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

Okay. We're back live, 42nd Annual Goldman Sachs Global Healthcare Conference. I'm Amit Hazan, the med tech -- sorry about that. We are back, Goldman Sachs Healthcare Conference. I'm Amit Hazan, the med tech analyst at Goldman Sachs, and we continue day 1 with Zimmer Biomet who's joining us. We've got -- we're excited to have both President and CEO, Bryan Hanson; and also the CFO, Suky Upadhyay with us today. So first and foremost, Bryan and Suky, thanks so much for joining us again this year.

Absolutely.

Great.

Thanks, Amit. Nice to be here.

Yes. Great to hear your voices. And what I thought we could do guys is maybe first just kind of hit the recovery piece in COVID since that's top of mind for a lot of folks, and then we'll get into all the exciting technologies and things going on at the company. So with that, let's just kind of -- I'll set it up for you and let you take it over. But second quarter guidance was basically for exiting the quarter at 2019 levels, at a company level, you expected APAC to be above '19; Americas to be flat to slightly up versus '19; EMEA continuing to lag. How are you performing relative to that prediction?

Well, we try not to give too much inter-quarter information, obviously. But what I would tell you is that we still feel confident in the color that we provided. And really not just the color we provided for the quarter, but for the entire year. What we would say right now, based on what we're seeing relative to pace of the recovery, what we'd tell you that we could just as easily be at the high end of the range that we've provided for the year as we could the low end of the range. And so we still need to see a lot happen from here, but we see a path to either one of those. And I think it's important to state that because we gave a range for a reason. There's a lot of variables that are out of our control, but we're still in a place where we feel confident we can get to either side, the high end or the low end, just depending on what happens with the recovery.

I think that one of the things that got investors talking in the last week or so is just your commentary around whether you've seen that recovery continue at a pace that would get you towards the high end, even in the second quarter. And you're a little bit reluctant to say that it felt like things were developing a little bit more slowly than what many of us would have hoped maybe. Is that the case? Or is it -- for the second quarter, is it still kind of that the bands are still wide and you can get to either side of your guidance? How do you view kind of just a month-to-month, if you will, if you can comment on that would be super helpful.

Yes. I mean it is playing out pretty similar to what we had thought. We'd love to see it come in sooner. And absolutely no, we're on the trajectory to be at the top end of the range, but that's just going to take time for it to play out. It's not inconsistent with our thinking. That was the purpose of the range, and that was what I just said a minute ago. I truly do believe where we are today and what we're seeing today gives us an opportunity to be at the top end. And depending on how long it takes from here, we could also be at the bottom. So I truly do believe that range that we gave just weeks ago is still very much the way we think about it today.

Okay. Okay. So let me kind of add my perspective here and see if we can talk to it from my version of it. I -- my own prediction was that we would start to see some green shoots, for lack of a better term here in the second quarter, which is to say backlog really start to come through and show, at least a little bit. I don't know if that's happened yet. It feels to me like reading commentary from you and others, maybe it hasn't. And so I'm trying to think through the plausible explanations. Not to say that it's not coming back, but to say that why hasn't it come back yet? I think about doctors and whether they have capacity or whether they're just taking vacations and needed a break. I think about patients taking vacations. I think about maybe patients having less wear and tear on their joints in the last year because they've been sitting around more and not out as much. I wonder if you could comment on all those factors and how you see those playing out as maybe parts of the reasons we haven't seen even more strength to this point than what you're describing.

