Zimmer Biomet at Barclays Conference: Strategic Growth Insights

On Thursday, 13 March 2025, Zimmer Biomet Holdings Inc. (NYSE: ZBH) took center stage at the Barclays 27th Annual Global Healthcare Conference. CEO Yvonne Tornos and CFO Sukiyo Padier outlined the company’s strategic vision amidst stable pricing and strong volumes, while addressing both challenges and opportunities in the orthopedic market.

Key Takeaways

• Zimmer Biomet aims for 4% to 5% growth in orthopedics, driven by demographic trends and technological advancements.
• The company plans to regain market share in the hip category with new product launches.
• Paragon 28 acquisition is expected to break even by the end of the second year and expand globally.
• Commitment to expanding operating margins by at least 30 basis points on average organically.
• Focus on innovation with products like the ROSA robotic system and Persona IQ smart implants.

Financial Results

• Gross Margin: Maintained class-leading gross margin through pricing stability and efficiency improvements.
• Operating Margin: Achieved fourth consecutive year of expansion, with a goal to continue expanding by at least 30 basis points on average.
• SG&A: Operating expenses are targeted for further efficiency gains, currently at 42-43% of OpEx.
• Revenue Growth: Aiming for mid-single-digit growth, with a target of 5% company revenue growth.

Operational Updates

• Paragon 28 Integration: Focus on protecting the commercial channel and retaining key leadership during integration, with 250 sales reps joining Zimmer Biomet.
• Product Portfolio: Launch of the "Magnificent Seven" in reconstructive surgery, including products like Persona Osteotype and Oxford Partial Cementless.
• Technology: Continued adoption of the ROSA robotic system, with three new indications planned for launch in the next 18 months.
• Sales Force Specialization: Separation of hip and knee reps and sports and extremities teams to better serve customers.

Future Outlook

• Market Growth: Orthopedic market projected to grow by 4% to 5%.
• Ambulatory Surgical Centers (ASCs): Expectation that 40% to 60% of cases will move to ASCs over the next three to five years.
• Inorganic Growth: Evaluation of opportunities similar to the Paragon 28 acquisition to support revenue growth.
• Focus on Integration: Concentration on integrating Paragon 28 before pursuing additional inorganic strategies.

Q&A Highlights

• ASCs Expansion: Expansion is increasing capacity for orthopedic procedures, benefiting the market.
• Younger Patients: Surgeons are more willing to recommend procedures to younger patients, with the average age for knee replacement in the U.S. dropping from 66 to 61.
• International Opportunities: Plans to leverage Zimmer Biomet’s global infrastructure to expand Paragon 28.

For a detailed understanding, readers are encouraged to refer to the full conference call transcript.

Full transcript - Barclays 27th Annual Global Healthcare Conference:

Matt Makesic, Analyst, Barclays: Thanks so much for joining us. My name is Matt Makesic. I cover medical devices here at Barclays. And I am so pleased to have with us today December of Biomath. So, Yvonne Tornos, President and Chief Executive Officer, Sukiyo Padier, CFO, thanks so much, especially busy week at AOS and making it to the last day of our conference.

I can’t thank you enough for coming.

Yvonne Tornos, President and Chief Executive Officer, Zimmer Biomet: Great to be here.

Matt Makesic, Analyst, Barclays: So I wanted to maybe start with a comment on just the market because that’s something I think you have you’ve been sort of vocal about where we are in this post pandemic, elevated but maybe settling volume environment in orthopedics. What’s been your message? How we should think about this year versus last year and maybe the next couple of years in terms of just volume growth and demand and opportunity?

Yvonne Tornos, President and Chief Executive Officer, Zimmer Biomet: Sure. Well, first things first, good morning to everybody. Matt, you are the only banker that I know that knows how to pronounce his last name. That’s extremely impressive already. Thanks.

