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Can Zimmer Biomet Recover after Disappointing 3Q17?

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Part 6
Can Zimmer Biomet Recover after Disappointing 3Q17? PART 6 OF 10

Zimmer Biomet’s Plan to Revive Growth amid Supply Disruptions

Overview

As we saw in the previous parts of this series, Zimmer Biomet Holdings (ZBH) registered a fall in sales in 3Q17. The major factor that led to the sales decline was reportedly the company’s inability to revive supply levels of some of its key brands manufactured at its Warsaw North Campus facility. The production issues led to a supply shortfall in 2Q17 and 3Q17, which is expected to linger throughout the rest of fiscal 2017 and first half of fiscal 2018. The company has initiated a number of strategic initiatives to recover from the crisis and revive its sales growth. Let’s look at some of the company’s key operational plans that aim to regain sufficient inventory levels and accelerate its products supply pace. The company expects to reach full supply of all products by 2Q18.

Zimmer Biomet’s Plan to Revive Growth amid Supply Disruptions

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Quality remediation plan

In December 2016, the FDA (U.S. Food & Drug Administration) issued some observations to Zimmer Biomet Holdings after an inspection of its Warsaw facility. In response, the company put in place a quality remediation plan to make the necessary improvements in processes and procedures. In 3Q17, ZBH spent ~$50 million on its quality remediation plan. The plan is on track and will continue through 2018.

Staffing policy plan

In relation to improving the quality at its Warsaw facility, the company has implemented strategies for resource stability at the site. In order to retain and attract skilled labor, from temporary help to direct hiring, the company has implemented strategic plans and policies.

Dual sourcing strategy

Zimmer Biomet Holdings has laid down a dual sourcing strategy to resolve production issues at its Warsaw facility. The strategy involves optimizing its internal procedures and policies and adding capacity to its complex production lines through its current network and vendors. These initiatives aim to create higher consistency in processes and outputs.

Zimmer Biomet’s Plan to Revive Growth amid Supply Disruptions

US sales recapture program

Zimmer Biomet Holdings has been accelerating its US sales recapture program, which aims to regain sales lost due to supply constraints at its Warsaw manufacturing plant. Under this program, its sales force is focusing on products not impacted by the production issues. Customer engagement and responsiveness have also been enhanced to ensure a better customer experience. The company continues to invest in the incentive program for sales representatives and a specialized sales force in order to accelerate growth. Its SG&A (selling, general, and administrative) expenses for 3Q17 were reported at 38.2%, as shown in the diagram above.

Peers Stryker (SYK), Becton Dickinson (BDX), and Intuitive Surgical (ISRG) incurred SG&A expenses of 35.5%, 24.4%, and 24.2%, respectively, of their total sales in their recently reported quarters. Investors who want to invest in Zimmer Biomet Holdings with a diversified exposure to the stock can consider investing in the iShares Russell 1000 Value (IWD). ZBH makes up 0.19% of IWD’s total holdings.

Next, we’ll look at the company’s product pipeline.

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