Yes. So what I would say, just real quick, going back to the color we provided for Q2. It is playing out pretty much the way we said. So when we were saying we would be at 2019 rates exiting the quarter, that would indicate that really, you're not working through backlog. And we did not expect to work through any backlog in the second quarter. Remember, that doesn't mean that there aren't backlog patients coming through, but the net result is that you're growing faster than market, right? So that's what we're basically saying. So it's not surprising that we are where we are right now, to us anyway, in Q2. Now what I would say on a go-forward basis as we think about whether we get to the high end of the range or the low end of the range, I think it will depend on when people decide to come back in and get their procedures. And also, by the way, from a provider standpoint, when people are willing to go above in capacity to absorb that net backlog of patients. So those are the 2 variables that we're watching. And all the things you just mentioned are things we're thinking about. Is it someone sitting now on the sidelines that really needs a procedure, feels the pain, but is saying, "You know what, I don't care how much pain I'm in. I'm going to go take a holiday. I'm going to go spend time with my grandkids. I'm going to go see family that I haven't seen." I can't predict that, but we're hearing that. Whether it's material or not, who knows. We're hearing some surgeons even saying, "Hey, listen, I'm ready to do procedures, but I'm going to take a holiday right now because I've also been tied up." So there's a lot of different variables that we're trying to corral. The thing that we know is that just given the progression of the disease, there is a backlog of patients that is very sizable. And at some point, that patient population has to come through the funnel. And at some point, particularly in a place like the U.S., because there is profit-loss statements in hospitals as well, the people are going to have to absorb those patients. And so we're entering a phase, we believe, that is very positive. We can't predict exactly when. We can't predict exactly for how long, but we definitely feel that we're entering a phase where COVID is going to be a positive catalyst, not a negative catalyst.

Okay. And in terms of the categories, hips, knees, spine, others, would you call out differences in cadence or pace of recovery?

Yes, we have in our business. Dental has done pretty well pretty quickly out of the gate. Hip, as you've seen from our performance, it's been better than knee. Some of that, we just think on the hip versus knees, you get some trauma, obviously associated with hip and the pain is a little more challenging. So those are the typical reasons why you see the differences. I don't know that there's any fundamental reason beyond just the threshold of pain associated with certain procedures or the trauma associated with procedures, but we're definitely seeing them recover at different paces.

Okay. Okay. Last one here, and then I promise we'll move on. So we have the second half of the year. You've already commented on kind of just your expectations that your guidance is -- and you've set the ranges and you're comfortable with them. But between third quarter and fourth quarter, there's some seasonality in the past. 2Q and 4Q have always been your strongest. 3Q weaker, just seasonally, everybody knows that. This year, the Street is a little bit higher, 3Q versus 2Q. A lot of things going on, recovery. Just want to get a sense from you, if that's what you were hoping when you set out that guidance. Are you okay when you think about the cadence of where the Street is on a sequential basis throughout the rest of the year?

Yes. We kind of viewed that there would be seasonality -- typical seasonality, but we thought it would likely be masked just given all the other major variables that are in play right now. So -- but we do feel like a new patient coming through the funnel. Like forget the backlog patients. The new patient that would be entering the funnel, why wouldn't they act the same way they always have when you talk about seasonality. So we do believe that seasonality will play a part in the back half of the year. We just believe that once the backlog starts to come through, that it will likely overshadow whatever seasonality you typically see.

Okay. Okay. Got it. Let's talk a little bit about market share. So let's kind of move on. Recent trends, there's a lot of investor discussions about this I think that we had with folks after the first quarter. You can look at annual versus 2-year stack and tell your own story about what might be going on. We're only looking at a few quarters of trends here. Really, given COVID, it's even harder to tell. A good amount of confusion out there. So has it changed from your perspective? When you think about first quarter, fourth quarter, just the last couple of quarter dynamics, what does your own market share data tell you about how you're doing in hips and knees, in particular in the U.S.?

Yes. So we've mainly looked at the U.S. because I think it's the cleanest, the most homogeneous. There's still variations depending on -- are you more ASC or hospital? What state you have traction in versus others? But the U.S. is really where we've really tried to pay attention to how we're doing versus our competitors. And the good news is everybody presents their numbers on the U.S. So I get to see the large joint numbers from every one of our major competitors each and every quarter. And we get to see ours, and we present them to you as well. And what I would tell you is I never look at and get 2 up or 2 down on a single quarter. Anything can happen in a quarter, particularly during COVID. So if it's good in a quarter, hey, great. I'd rather be that than negative, but I'm not going to read too much into it, but I will look at as trends. And if I look at the last 5 quarters, and 4 of those quarters, the 4 most recent quarters, we have definitely taken share. We're growing faster than our competitor. So again, I'm not going to beat in on any one of those individual quarters, but the 4 quarters tell a story. And that story is exciting for us. And COVID is frustrating because it's hiding what is actually happening in our business, which is the innovation is coming. We've moved to that second phase, now into the third phase, and the team is executing. And that is translating into us looking better than market in 4 of the last quarters that we've seen, and we would expect that to continue. Now any individual quarter can have an anomaly in it. But my sense is you don't just all of a sudden see 4 quarters turn into something that isn't attractive versus market. And so again, if I look at what's been happening so far and why that's been occurring, I don't see it stopping anytime soon.

