Zimmer Biomet Holdings, Inc. has announced that its spine and dental businesses will combine to form a new, independent, publicly traded company called “NewCo.”
Transaction Details
Zimmer Biomet (ZBH) provided details of the transaction in its February 2021 corporate update. It expects the transaction to close by mid-2022, subject to certain conditions. In the update, ZBH executives explained that the transaction is “intended to take the form of a tax-free distribution of newly issued shares of NewCo to U.S. shareholders.”
Closing of the transaction depends upon final approval from ZBH’s Board of Directors, “receipt of a favorable opinion and Internal Revenue Service ruling with respect to the tax-free nature of the transaction, and the effectiveness of a Form 10 registration statement that will be filed with the U.S. Securities and Exchange Commission.”
The transaction is expected to improve the company’s financial profile. The company reported that it “delivered 2019 and 2020 pro forma revenue totaling $6.96 billion and $6.128 billion.” The spin off “is expected to be accretive to revenue growth by approximately 50 basis points over the course of the Company’s five-year strategic planning period, accelerate adjusted earnings per share growth and expand the Company’s adjusted EBITDA [earnings before interest, taxes, depreciation, and amortization] and operating margins by approximately 125 basis points on a pro forma basis, making its adjusted margin profile compelling among med tech companies.”
Leadership Insight
What does the spin off mean to Zimmer Biomet? According to CEO Bryan Hanson, “Over the past three years, Zimmer Biomet has made steady progress executing on our strategic plan to reshape the Company into a results-driven organization. We have moved into the third phase of our transformation and have built the internal capabilities to drive active portfolio management. This is consistent with our One ZB [Zimmer Biomet] mission and culture and aligns with our focus on active portfolio management, growth acceleration and value creation.”
Hanson continued, “For Zimmer Biomet, this is an important next step in our transition into a more streamlined company that will deliver even greater focus and resources to innovation and our core businesses. Following the spin-off, Zimmer Biomet will remain a leader within the orthopedics market—including Hips, Knees and Sports Medicine, Extremities and Trauma—and Craniomaxillofacial and Thoracic.”
“As an independent public company, NewCo will be in a better position to commercialize key new product launches and existing product offerings with a focused execution strategy for each geography in which it operates. As a result, NewCo will be better able to meet customer needs more directly.”
Conference Call
Coinciding with the spin off announcement, Zimmer Biomet reported 2020 fourth quarter and full-year financial results and hosted a conference call. The conference call discussed the financial results and the spin off announcement.
During the conference call, Hanson discussed NewCo commenting, “We think about NewCo, and we think it’s going to thrive as an independent company with prioritized capital allocation to pursue strategies and growth opportunities and internal investments inside of Spine and Dental that has not been a focus for ZB. It will absolutely be a focus for NewCo.”
Hanson also commented that the spin-off is going to drive increased growth and efficiency for both companies. Hanson stated, “we expect that these two companies, with their simplified operating models and just reduced complexity and increased focus, will be able to grow revenue, margin and earnings per share faster than they would if we remain combined as one company.”
Zimmer Biomet Financials
Zimmer Biomet’s 2020 fourth quarter and full-year financial results provide some insight into the profitability of its spin off. However, it should be noted that the continued uncertainty of the impact of the COVID-19 pandemic lingers over any financial discussion.
The following figures are sales results for the dental, spine, and craniomaxillofacial and thoracic product category for the year ending December 31, 2020. The figures also include the percentage change compared to the prior year periods, on a reported basis. In 2020, net sales in millions were $1,043.7, a 10.1% decrease. In 2019, net sales in millions were $1,161.3.
In 2019, Zimmer Biomet reported that spine and craniomaxillofacial and thoracic sales decreased by 2.2% compared to 2018 primarily due to “ongoing sales channel consolidation in our [Zimmer Biomet’s] Spine division, price declines and changes in foreign currency exchange rates.”
During the conference call, Zimmer Biomet Executive Vice President and CFO Suketu (Suky) Upadhyay discussed NewCo’s financial profile, saying, “In terms of the NewCo financial profile, 2019 and 2020 pro forma revenues totaled approximately $1.022 billion and $897 million, respectively, and is supported by a diversified geographic base with real opportunities for enhanced growth and margin expansion.”
Upadhyay continued, “We expect NewCo to have a financial profile generally in line with its peer group and a capital structure supportive of innovation and investment over time. Importantly, the transaction will empower NewCo to pursue a more focused investment and execution strategy.”
Zimmer Biomet’s Spine Portfolio
NewCo’s spine portfolio will be expansive. Zimmer Biomet’s key spine products include the Mobi-C® Cervical Disc, ROSA ONE® Spine, and The Tether™. According to its February 2021 corporate update, its spine portfolio addresses “all areas of Spine with market leadership in cervical disc.”
Mobi-C® Cervical Disc is “designed for cervical disc replacement to restore segmental motion and disc height.” It has U.S. Food and Drug Administration approval for both one and two-level indications.
ROSA stands for robotic surgical assistant. The ROSA ONE Spine is a “robotic and surgical navigation system designed to aid surgeons in performing minimally invasive thoracolumbar spine procedures.”
The Tether™ is used to treat scoliosis. It provides “a fusion-less alternative for young patients requiring surgery.”
Zimmer Biomet’s extensive spine product portfolio also includes the following: MIS (minimally invasive spine) solutions; anterior cervical solutions; posterior cervical solutions; anterior/lateral thoracolumbar solutions; posterior thoracolumbar solutions; biologics products including advanced allografts, synthetic bone void fillers, and allograft demineralized bone matrix products; implantable stimulation solutions; and the WalterLorenz® Surgical Assist Arm, a bionic, electromechanical arm.
Analyst Insight
What do the analysts have to say about the spin off? Top Wall Street analysts, Mike Matson, CFA, David Saxon, CFA, and Joseph Conway think that it “should unlock value.”
Matson, Saxon, and Conway, who are analysts at Needham & Company, LLC, sent a note to their clients examining Zimmer Biomet’s 2020 fourth quarter revenue and explaining why they thought the spine and dental spin off “is a big step forward in ZBH’s [Zimmer Biomet Holdings, Inc.] transformation.” The analysts “have increased confidence that it can reach, and sustain, mid-single digit revenue growth, and we [the analysts] reiterate our Strong Buy rating. We [the analysts] have raised our price target to $192 from $185 due to peer multiple expansion.”
Were the analysts surprised by the spin off? Not really since they “believe that both businesses were sub-scale and had struggled to grow in recent years….” The analysts reiterated NewCo’s financials discussed above, pointing out that “NewCo’s pro forma 2019 and 2020 revenue was $1.022B [billion] and $0.897B [billion], respectively (down ~12.3% [approximately] due to COVID-19).”
What are your thoughts on Zimmer Biomet’s spine and dental spin off? Let us know in the comments below.
