All right, great. Thanks for joining us for our next session here at the Jefferies Healthcare conference. I've been informed that I'm the Jefferies Healthcare Analyst here covering med tech, and I'm pleased to be joined by the management team from Zimmer Biomet , Ivan Tornos, who's the CEO, and Suke Upadhyay, who's the CFO. We're going to start with some high-level comments from Ivan, just talking about the state of affairs of the business. Ivan, if you want to get us going.
Thanks, Matt. Great to be here. Maybe I'll summarize the, let's call it, investment thesis of Zimmer Biomet in four bullet points, or maybe, as you call it, the state of affairs of Zimmer Biomet. Looking at the current multiple of 10, probably seeing the reaction to the earnings call, you will think that everything is out of whack here. Maybe it's worth spending three minutes, if you allow me, to talk about these four key components. Let's talk about market. Let's talk about innovation. Let's talk about execution, which is both commercial and operational. Lastly, let's talk about the topic du jour. Let's talk about guidance and expectations. On market, I think it's very clear by now that these markets, orthopedic markets, are not retracting. These are healthy markets. Combination of volumes and price.
We peg the market to be 4-4.25. And every other quarter, I get asked the question, is pricing sustainable? Do we believe that volume is going to continue to be steady? The answer is yes, yes, and yes. We look at pricing two years forward. We look at volumes pretty much every other week. For a variety of reasons, these markets will not retract. So 4-4.25. Let's move to innovation. Look, those of you who know Zimmer Biomet, we went through a lot of stuff. We did a deal back in 2015, June 24th, to be exact, called Biomet. And in many ways, it was a great deal. In some ways, it did set us back. The integration was complex. We had a $1.4 million FDA warning letter. We had some compliance challenges, and that delayed our innovation journey.
Now, fast forward to 2025, we are launching a ton of innovation that we should have launched a while ago. The good news is that we have no gaps in the portfolio. When you look at our recon portfolio and set portfolio, as opposed to three years ago, there is not a single gap that I can tell you we do not have it. Late to robotics, but we got plenty of them. Late to cementless knee, but we have them. Late to ACT, ASC products, we have them. Now we are entering a new chapter in innovation for the company. We are moving from doing what I call customer, or rather competition-centric innovation, catching up with competitors, to doing customer-centric innovation. We are first to market in anti-infective platforms. We are first to market in smart implants. We are first to market in solder robotics.
We will be first to market in autonomous robotics. When it comes to innovation, we really are excited in terms of where we are at. There is the third topic, which is execution. Hey, look, it has been inconsistent. We own it. I own it. This is a company that does not miss years. If you go back and look at the guidance we provided in 2019, skip 2020 with COVID. Look at 2021, 2022, 2023, 2024, soon to be the end of 2025. We do not miss yearly guidance. We do not. We do have some inconsistencies along the way. One quarter is up. The next quarter is down. That is not how you need to be running a company like ours. We need to deliver consistent results. We need to avoid the operational surprises that we have had.
On my second quarter as CEO, I was here announcing an ERP debacle, that 10 years working on ERP. Then we got a surprise. In the latest earnings call, we are talking about restorative therapies, Latin America, and emerging markets. That is not how you run a best-in-class company. We got to work on those inconsistent quarters and some of those operational challenges. That leads me to the fourth and final point at the end of the summer here. As we work on those operational commercial challenges, we need to be more measured in how we think about quarterly guidance, the comments that we make or do not make about the quarter, and then how we set up the year. Again, recapping healthy markets, best-in-class innovation, about to be bolder with the introduction of new-to-the-world technologies, got to work on commercial execution to deliver consistent quarters.
It's not just about the year. It's about the quarter. Again, in the backdrop of all of the above, we will be much more measured when it comes to setting expectations and the comments that we make about different quarters.
Great. Good summary. A lot of things to key off of there. I guess I'd like to start with some things that are actually going well, which are seeing the organic growth pick up in Q3 to 5.6% from, I think, 2.3% in Q2. Can you talk about the drivers of that sequential year-over-year acceleration?