Okay. Okay. Good stuff. And if we think about that data on market share from a volume perspective versus a wallet share perspective, would you feel comfortable that on the volume side as well, you're gaining share?

Yes. It's both, for sure. In this business, if you're not paying attention and dramatically working the mix benefit, you're missing a significant opportunity because we have new technologies now in robotics or data or even cementless technologies that do allow for a mix benefit. So if you can go to the same customer, same procedure, same patient and get a bigger share of that wallet, which is something we're certainly pursuing. But we also have technologies that are differentiated, and it's giving us an opportunity through that differentiation to get competitive business. So we're growing in both categories. So we truly do believe it's not just price and mix. It truly -- or more mix. It truly is this opportunity to pick up procedures we did not have before. Revision is a perfect example of that. The Revision system that we launched in the middle of the pandemic went from 0 to $100 million in 2020. That was when we were most impacted by the pandemic. And almost half of that business was competitive. So that just tells you, just that one product alone tells you what's happening from an innovation standpoint and execution.

Yes. It's good stuff. Okay. So just one clarification on hips. It does look like there's signs of share gains there as well. I just wonder if you agree with that. And more interestingly, I'm curious if that's related to the pull-through that you talked to from the ROSA side. Is that just basically ROSA placements helping you out in other categories? Or is that product-related in hips, specifically?

Yes. So I'd say, first, I do agree with that. And to me, it's simple math, right? I look at the growth rates of every other company. I look at the growth rates of our company, and whoever is kind of faster growth rate is taking share. And so it's as simple as that. It's a simple math. And over the last 4 quarters, in fact, if you look at the hip, we have taken share, not as dramatic as knee, but we've taken share. Not necessarily always versus any competitor, but when I look at the overall market growth in the U.S. And then I would say there's a couple of reasons for it. Number one, we have the Avenir Complete, which is a fantastic product. But even outside of the Avenir Complete, which gives us the access to that direct anterior approach procedure, which is a fast growth subcategory, we have a great portfolio of products that we just -- has been hidden in the past because we have supply issues. We have other challenges that did not allow our sales representatives to go on offense. So just the organization shifting to offense and then also digesting inside of that, the Avenir Complete. And yes, we're already talking about that we've got another application coming. Now we can't market it because we don't have approval yet. But certainly, there is anticipation of that technology coming. And I would say, inside of that as well, when you place a ROSA Knee, even though it's typically associated with getting knee volume, every now and then, you place a ROSA Knee, you already have over knee volume, and they give you a hip instead. So there is that opportunity to get pull-through even on a knee placement in ROSA. But those are the things that are really giving us traction right now, and we would expect that to continue when ROSA is approved and we actually launch it. Remember, the ROSA application is going to be part and parcel to the Avenir Complete, which is going to go right after that fast growth subsegment of hip, which is that direct anterior approach. We truly do believe we're going to make that procedure much easier for the surgeon to do.

Okay, okay. And so let me follow up on that on the ROSA side and kind of give you my simplistic version of it that I talked to investors about, and hopefully, I'm not misleading them. But when we talk about it, we say, look, if you're placing a system, you're basically can model in $500,000 or so of roughly of incremental revenue for the robot over a 3-, 4-, 5-year period, and I'm wondering if that's about right. And then as you mentioned, if we can think about it as incremental revenue is not just coming from knees, but also coming from your other products. Am I in the ballpark in how to think about a ROSA placement?

