All right. All right. Thank you everyone in the audience for joining. I'm Jami Rubin, the healthcare provider analyst here at Goldman Sachs. I've covered Zimmer Biomet for many years. Thank you for both of you for joining. We have Bryan Hanson, the CEO, and Suketu Upadhyay, the CFO from Zimmer Biomet. Thank you.
Sure, absolutely. Happy to be here. These chairs slippery for you?
A little bit. Well, with this conference we try to start a little bit high level.
Yeah
... and we'll certainly get to some Zimmer specific questions. Big picture, what are you thinking about for the next five years in terms of trends that you need to capitalize on as a company that also might shape med tech over the next five years?
It is more high level, isn't it, that question? I would say.
We'll get more detail.
Yeah. Okay. I'm gonna be a little biased to where we play as a company, because there's a lot happening in med tech across the board. I would say probably two things stand out for me that we're seeing happen. Number one, we're seeing technology adoption at probably a faster rate than what I would've expected in orthopedics, I think broadly in med tech. To me, that's really important because as robotics comes in, data and informatics comes in, use of artificial intelligence, even augmented reality, which is new but entering the space, it really changes the way that we care for patients, I think will change the face of med tech over time. It is already. That's one. That's a pretty big one I think.
Then the 2nd I would say is just a change in setting, at least in orthopedics, to migrate towards the ASC, which is a more dedicated space to the procedure that you need to have. I think a lot of patients feel like it's more efficient and probably a little safer, perceived or real, because you don't have sick people there. You have people going in to get the procedure they need, and you know, you don't have COVID patients or others. Those are two pretty big changes. Maybe, you know, what's underappreciated about those things are that they both can impact the growth rate of the market, you know. First of all, if you look at technology, it could be two ways.
The 1st one is that you've got now the same procedures bringing in technology that actually matters, that can actually increase the amount of revenue you get per procedure. If you get no more volume in procedures, but you get more revenue per procedure, you can actually have the dollar market grow faster. I think as we continue to see adoption of technology, you're gonna see that happen. The other thing that can do, though, is you got a lot of patients still that are not coming into the funnel because they're concerned about the procedure. They don't think they're gonna get the outcome that they want.
As technology gets better, as we're bringing more technology in that people can see and feel, I think you'll have more people feel comfortable with the procedure come in and enter the funnel, and you'll see an expansion procedurally as well. I think the ASC could do the same thing. I think people feel more comfortable not going to the hospital and going to the ASC, so you could actually expand the market just because you've got a setting that is more comfortable for the patient.
Technology and data analytics, robotics, and setting of care, not surprising answers. We'll touch on all of those today. Second big picture question, we'll get to some more detail. We're moving to the endemic phase, hopefully of COVID. What are some of the lasting changes you think will impact healthcare, you know, the healthcare system over the next few years?
I'd say the ASC setting is.
Yep
... we cross over there, too. I think that it was happening anyway, but COVID definitely created a catalyst to move it further because, again, people were concerned about going into a hospital setting where people are sick, you know. If you're getting a knee procedure, you're not actually sick. You have arthritis, and you just gotta get a procedure done. I think that setting will continue. It's more efficient, it's lower cost overall, and I do believe people would rather go to an ASC than a hospital. The other one I think would just be comfort with telemedicine and care that's remote. That's a pretty big shift that I think was occurring anyway, but man, the catalyst associated with how people are digesting that now because of COVID is pretty significant.
It really helped us because we were already spending money in things like mymobility, smart implants, robotics, and OrthoIntel to be able to make sense out of that and be able to have, you know, surgeons and care teams be able to manage their patient remotely. We believe that we're gonna benefit from the fact that people feel more comfortable with that now.
Hoping to move to a procedure recovery update. You guys made some comments during the quarter that you are on track with how you had talked about trends in the 3rd quarter. What are you seeing now just in terms of procedure trends? We've obviously got COVID and flu as factors here late in December. Are those impacting cancellation rates and things like that? Just any comments you can make on the procedure environment, and maybe we'll start with the U.S.
See, when he asked a tougher question, he looked at you. I'm good. You know, I'll rewind a little bit and go back to 2022. You know, we came out of the 3rd quarter, it was choppy, but we started to begin to see some recovery towards the back end of the 3rd quarter. We said that we expected that to be somewhat stable into the 4th quarter, and that's what we saw, fortunately. As we move into 2023, it's still very early days, but, you know, we've always characterized when we talked about all the color we provided for 2023 that we did not expect it to be a normal environment, especially in the early days.
