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

Okay. Good afternoon, everyone. A pleasure to have with us management team from Zimmer Biomet. For a variety of reasons, I think Zimmer -- this should be an interesting meeting. I'm curious to hear what Bryan and Suketu have to say. From the company, we have CEO, Bryan Hanson; CFO, Suketu Upadhyay; and from Investor Relations, we have Keri Mattox. Bryan, Suketu and Keri, thanks for spending the time with us this afternoon.

Absolutely.

Bryan, I want to start with a high-level question for you. I'm going to switch this slightly. Most of your peers have started with Omicron and what's happening in utilization. I will not ask you , we'll save that for later. I just look at the stock performance Zimmer versus the rest of the Medtech peers. I mean I get the COVID noise, but the stock has been punished unduly versus your medtech peers. I guess my question is, ex the COVID noises, is there something fundamental that's going on in the business that should justify this move? Or how do you see the base fundamentals from your [indiscernible]?

Yes. So I would tell you that I would agree that I think the stock has been unduly impacted, so I'm just going to agree with you right there. I would tell you that it is likely very much connected to COVID. As you know, we have a very high percentage of our revenue that is linked to those procedures that, unfortunately, are determined to be deferrable, and that has a direct impact on us when COVID flares up, and we have ICU beds that are full. So that is definitely weighing on the business. Outside of that, if I think about the things we can control and the strategy that we put into place, I feel great about where we are as an organization. So if anyone is looking at the performance of the business inside of COVID and the things that we can control. And is -- does not have a positive viewpoint, you probably just don't know what's occurring because right now, it looks really good. And I think the best proof point for that is to look at the last 6 quarters. We've been able to take share pretty consistently across our large joints business, particularly in knees but also in hips. And to put that into perspective, before those 6 quarters, Zimmer Biomet, as a company that's been combined, was not able to do that in 1 quarter, so 20-plus quarters of not being able to achieve an over performance in those 2 areas. And so that's just by itself tells you that the strategy is working, that we're delivering on what we can control. And if people are -- don't have confidence there, they just got to look at the facts. That is actually working. Unfortunately, COVID is muting that performance. But outside of that, we're delivering what we can control.

Fantastic. And I think that segues into the COVID topic, right, with the recent Omicron news. I guess when you gave guidance on 3Q call, there were certain assumptions around utilization. Has that changed in any way at all? Does Omicron or restrictions in Europe change that view at all?

Yes. I'll just maybe quickly touch upon this and then try to provide any additional color. But what I would say is that we came into the fourth quarter with a pretty specific assumption around what we thought was going to be the pressure globally from COVID. And I can tell you, for sure, things have changed since that time, puts and takes for sure. But generally speaking, given all those puts and takes, we still feel pretty confident that our view of COVID impact on our business was accurate. And our guidance still holds. But Suketu, I don't know if you want to give any more color beyond that. But that's the way we certainly feel about it.

Yes. Yes. Sure, Bryan. If you recall, Vijay, we basically took our September exit in the third quarter and said that we're going to assume that the fourth quarter COVID environment kind of hold to that point. We weren't going to try and call [ a ] recovery, which I think has been elusive for us and as well as every other player in the marketplace. Every time you think you've got this figured out, it changes shape on you, right? But in that backdrop, it's broadly been the same, as Bryan said, there's puts and pause. Europe has gotten worse. You see the headlines. I'm sure all of our peers are talking about that. And I just want to highlight something on that. When we came and provided our guidance in very early November, we had come off one of the strongest quarters for EMEA, our European business since the pandemic. And literally in 2 short weeks after that, you see all these surges coming, and we're actually now seeing EMEA slightly underperformed our original expectations for Q4. That's just a proof point of how fluid this is and how quickly things are moving. Now countering that, we're actually seeing some promise in parts of the U.S. Clearly not where we want it to be or needed to be. We're still struggling in some large states, Michigan, Texas, California, Florida, et cetera, but we are seeing some better-than-expected performance in other parts of the country. So that's good. And that's helping offset some of that headwind that we see from Europe. Asia Pacific is largely in line with how we thought about things for Q4. So that remains stable. The one thing that we are keeping our eyes on, as you said, is Omicron. Now we've not seen to date that we're only literally less than a week into this. We've not seen any material near-term impact from Omicron. So I think that's a net positive. However, it's still early days, and we're going to have to see how this progresses. But largely, we're in line with our expectations of how we thought about it.

