With Six Months of Biomet, Zimmer Sales Pop 28% for 2015

Zimmer and Biomet’s merger was final on June 29, 2015 and for the next six months the #1 question on Wall Street was about integration of the two companies.

The answer to that question came in the form a pro forma (excluding currency effects) sales of $1.93 billion for the fourth quarter, up 0.5%—which showed that distribution is still finding its sea legs—but earnings that beat Wall Street’s consensus—which shows that the Zimmer Biomet team had truly integrated the two company’s systems well—as promised.

Adjusted earnings (adjusted for merger related costs and inventory or manufacturing charges) for the combined companies reached a very respectable $428 million in the final quarter, up 39%. Put a different way, those adjusted earnings represent about 22% of sales.

Said President and CEO David Dvorak: “At the close of a transformational year for Zimmer Biomet, we achieved top line growth supported by sequential improvement from our joint reconstructive and S.E.T. businesses in the U.S. In addition, we finished the year with strong earnings results, as we continued to execute on our global integration plans. Importantly, the substantial completion of our commercial integration in 2015, combined with the breadth of our musculoskeletal portfolio, positions our sales teams to accelerate our growth as we progress through 2016.”

For 2016, Dvorak and his team are guiding Wall Street’s analysts to expect a modest 1.5% — 2.5% sales growth (before considering what the dollar might do).

As we’ve now seen with Stryker, DePuy, ConMed and Zimmer Biomet, the orthopedic industry had a very good 2015 and the strong final quarter points to an excellent 2016. Demand for orthopedic products is riding a demographic, employment and insurance wave. The larger manufacturers are finding operational leverages through consolidation. And cash flows are high.

Here are the numbers for Zimmer Biomet.

Wall Street’s Take

• BMO Capital Market: “We continue to have a higher level of confidence in its ability to deliver EPS, while the revenue delivery is more of a show-me story. The pieces of the puzzle do seem in place, including the salesforce cross-training (completed); no worries regarding expiration of stay-in-place contracts (those were mostly for Biomet employees, and for the term until the deal closed, back in June 2015); the ability to cross-sell products which neither sales team had before; and new product launches (we expect to hear more about that at AAOS, March 1-5 in Orlando). Multiple times during the earnings call, management was asked questions regarding its confidence, and multiple times it reiterated their belief that “we are confident that we can provide sequential revenue improvement throughout 2016”. This, we believe, is key to the stock working this year, and it will take a quarter-by-quarter tracking of progress for it to prove out.”
• Wells Fargo: “Management confident it can deliver accelerating top-line growth through 2016. In Q4, ZBH’s adjusted pro forma growth was 0.5%, slightly lower than Q3 (+0.7%) and at the low end of its guidance (+0.5% – 1.5%). Management characterized Q4 as a quarter of stability with progress made in the commercial channel integration (which is substantially complete). ZBH continues to expect growth to accelerate sequentially through 2016. ZBH provided Q1 revenue growth guidance of +0.5% – 1.0% on a constant currency (cc) basis which implies an acceleration over Q4. For the full year, ZBH expects growth to be 1.5% – 2.5% cc and the company expects to exit 2016 with growth at or above market growth of 3%.”