Dvorak Out at Zimmer Biomet

Dave Dvorak has resigned, unexpectedly, as president and CEO of Zimmer Biomet Holdings, Inc.

The announcement on July 11, 2017, made by the company’s Board of Directors at the close of the day, stated that Dvorak resigned “effective today.”

Zimmer Under Dvorak

Larry Glasscock, chairman of the company’s Board of Directors didn’t say Dvorak was fired, but praised Dvorak’s ten-year term as CEO. He noted that Dvorak transformed Zimmer Biomet “into a truly global leader in musculoskeletal healthcare. Through a combination of organic growth and strategic acquisitions, Zimmer Biomet’s revenue has doubled and the company has established a leading portfolio of technologies, solutions and personalized services.”

Dvorak pointed to collective efforts with his team that grew employment from approximately 3,000 in 2001 to 18,000 today and built a Fortune 500 company. Dvorak was at the center of every major merger and acquisition made by the company going back to the Centerpulse AG acquisition in 2003. That acquisition was followed by acquisitions of Impel Corp (2004); ORTHOSoft, Inc. and Endifs, Inc. (2007); Abbott Spine (2008); Medizin-Technik GmbH and Knee Creations, LLC (2013); Biomet, Inc. (2015); and LDR (2016.)

But the Biomet acquisition proved to be a challenge as production problems at the Biomet legacy North Campus facility resulted in sales disruptions and disappointed Wall Street investors.

Dvorak established himself as an industry leader by serving as Chairman of the Board of AdvaMed, the industry’s largest trade association. He quickly moved to realign his company’s industry relationships with surgeons after former U.S. Attorney Chris Christie threatened to prosecute device makers for providing improper inducements to surgeons to use their products. The company, by far, has the highest annual payment amounts ($134 million) to surgeons. But under Dvorak’s realignment, over 75% of those payments are for royalties.

At the end of April, Dvorak sold over $10 million of his stock. He still owns over $34 million. Perhaps signaling disappointment with the company’s performance under Dvorak, Glasscock said there is “tremendous opportunity” for Zimmer Biomet.

Dan Florin

Daniel Florin, the company’s senior vice president and CFO, has been named to the additional role of Interim CEO and a member of the Board of Directors until a permanent successor can been named.

Florin was Biomet’s CFO for eight years and was appointed CFO of Zimmer Biomet in June 2015. Before Biomet, he held various executive financial positions with Boston Scientific Corporation and C.R. Bard. Florin holds a Bachelor’s degree in Business Administration with a concentration in Accounting from the University of Notre Dame and an Executive MBA from Boston University.

Wall Street Reaction: “About Time”

Analysts were quick to point to expected second quarter revenue of around $1.95 billion, a 1.1% 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%.

RBC Capital Market analyst, Glenn Novarro wrote that Zimmer Biomet has been a company “in need of new direction and better leadership for some time.”

Richard Newitter, an analyst with Leerink Partners, wrote of 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.”

Novarro contrasted Zimmer’s reaction to shifting market and regulatory challenges to one of its competitors, Stryker Corporation.

While Zimmer reacted by buying up Biomet, Stryker didn’t follow suit and passed on a possible merger with Smith & Nephew. Instead, said Novarro, Stryker has pursued tuck-in acquisitions and is spending much of this year promoting its surgical Mako robot which has been rolled out formally to be used in total knee procedures.

Zimmer Biomet stayed on the sidelines of robotics, said Novarro. Just last year, the company acquiring the Rosa Brain and Spine robot when it bought French company Medtech, in July 2016.

“… 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,” wrote Novarro.

Wells Fargo analyst Larry Biegelsen said the weak second quarter results show that the company’s supply constraints “persist and recapturing sales lost to competitors over the last several quarters may not return as quickly as expected.”

The King is Dead….Long Live the Next King/Queen

Biegelsen added that with the potential challenges that the business is currently facing and the turnaround necessary, “We believe that investors would like to see an experienced CEO with a strong track record. We believe that the new CEO choice is critical to restore investor confidence in the company.” Biegelsen noted that potential candidates include former Biomet CEO, Jeff Binder, former Stryker CEO, Steve McMillan and Zimmer board member and former insurance executive, Gail Boudreaux.

The company’s board is retaining a leading executive search firm to identify and evaluate candidates for the permanent CEO role.