Market, this is the new normal. This is the new normal. And we got a lot of data to validate this is the new normal. And what I mean is that the current volumes that we’re seeing, the pricing stability that we’re seeing, we believe is durable. We picked the market around 4% to 4.5%.

At the Academy this week, some of our competitors think it’s 4.5% to 5%, so got it 4% to 5% in terms of our market growth. We’re now going backwards. What’s driving this market stability? External and internal reasons. Externally, you know they deal with demographics.

We’re getting older. We are active. Ten thousand to twelve thousand people turn 65 years of age in The U. S. Every day.

That’s a fact that you see across all of MedTech. So, if you talk to people in cardio, general surgery, diabetes, it’s not an orthopedic phenomenon. This is the reality of demographics. ASCs here in The U. S.

Ambulatory Surgical Centers that is a huge tailwind for volumes. Before, you had to go get your case done in an inpatient, maybe outpatient hospital setting. Now people are going to ASCs, go on a Saturday morning, leave the same night. Hospitals are not ill. They’re not sitting there without cases.

As I tell people, Orthopaedics is the second highest margin contributor to any hospital. With average hospital in The U. S. Operating with 1.5% to 2% operating margin, it is one specialty that want to lose is orthopedics. So all of that to say that it’s a double dip in effect.

Case is going to an ASC, cases going into an in pacing HOPD at the hospital level. Internally it’s technology. The fact that we’re making these cases better, the fact that the surgery is faster, the fact that we are taking complexity out of the overall episodic treatment It’s another tailwind for people to go in there and want to do the surgery. I want to say we, I’m talking Zimmer Biomet, Stryker, Johnson and Johnson, Smith and Nephew. There is a lot of disruption in technology and that creates a situation where patients are more willing to go through the procedure.

The surgery is simpler and so is the physical therapy. It used to be three months. Now you see people up and running six weeks later. And then the last one I’ll talk about is pricing. We’ve seen now three, four years of pricing dynamics moving in the right direction as an industry, orthopedics.

The product side of the equation, the implant is now something like 20% to 25% of the DRG, whereas ten, twenty years ago it was north of 50. We are not the main offender in the economic side of the equation there. So we’re going to see price durability. 80% of Aboogor business is contracted. So this is the new normal.

Matt Makesic, Analyst, Barclays: Yes. No, that makes a lot of sense. We had a clinician panel earlier in the week and talking about the sort of the wave of sort of older patients that are finally really starting to show up. And in addition to that demographic wave, maybe talk a little bit about maybe this gets to your point about patients willing to have the procedure, also maybe surgeons willing to suggest the procedure for younger patients?

Yvonne Tornos, President and Chief Executive Officer, Zimmer Biomet: Yes. I’ll start with the age factor. So prior to COVID in The U. S, the average age for a knee replacement according to CMS was 66 years of age. Today, six to one.

For hips, it’s gone down from somewhere in the upper 50s to the low 50s. And then shoulder went from 53, 50 four to 49, 50. So again, the fact that we’re getting active, the fact that technology is better is inciting surgeons to say I’m okay now putting a shoulder on you or a knee or a hip because maybe you don’t need to go through a revision ten years, fifteen years from now there is better data there. And that’s on the product clinical side. On the side of care, I’ll say it again.

You used to go to a hospital on a Monday. Your length of stay was averaging around three days. A lot of those cases are now day cases for both knees and hips. You go in the morning, you leave at night for a lot of hip and knee cases. And then for hip, it may be a one night stay.

So definitely different reality that we see.

Matt Makesic, Analyst, Barclays: Right. And it’s been a ASC build out. I think in the very, very early days, there was a fear that ASCs would pick up and they would sort of take all these cases from the hospital, but from what we see and you see much better than we do, but is that the ASCs have built out and it’s basically just expanded capacity.

Yvonne Tornos, President and Chief Executive Officer, Zimmer Biomet: That’s it.

Matt Makesic, Analyst, Barclays: So bandwidth benefit as well.