That's helpful. Absolute. And Bryan, I think one of the other comments you made on the call was labor, right? And you and your peers have spoken about labor shortages. I guess from our perspective, is this temporal versus more structural? Is it something that the market has struggled? How do you answer the question on labor shortages?

Yes. I would tell you, it definitely feels more structural to me. And it's being exacerbated and, obviously, by COVID and the amount of patients that are coming into the hospital absorbing staffing. But this is not a new concept to the medtech industry or the healthcare industry. We've always been dealing with, for years now, these challenges with nursing, in particular. But again, what's exacerbating the problem right now is twofold in my mind: Number one, you've got more patients in the ICU taking the hospital space and, as a result, absorbing that staffing that was already stressed. That's one; and then two, you just have people that have decided that they don't want to work anymore and they're leaving the space. And that isn't just happening in this area if it's happening in a lot of areas. It's just that when you're already capacity constrained that creates a challenge for you. So I don't think that it's a quick recovery from this. I do believe the hospitals are scrambling to find ways to overcome it. So we'll see how that goes. But I think, first and foremost, I think what will help the most is COVID leaving the hospitals and as a result of COVID leaving, just having more capacity of that staffing that does exist.

And just maybe off of those comments, Bryan, assuming we're in a normalized environment at some point in the distant future, right? Should I think -- if I go back 12 months, we were talking about backlog benefit, right, given this labor situation should we even be assuming some backlog benefit at some distant future? Or is -- are we in a situation where the labor shortages limits that upside optionality?

Yes. Based on what I'm seeing today, first and foremost, we've got to get COVID behind us. And I think if COVID gets behind us in the rearview mirror, then we've got to believe all [indiscernible] that there is a backlog of patients because there's been no structural change in the disease state itself. The size and scale of that now is, as you know, I think, difficult to even try to figure out, but there's going to be a sizable backlog out there. But what I'm not seeing so far is this real push to start opening up capacity even if it exists. So to say you have a stacking capability. I'm just not seeing a lot of people saying that they would dramatically try to increase capacity to be able to pull that backlog through. So I think step one, COVID's got to be out of the way that we have a chance to start working through the backlog; and then step two, we've got to see if people who are going to be willing to flex up capacity if they haven't. And I'm just not getting a direct signal at this point. That's unilateral in any way that people are ready to do that. Some of it is a difference in desire to work. Interestingly enough, you've got some folks that have been pretty successful, that are pure takers, that are surgeons, that just are saying, "Hey, I don't want to work on the weekends. I'm going to have a backlog patients. So I'm going to have a longer wait list to do well. But I'm not in a position where I'm not going to take my holiday. I'm not in a position where I'm going to work weekends." And I'm hearing more of that than I'm hearing this significant desire to upscale capacity, which tells me that when the backlog does begin to come through, I think it will be slower. I don't think you're going to see a huge wave of backlog patients. I think it will be a tailwind, for sure, at some point, I just think it will be a slower role than what I originally thought.

That's helpful comments, Bryan. Maybe, Suketu, one for you the other data point that came out on 3Q call was China [ where we seem ]. And I think there were a few numbers flying around, and I want to make sure if we understand those numbers right? The overall impact of 100 basis points, that has not changed, correct?

That's right. That's right. We said that based on the latest information we got on the actual tender results, is that we still believe that the overall impact from VBP would be about 100 basis points on the consolidated level of [indiscernible] maybe slightly worse because our pricing did come out a little bit harsher than we originally expected. And the way we think about that, Vijay, is I just want to make sure we are out to the clear, if you sort of took a pre VBP model for '19 -- or sorry, for 2021 and for 2022, what we're saying versus that pre VBP model, in a post VBP world, you would reduce that revenue by 100 basis points for both years. Hopefully, that's as simple as we can make it. Now the construct of that -- so obviously, that impact has hit us earlier than we expected. We thought it would be largely when VBP went into effect. But we saw some dynamics earlier than expected around destocking heavier than we originally expected as well as [indiscernible] deferrals of elective procedures as they wait for VBP to take effect and secure lower out-of-pocket expense. That's -- those are the primary drivers of why it's bringing it in a little bit earlier than we originally expected. But I'll just pause it there, because I think there was another part of your question.

