Zimmer Biomet Earnings: Strength in Large Joints Leaves the Firm On Track for the Full Year

Wide-moat Zimmer Biomet ZBH posted second-quarter results that largely fell in line with our expectations, and the firm remains on track to meet our full-year projections, though the market might have been disappointed with management comments that suggested tempered expectations for 2024. Nonetheless, we’re leaving our fair value estimate and 2024 view unchanged for now. With solid quarterly topline growth of 6% in constant currency and adjusted operating margin of 27%, Zimmer Biomet is making progress on its precoronavirus benchmark in 2019 on both measures. We recognize that the firm remains in the early stages of expanding the installed base of Rosa robots, which is a key factor in setting the stage for increased penetration of the new cementless Persona OsseoTi Keel knee. Fortunately, solid demand for large joint replacement fueled by the backlog of patients should help these placements along through 2024.

At first blush, Zimmer Biomet appears to be largely back to its prepandemic normal state. However, some of the related dynamics continue to affect operations and costs. For example, acquisition of various inputs has been challenging and the supply of cementless knees remains constrained, which means the firm cannot yet begin its full commercial launch. Further, management decided to offer additional incentives to the salesforce, likely to keep those employees and their relationships with practitioners in place. All of this strikes us as near-term friction that should work itself out as the firm heads into 2024. That’s when Persona OsseoTi is anticipated to enter full launch mode. Considering all of these atypical impingements, we take it as a very good sign that price erosion was only 100 basis points in the quarter.

We were pleased to see knee and hip revenue rise by 11% and 5% in constant currency, respectively. Once again, Zimmer Biomet significantly outpaced rival Johnson & Johnson, which posted 5% knee and 3% hip growth in the quarter.