Yvonne Tornos, President and Chief Executive Officer, Zimmer Biomet: That’s it. So volumes are very strong. They’re going to continue to be strong. 40% to 60% of all cases are going to move to ASCs over the next three to five years. And again, I am not aware of any single hospital in The U.

S. That now has operating rooms that are not doing orthopedic cases.

Matt Makesic, Analyst, Barclays: So double dipping. And then last thing I’ll just ask about comment on about the market is that this is one of the folks get a cardiac procedure when they need a cardiac procedure, but this is a sort of patient expectation, patient activity driven procedure. Like I want to have a life that involves golf or something. And therefore, I need to do this procedure. Maybe talk about how activity levels, I don’t know, health and wellness is just generally driven higher demand for folks being able to walk and do things into their 70s, 80s and 90s?

Yvonne Tornos, President and Chief Executive Officer, Zimmer Biomet: Well, we sponsor Peekable for a reason. There is a lot of desire to be active and we are seeing exactly that that people do want to have a different lifestyle. The last two years our sports medicine business has been growing double digit. Our shoulder business, upper single digit. Parts of said that are directly related to mobility are in the teams.

So it is real. It is real.

Matt Makesic, Analyst, Barclays: Okay. So with that in mind, you’re sort of taking your growth up. We put your LRP out. You’re shooting higher for things like share and overall portfolio growth. We can talk about the additions of this portfolio in a second.

But what parts of the core reconstructive business, the key hip and knee business, do you feel like you’ve been executing well at? And which parts are you sort of leaning into to sort of hit some of the higher growth rates that you talked about in your LRP?

Yvonne Tornos, President and Chief Executive Officer, Zimmer Biomet: Yes. So our book of business has three components. You got reconstructive, which is knees and hips. Then you got what we call set, which is six businesses. You got shoulder replacement, upper extremities.

You got CMFT, which is cranial, maxillofacial, thoracic. You got sports medicine. Those are the three key product categories of set. And you got foot and ankle, you got biologics and you got trauma. And then the third segment is technology, other.

So starting with reconstructive, we still are the number one knee and hip company in the world. We have not done what we had to do in the hip category. We lost over the last three or five years, we lost here in The U. S. Three Hundred to 500 basis points of market share, so averaging about 100 basis points per year.

Why? Well, we didn’t have the portfolio. Today, as we enter 2025, we do have the full portfolio. We’ll talk about products later. So there’s no reason why we should not be gaining or regaining market share.

On knees, we’re staying afloat, but given the introduction of four key products over the last year, year and a half, we should accelerate our growth rate in knees. So that’s on recon. On said, we had, as I mentioned, three product categories that were growing strongly CMFT, shoulders and sports medicine. I just mentioned some of them growing double digit. But we’re declining in foot and ankle.

That’s going to stop with the integration of Paragon twenty eight. So that should be another growth driver, a strong mid teens growth driver. And then that leads you with Trauma and Biologics. We believe that Biologics is going to be accelerated. And then Trauma right now is a different business.

We like the cash flow that it generates. We don’t like the working capital requirements of Trauma. We are fifth in that segment. It’s not the one area where we want to deploy capital. And then you got technology another.

Technology, we’re continuing to see great adoption of ROSA. We’re launching three ROSA indications in the next eighteen months. Beyond ROSA or flagship robot, we got three different forms of navigation. You got mixed reality, less complex navigation and surgical guidance powered by AI. That’s also great.

So all of that to say that that is another growth driver for the company. And in the other, I’m not going to go through all the categories, but they grow where they need to be growing. So that’s a bit of the summary of the portfolio.

Matt Makesic, Analyst, Barclays: Okay. So, hips prepared to kind of lean back into share with the portfolio changes. Maybe talk about some of the catalysts in knees as PressFit, but then also even going back to what we just talked about with the market, more younger patients, more revisions. How is like your revision system and the addition to the portfolio in that category kind of positioned you to do better in knees?