You know, I think we're still dealing with staffing issues, which are, you know, in some areas, a modest headwind on procedural volume uptake. We're still dealing with some supply chain challenges. Foreign currency, while you're seeing some moderation of the dollar, it's still a year-over-year headwind for the company, inflation, right? Those variables are still very much in place in 2023. Maybe not at the same level that we saw in 2022, but still definitely there. You know, we've always said that we would expect from a procedural volume standpoint, let's call it, we'd be disappointed if we didn't see a 4% type of XFX organic growth rate for the company in a normalized market.
As I just described, 2023 will not be normal for all the reasons I just mentioned. That shouldn't come as a surprise to anyone. Given, you know, the optimism we have around the portfolio and the pipeline, our execution, the potential for some backlog relief over time, we do think that we can maintain a four handle within our guidance range for 2023. Organic XFX. We still feel very confident about that. Overall, things are sort of playing out with how we talked about the end of 2022 and the color that we've provided for 2023 so far.
Okay. I'll come back to some of the financial questions. Let's stick with patient volumes for a moment. You mentioned some of the factors, hospital capacity, maybe some manufacturing in pockets and being able to supply, I'd add patient behavior, maybe excess mortality, some of these factors that have inhibited this recapture backlog or even getting back to normal in some categories. Which of those factors do you think is most important in improving in 2023, where you have, you know, high probability that we'll see some improvement and start to, you know, get back towards normal?
Yeah. I'll give you my view. In my view, I would love to see supply constraints get out of the way. I mean, because they put a drag on the organization in a couple different ways. Number one, you've got sales reps that are supposed to be selling, that's what they're supposed to be spending their time doing, are actually playing logistics partners now, trying to make sure that they get what they need for the procedure, that the doctor's going to be taken care of, that the hospital's got what they need, and that's absorbing time that could be used to go convert another account. That's one challenge that I'd really like to get out of the way.
The other part of that equation is they're also in a position now because of the technology we have, probably ready to convert surgeons they've been working on for a year plus, they're tentative to do it. They're not saying it, I know they are because I've been in their shoes. If you've been working for a year to get somebody to convert, they're finally ready to do it, and you think you've got a risk in not being able to supply it, you're probably not gonna convert them in that moment. I'm guessing we're missing conversions that could happen because of supply constraints, it's putting pressure on our revenue growth. For me, I would like that one to subside more quickly.
To me, it's the most important variable as we go into 2023, and that's only because COVID seems to be abating. If COVID was still in the same place, it was eating up ICU beds, that would be my number one. My number one right now is probably more from a revenue growth standpoint, is probably more around supply.
Okay.
I think the quick 2nd to that would be, you know, some staffing sources, which are still impacting pockets of our markets and our accounts. Why that becomes important, not only to get to normalization of market growth, but then, you know, when you can finally start to get some stability in staffing, you then now have an opportunity to get after that backlog in a more meaningful way. I think that takes a very quick 2nd to the supply issue.
Yeah, that totally makes sense conceptually. Are you seeing it in real time, the hospital staffing situation getting better? You know, what are your hospital customers telling you about their ability to do procedures because of that bottleneck?
I'd probably say it's more stabilization.
Yeah.
You know, I don't know that it's getting any better. I mean, maybe the reasons why staffing might be shifting a bit, again, before it was eating up capacity of staffing because ICU beds were filling up with COVID patients. It's become more just the natural, you know, capacity, lack of capacity in staffing that is still there. Now it's, you know, staff members getting sick, either the flu or COVID, and not being able to come in to do procedures. The benefit that we have right now, though, because you're not filling up those ICU beds and there's runway, if a procedure gets canceled because the patient or the staff member has COVID or the flu, it almost immediately gets rescheduled. That wasn't happening before. As much as it's a headwind for us now, the dynamics of that headwind are different than they used to be during COVID, the true COVID.
Okay. I wanna touch on patient behavior a little bit too. We get asked all the time, why are things not back to normal or, you know, the backlog recapture opportunity not coming through. I always, you know, that's one of the factors I list. I'm curious how you think about that, if something has changed there, you know, patients really just not coming in the funnel in the same way they did pre-COVID.
Mm-hmm.
Do you have any thoughts on patient behavior as a factor?