I think the other aspect was -- so given -- I think 3Q is assuming 300 basis points impact, right? So that annualizes to around 75 basis points to be incremental impact to growth for next year, that should just be 25 basis points. Is that the right math and thinking about from a revenue perspective?

Yes. I think the piece you're missing is that there is the Q4 component. But if you recall back in the second quarter, we talked a little bit about some inventory destocking. And then in the third quarter, we took some charge on inventory revaluations. When you put all of those components together, it gets closer to that 100 basis points, maybe slightly higher. So I think that's the piece we're missing. And that's why we're still saying 100 basis points this year, 100 basis points for 2022 versus a pre VBP model.

That's helpful. So I missed the inventory destocking aspect effect. What should be the margin impacts here, Suketu, when you think about the destocking and the pricing impact as we look at, I think, Q4 exit rate on gross margins, should that be the right jump-off point? And should margins expand from there?

Yes. I think -- so first of all, the construct of that 100 basis points in 2021 versus 2022 is different. In 2021, you have sort of 3 components that are making up that VBP 100 basis point impact. You've got the deferral of patients that we've talked about. You have some destocking and then you have some price effect on inventory. To the extent that those impacts on the top line are not price related. So in other words, deferral of patients and deferral -- or sorry, destocking, those actually have a cost of goods offset, so you get the cost of goods benefit because you don't have to pay for that sales reduction. So the margin impact into 2021 is going to be less on that 100 basis points than it will be in 2020. So while the impact on a top line perspective from this year to next year is relatively the same, the margin impact is going to be a bit heavier in 2022 because it's going to be primarily price-driven. So as a jumping off point, if all things being equal, and by the way, all things are not equal. There's a lot of moving parts around our business on top line as well as bottom line. All things being equal, you would have a modest amount of pressure on gross margins and operating margins for VBP because of that phenomenon.

Understood. No, that's helpful. And maybe I do want to come back to margins in a bit, but Bryan, I think the other -- one of your peers had an analyst there, had an ASC panel, which spoke about how they're positioned to win in that market. I'm curious what is Zimmer's ASC strategy? And how are you guys positioned to win in that market?

Yes. So I'll maybe answer that in 2 ways. One, I would tell you that we are currently in what I would define as a deficient position in the ASC. We have less share in the ASC than we have in the hospital marketplace. It's just been a focus for the organization, [ fast more ] hospital bases versus ASC. So we're starting out in a deficient position. We don't intend to stay there, but that's where we're starting now. And so what are we doing to change that? And this will take time, obviously, because to move share in orthopedics does take time. But the focus for us is very clear. It's really in 3 key areas. The first is we've got to build infrastructure. We've got to have a dedicated organization and that is focused on ASC. And during the pandemic, we've built that organization. About 100 people that are dedicated fully to the ASC. And it's not selling products, it's contracting at the ASC level. You still have the same folks that sell in the hospital that sell on the ASC, but you've got a contracting arm now that's in place that truly does know how to contract on behalf of the ASC across multiple categories of our business. So that's the first one. The second one is that contracting piece. So we really make sure that we've got a strong multi-category contracting capability that leverages also ZBEdge in our technology. So taking our technology that we have that we think is differentiated because of data collection capabilities and making sure that we use that as a centerpiece in that contracting across multiple categories. And then really the third is portfolio. and we're attacking that in 2 ways. Number one, we've probably got the strongest NPI I've seen in a long time in those categories that apply to the ASC of those categories or businesses that apply to the ASC. And we're looking also M&A to be able to round out the portfolio as well. The 2 prime examples of that would be realigned in Omni Suite. Realigned, build out our sports portfolio, which gives us another right to be able to get in and compete for us, which, as you know, happens in the ASC for the most part. And then also Omni Suite which just booms [ license], got our artificial intelligence stored into it. So it's a little bit different than typical [ Room's Alliance ], but that gives us some of the infrastructure also for ASCs. So those are really the ways we're attacking. It is direct commercial organization around contracting, specifically leveraging technology and then making sure that we fill out the portfolio to be able to pursue that space.