Sure. Innovation, in one word. We are in the early stages of launching what we call the Magnificent Seven products. Some of these products are catch-ups to products that we did not have, but some are new technologies. In the third quarter, we delivered 5.6% organic growth in the U.S., the best quarter in the last two years. That is the combination of accelerating penetration for Persona OsseoTi, our cementless platform, having one of the best quarters we have had in solder robotics performance, upper single digit. We did see an increase in robotic penetration. I love the combination of having Think Surgical, ROSA, and other navigation modalities. We have one of the best quarters that we have had, 20% growth in capital sales. We saw in the quarter an uptake on Persona IQ. We have been talking about smart implants for a while.
The third quarter of 2025 was one of the best quarters for smart implants. When you move to hips, a combination of Z1 or triple-t apered Stem plus OrthoGrid plus surgical impactors delivered a robust number for the quarter. Again, summarizing, innovation was the driver of the growth in the U.S., and we do not see that fading away.
Super. Maybe you could just unpack some of the issues that you saw late in Q3. I think investors would appreciate some of those details to understand what happened at the end there.
Look, let me start with the fact that these are not structural issues. The three things that we spoke about in the earnings call, and I'll cover those here in a second, are not long-term problems for the company. We saw at the end of the third quarter, specifically on Friday, September 26th, we saw that three things were happening late in the third quarter of 2025. Number one, distributor orders out of Latin America in the amount of $7 million, were not going to come in, mostly from Brazil. Number two, we saw that in emerging markets, some distributor orders and a tender coming out of Saudi was not going to get realized in the quarter in the amount of $9 million. Number three, the smallest business that we got, restorative therapies, we do around $120 million per year.
I'll call it $25-$30 million per quarter. We're expecting some last-minute orders at the end of the quarter, and those did not materialize. Again, non-core geographies, non-core businesses, but when you add all three of them late in the quarter, that equals $24 million. If those three things were to happen, we would be talking about a 6.3%-6.4% growth rate instead of 5%. The fact that I'm sitting here talking about non-core businesses and non-core geographies is very telling. In any other company, these things will happen by inertia. What are we doing about it? We have changed management in some of these geographies. We're changing forecasting practices in some of those geographies. We're eliminating some of these distributors. We're taking the revenue from some of these volatile areas out of the guidance that we provided for the rest of the year 2025.
Again, this is not a structural issue. This is not something that's going to permeate into 2026. Moving forward, we're going to be more prudent when we account or not for some of this revenue.
As you talked about being more prudent, can you talk about any changes in the guidance philosophy and how you might give guidance in the future? Are you going to, I guess, haircut a little bit more or be a little bit more?
Yeah, look, I'll repeat myself. We don't miss years. I want everybody to fact-check me on this later on, send me an email if I'm saying something's inaccurate. We don't. We have missed revenue from a consensus standpoint four times in the last six, seven years. Twice because of COVID, once because of this ERP debacle that I mentioned earlier. In Q3, we missed revenue by consensus by $9 million. Just want to repeat that number. We missed consensus from a revenue standpoint by $9 million in the quarter, over delivered EPS by a couple of pennies in the third quarter. We don't miss years, and we miss a few quarters over the last six, seven years. All of that said, as we get into 2026, we're going to be much more measured when it comes to the outlook for the year.
We're going to establish, probably a more measured approach for the quarterly guidance that we provide and how we think about the phasing of the quarters throughout the year.
I guess bringing it back to sort of the core business and some of the changes that you're making, can you talk about changes to your commercial approach in the U.S., anything internationally? Maybe Suke can chime in on how that's going to impact margins.
Yeah. So 62% of the revenue of the company and north of 50% of the EBITDA of the company comes from the U.S. We are not going to be a best-in-class company if we do not have a best-in-class organization in the U.S. Over the years, we have moved from having a channel that sells every product to now specializing, having dedicated people doing SCT, dedicated people doing technology, dedicated people doing ASCs and whatnot. We need to go faster. We need to go faster. We cannot be in a position where a large percentage of the U.S. organization continues to miss commitments. If the U.S. was going at a faster pace, we would not be talking today about Latin America, emerging markets, and restorative therapies.