I don't think so much now. I mean, I'm gonna take, you know, kind of maybe China out of the equation right now because there's a lot of stuff going on there, but if you just take that out and look at the rest of the world, I think there was a period of time where people were afraid to come in because of COVID. Even if the hospital or the provider was saying, "Hey, you can come in and get your procedure," I think people did not wanna go in. They didn't wanna risk getting sick. I think that was definitely impacting people's decision on whether they got a procedure or waited, or they went to an ASC versus a hospital. I don't think that's the case now, though.
I really don't believe that there's been any fundamental shift in whether a patient would or would not come in to get a procedure. I think some of the same barriers exist today that they did before. I don't think that we've added any new, particularly now that COVID's getting behind us.
Okay. Okay, perfect. Let's move internationally. You mentioned China, where we're seeing the significant infection waves happening there and as in the context of their reopening. What are you seeing in China in terms of the procedure environment and how quickly are you thinking about that getting back to something more stable?
It's interesting because, you know, we've spent a lot of time in China over the years, and I haven't been to China in three years. It's hard to believe it's probably longest in decades. We're getting it arm's length as we get the information. It's, you know, as one would expect, it's disruptive. It started off with the draconian policies of zero COVID and just people not being able to leave their houses, and that was impacting procedures for sure.
When they opened everything up so dramatically, then everybody started getting sick, and you did see a run on ICU beds, and as a result of that, you saw some pressure on procedures. When I think about commercially in China, the 4th quarter has been a challenge for us. You know, the good news, bad news, however you wanna look at it's a much smaller business for us now than it was before, and that was kind of built into not that specific thing, but we had enough play in our expectations for Q4 and our guidance for Q4 that, we were able to digest it. But it is a, you know, it's a challenging market. On the other side of the equation, we manufacture in China for the globe.
It's a relatively small footprint, it still supports the globe, we have to bring products in to be able to support the local market. We've been able to keep those factories running. We're definitely seeing people that work in the factories getting sick and having to not come into the office, come into work, we've been able to continue to run the factories. We haven't had any supply challenges, we've been able to get stuff in and out of the country. Commercially speaking, it's been disruptive, from a manufacturing standpoint, it's been pretty smooth.
From a procedure volume standpoint, where do you think you guys are at in terms percent of normal for China? Any similar kind of way to describe where we're at today?
You know, I don't know if I would give you a percent if I have one, but I don't have a percent. I just know that we're off right now. For China, pretty materially, but for the company, it's not overly material. China's off for sure, and it's been more the last six, you know, last six weeks or so.
Okay. [guess] , just any comments on procedure environment in Europe and other key markets for you?
Kind of what Suke was saying, it's steady as she goes right now. I mean, we're definitely seeing more flare-ups of either flu or COVID. We're not seeing a run on the ICUs. You're seeing cancellations maybe going up slightly because of those people actually have, you know, the flu or COVID. So far so good. You know, the recovery continues to stay on track.
Okay. Sounds like good news on several fronts and wait to see on China.
Yeah.
Let's move to some of the macro pressures. We mentioned a few of them. Wanna go a little deeper. First, inflation. Maybe just as context, you, Suke, how much incremental cost is in the P&L over the last, you know, two years or so from these inflationary pressures that you guys have absorbed?
Yeah. We've characterized 2022 probably, if you think about extraordinary inflationary pressure, right? Every year you've got merit increase, you've got some CPI increases in some of your contracts from suppliers, et cetera. If you kind of put that off to the side, extraordinary increase in 2022 was somewhere basis points, either in COGS or in SG&A. What we said is, as part of COGS, we also saw pressure that would get capitalized into inventory and not actually see itself into the P&L until 2023. We originally sized that at basis points, back in the middle of 2022. As we went through the 3rd quarter and the 4th quarter, we actually revised that up to the upper end of that.
We think that there's about basis points of pressure in gross margin year-over-year, 2022 versus 2023. The good thing is that's remained stable. It's not gotten worse, but we've not seen any meaningful improvement in that. The one bright spot is I'm very excited about and impressed with what our supply chain and commercial teams are doing to help offset some of that. But there's definitely that 100 basis points headwind that we talked about last year is flowing into this year.
That last point is where I wanted to go next. I mean, every year, med tech companies, yourself included, try to, you know, take out costs from manufacturing or run the business more efficiently in the context of a market that tends to lose a little bit of price every year. You, you kinda have to fight that battle every year. How do you do that in an inflationary environment? You, you've started going in that direction. I'd love to hear more on that.