And just maybe when you think about the environment perhaps normalizing whether it's '22 or '23, we can debate. But at some point in a post-COVID environment, is this trend towards ASCs that we're seeing, which perhaps got accelerated by the pandemic, should that revert back to pre-pandemic trends and now we get back to normalized levels? Or is this Genies out of the bottle, and this is one way we should look at now.

Well, I tell you that if I look at it, again, a couple of different ways. One, from an outpatient standpoint, at least in the U.S., but I think you're going to see it in other areas as well. I think the outpatient portion is absolutely going to continue. I think we've learned very quickly. Now whether you're in the hospital or in the ASC, you can do an outpatient procedure in a lot of these situations where I think people questioned that in the past. And I think patients are doing fine that, I think that will be a trend that, absolutely, continues with or without COVID. But I think it's the right thing for the patient. Its' the right thing for the overall cost of caring for the patient. And it's just a good thing. It's one of those things you can say we learned in the COVID environment. But from an ASC standpoint, I think it's going to continue as well. I don't know if the pace will stay the same, but I absolutely see that, that cost setting, it makes sense to be able to do these procedures. And I think a lot of them can be done in the ASC, and I would expect it to continue. What I would think would change, though, is the differential in growth rates that you're seeing from a procedure standpoint in the ASC versus the hospital? Right now, that's kind of exacerbated by the fact that the ASC is not as encumbered by COVID as the hospital limits. And so that delta between the growth rates you're seeing in the ASC and the hospital is bigger now than it's ever been. But as the hospital recovers, as COVID leaves a hospital that delta will close, but my sense is that ASC will always be ahead of the hospital setting.

And that gets me to my next question, and this is actually -- it's kind of tied to ROSA. I think if I go back to ROSA, one of its advantages was it's the speed. I mean, this -- it was a highly productive system. It feels like it's tailor-made for ASCs. I'm curious, should that be a different share for Zimmer in that ASC setting?

I think it was one of many differentiating technologies that I think we can bring to the ASC setting and the hospital side, by the way, I think in both situations, people like that efficiency play. They like fewer things to disrupt the surgical flow and fewer things that would disrupt what they would typically have to do relative to providing care to the patient. And so that's what we bring to the table. That was part of the design philosophy that we have in ROSA. But it's only one part of the variable. And this data collection that we have now also is quite attractive to the ASC. People look at Persona IQ, they look at Mymobility, they look at the ability to collect data across [ floor ] during and after the procedure. And that's meaningful to folks in the ASC. And remember, a lot of the ASCs, particularly that have separate hospitals are owned by surgeons, and surgeons have the ability then to do remote patient monitoring with IQ and Mymobility. And that is an attractive thing to go to provide better care through the remote patient monitoring and also as they provide that care to get to reimbursement for it.

Could you maybe spend a couple of minutes here on this topic, Bryan. I mean, we keep hearing about AI, ML and digital transformation in health care. I feel like I've seen you guys speak about this. And this is probably the most tangible that we've seen in terms of a product offering. What's been the traction in the marketplace when you talk about Persona IQ and Mymobility and how meaningful is it as a differentiator when you think about the medium term?

Yes. So very early days, obviously, for IT specifically, but I'll give you just kind of a [ microscopic ] view of what I think is going to happen. And so just a real world example. I was with the system that I won't name for competitive reasons, but that system, where I was talking to the chief of Orthopedics there, is using multiple robotic systems [ competitive ]. It's not just one multiple robotic systems. And we're having a conversation about what are the puts and takes associated with my robotic system versus that robotic system. And we talked about that for maybe 5 minutes. I said, listen, at the end of the day, there's something you're going to like about mine, there is something you're going to like about theirs. They're both going to do a [ just]. The difference is that, that robotic system, for all types of purposes is a dumb system. It's going to do what you're asking it to do and it's going to do it more accurately than you can do it in your own, but it's not going to tell you what to do. The difference is with data collection that we have with Mymobility and now Persona IQ and ROSA beside the operation, we actually now using artificial intelligence can use that data collected to give you insights on what you should actually do during the surgery, what kind of rehab you should do post the surgery. So that becomes an intelligent insightful decision versus just executing what you already thought you were going to do. And since you got into that conversation with this person, and this is a pretty data-centric individual, they immediately said, "Well, can I take these robotic systems that I have today and just trade them in for ROSA systems." And it wasn't because they thought my ROSA was better than the competitor. They believe in that data story, and they believe that the insights are more important than the accuracy of the robotic system because all robotic systems are accurate. Then they do what you tell them to do. But if we can tell a surgeon, "Hey, this is what I would do in this situation because I've seen 1,000 patients just like this one," that gets exciting.