Yvonne Tornos, President and Chief Executive Officer, Zimmer Biomet: Yes. So maybe for the trade I’ll answer knees and hips. So two for one. So the seven products that we’ve been attention to this year is what we call the magnificent seven. I didn’t come out with a tagline, but I do like the tagline, right?

So we had seven products that we believe get Zima Biomet to consistent above market growth rates in reconstructive. From left to right, in order of importance, you got Persona osteotype, a resource cementless knee. This is a product that we launched really early, not late twenty twenty three. So early twenty twenty four, late ’20 ’20 ’3 got the full deployment of sets throughout 2024. That is a major tailwind for the company.

We generate a 15% ASP uplift every time we move from cemented to cementless. I was just at the Academy this week. The feedback on the product is outstanding. So this is a huge category with the shift to the SC. It’s going to be a great tailwind.

So that’s number one. Number two, you got Oxford partial cementless. This is the only parcel cementless need in The U. S. We’re launching that as we speak.

If you want to compete with me, you have to go through a PMA. If you’re going to do a PMA, a pre market approval clinical trial, that’s going to be a ten to fifteen year ordeal, very expensive. And again with the shift to the ASC that is going to be a major tailwind for Zimmer Biomet. The third product in any category is personal revision. You were talking about revision in Europe CE Mark at the end of twenty twenty four.

That is a major category both in The U. S. And in Europe. In Europe, the market is about $500,000,000 and growing up a single digit. Here, the market is near $2,000,000,000 Revision cases carry 7x.

I’ll say that again 7x the ASP of our primary cases. We have a 51% market share here in The U. S. Now committed to the same market share in Europe. But yes, we’re committed to get to a leading position in revision cases in Europe.

And then the fourth new product as part of the magnificent seven is Persona IQ, the shorter stem, the 30 millimeters. So it’s a shorter stem of this smart implant. As a reminder, we are the only company that has a smart implant in the world. We own 95% of the IP in the space. So a sensor in the tibia component that is creating or bringing objective data to a subjective procedure.

How is your working post surgery? Do you have the right gait? Are you doing the right level of activity? Potentially, is it a risk of dislocation? Dislocation equals infection and plenty other things.

So those are four key products that we pay attention in this. And then in Hibsys Z1, what we call a triple taper stem, really excited to buy this one out of the gate in 2025 is above our expectations. This enables Zimmer Biomet to compete in the direct anterior category, which is roughly 40% to 50% of all the cases. Again, one category where we’re not participating. Part of the reason why we lost market share at the tune of 300 to 500 basis points.

Surgical impactors to drive efficiency in the case, hammer. And then the seventh and final product is category is navigation. And I alluded to this earlier. We don’t do just robotics. We got navigation.

We got mixed reality. And we got large footprint and small footprint robotics. So that’s the portfolio. And that’s the longest answer you got in a week, but I think that saves time in future questions.

Matt Makesic, Analyst, Barclays: That’s a great answer. Let’s talk about the portfolio for exciting news and acquisition announcement on Paragon twenty eight. As you said, teens grow or mid teens grow. Maybe talk a little bit about where you are in the integration process. I mean, I have to ask the question, I think I may have asked it on the call, is the musculoskeletal sales rep, sales force kind of integrations have been challenging.

I’d say Zimmer Biomat for putting aside some of the operational problems that happen after the migration, I think went extremely well. Maybe talk a little bit about how you plan to bring that force on and keep them running on all cylinders?

Yvonne Tornos, President and Chief Executive Officer, Zimmer Biomet: Yes. First of all, I don’t think the integration of Zimmer and Bioni went well. He did very nice. I actually think that integration was a disaster and set us back a few years. That said, we’re not going to repeat the same mistakes.

Right. But we are going to treat this or we are going to treat this with a lot of rigor. We announced Paragon 28 on January, so a cool number for a cool deal. Over the last five, six weeks, I’ve been directly involved in the integration. While I’m not running the integration, Suki and I are micromanaging the hell out of this integration every day.

