Dive Brief:

• Zimmer Biomet's sales growth exceeded 2% for just the third time in the last three years, the orthopaedics giant said in its third quarter earnings report Tuesday.
• Analysts at Stifel called the company's "highly encouraging" 3% year-over-year sales growth to $1.89 billion, which helped beat analysts' expectations for both revenue and earnings per share, a sign "the company's multi-year turnaround is well on track, if not ahead of schedule."
• Strength in Zimmer's core businesses, with sales in knees and hips rising 3.8% and 3.5% apiece, inspired confidence among investors, who sent shares up more than 3% Tuesday morning.

Dive Insight:

Since Zimmer completed its acquisition of Biomet a little more than four years ago, and CEO Bryan Hanson's appointment in late 2017, the company has had a bumpy start to maximizing its position in orthopaedics.

"Encouragingly, even excluding the extra selling day, the quarter's sales rose above 2% for just the third time in three years," analysts at Stifel wrote to investors following the earnings release, noting the growth came even in spite of a "relatively tough" comparison of 2.2% in the same quarter the year before.

Along with debt reduction, Hanson highlighted operational efforts like taming inventory inefficiencies and implementing quality remediation efforts at its Warsaw, Indiana manufacturing site, the subject of an FDA warning letter.

Engines in the knee business set to carry forward from the quarter, Hanson said, are the Rosa robotic surgery platform, the 510(k) clearance and subsequent launch of the Persona Revision knee system for knee replacement procedures, and growing demand for cementless knees.

Hanson said the "implant will always be at the center of what we do," but like competitor Stryker, Zimmer places significant stock in the potential of "enabling technologies" like Rosa, which it launched in the knee replacement indication following 510(k) clearance earlier this year. The company hopes to extend the platform to hip replacement surgeries.

Zimmer did not specify the number of Rosa systems sold during the quarter. Executives said Rosa accounted for less than half of worldwide revenues related to the knee business. Rosa utilization rates are "all over the place," Hanson said, calling it "too early" to understand what the typical utilization rate will actually be.

The Rosa Knee introduction gave Stryker a U.S. challenger for its Mako robot. Stryker said on its earnings call last week it sold 51 Mako systems during the quarter and that the product's pricing has remained stable, even in light of the Rosa launch.

"On the competitive front, the numbers and feedback suggest that Zimmer's Rosa launch has had little impact on MAKO momentum out of the gate," analysts at Jefferies wrote to investors in an Oct. 30 note to investors.

In Zimmer's Surgical, Sports Medicine, Extremities and Trauma, or SET, business, sales grew 5.6% during the quarter to $438 million.

Hanson acknowledged Stryker's major play for the extremities devices market Monday with the announced $4 billion bid to acquire Wright Medical. "It's not surprising to me that we saw that activity out in the market," he told investors.

"You will absolutely continue to see us focus here," Hanson said, adding the company will be launching new products and focusing on maintaining supply stability. He said the company has not "gotten into specifics" on whether or how it will target robotics applications in extremities. 

As for Zimmer's own M&A plans, Hanson said the company has a "pathway to acceleration" without the need for inorganic growth. But now that Zimmer's core businesses have been better stabilized and the company is paying down debt ratios, Zimmer is "in a better position today to look at active portfolio management than we were six months ago," in part thanks to assembling a stronger M&A team.

"Our preference out of the gate is to test the team in tuck-in acquisitions," he said, before turning to larger or more diversifying acquisitions.

Analysts at Jefferies said Zimmer has "ample capacity" for dealmaking with more than $1.5 billion in annual free cash flow.

"While confidence in the underlying businesses delivering 2-3% topline growth for the time being and eventually even better as robotics in particular starts to play out seems very high, what takes ZBH meaningfully above even those targets is M&A," the Jefferies team wrote Tuesday.

The company said its guidance is unchanged, after tightening full-year sales growth expectations up from -0.5% to 0.5%, to 0% to 0.5%.

This story has been updated with additional analyst commentary.

Correction: A previous version of this story misstated the growth rate in the hips product category.