Zimmer Biomet Loses $509 Million and 80% of Revenue in First Quarter

06/29/2020
Zimmer Biomet

Medical device company Zimmer Biomet reported on Monday, May 11th that their first-quarter earnings were dramatically affected by the coronavirus pandemic in mid-March. Sales dropped 9.7% within the three month period to $1.78 billion. These results closely matched those estimated by a report posted on April 6th that predicted the company would see a decline between 9.5% and 10.5% based on the withdrawal of its financial guidance for 2020.

According to CEO Bryan Hanson, Elective procedures are responsible for bringing in more than 80% of Zimmer Biomet’s global revenue. However, Hanson stated that the company was very confident that they would recoup from these losses as China’s market is showing signs of recovery and the United States is allowing some elective procedures to return. These sentiments are similar among other medical device companies whose revenue is primarily based on elective procedures.

However, these companies have a long recovery road ahead of them. According to one survey of 40 orthopedic surgeons conducted by Jefferies, weekly hip arthroplasty procedures were down 87% during the last week of April (when compared to pre-pandemic procedures). Knee procedures were down 95%, also compared to pre-pandemic numbers. Surgeons predict that these volumes will be down 33% per month from here on out. They predict that these numbers will be down 5% and 7%, respectively for hip and knee procedures, in three months and up 5% to 9% in six months. 

Key highlights include:

  • Zimmer Biomet indicated in their first quarter report that sales dropped 9.7% to $1.78 billion within the three month time frame. The company withdrew its financial guidance for 2020 and these numbers fell within estimations that they would see a drop of between 9.5% and 10.5%.
  • The company’s CEO, Bryan Hanson, indicated that more than 80% of the company’s business is from elective procedures, which were halted when the pandemic first emerged. Hanson expects the company to recover as China’s market is showing signs of recovery and the United States expects to ramp up elective procedures again.
  • According to a report by Jefferies, hip and knee surgeries were down 87% and 95%, respectively, when compared to pre-pandemic times. Surgeons predict that these numbers will be down 33% from here on out, but will gradually rise to 5% and 9% in six months as procedures resume. However, much of the damage is already done as Zimmer Biomet reported a net loss of $509 million in the first quarter compared to earning $246 million from the previous year.

Zimmer Biomet was one of the last medical device companies to report their quarterly earnings. According to their management team, Zimmer expects to recover from the drastic revenue losses by following similar plans of action that other medical device companies have spoken about. This includes ramping up business again as elective procedures start to become widespread again. The company expects their second quarter earnings, especially during April, to account for the lack of elective procedures while the following months start to pick up. 

Zimmer Expects To Rebound At Uncertain Rate As Elective Procedures Resume

According to CFO Suketu Upadhyay, the amount of improvement that the company will see in the upcoming months will be fluid, assuming that the coronavirus does not spike and cause a second wave later this year with elective procedure shutdowns. The company stated that its earnings improvement will not include revenue as they plan to spend money to prepare for market recovery during the third and fourth quarters. In the first quarter alone, Zimmer lost $509 million compared to earning $246 million the year before. Revenue was down approximately 60% across the board during the closing weeks of March. This paved the way for a nearly 70% decline early in the second quarter.

Data shows that revenue from hip surgeries dropped 10.5% globally in the first quarter when compared to the year before. The most important of all surgeries for revenue, knee surgeries, dropped 9.3%. Zimmer’s sports medicine, surgical, trauma, and extremities divisions were not as impacted by the pandemic with a decline of 6.5%. However, sales from the company’s smallest unit (spine, dental, craniomaxillofacial and thoracic procedures) decreased 12.4%. According to Hanson, the company expects its trauma sales to rebound quicker than other areas with its dental division seeing the slowest comeback.

Investors Brace For Rough Second Quarter As Zimmer Has High Hopes For Robotics Systems

Capital market company SVB Leerink indicated that many investors already expected Zimmer Biomet to be hit harder than other large scale medical device companies. This suggests that they are likely bracing for larger second quarter revenue drops and negative margins, which may cause Zimmer’s investors to experience a drop that isn’t as bad as originally expected. Despite the revenue loss and large scale margin drops, Hanson stated that he expects its Rosa robotics program to accelerate during the recovery. However, sales from Zimmer’s robotics systems are mostly made at the end of the quarter from the United States. This means that first quarter deals are vulnerable to the impact of shifting resources due to the pandemic. Hanson stated that the company has not yet seen any cancellations of deals that were already in play, but some of them have been deferred. The analysts at SVB Leerink stated that as 2020 is largely already considered a lost year for Zimmer Biomet and other medical device companies, there will likely be a ‘trojan horse’ effect to Rosa. Its potential future would share gains and likely be favorable to Zimmer’s 2021-2022 recovery in the United States.

Jefferies analysts recently posted a note that detailed projected sales from orthopedic surgeons who perform a high amount of joint replacements. They concluded that most surgeons are optimistic that they are on the road to recovery. However, there are factors that make these trajectories slower than projected with a steady return to normal rather than a quick snap back that is reported in some medical company forecasts. Here is a breakdown of sales in April from other medical companies who rely heavily on global elective surgery sales:

  • Stryker: Sales in April dropped between 35% and 40%
  • Smith and Nephew: April sales dropped 47%
  • Medtronic: During the middle of April, revenue was down approximately y60% in the United States market
  • Quest Diagnostics: Testing volume declines had steadied in the 50% to 60% range, according to results posted from the third week of April
  • LapCorp: by the end of the first quarter, testing demand had decreased by 50% to 55%
  • Boston Scientific: April sales were down by approximately 50%
  • Intuitive Surgical: Procedures in the United States that use da Vinci robots were down 50% in the last two weeks of March when compared to earlier in the quarter
  • BD: The company reported a negative $240 million during April with surgery revenue down between 50% and 70>#/li###

Recovery Rates Vary By Company and Location

Experts expect that the rate at which procedures will resume may vary by county and state. This makes it hard for many medical device companies to accurately predict their future sales. Additionally, as delayed care starts to resume, customers may put off procedures as many people have expressed concerns about receiving care at hospital settings or in areas where they may otherwise catch COVID-19. Patients who decide to schedule their elective surgeries may have to work with employers and health insurance benefits that have been declined due to the high unemployment rate the pandemic caused. These variables are among the many reasons why medical device companies have pulled their guidances for 2020.

However, not all companies are at a disadvantage. Some companies are positioned in a favorable way to address the needs of patients during the pandemic. For example, Philips and ResMed are riding out the pandemic’s demand for respiratory technology and remote patient telemedicine tools. Roche, Thermo Fisher, and Qiagen are among several companies that are seeing a spike in sales for coronavirus diagnostic testing and antibody kits. The company Exact Science saw a decline in sales for an at-home colorectal cancer screening prescription product called Cologuard. However, they continue to sell the product as many patients have postponed their colonoscopies and the need for at-home products is on the rise.

Meanwhile, surgery revenues continue to decline as much as 70% for some companies. BD reported a spike of 1.4% in revenues for a total of $4.24 billion during its fiscal second quarter, which was up 2.4% from this time last year. However, in April, the company saw a decline in revenues of 50% to 70% due to the deferment of elective procedures. According to CFO Chris Reidy, surgeries in China were still approximately half of the pre-pandemic levels. In the United States and Europe, interventional and surgical revenues were down as much as 90% in April. He stated that BD’s surgery department lost $60 million with $50 million in peripheral intervention. IN total, he estimated that the coronavirus pandemic brought about a negative impact of about $240 million for the company in April alone.