Yeah. We really look up and ultimately, where you're getting at is how do you maintain earnings power, right? Better than growth of earnings faster than revenues, how we think about it. We really think about all the levers throughout the P&L. First and foremost is, you know, a strong top line really does solve a lot of issues. We wanna make sure we're continuing to invest against our top priorities from a growth perspective. That, that's, that is a sacred cow. We make sure that we continue to invest against our growth drivers. Beyond that, you know, pricing is gonna be, you know, there's gonna be erosion year-over-year, but we're trying to minimize that.
We've done a really nice job in 2022 in getting to a lower pricing erosion than what we've historically seen. We'd expect to see, you know, in 2023 being towards the lower end of that historic pricing erosion. We've made some structural changes around pricing that I think is gonna stick and be durable and help with margin. Beyond that, you know, within cost of goods, you've got a number of levers, things like site optimization, making sure we're, you know, downsizing inefficient plants that are in high-cost country, moving those lines to more efficient plants with a lower cost base. We're looking at things like just general Six Sigma and lean out costing from a manufacturing standpoint. We're looking at product rationalization to simplify the portfolio, which ultimately then reduce costs over time.
Further into SG&A, there are a number of opportunities and levers, things like our Global Business Services, which we established during the pandemic. We can do a lot more to leverage those, which are putting back office type activities and transactions into lower cost countries. There's a number of levers that we look at. Generally, when you see inflationary pressures, the 1st port of call is sourcing, right? You try to get procurement savings, either through, you know, going through different suppliers or negotiating contracts. That's probably less of an opportunity right now, and so we're really focused on those other levers I talked about.
Given all the challenges with manufacturing in the last year or so, how do you think you as a company will evolve your manufacturing footprint longer term? Or even medtech, if you have thoughts. You know, do you see more regionalization or, you know, domestication of manufacturing? Just curious longer term, how you're thinking about that, and does that impact cost structures at all?
I'll maybe address some of it.
Sure.
We always look at every year we do the, a new strat plan. We look at the footprint strategy that we have, manufacturing strategy that we have, and just kind of stress test, do we have the right footprint in the right places? We look at things like continuity of the supply chain. Is there a risk or benefit in any change we might make? The cost of manufacturing, whether it goes up or down, depending on those decisions, geopolitical risk, any other risks you might have. Right now, when you look at all those variables and the decisions that we would typically make, the geopolitical risk factor is probably one we're paying more attention to than we have in the past, for very good reasons.
We're spending time now with an external party to look at those geopolitical risks, get a better sense for those, and see if that augments our plan. You know, the fact is, if we make a change in our strategy, which we typically do at least some every year, it would take time to do. You know what I mean? It'll be a thoughtful process. We'll make the decision. We'll put a 5- 10 year plan in place and begin to move in that direction. There's no question that I think anybody right now, med tech or otherwise, has to be looking at the geopolitical risk and maybe augmenting the way they manufacture as a result of it. No major changes from us have been made at this point, but certainly it's a variable that we're paying more attention to.
Okay. More short term on the manufacturing piece, are you seeing more consistency in your, you know, ability to get products where they need to go when they need to be there? Just your supply chain generally, is that continuing to get to a place that's easier to manage for you?
It's pretty tough right now still. I would say again, that's why it's my primary thing that I like to see recovery. I think we're doing a good job, given the circumstances. We have a team that unfortunately or fortunately, has been battle tested back in the days when we couldn't get supply out the door, and we've managed through that across the board, not just in manufacturing and logistics, but also in the field sales organization and how we manage a situation like this. We have that muscle memory that we're leveraging. It's tough right now, and the supply challenges are tough. They're real, they're not getting worse, but they're not getting better.
I guess what needs to change there? Is it all external? And what are you waiting for from an external perspective? But what needs to happen?
Yeah
for that to improve? What can you do internally to, you know, cope with this type of environment?
Sure. Probably one of the big variables is just hiring people. It's been a real challenge to hire people in our manufacturing facilities. You know, we kind of hit, you know, it was a perfect storm. We had come off of COVID for so many years, not seeing that full recovery, then it just almost felt like it may not happen for a while. You weren't really prepared for the quick turnaround in COVID recovery. Right at the time that all the volume started coming back in, which was bigger than our expectation, we also had all these supply challenges from a raw material standpoint. In concert with that, you couldn't hire anybody because there was almost no unemployment. That's still a problem. It's getting better, but it is still hard to hire the labor force.
We've been doing some pretty creative things to be able to try to move past that. It's still a challenge to hire at the rate that we want to. The other part is just getting the raw materials. I mean, you still have trouble getting Tyvek for just basic packaging. This is a thing that pretty much everybody in healthcare uses because of EtO sterilization. EtO sterilization has met capacity because, again, the rebound has been significant. It's a fixed amount of capacity, and everybody's rushing in to try to get their items sterilized, and it's just taking more time than usual. There's a lot of external factors that have to get in line, not just internal factors.