Yes. We've not quantified the commitment level. What I would tell you is the commitment that we require in incremental business, that could come, by the way, through competitive conversion. It can come through a combination of that, disposable increases that you have to have when you use the robotic system, but it's some combination growth over the prior year, your payback is in the first year. So it gives you some order of magnitude to say that we place a system, and the payback would be in that first year of placing the system. And it could be any product. It doesn't have to be knee. It doesn't have to be hip. It could be even sports. It could be extremities. Now typically, it usually is more dedicated to the knee because that's the surgeon that's going to be using it, and that's a surgeon that usually goes out and get a competitive surgeon to use ours to be able to get that new business volume that they need. But that's the way we set it up. You also find that you get almost a halo effect because you create a longer-term contract with the customer through that placement. And then even business they have not committed to us but happens to come up for a tender or bid or they're just paying attention to it, we get an opportunity to get that as well. So we find in a lot of these accounts is you actually get more than the commitment in new business. And it's a lot of time in areas we never even talked about when we signed the contract.

Okay. So I hear that and I think it sounds like that incremental revenue would almost have to come mostly at the expense of the competitor in that first year just to make up that number. They just can't come just from a premium. Am I thinking about that right?

Yes. If I was looking at the mix, although I don't want to diminish the disposable uptick because that's real. But as a percentage, it would be more conversion than it would be disposable.

Okay. So that leads into kind of your ability to think about -- forget about the market for a second and what it might or might not do on COVID. But from your market share perspective, just given the number of placements that you have with ROSA, what does that tell you about market share? How strong a visibility do you have that your share is going to continue to go up over the next 12 months, 18 months?

There in lies the confidence. I mean when you think about the shots on goal that we have, it's pretty significant. We just started really this whole travel that we have with ROSA. Think about the journey we have ahead of us still. We're still significantly underpenetrated. I'd much rather be us than somebody who's already 50% penetrated in robotic procedures because it gives you a lot more headroom. And if we're already seeing that traction in knee versus market, it would tell you that we have a lot of headroom still. And that's -- you put Revision in there, which is doing great again this year. You put ROSA in there, the uni application, which is now out in the marketplace. Cementless for us, which is still underpenetrated, that has a lot of shots on the goal for us to be able to move forward. And that doesn't even include Persona iQ, which we're hopefully going to be launching later this year. Just waiting on the FDA approval. So when I think about the knee franchise, that's why we talk about that bullishness and being able to sustainably be above-market growth.

Yes. Okay. Obviously, in terms of the actual adoption curve, it's exceeded our expectations. It's been real strong, which has been nice to see. What I wonder about is how you think about it from here. Is it -- there must have been this pent-up demand given that Stryker had been out there for a while, folks -- your customers had waited for this. As you think about the ramp and how much -- how strong a demand you've had to date and then you kind of think about the next year or 2 or 3, are you confident that, that adoption curve can remain strong? Is the demand still there beyond kind of that early adopter phase?

I do for a number of reasons. Number one, just because I have visibility into our own pipeline and what we have out there as far as deals that are pending. So that tells me that the strength is still there. But also, let's just face it, we've seen somebody else in the marketplace continue to have that run rate and be able to increase penetration of robotic procedures versus their overall. And so that gives us confidence it's possible, obviously, because someone's already done it. And I would say that we did see that bolus of demand out of the gate, but that was offset by the fact that we were a fledgling organization. We also had to get a true funnel of opportunities, which takes time, capital sales, it just does. So it was a little bit of that upfront that was there for us, and that was nice to have, but you also had to build the funnel, and it took us a little while to get that funnel.

Okay. Okay. Just a quick clarification on the hip application. Is that just a software upgrade? And if so, just how fast can you retrofit the installed base for that?

Yes. It's mainly a software update. I mean it -- what I would tell you, it's a very low barrier relative to the amount of effort that needs to go in to being able to convert a system that exists today. And of course, if they buy one in the future where they don't have a ROSA at all, it would come automatically with both applications, if that's what they order. But we can go back to anything that's placed, upgrade it very quickly. You do have to have obviously a different instrument set to be able to use for it. But yes, that's it. It's a very simple upgrade. Now the good news is just because it's a simple upgrade doesn't mean that we can't charge for it. And so there will be a charge associated with that upgrade. So you can either, one, buy the upgrade in the same way you would buy capital or you can then put another contract in place that would commit a certain amount of volume, which is certainly what we prefer to do. And that could be in hip or it could be in any of the categories we mentioned before.

