Zimmer Biomet Holdings, Inc. (ZBH) Earnings Call Transcript & Summary

Okay. Thanks, everyone, for joining us for this morning's session with Zimmer Biomet. I'm Vijay Kumar, I cover devices, life sciences at Evercore. Very pleased to have with us Bryan Hanson, CEO; Suky Upadhyay, CFO; and representing the IR team, we have Keri Mattox. Gentlemen, ladies, thank you for joining us.

Maybe I'll start with something, which has been topical, Bryan, and it shouldn't be a surprise, second wave has been topical when I -- if I look back at your 3Q commentary, you said October was in line with 3Q, except for EMEA. Perhaps talk about what kind of impact, if any, the second wave was having on the business as you see now.

Sure. So clearly, it's having an impact. But what I'll do maybe is toss this over to Suky, he's the on the phone probably daily. We look at it as a team weekly, obviously, but I think he's on with the regions every day. So he's got the most up-to-date information on what's happening with the surges and how it's impacting the business. So Suky, why don't you go ahead and take this one.

Sure. Happy to do it. And thanks, Vijay, for hosting us today. Things are very fluid, Vijay, as I'm sure you and all the listeners have seen in the daily headlines and things do move, as Bryan noted, daily, if not weekly, just as we've seen the second wave come through. But if you break it down by region, I'll kind of link you back to Q3 and give you some sense of where we're headed within the fourth quarter. Just starting with our hardest hit area or region in the fourth quarter, which is EMEA. And I think you've seen the headlines there. We were down about 6% in Q3. We noted that we were seeing a lot more pressure in that region on our third quarter call. And I'd say that, that's probably accelerated. At the time of our third quarter call, there was a pretty good balance between some stabilization in developed markets and emerging markets were under a lot of stress because of the virus. And then secondly, we're actually now seeing that extend into developed markets within EMEA. And so that's put additional pressure. And that region has just had some challenges in dealing with the second waves. And we see more draconian actions at the local level and policy level as well. But overall, the way we see EMEA now is probably more like double digits down for the fourth quarter, maybe even high teens down year-over-year. And again, that assumes that December is largely in line and -- with November. And so that assumes no further deterioration. From there, if you move to the Americas, the way we characterized it back in the third quarter was overall, it was low single-digit growth, about 3% growth year-over-year, with the U.S. performing relatively well, and emerging markets are markets outside of the U.S. in the Americas struggling. We continue to see that in markets outside of the U.S. but now within the U.S., we're also feeling additional pressure because of the second waves. Many of the states continue to operate in that 70% to 90% of prior year. There are some exceptions on either end of that. But what you're seeing now versus the third quarter is where in the third quarter you had some states that were operating well above 90% or over even 100% as they were increasing capacity to take deferred patients. You're not seeing that, and you're seeing more of that impact wide spread than we did in the third quarter. And so the way we see the Americas for the fourth quarter is probably about flattish to 2019. And again, that assumes no further deterioration from I where we are today. And then last, Asia Pacific continues to be relatively stable. We posted just under 1% growth in Q3. We'll probably do just a little bit better in Q4. We continue to see China rebound really nicely and showing growth well above prior year. Japan, our largest market, continues to be relatively stable. But we are still seeing pressure in places like India and other southeastern -- sorry, Southeast Asian countries. So all in all, again, EMEA, probably somewhere around high teens down, Americas relatively flattish and Asia Pacific, likely a little bit better than what we saw in Q3. And again, that assumes no further erosion or worsening from what we are currently working with today. In the backdrop of all that though, Vijay, I would say, the fact that we're seeing infection rates as high as they are, right? In some instances, even higher than what we observed back in April and May, we are not seeing the deterioration in the business that we saw in April and May. And so what that suggests is that hospitals are much better prepared to deal with this. They're leading decisions on triaging of patients at the local level, at the hospital level, at the physician levels, which we think is the right thing for the patients. And so again, we don't expect to get anywhere near the situation we were in April and May, even though, in some instances, the infection rates and acuity of this is just as high. So that's a good thing. I'd say the other thing to remember, Vijay, is that as we think about -- in the categories we operate in, these are progressive diseases with high pain burden, high-impact on quality of life. And so while many of these patients are being deferred right now and may continue to be deferred for some time because of these second waves. We do expect for them to come back into the system over time. Now when that happens, will largely depend on stabilization of the virus, a vaccine, et cetera. But at some point, they will come back in or the vast majority of them will come back in. And we expect that to be a tailwind as we move into 2021 and beyond. So overall, yes, we are seeing heightened pressure. But I would say it's relatively good, given the level of infection rates we're seeing versus April and the growth rates that we're posting. So still a very fluid situation. We're going to continue to watch it day-to-day, week to week. But right now, that's our best view of where we think we'll land for Q4.

