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Product / Company Performance

Zimmer Biomet reports 4Q18 orthopedic revenue of $1,849.7MM, +0.2% vs. 4Q17 -

By Mike Evers, ORTHOWORLD

Zimmer Biomet posted 4Q18 orthopedic revenue of $1,849.7, +0.2% vs. 4Q17, with full year 2018 revenue of $7,081.7MM, +1.8% vs. 2017. Guidance provided for 2019 is in the range of -0.5% to +0.5% revenue growth.

The company’s 2018 growth rate improved marginally over 2017 (1.76% vs. 1.7%) amid ongoing recovery efforts and -2% price pressure, driven in part by global large joint performance. Leadership called out 3Q18 and 4Q18 as the best quarters for large joints in the last two years, which has helped the company reduce the gap to market growth. The Asia Pacific region continued its trend of overperformance for the company, while EMEA was not as strong but performed well in the face of potentially disruptive leadership changes and team restructuring.

Recovery efforts showed progress in the key areas of supply recovery, quality remediation and restructuring of leadership teams. Zimmer Biomet reduced backorders in 2018 and no longer considers supply to be a barrier to delivering on its financial commitments. The company is executing an ongoing quality remediation plan at the Warsaw North Campus and expects FDA re-inspection by the end of 2019. To create sustainable growth and recovery, the company restructured its leadership teams. Within the last year, 70% of those on the leadership team are new to the position.

Zimmer Biomet leadership spent much of the earnings call focused on the future. In 2019, supply goals include regaining the trust of the commercial salesforce and improving overall supply chain efficiency. Leadership is confident that stable supply levels and a cadence of new products will reinvigorate their surgeons, but acknowledged the task of regaining the trust of internal team members is slightly more complex. While ample product supply is necessary, the commercial team must also know that company leadership is directly engaged with and supportive of sales efforts.

Regaining trust was a theme in the commentary from leadership, and they promise to carry it over to Zimmer Biomet’s AAOS presence, which will be “very different” from prior years. The company will host an investor meeting to offer visibility to the leadership team and insight to the upcoming plans and innovations. While ROSA will be featured at the conference, company leaders were notably circumspect in their comments about the launch and potential features of the robot.

ROSA Knee, which received FDA 510(k) clearance in January, will start with a limited launch for the first half of 2019, with the focus on a disciplined, problem-free launch. While not stated directly, it is likely that the company will trade ROSA units for increased implant share. Zimmer Biomet’s ROSA strategy seems to prioritize high-volume surgeons who might otherwise avoid robotics because of the disruption to procedure flow.

Speaking on the knee franchise, Zimmer Biomet CEO Bryan Hanson had some enlightening comments about how robotics plays into the company’s larger sales strategy. He outlined three vectors by which Zimmer Biomet is losing units and revenue relative to competitors: surgeons are being converted by competitors, knowledgeable patients are electing for robotic procedures and competitors are achieving more favorable product mix through their robotic units. He said, “I really do believe we are losing surgeons. I do believe we’re losing patients to our competitors’ surgeons. But I think by far, the biggest contributor to share loss is…that our competitors are doing a very good job of going right to the surgeons they have in the procedures they already have and upselling the robotics in cementless and other areas.”

In that regard, the launch of ROSA could be a windfall for Zimmer Biomet. Despite recent struggles, they still maintain the number one position in the knee market, according to our estimates. With their flagship Persona Knee system being rounded out with partial, cementless and revision products, ROSA may offer an avenue for improved mix across a very large surgeon population. Additionally, like many orthopedic companies, Zimmer Biomet’s long-term commercial strategy is increasingly focused on creating closed “ecosystems” of products to leverage more of their portfolio per procedure.

Looking ahead to 2020, the company has a three-pillared approach to move beyond their recovery efforts. First, leadership wants to establish Zimmer Biomet as a preferred place to work by continuing to focus on the organization’s connection to its mission and culture. Second, the company will continue to regain the trust of stakeholders including customers, regulators, team members and investors. Finally, leadership plans to make the company a top performer in total shareholder return by accelerating revenue growth, expanding margins and increasing free cashflow.

ORTHOWOLRD estimates segment values and growth on an as-reported basis as follows.

  4Q18 4Q17 $ Change % Change
Joint Replacement $1,336.2 $1,334.4 $1.8 0.1%
Knees $729.5 $730.3 -$0.8 -0.1%
Hips $497.7 $497.2 $0.5 0.1%
Extremities $109.0 $106.9 $2.1 1.9%
Spine $114.7 $116.0 -$1.3 -1.1%
Trauma $152.7 $149.3 $3.4 2.3%
Sports Medicine $35.9 $35.0 $0.9 2.7%
Orthobiologics $74.0 $73.8 $0.1 0.2%
Other * $136.1 $137.5 -$1.4 -1.0%
Total  $1,849.7 $1,846.1 $3.6 0.2%
  FY18 FY17 $ Change % Change
Joint Replacement $5,110.5 $5,009.8 $100.7 2.0%
Knees $2,773.7 $2,734.0 $39.7 1.5%
Hips $1,921.4 $1,871.8 $49.6 2.6%
Extremities $415.4 $404.0 $11.4 2.8%
Spine $453.1 $456.4 -$3.3 -0.7%
Trauma $580.7 $562.7 $17.9 3.2%
Sports Medicine $135.0 $131.2 $3.8 2.9%
Orthobiologics $286.8 $281.7 $5.0 1.8%
Other * $515.7 $517.1 -$1.5 -0.3%
Total  $7,081.7 $6,958.9 $122.8 1.8%

* CMF, Bone Healing, Forgings, Accelero

Estimated orthopedic revenue by geographic region is as follows.

Geographic Region 4Q18 4Q17 $ Change % Change
US $1,069.13 $1,081.73 -$12.6 -1.2%
Ex-US $780.5 $764.34 $16.2 2.1%
   EMEA $424.77 $421.91 $2.9 0.7%
   Asia Pacific $300.27 $287.05 $13.2 4.6%
   Other $55.49 $55.38 $0.1 0.2%
Total  $1,849.7 $1,846.1 $3.6 0.2%

Net earnings, inclusive for all Zimmer Biomet revenue, is as follows.

4Q18 Amount ($MM) % of Sales
Sales $2,071.0  
Cost of Sales -$583.4 28.2%
Selling and Admin -$998.6 48.2%
R&D -$101.2 4.9%
Other -$1,290.3 62.3%
Net Earnings  -$902.5 -43.6%

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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