Okay. All right. So I want to step back from robotics for a second, talk more broadly about the pipeline, the R&D spend, in particular and whether you're spending enough to drive growth, really. So I mean I think when I think about -- when you guys talk about you stepped up your R&D investments, but total R&D dollars were down significantly in 2020. They're not back to normal pre-COVID run rate this year either. Even at 5% of revenues, you're still spending well below anyone else in med tech. So the question is, are you spending enough to drive the growth rate that you're hoping to achieve?

Yes. So maybe take a step back, and I'll give some credit to Ivan Tornos and his team because one of the major things that we needed to do as an organization was to reevaluate what we are spending our research development dollars on. And we made some tough choices. When we started to look at some of the returns and some of the opportunity of some of the projects that were in play, they didn't make sense. And we needed to do a pretty dramatic shift in killing projects that were just financially unattractive. It didn't make sense in moving the business forward and then adding projects that were significantly strategic to the organization and move us further down the path of robotics and data and technology. And Ivan Tornos and his team, they made some pretty drastic decisions. So it doesn't surprise me that you saw a reduction in overall spend because we had to rightsize where we were spending and why. That had to happen first, right? And so the mix shift occurred, and we actually are spending a lot more money on the things that matter than we were before and a lot less money on things that did not matter. And so that's why you saw kind of a mix shift occur. Now from here, we've got a level set. We know where we need to spend money. We've got a pipeline of opportunities. That then will get -- create an opportunity for us to begin to increase our spend. But I'll tell you, just philosophically speaking, I like being -- this is what we did at Covidien. I like being lower than what everybody else does because it makes you very judicious on how you spend that money. And by the way, you can also pepper in research and development, I'll just call it acquired research and development through M&A. And that's what we did at Covidien. That's what we're going to do here in this organization. It gives you an opportunity to be very judicious and very specific and make sure you're spending money wisely when you spend a little less than everybody else. And then you can pepper in technologies through acquisitions, just like we did this past year.

Okay. Okay. So just to be clear, and I apologize if I missed it, but the incremental spend kind of that you're adding now, where is that going? How are you spending those extra dollars?

Yes. So almost the -- now let's call it, 70-plus percent of what we spend in research and development is around that ZBEdge ecosystem. So clearly, we're always going to continue to make better implants, but that's going to be a smaller percentage of our R&D spend. The larger percentage will be around data, will be around robotics, will be around connecting those. And so if I think about even Persona iQ, I would consider that to be more data than an implant by itself. So that's the way we're actually moving our investment. And we're even hiring people that are different -- think differently in that way. You got to remember that we have an infrastructure of less than 100 people between 2 locations in Montreal and south of France. That's well over 300 or 400 people now that we have that are robotic specialists, that are data specialists, that understand artificial intelligence, and younger crowd, much smarter crowd. When you go, they're playing ping-pong and other things around at the site, but that's what they bring to the table and that's what we needed to hire. So we're going to do both though. We've been building that competency, as I just said. We dramatically increased that competency set in terms of the organization, but we're partnering as well with Apple. We're partnering with Microsoft. We're partnering with Canary. So we've got internal capabilities, but we're also leveraging those that do it best.

Okay. All right. So let's talk a little bit about Persona iQ. Definitely more excitement around that in recent months, I would say, in talking to investors than there has been in the past and more appreciation of what that might mean. So I wanted to see how much we can get you to talk about the business model here. You've got a partner. So the question is how you're generating revenues here. Are you generating revenues just from the premium on the new implant? Or do you get a piece of the remote data part as well?