That's helpful perspective, Suky. Bryan, on the back of those comments on vaccines. We've seen some data here, really high efficacy rates. How does this change your view? I think in the past, you mentioned perhaps 2021 revenues being in line with 2019. Does the vaccine efficacy data chain that view at all for you?

I mean, I'd tell you, I'm very excited about what we're hearing relative to the efficacy levels of the vaccine so far. I mean, the real test, in my view, isn't necessarily the specific efficacy data, but it's whether or not it stops the surges, right? So it's got to be a widespread enough vaccine to stop the surges from happening. And probably a very important component of that is eliminate the fear associated with COVID. And the fact that patients are -- that fear is driving them to defer procedures. So assuming that the efficacy translates into stopping surges and eventually translates into no more fear on COVID, that's a very positive environment for us. And what I would say in that environment, in particular, it gives us more confidence, obviously, that 2021 would be more in line with 2019 and if not show growth over 2019. And that's certainly what we're hoping for, but there's still a lot of real estate between where we're today and where we need to get with the vaccine to get us more comfortable with that.

Understood. No, that makes sense. I think some of these vaccines considering that they need to be transferred at certain temperature. I think the logistics are going to be challenging, you bring up a good point. I guess, stepping away from vaccines, if I look back over the last 2 years, Bryan, when you stepped into the role, there were a lot of issues, right? It was a war on many fronts. You were dealing with manufacturing. There was a cultural element. And last and all of this was innovation, right? What does Zimmer have to reinvigorate growth, if you will. And I do want to touch on each of these elements, but maybe let's start with manufacturing. I know in the past, you've said it's not a hindrance to growth anymore, but has it been solved? Or where are we on manufacturing right now?

Well, what I would say is I think of everything kind of in phases. And in that first phase of the turnaround, there were several elements to that, manufacturing was definitely 1 of them. I would just define it more broadly as supply issues. And even inside of that, I look at it as phases. The first phase was to make sure that in the supply issues, we triage the problem and stop the back order issues that we had. We were 4-plus in days of backorder, which is impossible to be able to get new customers, let alone just service the customers you have. And we're below half a day now, consistently below half a day. And so it's a dramatically different position than we were just 1.5 years, 2 years ago. And that doesn't mean we stop, though, the next phases then become how do we begin to optimize our footprint, how do we begin to optimize the overall cost structure in manufacturing. And that's the thing that we're working on now. So we're able to move away from this triaging the problem to being able to become more efficient in manufacturing. That would look at SKU reduction, footprint reduction and just overall efficiencies in manufacturing. So that will never stop. It's just a different view of how we're focused in manufacturing today. But there's no question, it is not a barrier anymore to growth.

That's helpful. The -- I guess, the second element of -- on the culture change, and this is harder for us to model, it's very hard to put numbers, but it certainly does have a real and tangible benefit to numbers. What is the best way to characterize the change in culture that you've seen in the organization over the past couple of years?

I'll tell you, this is one that can take a lot of time. And I was, quite frankly, pretty surprised, even though we put a lot of effort into it, that the speed at which the organization shifted. And that just tells you that people were hungry for it. They were really looking for a change in -- a One-Zimmer-Biomet mission, a One-Zimmer-Biomet culture. And the amount of effort and time we put into it was significant, but the adoption of that happened much quicker than I expected. But I would tell you there, Vijay, it never stops. I mean that work absolutely never stops. It's a continuous thing. But the jump that we've made as quickly as we have has been heartening for sure. And we check this, this isn't just me guessing. It's not like Spidey sense and we actually do surveys to check where the organization is relative to engagement. And even during the pandemic time, the engagement has actually moved north, particularly around connection to ZB mission, ZB culture, confidence in leadership and confidence in the future of business. And that's significant. When people have confidence in a business, that's dependent on elective procedures during the middle of a pandemic that is putting pressure on a lot of procedures, it speaks to what's happened in the organization. So again, it's -- I feel really good about where we are. I'm happy about it, but certainly never satisfied. We're going to continue to work on it and then even get better.