Couple more macro variables just wanna touch on. Currency seems to have gotten a little bit better since the 3Q update. Resin and oil seem to have gotten a little bit better. Freight costs seem to continue to come down. It seems like a lot of these things are moving in the right direction. How would you frame the magnitude of the improvement, maybe relative to the comments you generally gave about 2023?
Yeah, I think, you know, things haven't gotten worse, which is great. On the FX side, we did see some moderation of the dollar towards the back end of the 4th quarter. It's not gonna have a meaningful impact in 4Q, but it should provide some modest tailwind into 2023. However, there is still gonna be significant pressure or erosion from FX year-over-year. On the supply chain side, I think you mentioned freight. There was one other one. Sorry.
resin oil.
Correct. Yeah. You know, resin oil currency, we could potentially, hopefully we do see a moderation in supply chain costs or input costs. The thing you have to remember is we got into contracts back in 2022 when there was a lot of uncertainty around the supply chain, especially with the Russia-Ukraine war, COVID continuing to persist. We locked in a lot of our supply contracts at that time to make sure that we could meet demand. That was our primary objective. With that, you're signing multi-year contracts, two, three years, let's say, on some of those supply materials. As those prices come down, we may not see a direct dollar for dollar reduction in our input costs because of those contracts being signed. You should see some, but it won't be dollar for dollar.
Hopefully, if those prices continue to come down, you could potentially see some tailwind against supply costs in 2023. Again, as you see those, just like it happened in 2022, that relief may not manifest itself into the P&L to 2024 because of that capitalization cycle. Okay?
On the freight side, you know, we are seeing some moderation to reduction in the per unit cost of freight. Still our freight volume is much higher than it normally would be because of all of these supply chain disruptions. It just requires you to move a lot more product from location to location just to make sure that you can meet demand. Overall, I would say things are stable. Hopefully these are all pointing into favorable type tailwinds into 2023. We'll provide a lot more color on that when we, when we give guidance later in the 1st quarter.
Okay. Let's move to price. It was a clearly incremental positive to MedTech and to Zimmer in really in just the last six months, I'd say. You know, maybe we're early in that. I wanna get your thoughts on how you're achieving the price increases or lessening the burden of price pressures across the business.
Yeah. Pricing has been a headwind for basis points going back to the merger of Zimmer and Biomet. In 2022, we did see better performance than that, so it was less than basis points, I'd kind of bifurcated into two kind of streams. One was probably more temporal and the other being more structural. The temporal benefits we saw were really around just accounts with so many other things going on, hospitals, and accounts that they really didn't come to the table to try and renegotiate mid-contract like they typically do every year.
Okay.
Secondly, you saw contracts maybe not doing or accounts not doing that mid-year mid-contract renegotiation because they were actually concerned if they came to the table we'd take prices up, okay. Opportunistically, there were some areas where we were able to actually take price increases. I think the 3rd area that's probably temporal is around because COVID was impacting us, supply chain was impacting us, some of the accounts did not hit their volume thresholds or targets that would make them eligible for that next level of rebating, so their percent o f price reduction wasn't as high as it normally would be. That was kind of a temporal benefit that we saw in pricing erosion. The more structural things we saw were around, you know, we've hired resources in this area.
We've put a pricing czar in place at Zimmer Biomet, who's got a lot of orthopedics experience. He used to work for one of our competitors. We've put a team around them. We've invested in data systems. We've put governance and better strategies in place. I think our sophistication around account management and how to leverage the power of our entire portfolio to stabilize or improve pricing has really come a long way in the last 12-18 months. You put all that together, as we move into 2023, I'm not sure if those temporal benefits we saw in 2022 are going to extend. Hopefully, they do. Those structural benefits will continue to be durable into 2023 and beyond.
That's why as we move into 2023, I would say at this time, we believe we've got confidence that we'll be at that lower end of that historical pricing basis points, so 200 basis points. Could we be better? Potentially, if some of those temporal things continue into 2023. That's how we're thinking about price. Make no mistake, we've seen some improvement in that area. That's a positive.
Are you able to size the temporal versus some of the structural just in terms of impact to 2022?
Yeah. Again, for 2022, that's why I kind of said when you put all that math together, where in 2022 we were, you know, below basis points, I think in 2023, our starting position would be around 200 basis points.
