Orthopedic companies felt pressure from COVID-19 in their most recent quarters. For example, Zimmer Biomet Holdings Inc. reported second-quarter net sales of $1.226 billion, a decrease of 38.3% from the prior-year period.

Still, those revenues did come ahead of expectations, as Wells Fargo analyst Larry Biegelsen noted – $432 million ahead of his group's estimate and $305 million ahead of consensus. He added that this beat was expected, given results from competitors Johnson & Johnson (JNJ), Smith + Nephew (SNN) and Stryker (SYK).

In a separate note, he highlighted that these four companies represent more than 90% of the global ortho recon market, which got hit by the pandemic. “Adjusted for the y/y [year-over-year] impact of [foreign exchange] and selling days, we estimate that the global recon market decelerated by 3,420bps sequentially in Q2’20 (to -41.1% y/y) due to COVID-19 after declining 6.9% y/y in Q1’20.”

Deceleration in the hips was not as big as knees (2,610bps vs. 4,040bps, worldwide), Biegelsen noted, citing the trauma factor. Looking specifically at knees, JNJ’s second-quarter growth lagged the peer group average, “while SYK followed by [Zimmer Biomet] and SNN performed better.” In terms of hips, JNJ and SYK saw their growth in this space fall behind the peer group average, while SNN and Zimmer Biomet saw better results.

Fluid situation for Zimmer Biomet

"While we are encouraged by our operational performance and the stronger than expected recovery of elective procedures in the second quarter, the impact of COVID-19 is still significant and remains very fluid," said Bryan Hanson, president and CEO of Warsaw, Ind.-based Zimmer Biomet. "Even in this time of ongoing challenge and uncertainty, we continue to reshape and evolve Zimmer Biomet for greater value and are investing aggressively in our primary growth initiatives and innovative R&D programs to better position us for growth over the long term.”

During a call on the results, he reiterated that optimism. However, he noted that it is prudent to temper that optimism with caution. Because of the ongoing uncertainty, the company did not provide full-year financial guidance.

Still, it did give an upbeat report on progress related to the Rosa robotic surgical navigation and positioning system for the knee. Hanson affirmed that robotics is an important part of the company’s focus moving forward. Despite the pandemic, the demand for Rosa remained strong, while surgeon feedback has been positive.

“[W]e're now about a year away from the full launch of our business. About a year into that launch. And we now have about 150 Rosa knee systems out in the globe. And the good news is we're seeing with those units, very strong utilization per unit,” he added.

At this point, based on the volume of accounts in its active pipeline, “we'll be very disappointed if we don't have between 200 and 300 Rosa systems out in the market by the end of this year.”

Individual franchises

Cowen analyst Josh Jennings went over the results of each of the company’s franchises, noting that knee sales came in short of his organization’s estimate: $374 million vs. a $416 million estimate. However, the figure far surpassed the Street’s prediction of $306 million. “[Zimmer Biomet’s] Knee Unit performance was relatively on par with peers as SYK Knee sales declined 45%, JNJ's Knee unit took a 55% revenue hit, and SNN Knee sales were down 47% in 2Q.”

Turning to hips, the company saw sales of about $330 million, which came above his organization’s $302 million estimate and the Street’s $214 million estimate. “[Zimmer Biomet’s] Hip unit sales fared modestly better than SYK's and JNJ's Hip units[,] which experienced a 36% and 40% sales decline respectively. SNN Hips sales were only down 27% in 2Q.”

The call also featured an analyst question on M&A, particularly in the wake of COVID-19. Earlier in the call, Hanson explained that the thinking around M&A remained consistent with what the company had laid out last year and previously in 2020. “We will continue to focus on high-growth areas and areas where we truly believe we have a right to win. And size is going to be a factor here as well, with a preference, at least at the outset, toward tuck-in deals that we can easily integrate and operationalize while also maintaining an investment-grade rating.”

As to whether the pandemic had changed its focus, Hanson said the company is focusing on diversification and gaining better penetration in the ambulatory surgery center space. In addition, it hopes to focus on potentially attractive subspecialties in sports medicine, extremities and trauma “and to be able to think about acquisitions now to get us away from our dependence on elective procedures.” He emphasized that acquisitions would be smaller tuck-ins, given that the pandemic has led to issues related to access to liquidity.

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