And then one way maybe perhaps look at the change in culture, Bryan, for us is looking at churn or headcount turnover. House turnover been in the organization, I would imagine what the pandemic -- there's been some stabilization. You wouldn't expect people to be looking for new careers in the midst of a pandemic. But maybe talk about the churn rate you're seeing in the business.

I'd tell you, even before the pandemic -- and trust me, we've been putting a lot of pressure on people. Part of changing the culture is to say we will deliver that, we're going to make commitments, we're going to be aspirational on those commitments, and we're going to deliver on those commitments. And with that comes a lot of work, comes a lot of effort. And a lot of change for people. And even in the midst of that, what we found even in the commercial organization, we didn't really have any churn, almost no negative churn. We moved people out of the organization. So we did have churn, but it was a desired churn. But when you looked at the non-desired churn from a commercial perspective, we almost had none, the year prior to the pandemic, which is almost unbelievable, given the amount of change that we've had. So I've been very happy with the stabilization of the commercial organization and just broadly the ZB team overall. But the good news is when you start to have success, as I said before, you do have the opportunity to begin to move underperformers out with confidence. We've been doing that, moving people out that are not able to drive the revenue forward, that don't have the same cultural aspirations that we do at ZB and bringing people in that do. So it's been a good environment for us relative to talent selection. And that's a big part of Phase III that we're in right now, the turnaround, which is a deeper dive on talent. Understanding the critical roles in the organization to drive success. What does it take from an experience and capability standpoint to be in those roles, making sure that we're developing our team to get there. We're hiring people that already have that. So I've been pretty happy overall with talent.

And it's interesting, culture change. One of your peers is talking about we're here to win market share, gain market share. And I'm curious, if I had to apply that same ruler to ZB, for ROSA, clearly, that's been a focus for investors. When does Zimmer get back to growing above market in core implants? And I'm curious on your response.

Yes. Well, I would say it's same for us. We love playing the game, but we're not here to play of the game, we're here to win the game. It's just -- it's the way it is now. It's the culture that we're going to drive. And I would say that I think we're -- in certain businesses, we're already there. It's frustrating because just as we were picking up on the innovation side, getting the swagger back on the commercial side of the organization, getting the problem their way, the COVID hit. And so it's been masking what I think otherwise would be very impressive performance in a lot of our businesses. Now we can still look at our relative performance versus competitors, versus our peers. And that's helpful, but it's still a little bit murky. So I'd say we're kind of already there, particularly when we talk about the knee franchise, we just have so many potential shots on goal that I feel we're already in a place where we could be consistently above market. The market growth is always challenging to see right now because of COVID, but if I just look at us relative to our peers, I would expect us to look pretty good versus our peers on a go-forward basis. That comes down to all the different innovation that we're bringing to the marketplace right now, again, that confidence and comfort right now with the organization, going on offense, all those things are really allowing us to move forward well there. Hip is doing quite well as well. We have more innovation on the forefront in 2021. That's going to continue to help us there. We've just added quite a bit to [ set ]. As you remember, we just did 2 small acquisitions that filled out the portfolio in ASC and sports for us, and we continue to specialize the sales organization. So all the things, all the components, all the variables that we need to put into place to drive traction in the key areas of focus for us are moving in the right direction.

That's helpful. Maybe just sticking to ROSA. Any change in CapEx environment? I think there's been a change in the selling process. You're looking at placing systems. And I think some of the numbers have seen a 200 to 300 systems for fiscal 2020 and perhaps a similar level for '21, are those numbers are still intact, Bryan, do you -- and changing the environment?

