What CEO Departure Means for Zimmer Biomet
The company's wide economic moat, which primarily stems from surgeon switching costs, remains intact.
We speculate the Zimmer Biomet (ZBH) board has lost patience with CEO David Dvorak, resulting in the long-standing executive’s resignation with little forewarning. This development comes on the heels of preliminary second-quarter results that fell short of management’s outlook. While shares are likely to dip on this news, we’re leaving our fair value estimate unchanged, as our downward adjustments for 2017 did not materially change our valuation. In the interim, CFO Dan Florin will step into the CEO role while the board convenes a search for a new leader. We think Zimmer Biomet’s wide economic moat, which primarily stems from surgeon switching costs, is intact. The firm still enjoys the largest pool of surgeons trained on its instrumentation, as well as relationships with virtually all hospitals.
In the two years since Zimmer closed on its Biomet acquisition, the firm has run into many difficulties with the integration, including merging both organizations onto a single platform to handle its order and inventory information, and quality and regulatory standards at a legacy Biomet manufacturing facility. Some of these issues have caused inventory planning problems. As we discussed last fall, it could take many months to rectify regulatory issues to the satisfaction of the U.S. Food and Drug Administration, and related inventory snags could drag on near-term revenue growth. On an adjusted basis, Zimmer Biomet has been mired in low-single-digit growth for several years and lagged behind key rivals Stryker and Johnson & Johnson in the large-joint reconstruction business. Although large joints remain more vulnerable to price pressure than extremities, the demographic trend remains in Zimmer’s favor for knee replacements, as baby boomers are now hitting the peak ages for knee replacement. We still think opportunities for volume gains will outweigh price erosion, but Zimmer needs to improve execution to optimize this opportunity.
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Debbie Wang does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.