Zimmer Biomet Delivers Decent Q3 but Faces Growing Headwinds; Holding Steady on Our FVE

Zimmer Biomet posted decent third-quarter results that leave the firm on track to meet our tempered expectations for the full year. We’re leaving our fair value estimate intact, as the slight tweaks to our near-term assumptions for declines in pricing and the impending impact of the Chinese volume-based procurement (VBP) plan for 2022 weren’t enough to materially move the needle on our valuation. The pandemic remains the most significant near-term factor, in our minds, as we’ve seen elective surgeries delayed each time viral transmission spikes. While the delta variant clearly damped third-quarter sales, we’re more focused on management’s comment that procedure volume in the fourth quarter, thus far, hasn’t risen more, as is normally expected with typical seasonality. We had originally expected a stronger bounceback in the fourth quarter, with the return of some postponed procedures adding incrementally to the usual seasonal rise. But, based on the firm’s initial view into procedures in October, we’ve slightly trimmed our projections for knees and hips for 2021 as well as 2022. In all the movement on volume and price through the quarter, we haven’t seen anything to change our opinion of Zimmer Biomet’s wide economic moat and the surgeon switching costs that support it.