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

All right. Good morning, everybody. Thank you for joining us during our Annual Healthcare Conference. Hope everything is going well so far with this virtual format. This is Mat O'Brien of Piper's equity research team. I'll be moderating this fireside with Zimmer Biomet. From the company is Suky Upadhyay, the Executive Vice President and Chief Financial Officer. Keri [indiscernible] here on as well, but they're just going to be muted in the background. One housekeeping item, if you do have questions for Suky, there's a box at the bottom of the Zoom where you can send them in to me or conversely, you can just e-mail me at [email protected], and I'm happy to ask those questions for you on this fireside.

So with that out of the way, with that housekeeping out of the way, let's get out with the fireside. Suky, thanks again so much for joining us.

Yes. Thanks for hosting ZB, Matt. I appreciate. Glad to be here.

Of course. So I'm curious, what were you seeing prior to reporting Q3 in terms of the slowdown? I don't want to get into Q4 here at all. But the slowdowns in Europe specifically as a result of COVID, it seems like joint replacement would largely kind of be in the crosshairs of what's deferrable. Some people will stay and recover and having a hospital beds available for COVID patients is something that's really important right now. So what were you seeing when you reported as far as some of those slowdowns in Europe and the impact on the business?

Yes. When we reported third quarter in early November, broadly across the Americas and Asia Pacific, we were seeing stabilization to the growth rates we posted for the full third quarter, and clearly, seeing pressure in EMEA, as you pointed out, as the surges were accelerating there, and we were starting to see various levels of policy action or other austerity relative to elective procedures. And what we've actually seen now coming through November is that's accelerated in EMEA. So our trend from October -- or sorry, from the third quarter was down about 6%. We're now looking at somewhere closer to the high teens for Q4 being down versus 2019. So things have gotten a lot more acute there. When we were in the third quarter in EMEA, it was mostly emerging markets within EMEA that were struggling and developed markets, we're still hoping they're pretty stable. Now what we've seen in the last 4 to 5 weeks is that developed markets are also getting significantly impacted. So it continues to be very fluid in the Americas. We're also seeing a bit of a slowdown, as you're probably seeing all these surges happen across various states. Where we are seeing heightened level surges, we still continue to operate in that 70% to 90% range across different states, some outliers, of course, across that. But broadly, we expect to be in the Americas about flattish for Q4. So that's slightly down versus what we saw in the third quarter. And then Asia Pacific continues to show stability with China growing really well. Japan being stable, that's our biggest market and most profitable market within Asia Pacific. So that's a good positive proof point. So all in all, we are seeing heightened pressure but I would say, in the backdrop of all that, we are in elective procedures in large joints. These are progressive diseases, high pain burden, high quality of life impact and unfavorable impact. And so we would expect these deferred procedures over time to come back. And once we start to turn the corner with what we've heard is some very positive news on vaccines, these procedures will at some point become a tailwind for us. So it continues to be fluid. We're seeing a little bit more pressure. But nonetheless, we're focused on where we can win and how we can execute within a very choppy market.

Got it. And so just to sum up then, so you can't put a finer point on this. It sounds like Asia Pac is doing what you had thought. The Americas are doing what you had thought. Maybe EMEA is a little bit softer than maybe it contemplated when you guided. Is that the right way of viewing it? Or had you contemplated that weakness in EMEA when you were talking about things in Q4?

I think you've got the broad stroke right. I would say EMEA is probably more acute and probably more severely impacted than what we originally thought and the Americas is slightly more impacted than we originally thought.

Got it. Okay. Okay. Yes, that's the unfortunate. But like you said, these are all progressive diseases, and these folks are going to end up showing up 1 of these days and getting their hips and knees replaced. So -- all right. That's helpful. Let's flip over to what I'm sure everybody is really curious about and I'm sure you're getting a ton of questions on, which I'm guessing you probably like. That's ROSA. I think you placed 50 systems in Q3. What did that split look like in terms of existing versus competitive accounts?

