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Zimmer Biomet Succeeds in Priority Areas, Suffers Pricing Woe

Zacks Equity Research

On Aug 30, we issued an updated research report on Zimmer Biomet Holdings, Inc. ZBH. The company continues to witness strength in the Asia Pacific (APAC) and Europe, Middle East and Africa (EMEA) regions. However, pricing persists to be a major concern for this Zacks Rank #3 (Hold) stock.

Shares of this leading musculoskeletal healthcare company have outperformed its industry over the past six months. The stock has rallied 10.2% versus the 8.4% fall of the industry.

During the second quarter of 2019, although Zimmer Biomet registered sluggish top-line growth, the results were above its expectations. The company saw progress in the Europe, Middle East and Africa and Asia-Pacific regions as well as in the S.E.T. and Dental businesses. In the Americas, the company gained traction from its Knee business.

Zimmer Biomet Holdings, Inc. Price

Zimmer Biomet Holdings, Inc. Price

Zimmer Biomet Holdings, Inc. price | Zimmer Biomet Holdings, Inc. Quote

Zimmer Biomet is also executing well within its priority areas like quality remediation, supply recovery efforts and product launches. With respect to quality remediation, the company made a good improvement in the second quarter. It is currently on track to complete its detailed remediation plan on the Warsaw North campus by 2019 end.

Relative to product, over the past several months, Zimmer Biomet steadily secured a number of important regulatory clearances for knee, brain and spine applications under its ROSA platform. This apart, the company’s ‘my mobility digital health platform’ (developed in partnership with Apple) and the flagship Persona Partial and Cementless are among other major launches of recent times. Zimmer Biomet expects 2019 to be an important year with regard to its pipeline and commercial strategy.

Of late, Zimmer Biomet is seen to solidify its foothold in the emerging markets that provide long-term opportunities. The company’s strategic investments in these zones over the last several quarters to improve its operational and sales performance are yielding results. Zimmer Biomet expects consistent growth in the APAC and EMEA markets this year.

The company should benefit from favorable long-term trends that point toward sustained growth, driven by obesity, wear and tear of joints from more active lifestyles, uptick in the emerging markets, new material technologies, advancements in the surgical techniques and proven clinical benefits of joint replacement procedures.

However, the company’s top-line growth has been partially offset by an unrelenting pricing pressure, mostly in the operating segments of Americas and Europe. We are further worried about this pricing scenario as it will be affected by cost-containment efforts by governmental healthcare, local hospitals and health systems. In the second quarter, pricing pressure was a negative 2.7%, in line with the company's estimates.

Furthermore, escalating costs and expenses are denting the company’s adjusted operating margin. Adverse currency movements are a lingering downside.

Key Picks

Some better-ranked stocks in the broader medical space are Medtronic MDT, Baxter BAX and NuVasive NUVA, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Medtronic’s long-term earnings growth rate is expected at 7.13%.

Baxter’s long-term earnings growth rate is projected at 12.8%.

NuVasive’s long-term earnings growth rate is estimated to be 12.75%.

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