As we enter 2026, in the backdrop of being more measured with guidance, we are going to accelerate some of these changes that we started to implement in the U.S. many years ago. I want to exit 2026 knowing that I have the absolute best team that we can have in the U.S., fully dedicated in the core areas of growth, having the right people in the right jobs when it comes to technology, and making sure that across the board, we have best-in-class talent because we do have best-in-class innovation.
Yeah. Thanks, Matt. From a margin perspective, our operating margins, our gross margins are much stronger in the U.S. than they are outside of the U.S. As we do better there, of course, it helps our earnings profile. You saw that in the third quarter. Mix was one of the reasons why we had such a strong gross margin quarter, as well as a good earnings profile. As Ivan said, as we continue to work on accelerating the U.S., that is just going to mean better things for our earnings power.
Great. Ivan, you touched on this in the beginning, but can you talk a little bit more about the health of your underlying markets? Maybe talk about things like the shape of the quarter and the strength that you're seeing. There's been questions about whether Medicaid is going to impact you, things like that. Talk about your outlook for demand and pricing a little bit more.
Yeah. As the largest pure-play in orthopedics, we spend a lot of time, and we engage third party in understanding market dynamics. First things first, volumes continue to be very strong. In the U.S., the shift to the ASC, Ambulatory Surgical Centers, is creating a double- dipping effect. Now you're seeing a lot of cases moving to an ASC, but you still continue to see a lot of volume going to inpatient, HOPD, Hospital Outpatient Departments. We don't see that slowing down. I can give you the three-minute speech on demographics, technology, and all that, but you get it. Pricing. Look, 10 countries account for 90% of the revenue of the company and most of the EBITDA. Those being the U.S., the U.K., France, Germany, Italy, Spain, China, Japan, Australia, and New Zealand.
The beautiful thing about these 10 countries is that they operate with either commercial contracts, CMS in the U.S., or tender cycles of two to three years. We monitor the contracts. We extend the contracts before they expire. We can see the pricing evolution of these contracts over a two- to three-year cycle. We see a strong volume. We do not see anything on the horizon for the next two to three years that leads us to believe that pricing is going to revert to pre-pandemic levels. The third quarter of 2025 was the seventh consecutive quarter for Zimmer Biomet to deliver a positive pricing. We cannot commit to that moving forward, but we know we are not going back to the price erosion that we used to see. In terms of Medicaid exchanges and whatnot, Medicaid is less than 3% of our volumes for Zimmer Biomet.
Even if we lose that 3%, there is a backlog of patients non-COVID related, just people waiting, patients waiting in the silence to get activated as patients. We do not see this as an imminent threat for the company. Again, we have done extensive research in that regard.
Innovation is a key theme here. Maybe you could talk a little bit more specifically about the innovations you're excited about for 2026 and beyond.
Sure. As I mentioned, we caught up with all the gaps that we had in the portfolio, right? There is not a single portfolio gap when it comes to hips, knees, or SCT. Now we're in a different stage of innovation. We're leaping forward with new-to-the-world technology. Next week, we're going to be launching the first anti-infective platform in the world in Japan, which is the second largest market for Zimmer Biomet. It's an iodine-coated hip implant that has a coated platform on the surface of the implant. We're going to start with hips that reduces biofilm formation. Again, that's a product that took 10 years to bring to market. We got a pretty significant competitive barrier over next-generation technology. This is a product that took 10 years from a clinical standpoint to bring to market. We're going to start in Japan.
We're going to bring it to other markets. We already got breakthrough designation in the U.S. via the FDA. We were first to market with smart implants and solder robotics. Those two categories are going to be full launches in 2026. We're done with the limited market release for both categories. A week ago, on the 13th of November, we got approval from the FDA to launch ROSA OptimiZe. That's next-generation ROSA with full automation to do a kinematic knee, not to mention a simpler registration, faster registration, easier user interface. We got, I don't know, 20 new products in SCT that we're launching. 2026 will be a very exciting year when it comes to our new products. Of course, in early 2027, we expect to be first to market with semi-autonomous robotics.
At the end of the year, we'll be the first company to launch a fully autonomous robot with the acquisition of Monogram.
Maybe you could expound on the Monogram opportunity. Talk about why that's so exciting. What are the key aspects that are resonating with customers?