Well, first, I want to make sure that when we say the 200 to 300 by the end of 2020, that would be for the -- since launch. So that wouldn't just be placements in 2020, that would be since launch. And I would say that we continue to see a significant amount of demand for ROSA. A, you always look at the amount of customers that are in the funnel to be able to convert, and that customer number continues to grow, and our confidence as a result of that of having a lot of tailwind from ROSA for some period of time increases every time we see that number go up. And it's translating into conversions, right? It's translating into placements out in the marketplace. I won't speak specifically about it, but Q3 was pretty attractive for us in ROSA placements, and Q4 is going to be better than that. And my sense is that Q4 kind of placement quantity should carry forward into 2021, which would make 2021 better than 2020. So right now, it feels pretty good. There is a little bit of a shift coming to the fourth quarter, I think hospitals are feeling a little more confident right now in their budgets, and a lot of hospitals want to use their budget -- capital budget before the end of the year. I haven't seen a material shift, but we're definitely seeing a little more leaning towards spending capital versus placements right now in the fourth quarter. And whether that continues or not into 2021, I'm not sure. For us, it doesn't necessarily matter. We have a number of different [Audio Gap] for a extended contract with volume commitment, that's actually the preferred way for us. Because it creates that relationship, that long-term relationship. But either way, for us, is accretive to our overall revenue growth and profitability. So both are exciting and attractive. And that funnel, again, continues to get bigger.

And can you talk a bit about those volume commitments, Bryan? Like, if I had to take a hypothetical example, right, if there was an account with ZB's share in that account at 30%, should that share double or triple perhaps based on these volume commitments?

It would depend on the size of the account because that would all -- there's a certain dollar amount that we require in a commitment to be able to get a placement in a system. And so it would depend on the overall size of the account relative to what percentage increase you get in the business. It ends up happening, at least what we've seen so far is there's a commitment made for that threshold level of competitive business. That usually is exceeded because you find that more people want to begin to use the ROSA system and the relationship that you have with that account grows, it strengthens. And so you end up winning other opportunities in the account that you probably wouldn't have won otherwise. And so it's hard to look at a specific percent, but just know that once the ROSA system is in place and extended contract is in place, we usually get more than the committed threshold of new business.

That is a helpful commentary, Bryan. Maybe on the topic of rate. One of the things -- at least, I don't know about the market, but I think about as the -- if you look at robotics, a few years ago, it was a 1 player market. Now Zimmer has gotten in and you're seeing great traction in that market. But once J&J comes in, is the playing field sort of -- does it even out amongst all the players? How should we think about that competitive landscape? And should it impact some of these volume growth we're seeing, maybe elaborate on the competitive landscape?

Well, I'd look at it probably in 2 ways. The good news is that the robotic penetration in orthopedics is really low. Even in knee, where we've been heavily focused to us and other players, it's still under 10% penetration. But if you go to hip, you go to shoulder, you got other areas of orthopedics, it's well below that. And so I truly do believe that there's plenty of room for all players that have a good solution in robotics to be successful. Now that said, again, we're not here to play the game, we're here to win the game. So our goal is to get more than our fair share of that positive momentum. And the way that we would do that, obviously, is to continue to innovate around robotics specifically as a swim lane. But also innovate around what I would just define as the ecosystem of robotics. And a big part of that is data and informatics, right? So how do we combine more inputs into what you get already from robotics to be able to give the surgeon a better dashboard on the patient, so they can make better care decisions for that patient. And that would be data that we would collect before the surgery, during the surgery using ROSA and then obviously, post the surgery. And the way that we do that today is with mymobility with our relationship with Apple, right? Across that full continuum of care, the ROSA collection that we have, and eventually, relatively soon, a smart implant that will also be communicating to this ortho intel back-end system that we have. And then using artificial intelligence over time with enough patients. The hope is that we can predict what -- how a patient is going to do, what kind of cuts you should get, what kind of tissue balancing you should have and help guide the surgeon, again, for better care for those patients. So for us, it's not just how do we win in robotics, believe me, we're going to do that through launches inside robotics, we have a very full NPI pipeline. But it's also these other things around robotics that will differentiate our technology, our solution set from everybody else, and again, allow us to get, hopefully, more than our fair share versus the competition.

That's really interesting on smart implants. That's something new. I haven't heard it before. Maybe talk about what kind of data should a smart implant be communicating? Is that communication happening at the time of implant? Or is this something that can continue to transfer data over time? I'm really curious on where this industry is going.