There are three things we got to protect the commercial channel. We already announced to the two fifty reps in The U. S. That they are going to be our channel. We don’t have a channel here at Zimmer Biomet.

Lots of excitement I was at the sales meetings, so they’re already guaranteed to be part of the company. So no changes there. Done on that one. The commercial leadership is already retained. So from the CEO, Alberto Costa, to the Chief Commercial Officer to the leadership at the commercial level.

I was with them this week in San Diego. They already are part of the company, design center in Denver, Colorado. So they got something like 50 different products coming over the strat plan period across all six key categories. We’re going to maintain that. And then operationally the things that we need to adjust we will, but we’re going to allow them to run the show.

We bought a company we are buying a company that is doing close to 300,000,000 growing in the upper teens in a market that is growing 6% to 8%, we will not screw that up.

Matt Makesic, Analyst, Barclays: Okay. Yes. And that is a clear difference between your core some of your core markets and foot and ankle is just the volume of implants, the types of procedures and sort of like the intensity of new product launch and new product introduction. So, I think you can see the value of bringing on an engine that’s demonstrated its ability to achieve. It’s a huge opportunity.

Right. So, maybe pivoting a little bit into margins. So, maybe talk about, Suki, if you could sort of like puts and takes to some including around Paragon and then some of the leverage that you expect to see coming out of this year and then going forward both on the, say, the gross margin and the operating line?

Sukiyo Padier, CFO, Zimmer Biomet: Yes. So, thanks, Mac. So, first thing I would say is, you just zoom out a bit. We’ve got very healthy, in fact, class leading gross margin as well as operating margins. We’ve just delivered our fourth straight year of operating margin expansion, even in a pretty tough environment there for ’twenty two and ’twenty three with a lot of inflation to overcome.

But having said that, the team responded incredibly well. The key building blocks there are revenue growth in the mid single digit. You just take our natural flow through that provides a pretty healthy level of margin expansion just in and of itself. Stabilized gross margins even while input costs continue to go up, maybe not at the same levels of ’twenty two and ’twenty three, but there’s still inflationary pressures there. And we’re able to hold gross margins largely because we’re doing much better in price, but also we’re driving a lot more efficiency that now that we’ve moved beyond remediation of quality and building excess capacity, which needed to be done.

And then within operating margins with SG and A, we continue to find areas of opportunity. We currently travel at about 42 to 43% of OpEx and SG and A. So we still consider it to be a target rich environment. So those are the building blocks that have delivered the last four years. They’re the building blocks that are going to deliver 25%.

And we’ve made a commitment of at least 30 basis points on average of operating margin expansion organically over our LRP. We’re very confident in that profile. What’s great about Paragon twenty eight is, yes, it’s going to be dilutive in the near term, but we love the fact that it’s a very fast growing platform in a very healthy end market. At the end of the day, you know this, everyone out here knows us that revenue is your best path to earnings power and margin expansion. So that’s great.

It’s got an accretive gross margin. It’s not going to be significant on the consolidated level just given the size, but it’s great to have an asset that you’re bringing in that has better margins than your company average. And then from an operating margin perspective, we’re continue to invest. And that’s why we’re saying it’s going to be dilutive for the first year, breakeven by the end of the second year, because what we don’t want to do is starve that business when it’s performing so well, introducing so much great innovation into the marketplace. So we are going to invest there.

But not only are we investing in Paragon twenty eight to your point, I think what you’re seeing is very obvious. We’re investing against our base business. You see that in DTP. So really improving awareness, which Yvonne has brought to the organization over the last eighteen to twenty four months, has been paying dividends. We’re specializing our sales forces, right?

So, we don’t have hip and knee sales reps. Now, sort of part timing sports and extremities, we’re individualizing and specializing in those channels. So, that’s another big area of focus for us. We’re making I wouldn’t even say incremental. I think we’re making bold investments in a number of areas.