And it's a powerful message, for sure. I think this is maybe slightly off topic, but I think for the first time a device, company CEO is President at [ CES ]. I think, it again goes to the fact that there's consumer from AI informatics, which is becoming more important in the space. The -- what kind of information can surgeons get when you talk about AI and Mymobility, Bryan? And can you add other capabilities to this platform as you think about the future?

We absolutely can, and would consider doing so, but we don't know if we have to. There's a lot of sensing capability that exists today between Mymobility and Persona IQ. And really, it's going to come down to -- and I would just say that we only have a few iQs out there now, but the amount of data that we're collecting per patient is overwhelmed. To the human, forget about it. There's no way you could digest it. But when it does give you a readout almost like an EKG, the read that you would get if you're going to get a murmur in the heart, you would see some inconsistency in that EKG. It's kind of the same thing. What we're expecting to the data that we're collecting today is to be able to show a graph that everything is normal, but then maybe something that would be off in that graph, which would tell you you've got a potential problem. And so what we believe, and we've got to play this out, that what we're sensing today might actually tell us if we're having loosening of the implant. It might actually tell us if we have an infection risk. We don't know yet because we haven't been able to pull enough of that data and put in the data lake. But we do believe that the things that we're sensing today may actually give us those insights just through what we're sensing to death. We're not having to add anything else. At the same time, we're still working on miniaturization. We're still working on different [ poor ] factors, so that we can apply this to other parts of the body. But we're pretty excited already, early days, but we're pretty excited with the amount of data we're collecting per patient.

Is there a way to collect all this data and perhaps publish them in a peer review journal? And if that's part of the program, then when can we see some data?

I won't speak to the time line, but that is absolutely. We're focused on it. And it's not just with iQ, I mean the whole intent here is the data will kind of set us free, right? We got to believe that, 100% believe it. Otherwise, we're spending in the wrong area. We truly do believe this data collection is going to be meaningful. And we're trying to align with institutions when we talk about Persona IQ because remember, we are a capacity constraint there. A lot of institutions that have that capability to collect data and do research for us. So we're going to be able to get in Mymobility, combined with ROSA, combined with iQ. This [indiscernible] wouldn't tell us that artificial intelligence backdrop and really make sure that this data collection means something. We absolutely believe it will. I mean, the perfect example, I tell this story all the time because I hear it all the time. Surgeons will say, yes, yes, I was in the operating room in a day, I was a rock star that day, got my procedure out in 30 minutes, everything was swimmingly, it was perfect. I did the right cut, the right balancing everything was perfect, the x-rays looks fantastic, and the patient is not happy. And I just -- and I don't know why. I don't know why. You know what, I don't either. But I'm pretty confident with the amount of data we're going to be able to collect. We'll be able to start to draw some insights on "why". Maybe it should have been kinematic alignment versus your [ structural alignment ] line? And if you can get that kind of insight to somebody that's going to be very interesting. And also, we're going to start to be able to segment customers or patients. Let's say that you want to be a -- I want to run a marathon, I just want to walk to the grocery store. That's a very different view of how you might actually work on the need. So we can begin to segment customers in that way or patients in that way and collect data across those. We can look at what kind of custom tissue balancing make the most sense interoperatively and what type of rehab makes sense for that type of patient. And that gets pretty exciting when you think about it that way.

It does sound exciting. The one last question maybe I did have, maybe the last one on this topic is -- and we saw this in the heart tailor monitoring. I think one of the pushbacks is the data became too much. It was overwhelming for the nursing staff. Is that an issue here, similar situation here in orthopedics?

It is absolutely too overwhelming for a human being. There's no question. So our job is to collect as much data as we possibly can across those factors that I referenced, but then use that machine learning and artificial intelligence to make sense of it. The machine learning is going to look for trends, artificial intelligence is going to take those trends and try to create insights as a result of what they're seeing. That then, it's up to us. We got to make this consumer rock. We've got to make this to where it's very easy to digest, and a human being can't. There's no way you can make sense today. It's just too many data points. But absolutely, through artificial intelligence, we can provide those insights in a very easily digestible manner. That's the intent.