I got to be careful what I say here publicly because we got to validate the thesis. To that extent, we're doing the largest clinical trial, I believe, in the history of robotics to demonstrate that you get faster registration with Monogram. You get higher accuracy because there is less human involvement. You get better reproducibility because it's a simpler procedure. Monogram offers all of the above. We believe that this is a standard of care changer. The fact that it's going to be efficient, fast, reproducible, accurate is highly compelling. Now, all of that said, we're not betting on one platform alone. I like the category leadership that we have put into play. We have now a CT scan handheld robot via the partnership with Think Surgical.
We have a large footprint robot, ROSA, that is non-CT scan- based, which is the preference outside of the U.S. We have fast navigation, non-robotic fast navigation with OrthoGrid. And now we add another component with Monogram. We think it's a bold bet. We know it's a bold bet. We're going to prove that it's a bold bet, but it's not the only bet that we're making in robotics or navigation.
Yeah. Like you did, maybe just underscore the efficiencies that we might see from a Monogram-like solution. Maybe just talk about how that could lead to speeding up procedures and managing an ASC, for example.
That's the thesis, right? In a world that we're looking for efficiency, and with the dynamic of the ambulatory surgical center here or there in the U.S., you want to do more cases. At the same time, you cannot compromise quality and accuracy with the speed. That's what we're going to be demonstrating with Monogram. The fact that AMBOSS can be doing those surgeries in, I don't want to give percentages because we need to validate it, but at a fraction of current robotic procedures, that's very compelling. The fact that at some point, you can have a surgeon and the staff going around in two, three different operating rooms while doing robotic cases, that's a compelling thesis that we need to validate. Again, I don't want to get ahead here and make commitments on what the clinical and economic benefit is going to be.
We're going to demonstrate it. The thesis is that this is going to be faster, more efficient, more accurate, and more reproducible.
You talked about the iodine hip a little bit. I think everyone understands how preventing infections could be important, but maybe just talk about the differential reimbursement and now with the breakthrough path, what that could ultimately mean for ASPs in Japan and the U.S.
Similar to the U.S., in Japan, when you launch a breakthrough technology, you can apply for a different level of reimbursement that triggers different pricing. In this case, we're looking at a 40%-50% premium on price in Japan, which, by the way, is the second largest market, multi-billion dollar opportunity as you expand this technology across the world. I'm not going to commit to when we're going to be launching in the U.S., but I will say that infection as a problem costs the U.S. healthcare system north of $20 billion. Once you launch the technology, there is a clinical benefit and there is an economic benefit. We're going to start with Japan. Then we'll move into the less- regulated markets around the world. It'll take some time and a PMA to get into the U.S., but we will bring the technology to the U.S.
We'll start with hips, and then we'll move into NIST and other categories.
Great. We will shift to margins. Obviously, pricing has a big impact there. Could you talk about what has driven some of the gross margin expansion that you have seen this year and the outlook for gross margin, the biggest puts and takes impacting that going forward?
Yeah. So we've had a good quarter overall for the full year. We would expect gross margins to be up modestly versus 2024. Some of the puts and takes in there, we've seen positive mix both at a product level, but also from a geographic perspective. The teams continue to get efficiency gains. We've seen slightly positive pricing, which has been helpful, all of which has helped to offset the tariff headwind this year. As we move into, and you take all that together, Matt, and you look at our guide for earnings, it's kind of funny. We're actually almost right back where we started the year with our initial guidance, but that's after stepping over tariffs, which was new, as well as the Paragon 28 dilution, which was new since we first launched this year.
It's great to see that we're almost right back where we started from, even after digesting both of those. As we move into next year, revenue growth is going to be the key driver and determinant of where our margins go. From a gross margin perspective, there are some headwinds that we have to watch for. I think we've talked about those, which is the annualization of the tariff headwind, as well as some pressure from FX hedge gain perspective, as we've seen a weakening of the dollar. We're going to take those things, and we're going to continue to work on efficiency gains to try and mitigate those impacts. It's a little bit on gross margin. Like I said, from an operating margin perspective, it'll follow revenue.
