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Product / Company Performance

Zimmer Biomet Reports 3Q18 Revenue of $1.637.4MM, +1.2% vs. 3Q17 -
By Mike Evers, ORTHOWORLD

Zimmer Biomet leadership expressed cautious optimism as the recovery timeline for 2020 remains on track, posting 3Q18 orthopaedic revenue of $1,637.4MM, +1.2% vs. 3Q17. The company continues to work through quality remediation and supply chain issues, while facing new challenges like the pending termination of their U.S. distribution agreement with bone cement supplier Heraeus.

 

Some Positives, but Much Work to be Done

Zimmer Biomet 3Q18 results “look a little better than they actually were,” according to President and CEO Bryan Hanson. The company benefitted from easy third quarter comps as well as timing on tenders from capital sales in Asia Pacific and EMEA. Hips gained some momentum but, like all reconstruction segments, went up against notably easy comps that become more challenging in 4Q18. The spine segment remains challenged due to the ongoing restructuring of that sales channel while pursuing growth, a process leadership likened to driving a car down the street while changing the fan belt.

On the positive side, the company continues to see improved engagement from its salesforce as reps become more confident in the supply recovery. Launch of new products like PERSONA partial knee, PERSONA TM Tibia and PERSONA revision system, the latter of which received FDA clearance on October 25, represents an important growth opportunity for the company.

Another product in Zimmer Biomet’s pipeline is the ROSA total knee application, which is expected to receive FDA approval in early 2019. The first five cases using ROSA for knee surgery were done in Australia, all in a single surgery day by one physician, perhaps hinting at the company’s positioning of their robot as efficient and minimally disruptive to procedure flow. A possible drawback for ROSA, however, is the inability for one robot to handle brain, spine and knee applications.

Additionally, leadership is excited about the potential of the mymobility app, designed in collaboration with Apple to better connect patients and surgical teams through an entire episode of care for hip and knee replacements.

ORTHOWORLD estimates 3Q18 and YTD segment sales and growth on an as-reported basis, as follows:

  3Q18 3Q17 $ Change % Change
Joint Reconstruction $1,170.1 $1,151.3 $18.8 1.6%
Knees $627.9 $622.9 $5.0 0.8%
Hips $444.8 $432.8 $12.0 2.8%
Extremities $97.4 $95.6 $1.8 1.9%
Spine $109.2 $109.5 -$0.3 -0.3%
Trauma $137.0 $133.5 $3.5 2.7%
Arthroscopy/Soft Tissue Repair $31.5 $31.3 $0.2 0.7%
Orthobiologics $67.2 $66.3 $0.9 1.3%
Other $122.3 $125.6 -$3.2 -2.6%
Total  $1,637.4 $1,617.5 $19.9 1.2%

 

  YTD18 YTD17 $ Change % Change
Joint Reconstruction $3,774.3 $3,675.4 $98.9 2.7%
Knees $2,044.2 $2,003.7 $40.5 2.0%
Hips $1,423.7 $1,374.6 $49.1 3.6%
Extremities $306.4 $297.1 $9.3 3.1%
Spine $338.4 $340.4 -$2.0 -0.6%
Trauma $428.0 $413.5 $14.5 3.5%
Arthroscopy/Soft Tissue Repair $99.1 $96.2 $2.9 3.0%
Orthobiologics $212.8 $207.9 $4.9 2.4%
Other $379.5 $379.6 -$0.1 0.0%
Total  $5,232.0 $5,112.9 $119.2 2.3%

 

3Q18 Revenue by Geographic Region

Negative impact of foreign currency exchange was about 1% worse than anticipated by Zimmer Biomet, and leadership expects this to be a headwind for the next several quarters. ORTHOWORLD estimates Zimmer Biomet’s orthopaedic revenue by geographic region as follows.

Geographic Region 3Q18 3Q17 $ Change % Change
US $974.3 $962.4 $11.9 1.2%
Ex-US $663.1 $655.1 $8.1 1.2%
   EMEA $352.04 $355.84 -$3.8 -1.1%
   Asia Pacific $261.98 $250.71 $11.3 4.5%
   Rest of World $49.12 $48.52 $0.6 1.2%
Total  $1,637.4 $1,617.5 $19.9 1.2%

 

Challenges Facing the Company During Recovery

The pending termination of the distribution agreement with Heraeus will cost Zimmer Biomet an estimated $10MM to $15MM per quarter for several quarters. To offset the loss, the company will transition customers to their internally produced bone cement. Leadership stated that while the timing is frustrating, the issue will not have a negative pull-through effect or hinder the recovery timeline.

Zimmer Biomet expects a reinvigorated spine salesforce entering 2019. Hanson said, “[W]hen you have a kickoff meeting with an organization that’s ready to go and you introduced new products, there is serious energy that comes out of that.”

However, he also noted the need for the company to simplify its portfolio overall as the sheer number SKUs inhibits Zimmer Biomet from offering best-in-class service or driving production efficiencies. It will require a deft touch, however, to reduce the portfolio without further frustrating surgeons already stressed by supply chain issues on the products they use. This portfolio reduction, and the pivot to focus on manufacturing cost reduction measures, are expected to contribute to the 2020 recovery goal by improving margins. Hanson reaffirmed that the 2020 recovery goal includes consistent 2% to 3% growth.

Considering the quarterly loss of $10MM to $15MM due to the bone cement supplier issue, as well as expectation from leadership of less growth in 4Q18, we project Zimmer Biomet 2018 orthopaedic revenue of $7,088.2MM, +1.8% vs. 2017.

 

Net Earnings

Pressure on Zimmer Biomet’s gross margins are expected to continue through 2019 due to elevated production costs at their North Campus facility. Net earnings data below reflects all revenue for Zimmer Biomet, not just orthopaedic segments. We categorize costs associated with acquisition integration as Administrative and costs associated with quality remediation as Other.

3Q18 Amount ($MM) % of Sales
Sales $1,836.7  
   Administrative -$805.1 43.8%
   Cost of Goods -$529.0 28.8%
   Other -$244.7 13.3%
   R&D -$95.7 5.2%
Net Earnings  $162.2 8.8%

 

Sources: Zimmer Biomet; ORTHOWORLD estimates. All revenue figures presented in USD $MM.

Mike Evers is ORTHOWORLD’s Market Analyst. He can be reached by email.

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