Okay. I guess just on the contracting front, you know, how are those conversations going with hospitals? I guess more this structural piece. What are they receptive to in terms of, you know, you guys taking prices up in some cases or holding the line? They're facing their own challenges too in trying to run their businesses. How is that contracting process developing?
Well, I'd say it's never a fun conversation, that's for sure, because everybody feels that there's impact to them, and they want to be able to take it out of somebody else's pie. What I would say is that it depends because we don't treat all of our customers the same. Obviously, those platinum customers that do a lot of volume with us, that are big customers, we have a high percentage of the revenue, we're going to contract with them differently than someone who's a gold or someone who's, you know, just not as much volume. We would go in with those and have a tougher conversation around what's going to happen with price. In certain situations, whole countries.
You know, in Europe, you know, we've gone into full countries and said, "Listen, given currency changes, given the dynamics from a profitability standpoint, we cannot continue to supply you with this price. We're taking prices up," sometimes dramatically, and they've absorbed it because there was really nowhere else to go. We've had those opportunities to have tougher discussions, but we don't have the same discussion, depending on the customer.
Is anything changing within the contract, you know, inflation indexing or, you know, anything like that? Or is it really just price as the variable? Or maybe even changing thresholds around volume to reach those tiers.
I would say the contracting strategy is pretty similar, the way we write the contract, but your ability to negotiate is probably better now just because it's known that inflation is hurting MedTech as much as it is.
Okay. You mentioned pricing below basis points. I think 140 basis points by our math for 3Q and for year- to- date, 140 basis points negative. That includes China VBP, which was, you know, a headwind. And, you know, not all these contracts have rolled over. It suggests in some accounts or maybe some countries, you're having a lot of success. Is that the right kind of interpretation of what's going on under the hood in some of these pockets? Maybe we can extrapolate, you know, a little bit longer term.
Partly. I would say the VBP was not really a benefit on pricing in 2022 because remember, we took a substantial number of charges in 2021, which so then when you sunset those year-over-year, there wasn't really a big negative price headwind in China in 2022 because of those impacts we took in 2021. I'd kinda take that off the table when you're looking at 2022's pricing erosion.
Even for the quarter, if we look at 1Q, 2Q, 3Q, isn't there incremental VBP pressure relative to 2021?
Not significantly.
Okay. Okay.
I wouldn't put it into China. Remember, China was a bit delayed in their actual rollout of VBP through 2022, right? It was anticipated to happen more in the 1st quarter. It happened more in the 2nd half of the year. Again, that wasn't a major driver. It really came down to, again, some of those temporal nuances that I talked about, our ability to take opportunistic price increases in some areas. Look, we did much better. As I said, hopefully, some of those things continue to carry to in 2023. That could be upside to our plan. Right now, our starting position is around $200 base.
Okay. Okay, great. Let's move to some of your new products and innovation. Innovation has been a theme in this transformation you've been on over the last few years. You know, simplistically, I can break it down. There's products that are very clear incremental revenue drivers, cementless, for example. There's others that I'm not clear how you monetize some of these software capabilities, that you're rolling out across multiple businesses. How do you monetize some of the investment you've made in these, you know, capabilities?
Sure. It kinda depends actually. I'd look at maybe ROSA and software upgrades for ROSA is a good example. With ROSA or a software upgrade where you can go sell it, you can actually sell it from a capital perspective and get cash right then for the deal. Two, you can place it even with a software upgrade and have the customer basically lease it through a commitment of additional revenue. That's another way that you would drive the revenue. It's not specifically associated with the capital you're placing or the software upgrade, but it's a commitment on implants, which I'd prefer to have anyway 'cause it's a nice annuity. That's another way to do it.
Then when you bring in something like a ROSA, you also use a disposable to do the procedure, and you get an up-sale or a higher revenue number per procedure based on that disposable. Those are just a couple of examples. It'd be the same thing with mymobility. We can do it the same way. smart implant, you know, the IQ will be just an increase in overall price to be able to take advantage of that technology. and that's really the way we do it. It really kinda depends on the account, whether they wanna pay capital or whether they wanna do a leasing program and what they're willing to commit to us. You can absolutely monetize the investment that we've made in robotics and data and informatics.
Okay. You started with this in the beginning, you expect these innovations, not just that Zimmer's making, but the market-.
Yeah
...making to accelerate orthopedics.
