Zimmer Biomet: Despite Change in CEO, Dramatic Changes to the Firm’s Strategy Are Unlikely

We’re surprised and disappointed by the news that Bryan Hanson has stepped down as chief executive officer at Zimmer Biomet ZBH to take a comparable position at 3M’s impending healthcare spinoff. With former COO Ivan Tornos named as the new president and CEO of Zimmer Biomet and CFO Suky Upadhyay assuming additional responsibilities for global operations and supply chain, we don’t expect any dramatic changes for now and are holding steady on our fair value estimate. We also see little to shift our thinking on Zimmer Biomet’s wide economic moat, which primarily stems from strong switching costs among surgeons. Having said that, we recognize that cultural issues were a crucial factor contributing to how bumpy the integration of Biomet was, and Hanson played a critical role in healing some of those divisions and putting the combined firm on a healthier path.

Over the last five years, Hanson laid the groundwork to get this firm back on track, which included much blocking and tackling to fix inventory management, supply chain challenges, and a focus on operational improvements in the early days. Importantly, he also kept the firm from falling behind on innovation, which we saw in the launch of the Rosa robot and stocking the pipeline with such devices as the Persona IQ smart knee, digital tools for surgeons and patients, and a redesigned cementless knee. We began to see green shoots in the second half of 2019, before the pandemic disrupted everything. Zimmer Biomet again saw accelerating top-line growth this year, and new management intends to maintain that trend while ramping up efforts to improve margins. Considering the existing strategy seems to be working, we think it’s more likely that new management will tinker around the periphery rather than introduce any wholesale changes. With that in mind, we wouldn’t be surprised to see Zimmer Biomet make more acquisitions in orthopedic-adjacent markets now that the balance sheet has regained strength.