Yes, yes. So you're right. It's great to talk about things other than COVID. And for sure, we love talking about ROSA just given how important it is to our portfolio and the success we've had. I'll just step back a little bit, Matt, and the first thing I would say is ROSA is an incredibly important opportunity for us to continue to pivot the company from being sort of a products company to more of a solutions-based company. So when I say solutions, we're trying to address challenges in the marketplace as we think about innovation moving forward. The implant will always be the center of what we do, but solutions really is going to take center stage for us. And when we think about that, we think about, one, the patient, how do we improve their outcome? And how do we help them through their anxiety and fear of having a procedure? Then we think about the physician. They have a vested interest in outcomes. So we want to make sure that, again, we're addressing outcomes, but they also have vested interest in efficiency, right? How do they get through their procedure faster, better, smarter and more economically viable. And then the third is the payer. How do we demonstrate that? And so as we think about those challenges in the marketplace, how do we bring solutions to address those, ROSA is a big part of that because it really hits across that full spectrum that I just spoke about. And so it's not surprising that we're seeing great uptake. We're already, we said at the end of the third quarter, at the bottom end of our aspiration range for this year, which was 200 to 300. So we're already across the bottom end. We had a great third quarter, and that's in the backdrop of a pandemic, right? We're putting robots in place in a very choppy market. So that's another proof point. I can't wait until we get to the other side of this to really see what ROSA can do. But inside of that, what we're really excited about is that we're seeing ROSA placements in competitive accounts, about 40% or maybe a little bit better than 40% of the time. And that's really exciting to us because that gives us the opportunity in those accounts to start to take share, right? And that ultimately could be a key growth driver for us going forward. Now I would say it's not uncommon for some accounts to have multiple robotic systems. So they might have our competitors, and they may have a ROSA. But again, the ability to put a ROSA in a nonpriority count for ZB gives us the opportunity to turn that to a priority account. And so we're pretty excited about where we can go.

Got it. Okay. Well, that's interesting. I'm going to bounce around a little bit and off script from the questions I sent over. But I'm curious about that specifically because a lot gets made about you guys leasing systems versus selling systems. So can you help investors understand when you place a system, what kind of volume commitment do you get? What kind of buy in do you get from those facilities? Is it different than when somebody purchases a system? I mean how does that typically look?

Yes. So you're right. Every -- since launch, we've always offered a variety of options for our customers, again, trying to be solutions oriented. We could sell a system cash upfront, no commitment, all the way to the other extreme, which is place a system and efforts basically at no capital upfront, but then there's a volume commitment on the back end. Both are very attractive to Zimmer Biomet. I would say we actually prefer the placement because it does, as you said, comes with volume commitments on the other end, which makes our business stickier, generally has a volume lift component to it, so above their normal baseline. And secondly, it can offer -- because it's longer-term contract, it can offer some pricing stability as we move forward. So it becomes a very attractive option for us, and it's an attractive option for our customers as well. And what we actually saw through the pandemic when there was a lot of uncertainty on their capital budgets, we actually saw a big shift to the majority of our robotics being placed or provided with a volume commitment as opposed to an outright sale. I would say the commitments that come with that, it will be different from hospital to hospital, setting to setting or it can't be different. But what I would tell you is that we do tend to see a very fast payback, usually, within a year on that robotic system being placed into the hospital system or ASC. And again, that provides an annuity beyond that year when we've gotten that payback.

Got it. Okay. That's really helpful. You mentioned the ASCs, what kind of opportunity really is on the -- is there for the ASC side of things for robots going forward? And does those ROSA make more sense in that setting than the market leader right now or others that are coming into the space?

Yes. It's a great question. And first thing I would say is that about 1/3 of our robots placements are actually in ASC. So that's just one proof point that this is a solution that works well for the ASC. But to answer your question, I think I'd step back a little bit and say, what is it that the ASCs are looking for, right? Generally, just to make a very simple, faster, better, cheaper. They're looking for outcomes, right? They don't want patients coming back in because of a procedure that isn't up to their satisfaction. They want throughput. They want a patient that's in and out within about 24 hours. They're looking for efficiency as they drive their business moving forward. And they're also looking for providers that can offer a suite of solutions across their needs. And so when you think about that and those aspects, ROSA, I think, is well positioned because when you think about no CT scan required, when you think about time neutrality, when you think about the physicians who are telling us that they believe the outcomes are better with ROSA versus traditional method. When you think about that we're going to have a breadth of indications, not only primary need, but moving into uni or partial, moving into hip and then eventually moving into Revision and then to into extremities. You begin to paint a path for them where 1 platform can solve a number of opportunities for them. And so we think ROSA is well positioned for the ASCs. We're already, as I said, seen about 1/3 of our placements in the ASCs, and we would expect that to accelerate over time. When you take that in tandem with leading implants and then also the rest of our portfolio and some new additions we've done through M&A, I think that makes our offerings pretty attractive to the ASC setting.

Got it. That's really interesting. So Suky, when you talked about a majority of your systems that are going out in the field now are at minimal capital cost versus the volume benefits that you're going to get going forward, is it fair to think that given that you just rolled this out, rolled out ROSA, maybe 18 or the less than 2 years ago -- 18 months or 2 years ago that we're going to start to see a compounding effect on the implant side in '21 and more so probably in '22, which will be more of a normalized year.