Understood. And maybe this is for perhaps a Suketu question, but have you guys disclosed the latest on ROSA placements? And has anything changed and how you sell ROSA? Is this still a usage-based [ mono ]? Or do people want to just buy the system outright?

Yes. So we haven't disclosed our placements for competitive reasons, and we're going to keep going down that approach. But I will tell you, we've been incredibly happy and pleased with our execution on this front with placements, not only in the U.S., but quite frankly, outside of the U.S., where we're making significant traction. The way we would talk about it is we expect in '21 for our placements to be at a minimum of what we did in 2020. I'd personally be upset if we didn't even do better than that. So I'm pleased with where that's all trending. And obviously, that presents a really good opportunity for us on a number of fronts for competitive pull-through mix shift as well as other streams of revenue through disposables. So that's playing out as expected, if not a little bit better than where we expect it to be. Regarding placement versus outright purchase, that swings from quarter-to-quarter depending on the type of account. So there's no real anomaly from what we've seen from a trend perspective there. Again, I just keep coming back to we're really pleased with our execution on this front. And we're excited about where that's going to go into next year, now that we've got the knee as well as hip application -- as well.

And that sort of segues into the next question, Bryan. What's been the utilization on these systems? Do you -- is that a metric that you track? And are you happy with how utilization on the ROSA is tracking?

Yes. It's one of many actually variables that we track when we look at the ROSA system. Obviously, we're putting a lot of time and effort, resources, money, everything else in the ROSA technology. and we make sure that we track it in more ways than you can probably imagine. But that is certainly one of the things we look at. But probably the biggest metric though that we pay attention to is the number of overall procedures that we have the need and how many of those are done robotically. But we want to be able to move the needle as quickly as we possibly can to get the highest percent penetration of robotic procedures on our total needs. And that's one that we're still -- we're still early in the game on this one, which is great news for us because the traction is already very good. It's having a meaningful impact on the performance of our business versus our peers and our competitors, and we're just getting started. So the tailwind associated with robotics and the penetration of robotics has a long road ahead of us. I mean true, I'm very excited about that. But it's working. We're putting robotic systems in the demand assigned or getting the expected output from [indiscernible]. So we look at revenue per system place, if you look at the contract commitments that were made above or below those. We look at do we have multi-category contracting inside of those institutions that have ROSA's. A lot of things that we look at as the biggest one, the most important one is looking at that penetration of overall procedures.

And would that penetration be specific to that institute where you place the system?

Well, we look at both, actually. When we look broadly at global procedures and our percent penetration of those global procedures, and then we absolutely look at the individual institution that acquires ROSA.

Got you. And then maybe another ROSA related question. I think one of the questions, which came up a few quarters ago, does Zimmer have a few support personal clinical specialist to support this demand, right? Do you feel like you have the support staff and clinical specialists at a place where you can meet the demand when you think about a more normalized environment in '22?

Yes. I'd say really proud of the team here because commercialization effort when you're talking about robotics is multipronged. It's not just a typical launch of a product. You've got to look at your capacity in robotics. Number one, make sure that the field is communicating what they're going to sell, so you can build enough of these things, which is kind of obvious. You got to have enough salespeople dedicated to it as well to be able to drive the demand. You got to have the service organization that's ready and ramping up as well. And you're going to have all these things in place to make sure that you're delivering and you've got to have the specialist outside of the sales organization that can help with that transition period when some of you first brings on a robotic system. And they've done a -- just a very, very good job of planning that out well because we're ahead of where we thought we would be. And we've not run into capacity constraints in that way, which tells you that it's a very good planning with the ability to think about that extraordinary performance and [indiscernible] to meet it. So I've been very happy so far with our ability to hit all of the capacity areas and not get in the way of our own success because sometimes you can see that product launches. You have capacity constraints internally in one way or another, people want to buy, but you can't sell. And that has not happened so far.

Fantastic. I think maybe back to the margin question, Suketu. So based on everything you said, right, I think there was some incremental commentary around supply chain inflation on 3Q. Maybe talk about margin from your LRP perspective, right? I think the last stage of the goal was exiting '23, Zimmer would be at 30% exiting fiscal '23. Is that still intact for Zimmer?

