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Zimmer Biomet CEO Resigns

Zimmer Biomet (ZBH) announced preliminary 2Q17 overall results alongside news of the departure of David Dvorak, its CEO of ten years. Dan Florin, Senior Vice President and CFO, will serve as interim CEO while the board seeks to fill the vacancy.

While overall preliminary 2Q17 ZBH revenue of ~$1.95BB (including non-ortho) is an increase of +1.1% vs. 2Q16, the company’s organic growth is expected to post a decrease of -0.3%—below previously-stated guidance of flat to +1% for the quarter.

News of the executive change should please shareholders. Zimmer Biomet is still dealing with fallout from product supply issues originally reported in 3Q16 affecting the manufacture of Persona knees and legacy Biomet hips, and to a lesser degree the Comprehensive Shoulder system. The matters contributed, at the time, to an inability to secure new customers while maintaining product supply to current customers.

In its 1Q17 call, leadership had acknowledged the impact of its supply chain challenges, stating that though overall production at its Warsaw North Campus manufacturing facility had improved during the quarter, greater-than-expected production delays remained. In yesterday’s announcements, Florin noted that while output increased during 2Q17, “certain brands did not achieve targeted production levels as quickly as anticipated.” Further, he noted a slower recapture of revenue from customers affected by the product supply issues.

Major leadership changes create a period of internal and external uncertainty. While the new CEO will be tasked with reconciliation of lingering merger integration/quality issues, he or she must also manage other challenges and growth initiatives; within 2017 alone, those have included unveiling the Signature Solutions clinical service and technology suite, at AAOS; the close-out of a warning letter for a facility in China; ex-U.S. launch of Subchondroplasty; a voluntary field safety corrective action for certain ROSA Brain, Spine and One surgical robotic devices; launch of a surgical planning tool that uses x-ray technology for patient-specific knee implant positioning; a recall of implantable spinal fusion stimulators and the Comprehensive Shoulder, etc.

To alleviate the impact of hip and knee supply chain issues, our assumption is that new leadership will continue to execute on Dvorak’s strategy to diversify the company’s portfolio. ORTHOWORLD estimates that 70.6% of ZBH’s 2016 revenue came from the joint reconstruction market. None of its closest competitors—DePuy Synthes, Stryker, Smith & Nephew—derive more than 52% of their revenue from joint recon.

Zimmer Biomet holds the #1 spot in the joint recon market. For 2016, the company’s 29% share of the market ($5BB) was followed in the #2 spot by Stryker, with 20% of segment share ($3.4BB), per ORTHOWORLD estimates. While Stryker’s year over year growth increased 5% from 2015 to 2016, ZBH’s fluctuated throughout 2016, ending at 0.7% over 2015. For 1Q17, ZBH’s joint recon revenue grew 1.0%, while Stryker’s grew 5.6%.