Executive Summary / Key Takeaways

• Zimmer Biomet is executing a strategic turnaround, shifting from a period of market share challenges to focusing on innovation, diversification into higher-growth segments like S.E.T. and foot & ankle, and enhancing operational efficiency.
• The company's robust new product pipeline, including the "Magnificent Seven" in core reconstruction and advancements in robotics and smart implants, is expected to drive future organic growth and regain market share, particularly in Hips and U.S. Knees.
• The recent acquisition of Paragon 28 (FNA) significantly diversifies the portfolio into the fast-growing foot & ankle market and enhances penetration opportunities in the Ambulatory Surgery Center (ASC) setting, positioning the combined S.E.T. segment to be larger than Hips.
• Despite facing headwinds from tariffs and foreign exchange fluctuations, Zimmer Biomet maintains its 2025 organic constant currency revenue growth guidance of 3% to 5% (5.7% to 8.2% reported including Paragon 28), expecting second-half acceleration driven by easier comps and new product ramps, while aiming to offset tariff impacts on EPS.
• Key risks include successful integration of acquisitions, execution of new product launches, ongoing litigation and tax disputes, and the fluid nature of global tariffs, which could impact financial performance and cash flow.

Setting the Scene: A Reconstructed Foundation for Growth

Zimmer Biomet Holdings, Inc. (NYSE:ZBH) stands as a prominent player in the global musculoskeletal healthcare market, primarily known for its orthopedic reconstructive products, including knee and hip implants. Formed by the significant merger of Zimmer and Biomet in 2015, the company has undergone strategic portfolio adjustments, including the divestiture of its Spine and Dental businesses, to sharpen its focus on core and adjacent high-growth areas. This strategic evolution marks a deliberate shift from past market share challenges towards a renewed emphasis on innovation, operational excellence, and diversification.

Operating across three main geographic segments – Americas, EMEA, and Asia Pacific – Zimmer Biomet serves a global market characterized by an aging and increasingly active population, technological advancements, and a growing shift towards outpatient surgical settings like Ambulatory Surgery Centers (ASCs). The company's overarching strategy is centered on accelerating growth, expanding profitability, and enhancing cash flow generation, underpinned by a commitment to innovation that addresses unmet clinical needs and improves patient outcomes.

The Competitive Arena: Leveraging Technology in a Dynamic Market

The orthopedic market is highly competitive, dominated by a few large players including Johnson & Johnson (JNJ) (DePuy Synthes), Stryker Corporation (SYK), Medtronic plc (MDT), and Smith & Nephew plc (SNN). These rivals compete across various segments, offering a range of implants, instruments, and enabling technologies.

While competitors like Stryker boast strong robotic platforms such as Mako, Zimmer Biomet counters with its ROSA robotics system, which is already a leading platform in Europe and growing double-digit in the U.S. capital sales. ZBH is actively expanding its robotics and navigation offerings, aiming for the "broadest navigation portfolio in hip surgery" through a combination of ROSA Hip, the OrthoGrid AI-driven surgical guidance system (acquired in 2024), and the Hip Insights augmented reality platform. This multi-modality approach provides surgeons with optionality, including CT scan-based options through a partnership with THINK Surgical, appealing to different preferences and care settings, particularly the ASC. Despite lacking proprietary, quantifiable technology differentiators, the company positions itself by leveraging its established brand, extensive distribution network, and a revitalized product pipeline.

In core reconstruction, ZBH's new products like the Z1 triple-taper hip stem and HAMMR surgical impactor are designed to address past portfolio gaps and regain market share. Notably, roughly half of Z1 users in the U.S. are conversions from competitive accounts, indicating early success in attracting new business. The Oxford Partial Cementless Knee, with its PMA approval and robust clinical data showing 93% survivorship at 10 years (statistically significant improvement over cemented options), provides a strong clinical differentiator against competitors in the partial knee market.

