Zimmer Biomet Earnings: Further Penetration of Rosa Robot Into ASCs Bodes Well

Wide-moat Zimmer Biomet ZBH posted solid third-quarter performance, and we’re holding steady on our fair value estimate, as the firm’s year-to-date results are tracking nearly on the nose with our full-year estimates. Although management adjusted its outlook slightly downward to account for foreign currency headwinds, our projections for the full year remain bounded by the new guidance.

Quarterly revenue rose 5% year over year in constant currency, and was characterized by respectable 6% growth in the U.S., partially hampered by soft international growth of 3% in constant currency. Knees remained a point of strength, up 7% versus the prior-year period, which was on par with rival Stryker’s quarterly knee growth, and just a hair ahead of Johnson & Johnson’s. On the whole, knee growth at the three major competitors seems to have converged this quarter. However, Zimmer Biomet hips were particularly weak outside the U.S. (down 4%), in contrast to robust hip growth at Stryker and J&J.

Nonetheless, we think Zimmer Biomet deserves credit for the improvements it has made through this year. In particular, we’re pleased to see adjusted year-to-date operating margin rise 150 basis points. This favorable move is in keeping with our expectation that as volume settles into a more normalized pattern of growth, profitability should improve. All the competitors are in a flat-out race to establish their footprints in the ambulatory surgical centers, or ASCs, which have seen significant migration of large joint replacement from hospitals now that Medicare reimbursement has been set. We think Zimmer Biomet’s prospects are favorable here, and the expansion of its Rosa robot in ASCs should pay off. Roughly one third of Rosa units are currently being installed in ASCs, setting up the infrastructure for implant pull-through.