I really believe it can. What I love about this is everyone is leaning into it. All the big players are moving, and not just talking about robotics anymore. Everybody's talking about data and analytics as well, leveraging artificial intelligence to change the way we provide care for a patient. The more data we can collect, us and everybody included, and we can prove this, I think the more you're gonna see this technology digested. As it is, and we're seeing pretty good momentum already, that will take up, it has to take up the overall growth of the market because it'll take a while to get that full adoption. As you start to see that wave of adoption at that higher price per procedure, you have to see the overall market growth rate go up.
Okay. just on ROSA, can you level set us in terms of where we are in terms of procedure penetration for hip and knee in ending 2022?
Sure. It's still pretty low, actually. That's a good thing, I think, actually, 'cause we performed well, but we're still pretty low penetration, both in cementless as well as robotics. They're a good combination. People feel more comfortable doing a cementless procedure with robotics because of the accuracy associated with it. So the good news is, I think, I know Carrie's in here, so I'm looking at her because she's gonna get mad if I say the wrong word. I think we've been in the 10%-13% penetration is what we said in the U.S. in robotics, and about the same in cementless. That gives us a huge amount of upside potential because we believe both can get north of 50% penetration.
That gives us a real premium because you get about 10% premium to every procedure in cementless, and you get about 10% premium to every procedure with robotics. If you can get both of them combined in the same procedure, you basically got a 20% price increase in that single procedure.
You know, just thinking about 2023, maybe 2024, do you expect the kinda cadence of penetration to remain stable, or will there be an inflection at some point? What's the catalyst to more adoption?
Sure. I actually think for cementless, with the new form factor, it should increase. I'd be very happy on the ROSA side if we continue to keep the same trajectory because it's been pretty strong. On the cementless side, we lacked in the beginning the right form factor and robotics. We solved the problem with robotics, but we didn't have the right form factor, and we just launched the new cementless Persona, which I'm very excited about.
Okay. One more on ROSA. I just wanna sneak a capital question in here. I know you guys are under indexed. It's not a huge part of the business. In terms of how hospitals are approaching adopting ROSA, on the margin, are you seeing any change in CapEx budgets or, are there any comments on that?
Yeah. I'm always tentative to say this 'cause people that really depend on the capital markets probably don't like me commenting on these, but because it's not that in-influential for us. We haven't seen it get in the way at all. You know, people that wanna buy the ROSA, which is again, not really our preference, they're buying. There's nobody saying they don't have the capital budgets to do it. We usually try to drive them into the form of leasing again, because I like to get the annuity associated with the disposables. At this point, we're not seeing capital budget constraints get in the way of selling capital.
If you take a outright purchase versus these lease agreements.
Yeah
Say over five years, what's the, you know, cash in comparison between those two structures look like?
It's a real fast payback. I mean, you place the system, you've got to get a commitment of a. There's a minimum amount of commitment no matter where you are in the world that you have to give us from a competitive conversion standpoint to be able to get that. The payback is very quick. You're basically paying it back in the 1st year. The return on that investment is pretty high, but the benefit of it is you get it every year because you just picked up that annuity. It just stays with you. You hold onto the business because you typically have a five year agreement in place when you've done that. I'd much rather delay that gratification by a year, pick it up then, and then have it for the next five years.
Okay. two more quick ones just on SET. your SET business, you mentioned some launches you're excited about for 2023. Can you give us any more color on what you're referring to there?
In SET specifically?
Yeah.
It's really just the volume of launches. Identity obviously is a pretty big launch for us in the shoulder category, which is a big part of our SET business. In sports, we've got a number of products that we're going to be launching organically. We also just acquired a technology that I'm very excited about. It's not huge. I think about the one that we just acquired as more of a product launch. It's a pretty big gap filler for us in sports, which is in a very attractive market. This happens to be a very attractive sub-market of sports, which is growing very well, and it's probably one of the most heavy from a revenue generation per procedure. To fill that gap with this acquisition that we just did was a big deal.
The other key thing there is, as we're trying to grow the SET business in sports, specifically in our ASC presence, when you go out to try to build your commercial channel, they look at your portfolio to say, "Hey, do I want to come over if I'm a sports professional and be able to come in and start to sell for you?" Well, the only way I'm going to do that is if, in fact, you have a full portfolio, and they would look for a product like what we just acquired. When you have that, then you can attract those great people, and you can expand the sales organization. The acquisition that we did is important by itself, but it's also important to grow that sports channel. Yeah, I feel pretty good about where we are.
That's helpful on the acquisition. What about in hips? You said you've got some early launches.
Yeah
-2023. What do you, what details can you share?