Financially, Zimmer Biomet's latest TTM metrics show a Gross Profit Margin of 71.05%, an Operating Profit Margin of 17.04%, and a Net Profit Margin of 11.86%. While these margins are competitive within the industry, some larger, more diversified peers like J&J (TTM Gross Margin ~69%, Operating Margin ~25%, Net Margin ~16%) demonstrate the scale advantages that can translate to higher profitability. Stryker (TTM Gross Margin ~64%, Operating Margin ~16%, Net Margin ~13%) shows strong operating leverage, particularly driven by its high-growth segments and integrated solutions. Zimmer Biomet's strategic focus on improving operational efficiency and diversifying into higher-margin S.E.T. segments is crucial for closing this profitability gap and enhancing its competitive financial standing.

Technological Edge: Fueling the Narrative with Innovation

At the heart of Zimmer Biomet's strategy is a commitment to technological differentiation and innovation. The company's pipeline is robust, with plans to launch over 50 new products in the next 36 months, many described as "new to the world" and expected to be accretive to the company's weighted average market growth rate (WAMGR).

Key technological advancements include:

• Advanced Implants: The Z1 Triple-Taper Hip Stem and HAMMR Surgical Impactor are designed to improve efficiency and outcomes in hip replacement. The Z1, specifically for direct anterior procedures, has shown rapid uptake, with approximately 50% of new users converting from competitive accounts. While specific quantifiable speed benefits were noted in prior periods (e.g., up to 20% faster surgical implantation times), the current focus is on its role in regaining market share. The Oxford Partial Cementless Knee stands out with its PMA approval and compelling clinical data, demonstrating 93% survivorship at 10 years in the UK registry, a statistically significant improvement over traditional cemented partial implants. This clinical advantage is a powerful tool for market penetration, particularly in the growing ASC setting.
• Robotics and Navigation: The ROSA Robotics platform is central to ZBH's enabling technology strategy. While Q1 2025 saw a decline in outright ROSA sales due to tough comps and a mix shift towards placements, the underlying demand and adoption remain key. ROSA is expanding beyond Knees and Hips to ROSA Shoulder, the first robotic shoulder system capable of both anatomic and reverse procedures, aiming to change the treatment paradigm. The acquisition of OrthoGrid Systems adds AI-driven surgical guidance, complementing ROSA and the Hip Insights augmented reality platform to offer a comprehensive suite of navigation tools. Future ROSA applications are planned, including CT scan capabilities and kinematic alignment for knees, targeting enhanced accuracy and workflow efficiency.
• Smart Implants and Data: Persona IQ, the smart knee implant, continues to see adoption, providing valuable data on patient recovery and mobility. While specific quantifiable benefits from this data for patients or surgeons were not detailed in the latest reports, the strategic intent is to leverage this data for improved outcomes, potential risk-sharing agreements with payers, and enhanced post-surgery recovery.
• Infection Prevention: Addressing the critical issue of Periprosthetic Joint Infection (PJI), ZBH is developing iodine-surface-treated implants. The first iodine-surface-treated HIP System is planned for launch in Japan in late 2025, with a U.S. launch targeted for the future. This technology aims to prevent bacterial colonization and biofilm formation, addressing a devastating complication with high mortality rates. While quantitative data on infection reduction rates was not provided, the strategic goal is to significantly improve patient safety.

For investors, this technological push is the engine for future growth. These innovations are designed to command premium pricing, improve procedural efficiency (potentially lowering costs for healthcare providers), enhance clinical outcomes (driving demand and market share), and differentiate Zimmer Biomet in a crowded market. The focus on high-growth areas like robotics, smart implants, and infection prevention positions ZBH to capture a larger share of the evolving musculoskeletal market.

