biomet’s OSS, Orthopedic Salvage System, provided the most complete product offering for salvage procedures. The OSS is designed for use in complex revision cases as well as trauma and oncology procedures.

Moving on to extremity sales, we saw an increase of 21% in the US during the Quarter and 16% worldwide. On a constant currency basis, extremity sales increased 20% worldwide. Numerous devices contributed to the strong extremity sales growth during the 3rd Quarter including the Discovery Elbow, the Copeland Humeral Resurfacing Head, the Comprehensive Fracture Stem, the ExploR Radial Head Replacement, and the Mosaic Humeral Replacement System. The Discovery Elbow is a bone-sparing device featuring an improved design using ArCom direct compression mold polyethylene. The bone conserving Copeland Shoulder is a resurfacing system used to treat patients in the early stage of degenerative disease. The Comprehensive Fracture Stem available in both cemented and pressfit versions is utilized to treat complex shoulder fractures. The Mosaic System is a modular shoulder system designed for revision, salvage, and oncology procedures. Recently introduced extremity products experienced strong market acceptance including the ExploR Radial Head Replacement and Maestro Wrist Reconstructive System. ExploR is a modular device comprising of a tapered stem with a head designed to articulate with the patient’s natural bone. The Maestro Wrist can be utilized as a hemiarthroplasty for carpal replacement or as a total wrist replacement.

Sales of bone cement and accessories decreased 10% in the US and 15% worldwide during the Quarter. These rates were again very tough comparisons from last year’s 3rd Quarter growth rate of 36% worldwide and 78% in the US. The 3rd Quarter sales of bone cement and accessories decreased 8% worldwide on a constant currency basis.

The rollout of Cobalt and Cobalt G bone cements was completed during the 3rd Quarter. These cements were developed internally and offer high-contrast materials providing a benefit with minimally invasive reconstructive procedures. Biomet’s StageOne Cement Spacer Molds introduced during the 2nd Quarter experienced excellent market acceptance during the 3rd Quarter. The Spacer Molds are used in stage one of a two-stage revision procedure technically involving septic joints and offer surgeons an advantage over conventional handmade or pre-made cement spacers. Biomet also received FDA clearance for StageOne Cement Hip Spacer Molds during the 3rd Quarter and the rollout will be initiated during the 4th Quarter.

Dental reconstructive sales increased 13% in the US during the 3rd Quarter and 12% worldwide; excluding the impact of foreign currency, 3rd Quarter sales of dental reconstructive implants actually increased 16%.

During the 3rd Quarter, our 3i subsidiary launched the Advanced Cutting Technology, ACT, drill used to create the implant osteotomy. These reusable drills are designed to offer enhanced cutting geometry as well as modified laser marking and scoring for improved depth visibility. We received FDA clearance for the PreFormance Post provisional abutment. The PreFormance is a temporary abutment manufactured from teeth material allowing for easy modification by the clinician, making it particularly appropriate for provisional restoration of an implant. The abutment is available in both straight and pre-angled versions, featuring the titanium interface for improved strength and quality of fit, and is designed for up to six months of intraoral use. The launch of the PreFormance Post is scheduled to begin during the 4th Quarter.

Additional new products being launched during the 4th Quarter by 3i include the 3-Prevail line extension of the new OSSEOTITE Certain Prevail Implant System and Osteocision Incision Surgical Drill System. The 3-Prevail implant is designed to eliminate the expanded platform features which sometimes could be challenging when mandibular ridge width is inadequate. Osteocision Surgical Drill Systems provides a miniature handpiece for improved access between teeth and an electronically controlled irrigation system. In addition, during the 3rd Quarter, the FDA cleared Optics Plus a renowned collagen membrane. Optics Plus provides long lasting failure function and excellent tissue response for guided bone regeneration as well as improved handling characteristics with a more flexible membrane.

Moving on to fixation sales during the 3rd Quarter, worldwide fixation sales remained flat at $62.3 million and increased 1% in the US. Fixation sales increased 2% worldwide on a constant currency basis. Lorenz Surgical’s cranomaxillofacial fixation sales increased 7% in the US during the 3rd Quarter and 4% worldwide. Excluding the effect of foreign currency, cranomaxillofacial sales increased 5% worldwide. Internal fixation sales increased 15% in the US and 4% worldwide during the 3rd Quarter. On a constant currency basis, internal fixation sales increased 7% worldwide.