Yes. I would say that we still have a path to that 30%, but it has become incrementally more challenging. If you think about when we provided that target back at the end of '19, early part 2020, that was before 3 key events that have happened since then. One is the announced spin which actually would be a tailwind to that margin -- operating margin profile. However, we've had 2 significant tailwinds. One is VBP. And if you think about VBP and the spin, they kind of offset each other, not perfectly, but in order of magnitude. The biggest impact has really been around COVID, right? Because our 30% operating margin target was predicated really on 3 basic building blocks. It was a stabilized gross margin off of the back end of 2020. It was on our efficiency programs, which we would then reinvest for top line growth. And that's what underpinned how we thought about that 30% operating margin. So what's happened since then is our gross margin, we still believe that, that stability in gross margin as a starting point is the right place to be, right place to start. However, there are some modest headwinds into next year that we're going to have to continue to work through and try and offset. As it relates to our efficiency program. It's been incredibly proud in what the team's been able to deliver there. We're on track -- ahead of track on all the efficiency programs that we initiated, and we're now starting some new programs that are going to start to take effect into 2022. So both of those things have been within our control -- have been operating as intended. The big outlier has been around revenue. And so for us now, to still get to that 30% operating target, having effectively lost 2 years of revenue growth coming off of '19. I mean not only have we lost the revenue growth, but we've declined because of the impact of COVID and all the leverage that comes with that revenue. For us to get to that 30%, which we still have a path to, we would need to see, in 2023, effectively a normalized market, which would translate to a normalized market growth plus and share [indiscernible] taking, so around that 4% to 5% growth rate. And within 2022, we'd need to see a pretty steep ramp to get there, right? So this is very much going to be revenue dependent. Now if the revenue doesn't come, we'll be left with a choice. Do we allow those savings to drop to the bottom line or do we use those savings to reinvest back to the top line around ZB and all the exciting stuff that Bryan just talked about. And so we'll be faced with that decision in a not-too-distant future. I know our bias would be to continue to reinvest for the long term because we think we're creating even more differentiation in our leadership, and we want to continue down that trend. But that's kind of how we see it right now. Definitely still a path there, but it has become incrementally harder because of that revenue [ dip it ] over the last 2 years. In order for us to get there, we're going to need to see revenue come back pretty strongly and pretty quickly here.

That's helpful comments, Suketu. Maybe off of that, Bryan, for you. Sometimes, we do get caught up in targets, right? And without recognizing the environment has changed, and that is true for you guys, and it's true for every single medtech company, right? Some of the LRP companies have issued it certainly has changed. But still -- I mean, what does it mean for the ZB pieces, right? So when you came on board, I think there was the optimism around the turnaround look, should ZB get back to perhaps mid-singles growth. we should still see a good margin expansion, whether those targets got pushed out by a year or 2, but there should be pretty healthy margin expansion. Certainly compared to your peer, there should be some very good margin expansion. I think will end up at the same sort of double-digit perhaps earnings CAGR algorithm here for the company. Has any of those elements, big picture elements changed for ZB from your perspective?

So what I would tell you is that I won't comment specifically on some of the specific numbers you threw out there, but because we haven't referenced those, but what I would tell you is that there's no reason that the formula that we put out in place has changed other than COVID. And if COVID gets behind us, which we do believe at some point it will, the strategies work. And so as we get that revenue growth, I absolutely see an environment where, again, all other things out of the picture, we can grow the business, invest to grow the business invest to grow the business and drive margin expansion as well. That was the game plan. That was the intent that is fully what we would be able to do. And remember, our margins are already some of the best-in-class margins out there. But we've done the analysis and part of the efficiency program is based on the fact that we have data that tells you that we probably spend more in almost every one of our functions as a percent of sales than our peers do. So we know we have an opportunity for efficiency here. And on top of that, with the revenue growth and the margin profile we have, that provides a lot of leverage. So we clearly see a path, as we've always stated. To be able to drive that revenue growth, invest for the future of the organization while also getting margin expansion. And we would absolutely believe that will continue if COVID gets out the way.

Got you. And then maybe along with [indiscernible], if the formula -- the big picture hasn't changed. What else are you excited about from a new product perspective? Is this expansion for ROSA into other applications, maybe something perhaps on data and analytics. Maybe talk about that medium term, what excites you?