Financial Performance: Building Momentum

Zimmer Biomet's financial performance in the first quarter of 2025 reflects a business building momentum despite facing headwinds. Net sales increased 1.1% on a reported basis to $1,909.1 million compared to Q1 2024. On a constant currency basis, growth was a more robust 2.3%, highlighting the impact of a 1.2% negative foreign currency effect. This growth was attributed to underlying market expansion, contributions from new product introductions, and commercial execution.

Looking at product categories, S.E.T. continued its strong performance, growing 3.9% to $470.5 million. Knees saw a modest 0.6% increase to $792.9 million, while Hips grew 0.9% to $495.8 million. The Technology & Data, Bone Cement and Surgical category declined 4.7% to $149.9 million, primarily due to tough comparisons and a shift in ROSA robot sales mix towards placements rather than outright sales. Geographically, U.S. sales grew 1.3% to $1,113.6 million, driven by market growth across key categories. International sales increased 0.7% to $795.5 million, also benefiting from market growth but significantly impacted by a 3.0% negative foreign currency effect.

Profitability in Q1 2025 showed improvement. Net earnings attributable to Zimmer Biomet Holdings, Inc. increased to $182.0 million ($0.91 diluted EPS) from $172.4 million ($0.84 diluted EPS) in Q1 2024. This increase was primarily driven by lower restructuring charges ($36.0 million in Q1 2025 vs. $124.4 million in Q1 2024) and higher net sales. These favorable factors were partially offset by higher cost of products sold (due to inflation and increased manufacturing costs), increased investments in marketing and IT, and higher net interest expense ($66.2 million vs. $50.7 million) due to increased borrowings. Adjusted operating margin for Q1 2025 was 26.2%, slightly lower than the prior year, but in line with expectations.

Operational Efficiency and Liquidity

Operational excellence remains a core strategic priority. The company is actively working to improve efficiency and reduce costs through ongoing restructuring programs. The 2023 Restructuring Plan concluded in Q1 2025, achieving approximately $117.0 million in pre-tax charges and expected annual operating expense reductions of $175.0 million to $200.0 million by the end of 2025. A new 2025 Restructuring Plan was initiated, targeting $85.0 million in pre-tax charges by 2027 and expected annual savings of $95.0 million. The long-running 2019 plan is also expected to conclude in 2025. These initiatives aim to streamline operations and improve profitability.

Working capital management is also a focus, particularly inventory reduction. The company has seen a reduction in Days on Hand (DOH) from over 400 days in early 2024 to around 370 days currently, with a goal to reduce this further, which is expected to enhance free cash flow generation.

Liquidity remains strong. As of March 31, 2025, cash and cash equivalents stood at $1,384.5 million, a significant increase from $525.5 million at the end of 2024, partly due to debt issuance in anticipation of the Paragon 28 acquisition. Operating cash flow for Q1 2025 was robust at $382.8 million, up from $228.0 million in Q1 2024, driven by lower inventory investments and favorable working capital timing. The company has access to $2.5 billion in revolving credit facilities and believes its liquidity is sufficient for the next twelve months.

Total debt was $7,176.3 million. The Paragon 28 acquisition, completed post-quarter on April 21, 2025, was funded using cash on hand and borrowings, increasing debt levels but strategically positioning the company in a high-growth market. The company continues to return capital to shareholders through dividends ($0.24/share quarterly) and share repurchases ($1,020.2 million remaining under authorization).

Outlook and Guidance: Accelerating Towards Mid-Single Digits

Zimmer Biomet is maintaining its full-year 2025 organic constant currency revenue growth guidance of 3% to 5%. This outlook is underpinned by expectations of continued healthy market growth, the impact of new product introductions (particularly the ramp-up of products like Oxford Partial Cementless, Persona OsseoTi, Z1, and HAMMR), and ongoing commercial execution improvements. The company anticipates an acceleration in organic growth during the second half of 2025, benefiting from easier comparisons to the 2024 period impacted by ERP challenges, the full adoption curve of new products, and no selling day headwinds.