Well, we're still gonna probably wait on what it is, but we have a launch that should be coming up, you know, relatively soon now that we're pretty excited about. That I think will give us a, you know, kind of a differentiation versus most players in the marketplace that will be a benefit to the hip business.
Okay. Moving to financials. Just got about 5 min left here, but you gave this framework for 2023, the 4%. You got a lot of questions on it on 3Q, so I don't need to rehash that. On the innovation piece, that was one of the contributors to that. How much do all these ones and twos and sets and hips and, how much does innovation and new products contribute to that 4% operational growth you're targeting?
Well, it's really important. I mean, it is, it's important in two ways. Vitality Index or the vitality of your business is a dictator in med device on whether or not you're going to get that revenue growth and traction in the field. You've got to see Vitality Index move up. We went from almost nothing to, you know, more than doubling that over the past five years, and that will continue coming into 2023. It is a very important factor just to be able to get revenue generation in the year. The secondary piece that sometimes people miss, and I would just define it more as active portfolio management, is that you're investing in those fastest growth markets.
When we're launching technologies in robotics and data, which happens to be a very fast growth sub-market of large joints or in sports or in upper extremities, which are fast growth markets. You're also building scale in those faster markets, which increases your weighted average market growth. It's not just the short-term revenue benefit that you get, but it's the scale you're driving in those faster growth markets, which drives your weighted average market growth rate up.
Okay. Okay. Just on guidance, your approach to guidance, we've seen it evolve over the course of the pandemic. There was a period where you were forecasting recovery, and then we all messed that prediction up multiple times. You backed away from projecting backlog and recovery and things like that and set much more achievable expectations and have done a really nice job hitting those over the last few quarters. What's your approach to setting guidance going into 2023?
You wanna take that one?
Yeah, sure. I'll start there. Look, I think 1st of all, there are a number of variables, as I talked about earlier in our discussion, that are gonna still be in play into 2023. We're gonna absolutely continue to be mindful about that. We're gonna use a recency bias as we have throughout 2022 against those. We do expect the overall market to improve slightly versus where it was in 2022, but still having to deal with a number of these headwinds. I talked about some of the tailwinds that we've got in our portfolio and execution. We're putting those together, that'll, you know, effectively make our base case.
Then, as we've done in the past, our upside, downside cases will be, you know, dependent on a number of variables around severity of those, of those impacts. In addition, we're also gonna be mindful of, you know, do we head into a recession? What kind of tailwind could backlog be? There are a number of moving parts that will ultimately help inform our ranges. That's, that's the approach we're gonna take. I think it's a little early to come out and say exactly what underpins, you know, mid, top, bottom 'cause we haven't given guidance yet. You know, we're gonna follow approach and that recency bias as we've done in the past.
I think it's important, though, just based on the way you asked the question, to create a distinction between the way we're gonna set guidance coming into 2023 and what we did in 2022. People would have said that we were more conservative in our guidance. Actually, we were just more conservative in what we thought COVID might do and how it might progress or not. I wouldn't expect, in other words, to see us set guidance and think that there's all kinds of headroom in 2023. There's still a lot of moving pieces in 2023, but versus the start of 2022, not even close. There's just not that much opportunity for dramatic ups or downs versus the guidance that we're gonna set. I just don't want people to think, "Well, God, they did that in 2022, it's gonna happen again in 2023." That's a wrong way to think about it.
That's a very important distinction. Last minute or so here, just M&A, you announced a small tuck-in this morning. How should we think about your appetite for 20-- for deals going into 2023? again, running out of time, so I'll throw another question in here as well. Do you feel like this process of seller expectations coming down to where buyers are at has-- there's been enough time elapsed, and it'll be a more active year for Zimmer in the market, or, you know, any thoughts on that?
I would say it's gonna be a more active year for ZBH in the market. I would say that, probably the assets that we're most interested in haven't come down as much as you would hope. I think that where they have come down, it's been not as much as the rest of the market, and people probably still haven't digested the fact that the value's lower. You probably haven't seen the discount that one might expect. Even if you did, you probably would see an offset there just 'cause the cost of capital's gone up. Hey, we're in phase three. Phase three is transforming the portfolio of this company. We have not had the capital to be able to do as much as we would like in that area, but we do now.
You know, we feel confident that we have the capital moving forward to do more transactions. You saw a very small one announced this morning. We would expect to do more.
All right. Well, I think we're up on time. Bryan and Suke, thank you for joining. I think we've got the lunch panel next. Thank you very much.
Great. Thanks, Jami.