Yes. So the way I would think about it, and I think the most material portion of it, although we're going to look at all different ways of potentially changing business models and monetizing that technology. But the way we're looking at it, and the way you should look at, at least in the short to midterm, most of the revenue is going to come from the implant. And it'll be 2 ways, the obvious way is that you would expect, an uptick in pricing for those accounts that we already have business in. So it would just be a mix or kind of a share of wallet benefit. And then it would be competitive conversions. We fully expect that people are going to be very interested in this technology. We'll be the only ones that have it. And my sense is it will be another catalyst for competitive conversions. Now we're also contemplating other pathways. Let's think about it. I mean you've got Canary now that will provide that opportunity to provide the service for remote patient monitoring. Those that don't have that will likely pay for that service so they can do it and not have to create it for themselves. And if that happens, we would share in that revenue. And there would be other ways to potentially monetize that relationship. We're going to have a sensor in a patient that's going to be talking to that patient and to the provider for 20 years and to us for 20 years. So we're going to have that relationship through an app with the patient that we're going to be able to hopefully monetize as well. Either one, just through a relationship that's created with the brand of our company, which does not happen very often in med tech, but we have an opportunity to keep that brand front and center. So the next time that patient comes back in for another knee or a hip or a shoulder, they're going to want that ecosystem. So that gives us that brand connection. We've also got other people now in the organization that don't think about innovation in the way we do. They think about innovation from a tech perspective. They think about monetizing that innovation in a very different way that we do. We're going to get those people thinking about how do we change the business model, not just with our provider, but with the patient, with the consumer. And so that's a very different view. I don't want to get people too excited about that because it's very fledgling, but that's the kind of thing we're thinking about it. It gives you a whole new potential vector of monetizing that relationship.

Okay. Okay. So when we talk to surgeons, what seems to be the case for us is that they're actually a lot more excited about being able to generate some revenues in the back end from remote monitoring, and that might be the key driver for them to adopt this. And it got us to thinking, all right, so we have the situation where we're waiting to see what reimbursement is for the implant. I'd like to -- love to hear an update from you on that, if you have it on just how to think about the incremental reimbursement. But then the second question to you would be, do we even really need it? Because if the driver for them is that remote monitoring piece, it seems like the incremental spend on the implant might be an afterthought. So what's your thoughts on that?

I'd say based on data, not just on my thinking here, but just the data-driven view of this because we did a very significant conjoint analysis to understand what would people pay given the same DRG system today, so no incremental reimbursement, and no remote patient monitoring at all. Let's assume those things were off the table. You got the DRG structure that you have today, and that's it. And here are the value proposition elements of Persona iQ. Would you pay more, basically, is the question, for that value proposition. And the answer came back, not everybody, obviously, but large majority, yes, absolutely. And very similar to what you would see in robotics. People felt that the value warranted an uptick in price. And so that's the way we're going to commercialize based on that data that we received and ultimately price it based on, again, that conjoint analysis. Now in addition to that, if we can get the surgeon -- remote patient monitoring and reimbursement rate, and we do believe the combination of mymobility and Persona iQ does fit the bill, does provide what is required to be able to get remote patient monitoring, now at the end of the day, it's a CMS decision, not our decision. But certainly, we believe there's an opportunity there, and that would be what I'd just define as kind of icing on the cake. And we're going to pursue [ MSIT ] when it opens back up. As you know, it's probably -- it's stalled right now. They changed administration, they put it on hold. When it opens back up, we're going to take a look at it. Now what that really was created for was to be able to get coverage for breakthrough technologies that did not have coverage. We don't actually fit that bill because we do have coverage in the DRG. But we're going to still pursue it when it opens back up to see if there could be additional leverage that would potentially relate to higher reimbursement for this technology by itself. We're not betting on that. We're not counting on it in any way, shape or form. But if we get it, great.

Okay. So let's talk about the launch here. I mean you're going to get approval here sometime this year. Year 1, you talked about a limited launch. Why do you need a limited launch here? Why not get more aggressive in just putting these implants out there?

Every bone in my body wants to be more aggressive, right? You get a technology like this, and we're getting cut. We can't sell this at all. We can't market it, which we don't. But people are reaching out, and people want to be the first to place it, they're willing to place big orders to be able to be the first and have the notoriety. So there's some excitement around this thing. And again, everything in a sales guy's nature says let's go fast. But we've done technology launches in the past. And any time you do something new like this, you want to go slow. You really want to learn what happens. What actually happens when you get it out in the marketplace? What did you not think about that occurs? Learn quickly and then adjust your commercialization plan based on whatever you learn. And so we're going to be smart about this. You only get one shot to do this right, and we're going to do it right. We're going to be patient, which is not always easy. It's not always easy. But we're going to do it in a way that allows that limited launch to play out. And then as soon as we feel highly confident, we're going to go all in. My guess is that's going to be closer to 2022, but we'll learn as we go.