Including the recently completed Paragon 28 acquisition, reported revenue growth is expected to be 5.7% to 8.2% in 2025, with Paragon 28 contributing an estimated 270 basis points. Foreign currency is now expected to be flat to a 50 basis point tailwind for the full year, an improvement from prior expectations.

Adjusted EPS guidance for 2025 has been updated to $7.90 to $8.10, down from the previous range of $8.15 to $8.35. This adjustment primarily reflects the estimated $60 million to $80 million headwind from global tariffs, which management expects to fully offset through a combination of the favorable FX tailwind, reduced discretionary spending, and other operational strategies. The guidance also incorporates the expected modest dilution (less than 3% in year one) from the Paragon 28 acquisition, which is anticipated to be EPS neutral by the end of year two.

Adjusted operating margins are expected to be down 100 to 150 basis points versus 2024, primarily due to the impact of tariffs and the Paragon 28 acquisition. However, margins are expected to be stronger in the second half of 2025 compared to the first half, driven by sales leverage, lower cost inventory, and ongoing efficiency programs. Adjusted net interest expense is projected to be approximately $305 million, reflecting higher debt levels post-Paragon 28. The adjusted tax rate is expected to be around 18%.

Free cash flow for 2025 is now anticipated to be $750 million to $850 million, a reduction from the earlier forecast of $1.1 billion to $1.2 billion. This decrease is attributed roughly equally to tariff-related headwinds and one-time costs associated with the Paragon 28 closing. Despite this, the guided free cash flow represents significant leverage over revenue growth and supports the company's capital allocation priorities, with M&A being the primary focus.

Risks and Challenges

While the outlook is positive, several risks could impact Zimmer Biomet's ability to achieve its targets. The successful integration of acquired companies, particularly Paragon 28, is critical to realizing expected synergies and avoiding disruption. Execution risk exists in the launch and adoption of the extensive new product pipeline, requiring effective commercial strategies and sales force execution, particularly in the U.S. market where performance has been inconsistent.

External factors like global tariffs pose a quantifiable headwind, estimated at $60 million to $80 million in 2025, with the majority impacting the second half. While management has outlined mitigation strategies, the fluid nature of trade policies introduces uncertainty, and the 2025 impact is not necessarily indicative of future years. Foreign currency fluctuations also remain a factor, although currently expected to be a slight tailwind.

Furthermore, the company faces ongoing legal proceedings, including product liability claims and significant tax disputes with the IRS and foreign authorities related to transfer pricing and foreign earnings. While liabilities are accrued, the ultimate cost of litigation and the resolution of tax disputes are uncertain and could materially impact financial condition and operating cash flows. Contingencies related to the Paragon 28 acquisition, including securities class action litigation and an SEC investigation, are also being evaluated.

Conclusion

Zimmer Biomet is in a period of strategic transformation, actively reconstructing its growth profile through a focus on innovation, diversification, and operational efficiency. The company's robust pipeline of new products, particularly in core reconstruction, S.E.T., and enabling technologies like robotics and smart implants, provides a clear pathway to accelerating organic growth and regaining market share lost in prior years. The strategic acquisition of Paragon 28 significantly enhances the company's position in the high-growth foot & ankle market and the ASC setting, aligning the portfolio towards faster-growing segments.

Despite facing headwinds from tariffs and integration costs, Zimmer Biomet's guidance for 2025 reflects confidence in its ability to deliver mid-single-digit organic growth and manage profitability, supported by operational improvements and expected second-half acceleration. While risks related to execution, external pressures, and legal/tax matters persist, the company's revitalized product portfolio, strategic market positioning, and commitment to efficiency improvements lay a foundation for potentially enhanced financial performance and value creation for investors in the years ahead. The narrative for Zimmer Biomet is one of a company actively reshaping its future, leveraging technology and strategic focus to navigate a dynamic competitive landscape and capture growth opportunities in musculoskeletal health.