Yes. I mean, it's exciting. I'd say -- because think about it, now even with mymobility, which we're very excited about, it requires a patient to wear the Apple Watch. And if for whatever reason, they're not compliant to that, you'll lose out a data set, right? Whenever they take that watch off. With the implant, you can't take it out of your body, it's there forever. And it immediately starts to provide input from the time you input -- you implant it to the patient, and it could go as many as 20 years. So we could be collecting data on patients for 20 years with the current design of the product. So it's pretty exciting. The kind of -- the type of data set that we're going to get, and ultimately, what we're going to learn as a result of this, I truly do believe, will change the way we care for patients. And what's great about that, it's not just great for patients in that moment, but I believe it's good for the marketplace because a lot of patients sit on the side, particularly with knee replacement because they're afraid of the procedure. They hear the horror stories of not getting the outcome they want. Some 20-plus percent of patients don't get the outcome they expect. And as a result of that, you've got a lot of people sitting on the sidelines. As we optimize the procedure, and we get better outcomes, more consistent outcomes, make a knee more like a hip from an outcome standpoint, I think you're going to see more patients into the funnel. And that's really the goal here, right? And how do we make sure that we get better outcomes. So patients have more confidence. And then ultimately, there's more volume coming into the procedure swim lane.

That is absolutely fascinating. I don't know about you but I had that, I guess, The Terminator movie flash in my mind when you spoke about hard implants, but it really is fascinating. So one of the thesis, this is someone with the longer-term time horizon asked me was the reason ortho end markets haven't grown is because of innovation. And I find it fascinating, you guys think that the category could expand with some of these innovation coming down the pipeline.

I do. I mean -- and here's what we've done around this whole idea of innovation and not just innovation in the sense of how do I bring a new implant. There's always going to be room for that, optimizing an implant, but we've reshifted dramatically the amount of research and development that we spend on robotics and data and informatics. We truly believe that's going to be the game-changing area of orthopedics and will give us an opportunity to, again, potentially change the growth of the market because you can impact the share of wallet you make per procedure because of the value that you're providing in that area for patients and for surgeons. So that is definitely an area that we're concentrating. Just to give you some perspective, 70-plus percent now over the last 2 years, of our R&D has shifted to robotics and data informatics, which also means that the profile of our research and development engineers has shifted around artificial intelligence, robotics, just data overall. We've got much bigger presence now in Montreal. We've got a much bigger presence in Southern France. These are areas that we have dramatically increased spend. So we have internal competency. And where we don't have the competency, we partner with people like Apple. We partner with people like Canary for the smart implant. And there's going to be additional partnerships on the technology side that you're going to hear about soon, again, to take us into areas that we couldn't go by ourselves. So we truly do believe this form of innovation, which we're 100% focused on, is going to drive better traction, not just for our business but also, ultimately, for the market.

Is there a time line, Bryan, on when we could get these sort of smart margin plants at the market?

2021. Yes, you'll definitely -- it's here, right? So we've got the relationship already with Canary. We've already coined it to Persona iQ. So it will be in our Persona implants, and it will be available in 2021.

Oh, wow. And how should we -- when you think about 2021, what other -- when you think about innovation and pipeline, maybe can you remind us on what are the key new products that are launching in '21? And then I had 1 question on Persona iQ.

Yes. So if I just think of some of the key things, remember, we launched things in 2020 that will still have significant momentum into 2021. Think about the signature one planner in upper extremities. That was a gap for us. We are really excited about that launch, and it's getting great traction with our surgeon partners right now. And the beautiful thing about that, and I talk about it a lot, but it's not just the fact that people are being wed then to your implant and to your pre-surgical planning. It becomes -- it creates a smarter surgeon, right? Because you know what you're going to run into from an anatomy perspective in the surgery. And so you know when you have deficiencies, and you can then order ahead of time, augments and/or guides, which, again, increase the spend for that procedure. It gives a better outcome for the patient because you have what you need, surgeon is happy because they have what they need to perform their surgery. And we're happy because we get more revenue per procedure. So that signature one planner is exciting because people like it, but it's also exciting because of what it does to patient care and also the amount of revenue we get per procedure. So that's an exciting one that will continue into 2021. ROSA Knee will continue. Obviously, we're going to have the partial knee application in 2021 as well in ROSA. We're going to have the hip application in 2021, and that will still be complemented by the Avenir Complete, which is a relatively new launch. And we're going to have other -- we just talked about the smart implant on Persona. So that Persona family just continues to drive energy for us. The iQ will, I think, be another new unique thing that we bring to the market first. And Persona Revision just continues to just knock it out of the park. So there's just a number of, again, shots at goal, if you will, and being able to drive above-market growth.