And that’s being fed from some of the areas that Ivan talked about, which we’re deprioritizing. It doesn’t mean they’re not important. They just have a different role to play in the company than what they used to. And so, we take investment from there, put them into the areas that have stronger market growth, better margin opportunities. And so far, it’s been playing out.

So, I feel bullish on it. That’s great.

Matt Makesic, Analyst, Barclays: And sort of getting through the integration, the breakeven and then accretion of Paragon is one thing kind of on the core U. S. Business. Maybe if you could talk a little bit about the opportunity you see to expand this globally given your global footprint?

Sukiyo Padier, CFO, Zimmer Biomet: PyreCon twenty eight, I think it’s a huge opportunity. They focused on The U. S. Being a new company, sort of early in their commercial scaling, which is apparent and probably the right decision, which gives us plenty of opportunity to bring those products and leverage our existing infrastructure. So, we’re excited about that.

Matt Makesic, Analyst, Barclays: Okay. So, similar and maybe untapped opportunity to bring this overseas? Yes.

Sukiyo Padier, CFO, Zimmer Biomet: Which by the way, we didn’t use a large level of revenue synergies to sort of validate the deal. So, I think those potentially could be a source of upside for us.

Matt Makesic, Analyst, Barclays: Right. I guess, stage two opportunity maybe for us. Well said. Got it. So, all right.

And then, you mentioned I have to ask about the rest of the portfolio. You made some changes since not under your watch necessarily, but there have been changes to the portfolio. Any further changes on the we’d love to talk about the positive side. You just announced the deal, you’re going to be in the middle of integrating the deal. So one question is, when should we see expect you to be out there again and active acquisitively.

But as importantly, how do you feel about the rest of the portfolio?

Yvonne Tornos, President and Chief Executive Officer, Zimmer Biomet: On the core portfolio, we’ve never been in a better position. So again, we had gaps in recon. I’m not going to repeat myself all those gaps are filled. On set, out of the six categories, four are going to be growing very strongly upper single digit, double digit. And one is going to do trauma what it needs to do.

And the other one, I do think it’s going to get accelerated. That’s a $2,500,000,000 business set now growing double digit with just a very nice opportunity to continue to grow. On technology, we have everything that we need. We launched in syndication. So again, the core business is strong.

Inorganically, we’re always going to be looking at deals that make sense. And deals like Paragon twenty eight make a lot of sense. Buying $300,000,000 that is growing at mid teen rate that within two years you can absorb the EPS dilution that creates a platform. Those kind of deals we’re going to continue to look. We’re going to focus on integrating Paragon twenty eight before we start looking at other opportunities.

But, yes, we see a path to continue to grow our Weimgard from 4% today to 5% and that is going to take some organic stuff that we’re doing and some responsible inorganic strategies.

Matt Makesic, Analyst, Barclays: That’s great. So, we’re coming up on time with forty minutes, forty seconds or so that we have remaining. Vaughn, like what would you like to wrap this up or leave with investors that you think is important?

Yvonne Tornos, President and Chief Executive Officer, Zimmer Biomet: In twenty nine seconds? Well, I speak fast, but I don’t speak that fast. So I’m going to attempt to just say that summarizing the markets are very strong. And now this is not backlog. This is not a one time short term centric event.

And then internally Zimmer Biomed is in a totally different position than we’ve been even a year ago. But even in the tough times like last year, we did deliver our guidance of close to 5% revenue growth with leveraged EPS and nice growth on free cash flow. So as we enter 2025, we’re very confident that we’re going to do even better than that. And there’s two seconds left.

Sukiyo Padier, CFO, Zimmer Biomet: Fair enough. Well, thanks so much. We’ll leave it there. Thank you for having us.

Matt Makesic, Analyst, Barclays: Thanks, Matt. Really pleased to have you.

Yvonne Tornos, President and Chief Executive Officer, Zimmer Biomet: Thanks, Matt. Thank

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