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Zimmer Biomet (ZBH) Business Hurt by China VBP, Price Woe

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Zimmer Biomet Holdings, Inc.’s (ZBH - Free Report) slow recovery in the Americas amid the emergence of a new strain of coronavirus remains a major concern. The company currently has a Zacks Rank #5 (Strong Sell).

In the past year, Zimmer Biomet has underperformed its industry. The stock has declined 28% compared with the 19.8% fall of the industry. 

Zimmer Biomet ended 2021 on a dismal note with fourth-quarter and full-year top-and-bottom-line numbers missing the Zacks Consensus Estimate. According to the company, both net sales and earnings metrics were negatively impacted in the fourth quarter by China volume-based procurement (VBP) in Knees, Hips and S.E.T. product categories due to a combination of variables in advance of VBP implementation.

Zimmer Biomet had earlier anticipated this negative impact in the Knees and Hips segments but it was not anticipated in the S.E.T. product category. In S.E.T., the nationalization of the provincial Trauma products tender was announced on Jan 24, 2022, by China’s government.

In the fourth quarter, Zimmer Biomet recognized severe customer staffing shortages and a more-than-anticipated impact of China VBP, both of which resulted in dismal Q4 revenues. The company expects these issues to continue into 2022 as well. The company even expects these negative trends to persist in early 2022 as well.

Accordingly, the company anticipates Q1 to likely be under more pressure than Q4. Given the prolonged impact of COVID-19 on Zimmer Biomet’s business, the company removed its target of at least 30% adjusted operating margin exiting 2023.

Further, Zimmer Biomet expects to face an adverse pricing impact in the first half of 2022, which is being compared to a non-VBP first half of 2021. According to the company, the pressure is going to be more acute on the year-over-year comparison. As the company moves to the second half of the year, it expects to have a modest level of impact in the third quarter around some inventory contraction.

On a positive note, Zimmer Biomet, in spite of a difficult business scenario in the fourth quarter, was able to drive continued strong demand and momentum for the ROSA robotics line globally. In the entire year, the company actually more than doubled the number of installed ROSAs versus its cumulative total at the end of 2020. As a major milestone achieved, in the fourth quarter, those installed ROSAs allowed Zimmer Biomet to reach 10% in total knee procedure penetration in the United States for the first time as a company. The team also delivered a successful limited launch of the world's first and only smart knee, the Persona iQ. So far, the customer feedback has been good.

Moreover, Zimmer Biomet’s spin-off of the non-core dental and spine business is expected to prove strategic.

Key Picks

A few better-ranked stocks in the broader medical space are AMN Healthcare Services, Inc. (AMN - Free Report) , Henry Schein, Inc. (HSIC - Free Report) and West Pharmaceutical Services, Inc. (WST - Free Report) .

AMN Healthcare, carrying a Zacks Rank #2 (Buy), has a long-term earnings growth rate of 16.2%. The company surpassed earnings estimates in the trailing four quarters, delivering a surprise of 19.5%, on average.

AMN Healthcare has outperformed its industry over the past year. AMN has gained 23.8% versus the 62% industry decline.

Henry Schein has an estimated long-term growth rate of 11.8%. Henry Schein’s earnings surpassed estimates in the trailing four quarters, the average surprise being 21.86%. It currently carries a Zacks Rank #2. You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.

Henry Schein has gained 6.1% compared with the industry’s 1.7% rise over the past year.

West Pharmaceutical has a long-term earnings growth rate of 27.6%. West Pharmaceutical surpassed earnings estimates in the trailing four quarters, delivering an average surprise of 29.4%.

West Pharmaceutical has outperformed its industry over the past year. WST currently carries a Zacks Rank of 2.

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