We Like Zimmer's Pick for CEO

Editor's note: At the time of publication (Dec. 20, 2017), a family member of the analyst owned shares in Stryker (SYK) in an account managed by a third party. Morningstar has confirmed that her ownership of Stryker did not influence any ratings or analysis.

We’re pleased with  Zimmer Biomet’s (ZBH) choice of president and CEO, and we’re leaving our fair value estimate and wide economic moat rating unchanged.

Bryan Hanson most recently ran the minimally invasive therapies group at Medtronic (MDT). While he is new to the orthopedic market, on balance, we think he’ll bring to Zimmer Biomet a much-needed new perspective and an appetite to try different ideas.

As medical technology rivals, including Stryker (SYK) and Medtronic, have significantly expanded their products and actively worked to address new target audiences in hospital CFOs, procurement departments, and value assessment committees, Zimmer Biomet moved much more conservatively and focused its efforts on strengthening relationships with orthopedic surgeons under the leadership of former CEO David Dvorak. We think the old med-tech model of selling solely to the practitioner is not enough, as the competitive landscape inexorably shifts toward value-based reimbursement.

Hanson was a rising star at Covidien, and we’ve been impressed by his ability at Medtronic to focus the minimally invasive therapies business and penetrate emerging markets. Hanson will need to tackle regulatory, operational, and strategic challenges in his new position at Zimmer Biomet.

On the regulatory front, Zimmer has made progress on its remediation efforts, but the U.S. Food and Drug Administration works on its own timeline. Covidien dealt with Form 483 letters from the FDA during Hanson’s tenure there, so we think his exposure will come in handy to put Zimmer’s quality issues to rest. We are hopeful that Hanson has the operational experience to rectify the supply issues that have dogged the company, as well as the challenge of optimizing how legacy Biomet and Zimmer work to enhance cross-selling and maintaining relationships with surgeons. He smoothly shepherded several divisions as Tyco spun out Covidien and followed that with the reorganization of Covidien divisions after its acquisition by Medtronic.

We think Hanson’s potential reshaping of Zimmer Biomet’s strategy could be his biggest contribution to the long-term health of the company. Dvorak’s risk aversion and uncreative approach to Zimmer’s future have left the company two steps behind rivals, in our opinion. The introduction of value-based reimbursement opened opportunities for forward-thinking med-tech companies to involve themselves in helping hospitals improve outcomes and/or lower costs. Fortunately for Zimmer Biomet, the high switching costs for orthopedic surgeons have helped shield the company from more intense competition and also buys time for it to readjust its path.

Considering Hanson’s hand in helping Covidien climb up the value curve with medical devices and his previous two years of involvement with Medtronic’s wide-ranging initiatives to take advantage of value-based reimbursement, we think he’ll bring some fresh thinking to Zimmer Biomet and the willingness to try out new initiatives. We would not be surprised if Hanson pushes for a greater Zimmer Biomet presence in the orthopedic robot market, for example.