Absolutely. We call that within the company pull-through, right? And that's the incremental volume that we see by placing these robots. And it is a compounding factor. And I think when you put back component together with other solutions that we're bringing in the marketplace, whether it's cementless or Revision or technology enablement for preplanning or postoperative surgery, these are all the building blocks that ultimately give us the confidence to say that our knee business in the not-too-distant future can grow and will grow above than the market growth rate, which is then an important building block in ZB overall, getting to that mid-single-digit aspiration that we have in the near term. So you're absolutely right. But I would say it's just one of the many building blocks we've got to get there.

Got it. Okay. So let's flip over to the other parts of the knee portfolio. What inning are we in on the cementless side of things for you guys?

We're still early. And on one side of it, I would say, I'm unsatisfied with where we are. Our penetration is still low. On the other side, I would say, that means we've got a lot of opportunity to go. Our -- one of our competitors has talked about cementless, actually done a really nice job of linking cementless to their robotics application and has gotten their penetration to a pretty healthy rate. But I see no reason why we cannot approach those levels, if not better, given our robotic system, given our leading implants. And so I would say that we're in the very early innings of that. And why that's attractive to us is one, we believe that they can drive better outcomes to have a cementless opportunity. Two, we believe it can be more efficient. ROSA can be a catalyst in that, in the precision of its cut. It can give the physician greater confidence to do a cementless application versus cemented. That takes some time out of the actual surgery. And again, when you think about throughput, especially in the ASC setting, throughput becomes important. And then thirdly, it provides a mix shift benefit for Zimmer Biomet, both on the top line and margin. So I'm not satisfied with where we are, but the good thing is we've got a lot of opportunity in front of us, and I think we'll capture it.

And do you think there was some impact as far as with the outbreak of COVID in terms of getting your cementless numbers to an even higher level? Because it seemed like the momentum was there before all this broke out.

The momentum was there. It's a good question, and it's difficult to say because this whole market turns everything kind of upside down. And now that we're starting to get back to some resemblance of normalization and not in those sort of deep trough of April and May and June. We are starting to see our cementless traction pick back up. So I would say that it's had some modest impact, but the reality is, this is -- we've got a lot of runway in front of us, and that's what keeps us excited.

Got it. Okay. What about the Persona Revision side of things? Are you a little bit further along as far as where you're at with that system?

We are. And it's amazing in the backdrop of COVID, the success we had with that particular product. And again, it's another proof point or example of building those solutions to achieve that above up market growth rate in knee. Our Revision -- this is probably one of the most difficult procedures an orthopedic specialist will do. And the ability to put our Persona Revision and the traction we're getting with our physicians has been really gratifying and gives us a lot of confidence that there's a lot more ahead of us on Revision. Not only does it take physicians who are Zimmer Biomet loyalists that were using another revision system, obviously, they can switch back out. They now have a Persona Revision. They love it. They're moving forward. It now gives us the opportunity where we have competitors that want to use a Persona Revision just because of how good the implant is. And that now gives us the opportunity when running that or putting that revision system in to start to hunt for that primary business. So we're really excited about what Revision's done. We talked about $100 million gross, $40 million net. And when you think about less than 20% -- less than 15% of the procedures are Revision and we're already seeing that kind of incremental uptake either through share of wallet or through share of capture, we get pretty excited about where that opportunity could go and then what it could mean on share gain on primary.

Got it. Okay. That's great to hear. There's still a lot of room there. As far as -- last question, I guess, on the knee side of things. Pricing for the robotic system, cementless and Persona revision, is it still healthy? Or are you having to give up some price in this environment? How are things going there from a mix perspective?

Yes. Pricing has been -- it's been relatively stable for us, even in the backdrop of the pandemic. And these are products that we believe offer a tremendous amount of value to the system, again, whether it's our patients, providers or payers. And so we feel good about our pricing position. And then when you put on top of it our ability now to connect preoperatively and then postoperatively, I think it really makes that value demonstration pull-through on our pricing. That in tandem with displacement strategy, which provides a little bit more stickiness for our products because we get into longer-term contracts through placements is also going to help our pricing over the long term.

Got it. Okay. Okay. Let's turn to the acquisition side of things. There's -- you've been active recently. I wouldn't say they're massive deals. They certainly seem intriguing. So can you talk about Canary, Relign and A&E. And just the different products that you're getting there and some of the contributions that we should be expecting over the next few years from those technologies.