That's pretty impressive. So Persona iQ, ZB will be the first to market. Is there perhaps a premium pricing associated with the iQ?

Yes. We haven't discussed it, but you could assume that -- given the value that would bring, there would be a premium associated with it. So it goes back to that whole idea of being able in that same procedure that would have occurred to get higher revenue or I'd just find it a share of wallet in that procedure. And that would be another opportunity for us to do that, very much like cementless, very much like a stemless shoulder. You look for those opportunities to be able to bring something to the market that drives real value, like robotics, that every procedure that is done right, you can get more revenue per procedure. And the hope is that it's attractive enough where you don't just get an upsell in your current [Audio Gap] but you also get competitive procedures.

No, those are great points. I -- should adoption for something like a Persona iQ, mirror, cementless knee -- and I'm curious on how -- like, I can't think of anyone else saying I don't want a smart me. So I'm curious on how you guys think about adoption.

It's interesting because it will depend, I mean, we've got to get it out there, see how people receive it and see how they -- I think what ends up happening is until you actually get the dashboard, with the data set on a patient. You don't really know what you're missing. It's kind of like driving around without ways and then all of a sudden having ways and going, gosh, how did it ever get anywhere without ways. It's going to be the same thing. I truly do believe once somebody sees the data they can get and the connected tissue between that data set and the care that they're going to provide, they're not going to want to give it up. So I truly do believe that people will want it. Now it will come down to the business model. Now, how do we do this in a way that makes it digestible for people to use this 100% of the time. And we just haven't figured that out yet. We're still working on it. And even if I had it, I wouldn't divulge it yet for competitive reasons. But that would be the goal. It was interesting, I saw a survey on a couple of surgeons, one that was a MAKO, one that was a ROSA surgeon. And they were talking about the future of orthopedics, and they talked about smart implants and both of them, whether it was Stryker or whether it was us, that said that they thought that the smart implant would be table stakes over the next 5 years. So it's an interesting concept just from them, and they don't even know what the smart implants are capable of.

That truly is a fascinating -- it is a fascinating topic, concept. I guess, switching gears to a couple of existing product launches you guys have ongoing, cementless knee. How has the uptake been for your cement list and perhaps should we think about the mix of cementless as a percentage of total implants being half your implant over time, over the next 3 to 5 years? Does it seem reasonable?

I mean we're -- the proxy is looking at what our competitor has been able to do, particularly as a result of having such good penetration in robotics. That is kind of opens up the opportunity for most people to feel comfortable with cementless because you get those perfect bone cuts. And so I just look at that as a proxy, we have a lot of opportunity still in cementless. And we're pursuing it now, obviously, with ROSA being placed, it does lay the framework of the groundwork for us to be able to get cementless conversions. And we're also going to be -- I think it's later this year coming out with another form factor in cementless to be able to make sure that we have what every surgeon needs in the cementless form factor in concert with ROSA. So as we continue to see ROSA penetration, we have that other form factor come out in cementless, our confidence level that we're going to continue to get penetration there, and that increased share of wallet is there, for sure.

Got you. And safe to say, you guys are very early in the single digit penetration. But over time, this should be a strong double-digit penetration for ZB?

Yes. Absolutely, I'd be disappointed -- it wouldn't make sense otherwise. Because if the other guys have been able to do it, there's no reason why we shouldn't be able to.

Got you. And then one on Persona Revision system, Bryan, and maybe I'm getting the math, I just want to make sure I understand the math correct. You noted $40 million of share gains in fiscal '20, and that's only in the Revision part of the market, right? And my understanding is Revisions are 10% to 20% of total knee. So when you do get into the primary part of the market, is this now -- should we think about 10% share gains in that primary part of the market, which is -- that's the larger bucket, that's 80% of knees. So I'm curious on how we should think about on the primary side?