I mean I think about this, and I mean, for someone who's -- from a sell side analyst who's never run a company before or anything like that. So I think about -- it's a sensor. And as long as the implant is safe, why not go out and implant as many of these as you can, and you got to deal with software on the back end and remote monitoring. You got to turn these things on and off and deal with that. I struggle to kind of think about wanting to control yourself. I get that in a normal technology in med tech that you want to be careful when you launch. But here, you had 20 years to kind of figure it out. What am I missing?

Yes. It's funny. I always say that to my R&D folks. It's just a sensor. I mean come on, guys, why can't you get this market faster? And every time you think it's just something simple, there's always something that complicates it more than you would expect. Now hey, everything could go swimmingly. We get out there and find no surprises. Our commercialization strategy works. The way we're going to market the product works. The price point that we chose is correct, and we just go all out. But we can also find things we didn't expect. And typically, what I found when you launch something new that then provides something that a surgeon never had before. It usually does take a little bit of time to get it right. So that's what we're going to assume. And so just so you know, whenever we put the guidance range out there, we assume we would go at a slow burn. We would do a limited launch. And that's the way we rolled it out. So that's already built into our assumptions for the year.

Okay. Okay. Fair enough. We've got to bring Suky in here. It's been too long. So Suky, let's bring you in here and talk a little bit about the P&L and thinking about this year and next year. Let's start with gross margin. It's been -- got a look at the multiyear trend. It's been deteriorating. How confident are you that gross margin can stabilize this year? And going forward, what are the puts and takes here that you want us to understand, contemplate?

Yes. First of all, Amit, yes, you're right. Gross margin has been compressing for a number of years, primarily because the company has been focused on supply remediation versus supply efficiency. And so what you've had is this year-over-year pricing pressure not being offset. That compounds and that drives that gross margin erosion. We've made significant progress into 2020 and early days in '21 on starting to combat that. And the supply chain group has done a really nice job of coming up with an efficiency program both tactical as well as structural over the long term to help abate and offset that pricing pressure. And so we did say that we would expect over the midterm gross margin to be relatively stable to the second half of 2020. Now when we say stable, that can mean we have periods where we're slightly up, periods where we're slightly down. And just like Bryan talks about share, we don't want to overreact or overread into fluctuations on that stable commentary. But we do feel confident in the full year for 2021 and gross margins being stable, as I talked about. Inside of that, I would say the first half is going to probably be a bit stronger than the second half on gross margins primarily because of regional mix and where the U.S. is taking a higher proportion of our sales as EMEA continues to recover. But as EMEA, as we assume in our guidance range, as it begins to recover in the second half of the year, you would begin to see a little bit more pressure on overall gross margins in the second half versus the first half. But again, full year, expect to maintain that profile. And I think what's in inside of that is there are a number of variables that can impact us from year-to-year, whether it's volumes or FX or regional mix or product mix, et cetera. But overall, we feel confident that the supply chain is doing a really nice job in helping to offset that pricing pressure that it has not been able to do historically. As we move into 2022, I think the headwinds, tailwinds remain consistent. It's really about that pricing pressure and our ability to offset that through supply efficiency. And I would say our commercial organization is working really hard and coming up with some nice strategies and tactics to help minimize that pricing pressure as we move forward, and our supply chain is ramping up their initiatives to help improve year-over-year cost improvement. So we would expect that trajectory to continue to progress into '22. Now I would say, though, the 2 things that we have to keep our eyes on as we move into 2022, and we've talked about this previously, is what does VBP bring relative to China and what can that mean to gross margins. And the second, I think everyone across the sector in many industries beyond med tech are looking at input costs. And while in the near term, it's not really impacting this, we just have to just watch that to see if there's a structural change or shift in input and raw material prices that ultimately could serve as a headwind into 2022. So all things being equal, we would expect to maintain that stabilization into '22, but we got to watch those 2 things as we learn more about VBP and as we see more unfold on input costs.