Yes. I just -- I'll take a step back first and say just broadly speaking. It's just the -- and this sounds a little softer, but I think it's really important, it's just the energy in our organization is completely different than it was 4 years ago. It is a different organization. Any -- which way you look at it, whether it's mission centricity, whether it's the culture of the organization, the talent that we have in the organization, the innovation pipeline is a different organization. When I see strategy reviews now, I see NPI reviews, I just talk to the field sales organization, it just feels different. So that I'm very excited about. Stepping back from that, I would say, getting a little closer to the question. It's really the NPI pipeline. Innovation is a big part of medtech. As you know, it's the lifeblood of a medtech company. We didn't have it in the beginning because we're focused on remediation and other things. But we've taken that really very nascent focus, and we've dramatically increased it. And now we've got a strong pipeline of products that are coming. And when we look at the vitality index of the company today and where it was even 2 years ago, and we look at we're going to take it over the strapline period, it's dramatically increasing. And that's a very good sign, as you know, for a medtech company. If I look inside of the NPI, the thing that gets me most exciting is a lot of good stuff in there. It is ZBEdge. It is around the data. It's not even about robots. It's about the data that can inform robotics, what to do. I always try to use the example, we used to have navigation systems in your car. Remember when you actually use the navigation system in your car and all that did was study to get from point A to point B. What it will lack -- what it lacked and what robotics lack is the data input, which you now get from applications like [indiscernible] from actual other cars that provide data insights and that data insight would change the track you're going to take to get to that endpoint. That's where we want to go. The old fashion navigation in your car is robotics. When you combine data input, it becomes [indiscernible]. That is a completely different application. That's what gets me excited. That's what truly gets me excited inside of NPI.

That was a pretty good analysis. You actually said it crystallized in my mind where things could go. Maybe one for you, Suketu, with the dental spend coming with all the comments you made on supply chain [ VBC ] , should we expect any margin expansion for next year, perhaps some tempered margin expansion? Or how should we think about margins for '22?

Yes. So we're not -- we've not put out guidance after '22, obviously, so I'll talk to the full company. But what we have said about the spin is that when we actually take effect, the full year impact of that is worth about 125 basis points on operating margin. And so we would expect to get some tailwind next year. Again, it depends on the ultimate timing of the spend, how much you finally get. But on a 12-month basis post spin, it's 125 basis points.

But that should roughly be offset by [ VBC ], correct?

That's a good way to think about it. That's how we talked about it a little bit earlier today. Yes.

Got you. And Bryan, maybe a last one for you. The ZB track and ESG, D&I metrics and has management team comped on these metrics?

We are in multiple ways actually. This is one area that -- we're doing a lot of great work actually over the last 4 years and even before that across all of the ESG categories. We were not doing a great job of communicating that great work. And I would tell you that I'm proud of what the organization has accomplished in all the areas where we actually have grades, if you will in ESG. We're moving in the right direction and becoming, in certain ones, best-in-class in medtech, very exciting for us. And I would put a lot of that in Keri's core. She runs IR, as you obviously know, but she also runs communications. And as a side job, she's done a great job of choreographing the ESG initiative for the organization, not each individual part, but just bringing them together and communicating them in a similar way. So it's maybe I'll just pass it to Keri just for a second to talk a little bit more about what we're doing there, but I'm very excited across each of E, S and G and what we're doing as an organization.

Yes. Sure, Bryan. I mean I think to your point, programmatically, Vijay, this has always been an area of focus for us, and I think even increasingly over the past few years. In 2021, we've ramped up the investor engagement around ESG. We also publicly committed to SASB standards and reporting on SASB standards, which has really helped us move that needle, like Bryan talked about with some of our most important rankings like MSCI, Sustainalytics. We stepped back and really tried to take a look at what was going to be the most valuable information for investors. QA RA data, our FDA recalls over a 5-year period, our metrics on the environmental front, what we were reporting out on DE&I. And then we said, how should we communicate these more effectively, right, what we're doing there programmatically. And we've seen that really impact our ranking so far. And I think you'll continue to see us look at those disclosures and how we talk to investors about them in the future.

Fantastic. I think with that, we're at the end of our time, Bryan, Suketu, Keri, thanks so much for spending the time with us this afternoon.

Yes, absolutely. Thank you.