Here's the way I think about it without getting into specific percentages. What I would tell you is that, that $40 million that I referenced is what I defined as net of cannibalization revenue for 2020, right? That's our expectation for 2020. And -- but that's $100 million of actual sales and provision, which is really impressive in a pandemic year and basically 1 year of launch. But that $40 million comes in 2 ways, right? One is where you actually go in and convert a current Revision user, your current Revision user to Persona Revision, and there's a higher price point. And that delta between the previous system and the new system is net of cannibalized revenue. And then the other portion of it, which is the bigger portion of that $40 million, is where you actually go in and get a competitive conversion. So they're using somebody else's Revision set. That's the one you want the most, obviously. And in that situation, if that customer was using a competitive Revision set and a competitive primary, that gives us a right to hunt for that primary business. Now, not every surgeon that has converted to us was using a competitive primary, some of them are using our primary. But in that subset of customers that are using a competitive primary, you better believe we're going after that business. And it's a much bigger revenue profile than revision, as you mentioned. So that gives us, again, an additional level of confidence that we've opened the door to competitive conversions because we're in the house now, which is exactly where you want to be.

Understood. And then 1 quick on hips. You did mention hips has done really well. I mean, that's one where we can see it in the numbers. Zimmer has done well above peers. What is driving this performance and perhaps sustainability of those trends?

It's really a few things. But what's interesting is you know the combination of Zimmer Biomet did bring together one of the most attractive portfolios in the industry. We just couldn't get out of our own way to take advantage of it. And the fact that we've eliminated, as you referenced before, the manufacturing and supply issues and giving people the right to hunt and get out and go get conversions is a big part of the success. On top of that, the operating mechanisms that we have right now are probably the best I've ever seen. The way that we manage the downstream part of our business is exceptional right now. And we didn't have that before. And our compensation plans have even shifted more towards paying in a biased way to people to grow. So all those things up. And then on top of that, you bring innovation like the Avenir Complete, and that's a perfect formula. That's what we're seeing right now in hips. Believe me, we were thinking that hips would be more at market growth until we got the robotic application, and then we would expect above-market growth. But we've been happy, and it's not a trend yet, but we've been happy that we've been performing very well on hips. And as we continue to move it in that direction, even before the robotic launch, and then we put it on steroids when we get the robotics launch.

That's helpful. Then Suky, a couple of ones for you. One, just back on your Q4 commentary, is -- I guess, those were all the numbers you quoted, those were on an organic basis. Is that correct? And I guess the implication is Q4 is perhaps shaping out to be flat to down low singles. Is that like a reasonable range for Q4?

Yes, it is all organic. And I think if you take the commentary I gave on the specific regions as a contribution or mix, your assumption of overall consolidated is probably in line.

Got you. And the other one that's -- and this is up in -- like an odd trend. I think on the 3Q call, you spoke about investments, need for investments. But surprisingly, or perhaps not surprisingly, street numbers actually went up for '21. So I guess, should '21 operating margins be at 2019 levels. I think I know the answer, and I think given the comments on investments, it should be perhaps a tad below, but maybe talk about margin trajectory for next year?

Yes, sure. I'd actually step back and talk about margins longer term, and we put that aspiration or target there, 30%, as we exit 2023. And there's a couple of things you have to understand, building blocks within that. One is that we stabilized gross margin coming out of 2020. And that's after many years of precipitous declines, right? So stabilization coming out of 2020 gross margin. And the next is driving our SG&A efficiency so that we can liberate funding to reinvest back in the top line because we are seeing a very good, very fast ROI on the investments we're making on an R&D and a commercial standpoint. And Bryan gave a lot of those proof points. And so the idea is you reinvest those dollars back into the top line. So you grow top line at a faster rate with stable gross margins, and a more efficient operating base that drives durable longer-term margin expansion, right? And we think that that's the right way to do it. And by the way, for some reason, there's a market disruption in there. We -- the great thing is we have the optionality, where we can drop some of those savings directly to the bottom. Now as we think about 2021, I think that shaping should follow -- or should flow into 2021. The ultimate margins will be dependent on the level of revenue and the recovery coming out of COVID. But as we said, we would expect, in 2021 for our operating margin to be at '19 levels at some point in the year, but not for the full year. We are going to increase investments in a number of areas because, as I said, we're getting very good return on investment in a number of areas, whether it's direct to patient, new product introductions, commercial initiatives across knees, hip, set and other parts of our business. So yes, we do expect to ramp up our investment in a number of areas.