In the backdrop of that, we're going to continue to invest against the things that are really important to our business, which is specialization of our sales force. We've got more work to do around Paragon 28. It's a very exciting pipeline and a lot more growth to be had there, as well as investing more against digital technology and robotics, especially ahead of Monogram. Putting all those together, again, we'll see where we net out when we give guidance in February. I like our starting point this year.
Great. I guess speaking of Paragon, maybe you could give us an update there and just talk about capital allocation priorities going forward.
Yeah. I'll start, and Suke Upadhyay will elaborate. Paragon 28 is going as expected, if not better than expected. We committed to seeing in 2025 a revenue accretion of around 270 basis points to our core business. That's exactly where we're going to end up the year, around 270 basis points of revenue accretion, which implies that we're going to keep more or less the same growth rates that Paragon 28 had as a standalone company. We said when we announced the deal that we're going to be having 3% of EPS dilution, up to 3% in year one, 1% in year two, and then we're going to be neutral as we start year three. That's exactly what's happening. We are in line to deliver on the EPS dilution associated with the deal.
Cash flow is a better story than anticipated, or integration costs have been lower than expected. One of the reasons why, at the end of Q2, we raised free cash flow guidance for the year. All the financial metrics around revenue, around dilution, and cash flow are moving in line, if not better than expected. From a commercial standpoint, we said that we're going to keep the core channel intact. We said we're going to keep leadership intact. We said we're not going to play around with innovation. We're going to keep the same pipeline, the same R&D center. We're not going to be disrupting the QMS quality management system. You can put a check in all of those. The same CEO that was running Paragon 28 is running Paragon 28. The same commercial team is running the organization. We had 256 reps.
I'm not aware of many of them that are leaving Zimmer Biomet. It very much functions as a standalone operation. On capital allocation, here's what I'll say. We've done three deals. People forget that in the last, call it, 12 months, OrthoGrid, Paragon 28, and now Monogram. We're going to take our time to integrate these deals. We're going to make sure that we earn the credibility we need to earn associated with M&A. We like the revenue associated with these three deals. We believe that these are platforms versus companies. In 2025, late 2025, 2026, the one deal that we like is CBH. At current valuations, it makes sense to buy CBH. We said we're going to be opportunistic around allocating capital to buybacks, and we're looking at that. At the right time, we'll talk about it.
Other than that, I don't think there is much more to add about capital.
I think that's a good summary.
Maybe Suke could just add some perspective on capacity and would like to double-click on how you're thinking about buybacks, just given where the shares are.
Yeah. Capacity continues to be incredibly strong for the company. Just some metrics to put that in frame, in context. We have a net debt leverage ratio in the low threes to high twos, so very attractive there. We do about $1.7 billion in adjusted EBITDA, so plenty of capacity when you put those two metrics together. We generate over $1 billion of free cash flow. Very strong balance sheet, a lot of strategic flexibility and optionality there. As Ivan said, as we move to 2026, the focus on M&A is more about integrating what we've already done versus starting new. As we generate cash flow into next year, very opportunistic on what I consider to be an attractive valuation for the company.
Maybe just to wrap up, we have just a minute or two left. One of your big competitors just announced that they're going to spin off their orthopedic business. In the short run, I was wondering if that could create some opportunity for you, some frictions. Maybe talk about your ability to capitalize on that as they spin.
I got to be careful what I say, and I got to be respectful to my former company, Johnson & Johnson . I think all of us have seen this movie before. When you announce a spinoff or an acquisition, you acquire somebody or you're getting acquired, there tends to be disruption across a couple of vectors, right? Customers wonder what's going to happen moving forward. Do I have the same reps, the same contracts, the same whatever? Employees are looking right and left to understand what's happening here, suppliers, and then overall contracts. Yeah, there is disruption in the marketplace. I do think for the next 18-24 months, there's going to be some disruption. It's up to some of us to leverage that disruption and serve those customers.
Look, down the road, 18-24 months from now, you have a standalone company that is not part of J& J. It's a worthy competitor with a great CEO. We are paying attention to that.
Great. I think we have to wrap up here, but thanks everybody for your attention and for your interest in Zimmer Biomet. Thanks, guys, for your time.
Thanks, Matt.