During the 3rd Quarter, electrical stimulation devices increased 1% in the US and worldwide. External fixation sales decreased 11% worldwide the 3rd Quarter and 12% in the US. Excluding the impact of foreign currency, external fixation sales actually decreased 10% worldwide. The 3rd Quarter internal fixation sales continued to benefit from the successful rollout of EBI’s PeriTrochanteric nail. This hip fracture system features a unique single lag screw concept with multiple lag options for various fracture patterns. Introduction of this system augments EBI’s portfolio of internal fixation products designed for use in the growing hip fracture market. The rollout in clinical evaluation of the OptiLock Periarticular Plating System for lower extremity fractures is ongoing and we are receiving excellent feedback from the market. In addition, anatomically pre-contoured plates, so the system is designed to allow use of different diameter bone screws in locked and unlocked options providing increased surgically flexibility with minimally invasive techniques and approaches. Introduction of this unique system to the market will enhance EBI’s portfolio of femoral products used in the treatment of complex periarticular fractures. EBI continues to receive excellent feedback regarding its pediatric locking nail for treatment of femoral fractures and reconstructive procedures. EBI have a wide range of internal and external fixation product offerings to treat a variety of femoral fractures in children, which uniquely position the company as a leader in this market segment. EBI will continue to expand product availability over the next two Quarters to increase penetration in this market segment.

Looking now at the spinal product sales, we saw spinal product sales increase 2% worldwide to $53.9 million and 3% in the US during the Quarter. Spinal product sales increased 3% worldwide on a constant currency basis. Sales of spinal implants and orthobiological products for the spine increased 9% worldwide and in the US during the 3rd Quarter, while spinal stimulation sales decreased 3% in the US and 4% worldwide. The rollout of the Polaris Spine System, which was initiated during the 2nd Quarter, is ongoing and should help to pick up momentum in spine sales during Fiscal ‘07. The Polaris is a 6.3-mm diameter top-loading rod system utilizing patented _____ locking technology. The PEEK-OPTIMA version of the Ibex Spine System, which was EBI’s first PEEK offering, received good market acceptance during the 3rd Quarter, additionally during the 4th Quarter EBI anticipates regulatory clearance for the PEEK version of the ESL, Elliptical Shaped Lumbar Spine System, and our stainless steel version of Array Spine System. ESL is EBI’s first spacer designed for direct posterior surgical approach. Pending the regulatory clearances, EBI plans to introduce these two new systems at the end of this fiscal year or the beginning of Fiscal ‘07. EBI’s clinical trial for the Regain lumbar nucleus replacement is scheduled to begin enrolling patients during the 1st Quarter of ‘07. Regain is a one-piece device made of pyrocarbon.

Looking briefly at other product sales, we saw an increase of 6% worldwide to $43.4 million at an increase of 4% in the US during the 3rd Quarter. On a constant currency basis, other product sales increased 8% worldwide. Sales of soft goods and bracing products increased 4% in the US during the 3rd Quarter and 2% worldwide. Arthroscopy sales increased 10% worldwide during the 3rd Quarter and 7% in the US. Arthroscopy sales increased 12% worldwide on a constant currency basis. Arthrotek products experienced excellent growth during the 3rd to include EZ-Loc Femoral Fixation device, the WasherLoc Tibial Fixation device, the InnverVue Diagnostic Scope System, and the Ti-Screw Anchors for shoulder repair. New arthroscopy products scheduled for introduction during the 4th Quarter are the ___ Fixation Device, the Bypass Suture Passer and the Bio-Port Interference Screw and Sport Mesh Tissue Reinforcement for rotator cuff repair. Looking at analyst estimates, we estimate foreign currency will continue to negatively impact our financial results with the 4th Quarter sales likely to affected by approximately $11 million. Consequently, we remain comfortable with sales and earning estimates for $530-540 million for the 4th Quarter and per-share earnings in the range of $0.05 to $0.46 per share.

In summary, we continue to be pleased with our market-leading growth from the important reconstructive device categories despite extremely difficult year-over-year comparisons in the important knee product categories. We’re pleased with the moment of certain EBI product categories, particularly internal fixation devices. In addition, after several Quarters of decline in sales, we’re pleased with the rebound in electrical stimulation device sales and the acceleration in growth of spinal hardware and orthobiological processors. Additionally, the product pipeline is strong as is seen in our history, as we will be introducing more than 100 new products in technologies at the American Academy of Orthopedics Surgeons’ Annual Meeting in Chicago beginning tomorrow. Just as reminder, our analyst meeting at the academy is scheduled for Thursday in the Grand Hall Room at the Wyndham Chicago Hotel at 633 North St. Clair Street. The reception will begin at 4:30 and the meeting to begin at 5 o’clock. We look forward to seeing some of you at least there. Thank you very much.

Questions?

Operator:

Thank you. The question and answer session will be conducted electronically. If you would like to ask a question, you can do so by pressing the “*

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