Morningstar | Zimmer Biomet Sees Improved Growth in 2Q; No Change to Our FVE
Zimmer Biomet delivered solid second-quarter results that were consistent with our expectations and remains on track to hit our full-year projections; we’re standing pat on our fair value. We were particularly pleased to see the firm meet its own deadline to restore inventory levels, especially in large joint reconstruction which remains the firm’s bread and butter. With supply constraints easing, Zimmer Biomet was better able to meet demand from its existing base of surgeons. Quarterly volume and mix on knees and hips rose 4.2% and 4.4%, respectively, which is considerably closer to market growth than we’ve seen since the second half of 2016. Price headwinds of roughly 280 basis points remain a challenge and are unlikely to diminish, but the firm is moving in the right direction. We expect wide-moat Zimmer Biomet will continue to see gradual improvement on the top line over the coming quarters as adequate supply is restored and the sales force eventually turns its attention to competitive accounts.The firm hasn’t seen quite as much progress on the regulatory front where the FDA’s issues with the legacy Biomet plant in Warsaw, Indiana have yet to be resolved. Management remains closemouthed about its approach to remediation, and we continue to caution that these situations can take longer to put to bed than one would expect. Additionally, the FDA works on its own schedule. The incremental cost of this remediation has knocked roughly 200 basis points off second-quarter operating margin. However, we see this as a near-term issue that is likely to ease by this time next year.
We find little to disagree with in management’s current priorities to stabilize existing businesses, then invest in reaching scale in attractive markets where Zimmer Biomet is currently sub-scale, and finally, to entertain the prospect of further diversification. We wouldn’t be surprised if Zimmer Biomet seeks to beef up its presence in sports medicine or trauma.
Zimmer Biomet Holdings is engaged in musculoskeletal healthcare. The company's products are: Knees, which includes knee replacement surgeries; Hips, which includes hip replacement surgeries; S.E.T., which includes surgical, sports medicine, biologics, foot and ankle, extremities and trauma products; Spine and Craniomaxillofacial and Thoracic, which designs, manufactures and distributes medical devices and surgical instruments, as well as provides face and skull reconstruction products; Dental, which manufactures and/or distributes dental reconstructive implants, dental prosthetic products and dental regenerative products; and Other, which includes bone cement and office based technology products.
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