Zimmer posts $509M loss in Q1 as 80% of business faces COVID-19 hit

Dive Brief:

Zimmer Biomet's first-quarter momentum was thwarted by the heavy impact of COVID-19 in late March, with sales for the three-month period ultimately decreasing 9.7% to about $1.78 billion, the Warsaw, Indiana-based medtech reported Monday. Those results roughly match estimates for a decline between 9.5% and 10.5% given on April 6, when the company also revoked its financial guidance for 2020.
More than 80% of Zimmer Biomet's global revenue comes from elective procedures, CEO Bryan Hanson said on Monday's earnings call. But Hanson, echoing sentiments shared in recent weeks by other medtechs highly exposed to elective procedure deferrals, expressed a "very high level of confidence" in recouping those procedures, with the China market showing signs of recovery and most U.S. states allowing the return of some elective procedures this month.
The trajectory of that recovery remains uncertain. One survey of 40 orthopaedic surgeons by Jefferies, released on Monday, suggested weekly hip arthroplasty procedure volumes were down 87% in the last week of April compared to pre-pandemic levels, and knee procedures were down 95%. Those surgeons foresee volumes to be down 33% a month from now, down between 5% and 7% in three months, and up 5% to 9% in six months.

Dive Insight:

One of the last major medtechs to report quarterly earnings, Zimmer's management expectation of the recovery to come mirrored tentative outlooks shared by others in the past month. Zimmer expects the second quarter, particularly the month of April, to reflect the brunt of the deferred procedures, with sequential improvement in the quarters following.

But the degree of improvement remains fluid, noted CFO Suketu Upadhyay, and does not assume significant recurrence of COVID-19 spread later this year. The company said earnings improvement will lag that of revenue, as the company spends in preparation of market recovery in the third and fourth quarters. The company reported a net loss of $509 million during the first quarter, compared with earning $246 million in the year ago period.

Across its businesses, revenues were down approximately 60% in the closing weeks of March, worsening to a roughly 70% decline early in the second quarter.

Hip revenues fell 10.5% worldwide in the first quarter compared to early 2019. The single-most lucrative segment, knees, declined 9.3%. Impact to growth in the division encompassing Zimmer's sports medicine, surgical, extremities and trauma sales was less pronounced, declining 6.5%. The company's smallest unit, covering its dental, spine and craniomaxillofacial and thoracic sales, fell 12.4%.

Hanson said the company expects its trauma business to rebound most quickly, with its dental business likely to have the slowest return.

SVB Leerink analysts wrote that many investors already expected Zimmer Biomet "to be one of the harder hit" large-cap medical device makers, meaning they're likely "braced" for sizable second quarter revenue declines and negative margins, which may set the company up for investors to have a "'less-bad-than-feared' takeaway on the horizon."

Despite the tough environment, Hanson said investment in its Rosa robotics program could accelerate.

Deals for Zimmer's robotic systems are most commonly made at the end of the quarter and most commonly come from the U.S., making first quarter deals vulnerable to shifting resources to COVID-19 response. Hanson said the company has not seen outright cancelation of deals, but has seen them deferred.

"With 2020 largely already considered a 'lost year' for [Zimmer Biomet] (and others), we believe this 'trojan horse' aspect to [Rosa], and its potential future share gain implications, would likely be viewed favorably with respect to [Zimmer Biomet's] 2021-2022 recovery prospects in US knees," SVB Leerink analysts wrote.

In a research note Monday, Jefferies analysts outlined results from a survey it conducted of orthopaedic surgeons who complete high volumes of joint replacements.

"Most are optimistic on a recovery though there are considerations that make the trajectory likely closer to a slow and steady return to normal rather than a sharp snap back into 2021 as is reflected in some medtech forecasts," analysts wrote.