Devices & Diagnostics

Analysts: Zimmer Biomet CEO’s departure long-needed

Zimmer Biomet pre-announced disappointing second-quarter results while also revealing that David Dvorak had stepped down as CEO, a move that some analysts feel was long needed.

Late Tuesday, Zimmer-Biomet did what businesses routinely resort to when bad news heads their way.

They try to get ahead of it.

With that aim in mind the Warsaw, Indiana orthopedics giant, pre-announced that it now expects its second quarter revenues to be about $1.95 billion, a mere 1.1 percent increase over the comparable period a year ago. The company had previously expected second-quarter revenue in the range of $1.94 billion to $1.96 billion. On an organic basis, the revenue declined 1.3 percent, per analysts. What’s more, in a separate announcement, the company revealed that CEO David Dvorak had stepped down as president and CEO after 10 years at the helm. He will stay on as an advisor to help with the transition.

Analysts praised the move.

“In our view, ZBH has been a company in need of new direction and better leadership for some time,” wrote Glenn Novarro, an analyst with RBC Capital Markets, in a research note late Tuesday. “We view the CEO leadership transition favorably for longer-term focused investors.”

Another analyst also seemed to be viewing Dvorak’s departure as good news for shareholders. “… tonight’s simultaneous announcement that President/CEO David Dvorak is stepping down, in our view caters to what we believe has been an evolving [Zimmer Biomet] “bull” thesis in recent months: that poor execution (i.e. supply issues, continued guidance re-sets) can only go on for so long before prompting a leadership change and ultimately renewing promise of improved execution & increased value creation potential for shareholders into the future,” wrote Richard Newitter, an analyst with Leerink Partners.

The news of Dvorak’s departure comes on the heels of several management changes, per Novarro.

“Mr. Dvorak’s departure comes after several other past management changes including a new SVP, Global Operations and Logistics and a new VP, Quality Assurance,” Novarro wrote.

What has been plaguing Zimmer has been supply issues that have forced existing customers to seek hips and knees elsewhere and the company’s inability to win them back once it overcame supply problems in some cases.

“While production output increased at our legacy Biomet manufacturing site in Warsaw, Indiana during the second quarter, certain brands did not achieve targeted production levels as quickly as anticipated,” interim CEO Florin said in a news release. “We also experienced slower than expected sales recapture from previously affected customers in the United States.”

An executive search firm is being retained to find Dvorak’s replacement but a turnaround won’t be quick, warned Newitter.

“It’s increasingly clear to us that [Zimmer Biomet’s] issues will not be a quick fix and that a sustainable rev growth acceleration trajectory could take longer than we and the Street had previously anticipated,” he wrote.

As Zimmer-Biomet enters a period of uncertainty, it’s probably worthwhile to note the separate paths taken by the Indiana company and its competitor Kalamazoo, Michigan-based Stryker.

In the face of similar challenges faced by healthcare reform and the ever greater pressure by hospitals to drive down implant prices, Zimmer reacted by buying its chief rival Biomet in a medtech megamerger in 2015.

Stryker didn’t or couldn’t find a suitable mate. [It’s pursuit of a merger with Smith & Nephew didn’t materialize after rumors of its interest in the U.K. company was leaked in 2015.] Since then, Stryker has pursued tuck-in acquisitions and is spending much of this year promoting its surgical robot which this year has been rolled out formally to be used in total knee procedures: the expensive Mako robot.

Zimmer Biomet stayed on the sidelines of the robotic trend in orthopedics before acquiring the Rosa Brain and Spine robot when it bought French company Medtech, in July 2016. The lack of innovation, robotic or otherwise, is one factor tempering analysts’ confidence in the financial guidance the company has offered regarding its finances in the latter half of the year.

“… given continued supply issues, uncertainty associated with leadership changes, and a recent lack of new product innovation, we no longer have confidence in management’s guidance for a return to market revenue growth in 2H17,” Novarro declared.

Photo: lvcandy, Getty Images