Yes. So the first thing I would say is each one of those deals are same to me. But we step back and actually put them all together, the reason why I'm really -- the company is excited about them is it's really a proof point that we've moved to sort of that third chapter that Bryan's talked about. Chapter 1 being sort of parts and minds, changing culture, establishing the mission of the company. Chapter 2 is about moving beyond triaging all the problems we have in supply and quality and commercially now moving to innovation and growth, right, and having the right execution and operating mechanisms in place. And chapter 3 was then, okay, active portfolio management for us. And what that meant was really about how do we allocate our capital, whether it's finer delineation between how we invest within our portfolio, and there will be some winners, and there will be some that have reductions in capital investment or whether it's M&A or whether it's divestiture of slower growth, slower margin businesses. That's how we think about active portfolio management and that third chapter. And I think it's a good validation that we moved through chapters 1 and 2. And we've gotten some of those barriers or headwinds behind us. Inside of that, all of these deals, whether it's Canary in smart implant, Incisive in the smart booms and lights, which can be a very attractive opportunity in the ASC setting, whether it's Relign in the 3-in-1 approach to arthroscopy completely novel or A&E, which further cements our position in the rigid fixation marketplace. All of these deals have characteristics that we've talked about around our M&A, which is we're looking for deals that are in faster sub-growth markets, right, that continues to move the company from these big, lower growth markets in knee and hip to faster sub-growth markets in the mid- to high single digits. Two, they have relatively low dissynergy risk or execution risk because they fit their products, they fit effectively really nicely into areas that we're already present or leading. So we have a right to win with those types of products. Three, they're modest call on capital. And so as we continue to work down our leverage ratios as we continue to work through COVID, the ability to deploy modest amounts of capital for products that are growing very attractively above the company average and very attractive margin profiles is very exciting to us, taking collectively across all 4. Now I would say, inside of that, especially when you think about Canary and the Smart Implant, this is a real proof point of how we're leveraging technology pre-intra and postoperatively to bring data and insights, which ultimately, we think, over time, can lead to more personalization of care, which is going to lead to better outcomes, which will lead to more efficiency in the OR. If you can win on those 2 things, outcomes and efficiency, you will be a leader in this category or in this sector. And so we're really excited about what Canary can bring. Then with Incisive and Relign, this really starts to fill out our portfolio in our ASC setting. As I said before, ASCs are looking for, they're looking for providers who can provide a suite of solutions across their implants, across their surgery centers, across delivering care. And with us now being able to fill out our portfolio more broadly with booms and lights -- smart booms and lights and arthroscopy, it gives us another opportunity to cross contract across the entire portfolio and the very deep portfolio that we have. And so we're very excited about those. And then with A&E in rigid fixation, you may not even know that we had a big presence in rigid fixation, $300 million. A market growing about 5% to 7%. If you actually start to expand the market into wire fixation, it could be upwards of a $1 billion marketplace that's growing at that rate. And so we're pretty excited about where this leading novel product can take us in that space. So again, you get the characteristics of faster growth, attractive margins, low dissynergy risks, modest cost on capital and in areas where we have the right to win.

Understood. Sounds exciting. So just a few minutes left here. Suky, extremities, specifically, a lot of consolidation going on right now in this space. Do you have the product portfolio to be successful of capturing some of the potential dislocation that will happen here? And are you aggressively adding some of these or do you plan on adding some reps from some of these providers that are being acquired?

Yes. I think in the shoulder, we definitely do. We are a leader there, and I feel really comfortable about our product portfolio there. I think we've got honestly, some work to do in the lower side, and that is where a fair amount of our R&D dollars are going organically. We, of course, also look inorganically at bolstering up our lower extremities portfolio. So we recognize we've got some work to do there, and we're focused on it. Relative to some of the deals that are out there right now in this space, those deals cause disruption. There's -- that's not a new phenomena for our industry. And I would say, some are looking at Zimmer Biomet as a safe harbor, especially in the backdrop of the traction we're starting to get in the marketplace. The fact that we're beginning to win again, right? And we've got those barriers, those headwinds behind us, and we're starting to become a leader in innovation in this sector. We're starting to get operational execution that's coming through in our performance versus market over the last several quarters. So you put those 2 things together with uncertainty on their side. And again, Zimmer Biomet starts to look like a pretty nice safe harbor for them. So we're taking advantage of that where we can.

Understand. Understood. I still have another 10-questions on the list, but we're not going able to get to them. I think we're just about out of time, so I'm going to go ahead and cut it off there. Suky and Keri, thank you so much for all the time this morning. I really do appreciate it.

Thank you, Matt. Pleasure being here again. Thanks.

Got it. Thanks again. Take care, everyone.