Understood. And I guess the 30% margins by 2023, that's still intact. So that would imply triple-digit margin expansion exiting 2021. Does it make sense to you?

It does. It does. And fortunately, the programs and things we control are on track, and I'm incredibly proud of how the team has responded to the restructurings we've done this year, the various other initiatives we've done to take out low-value spending and redirect it towards the top line. So yes, we're confident in being able to achieve that 30%.

And then in the last few minutes here, Bryan, back to you. When you think about M&A, I think you guys have -- you've been sounding a little bit more comfortable around this topic. So one, is that the right way to interpret your comments? And when you think about the portfolio, are there perhaps opportunities to reshape the portfolio? Is there any divestitures that are to come?

Yes. The reason why we're sounding more confident, I guess, in that area, which I kind of define broadly as active portfolio management. It was clearly a Phase III activity. We've been looking at it all along. But we knew that we wanted to get Phase I, which is the hearts and minds and triaging the problems out of the way. We wanted to make sure that we had innovation coming in a clearer strategy. And then Phase III was really, once those things were in place, to be able to start changing the portfolio mix that we have as an organization. And when you look at our 5-year strap, that's exactly what we're going to be focused on in deploying our capital against with the idea of that on that backdrop, we want to make sure that we remain investment grade. That's the reason why we're talking about it more, it's just part of the overall Phase III area that we're in today. And we've said very clearly that we look at it in 3 ways that we're going to disproportionately spend in those attractive areas that we already have in the organization in R&D, commercial. We're going to acquire those areas that we think we have a right to win in and can build scale in attractive spaces. And then we will eventually shed businesses over that 5-year period that don't fit those profiles. And the biggest thing for us is anything in the portfolio, we want to make sure it's mission-centric. We want to make sure that we have a right to win and a path to leadership. We want to make sure that it drives our revenue growth rate up by increasing the weighted average market growth of our business and that we keep an eye on profitability, right? We got to make sure that the portfolio changes that we make allow us to be kind of market-leading operating margin. And that's the way we think about portfolio management. And all 3 of those levers that I just referenced, the disproportionately spending internally, the M&A and also the shedding of businesses over that 5-year period, we intend to move on. And ultimately, as a result of that, change the portfolio mix that we have today to make it more attractive.

Got you. And on the topic at the -- I saw the A&E Medical acquisition close this morning. Maybe perhaps talk about what kind of revenue contribution does this business bring and why is this an attractive business for Zimmer?

Yes. I think this is a really good example because we're in businesses right now that people probably don't even know we play in, and we play pretty well. If we look about our CMF business, we have a thoracic portion of it where we play in the plating of thoracic procedures, where somebody goes in and actually has a heart procedure rather than wiring that we do active plating and that plating is a much better way to close the patient. It's better for the patient. There's less pain associated with it. It's just much more comfortable and you get overall better data as a result of it. And we've been in that space for a while. Nobody even probably knew. And this acquisition actually is to complement that product portfolio. And what's great about it is that's a subcategory of thoracic that's growing in the upper single digits. We are a market leader in the area, and we're going to continue to move that forward. It's about let's call it, a $300 million market today in that closing, the way that we closed the patient. But if we get it to be standard of care, which is absolutely our intent over time, that could be over $1 billion opportunity. So -- and where we have true and clear advantages versus the competition. So that's an exciting area for us that people probably didn't even know we played. And so those are the things that we'll be looking for. It will be the obvious stuff that you're going to see inside of set, where we play today and you would be obvious that we would try to pursue like we had in the sports acquisition or reline. But this is one that people probably didn't recognize was interesting to us. And this will absolutely give us a strong portfolio to continue to win in that very attractive submarket.

That's fantastic. With that, I think we're at the end of the time. Bryan, Suky and Keri, thank you for the time. This was an enjoyable conversation. A lot of details. And certainly, I think for my next Zimmer title, I have to -- getting The Terminator poster for you guys. So with that, thank you guys for the time this morning.

I appreciate it, Vijay.

Thanks, Vijay.

Thanks, Vijay.