Okay. So if you kind of take that to the operating margin line and just think through '22 versus '19, I mean, is it safe to say at this point that '22 will be above '19, even kind of at the low end?

Yes, I think so, Amit. I think even if you look at our guidance ranges for this year, you would see us, we're approaching '19 levels on revenue, the margin guidance -- operating margin guidance we provided also is approaching '19, and in some cases, maybe getting slightly above. So I think we're already starting to demonstrate that through our guidance in the back half of this year. As we move into next year and our efficiency programs continue to unfold, yes, there will be some headwinds on increased investments. As I said, we've got to watch input costs and VBP, but our efficiency programs are going to continue to ramp up. We would expect markets to normalize for tailwind, from the backlog, for revenue to increase. And our building blocks are playing through to that 30% operating margin, which is revenues accelerating with a slower ramp on investment and costs, which is leading to leverage. In addition, we also have the spin next year, which is going to be a nice portfolio move for us, which is going to help augment margins as well. So we would expect that back half of this year to continue into 2022.

Okay. And you mentioned it, but just to kind of belabor the point for a second. I mean Zimmer has historically not been a mid-single-digit grower that you're now aspiring to be. We get to normalization next year, hopefully, and you might get closer and closer to that. How levered is the margin profile of this business as you get these higher implied volumes that this company has not seen in the past?

Yes. So I'd say, first of all, we're starting from a point of strength, right? When you look at our operating margins, I think they're relatively attractive versus the rest of our sector and in our direct peer group. I think the leverage power of additional revenue is quite powerful, especially given the transformation initiatives that we've already run. We brought in a Chief Transformation Officer who's not only ensuring that we harvest what we've already started but planting the seeds for new efficiency going forward. So I think the leverage power of that acceleration of revenue to the mid-single digits is substantial and, more importantly, durable.

Okay. Just a couple of minutes left here, 1 minute left. I want to make sure we cover China just because that's also top of mind. It's come up a couple of times here. But to either of you, just any update on timing or whether you're going to be involved in the tender and the timing of that tender. And then -- and maybe most importantly, kind of in the shorter term, thinking through 2021 impact, second half of '21, any concerns about distributors kind of slowing orders ahead of that China tender implementation?

Yes. So unfortunately, we are going to be involved in the VBP. So to answer that question, yes, we will be involved, and it's going to be for large joints. At this point, it's still moving. I think anyone who's had any interaction with China and tried to negotiate with the government, it's challenging. Any government is challenging, but China can be even more. It's unpredictable the times. But right now, we feel pretty confident that the process should begin to allow us to decide who's going to be in the VBP or know who's going to be in the VBP by the July time frame, that's kind of what it's saying today. It could change but that's kind of the time frame. Now we're also hearing then that there would be a delay. So you would find out who's in it, and then there's going to be a number of months delay before that actually starts so that people could get prepared, to get the inventory levels up, get the infrastructure in place and be ready to go. So all that would tell us today. Anyway, our thinking is that the impact of this would likely be mostly in 2022, and that's the way we're modeling it. It could be a little bit in the fourth quarter, and we've got some of that built into the wide range that we've created for 2021. But most of the impact, at least based on what we're hearing today, would be 2022, and that's the way we're thinking about it. There's always -- by the way, the question on inventory. There's always a question of how distributors are going to react. We do know there's a lot of distributors, a lot of inventory in the way China typically manages their business, but we've got those relationships. We've been working with these distributors for a long time, and we're going to manage that effectively.

Okay. Good stuff. We got through a lot. We're right at the top of the hour, so we'll keep you guys on time for the rest of your day. I wanted to thank you, Bryan and Suky. As always, you're great to have at this conference. So we appreciate you coming. And hopefully, we'll do it live next year in California.

Hope so. Thanks. Thanks for having us.

Great.

Okay, folks.

Thanks, Amit. Take care.

Bye now.