Good afternoon, everyone. I'm Robbie Marcus, the med tech analyst at JP Morgan. Very happy to introduce our next session with Zimmer Biomet. I'm gonna bring up Bryan Hanson, CEO, and then we'll do a little Q&A after. Bryan.
Thanks, Robbie. All right. Hi, can you guys hear me okay? Yes. All right. Great. No applause, please. All right. I'm obviously Bryan Hanson , CEO of Zimmer Biomet, and I'm gonna spend hopefully about 20 minutes going over some content that I think will be helpful for the discussion that we have after for the Q&A. This is the sexiest slide that I have in the deck. There's a lot of words on this. I'm not gonna go through those words, thank goodness. I think you guys know the story around forward-looking statements, so I'll give you a minute to peruse this just so legal knows you looked at it. That was the pause.
Here's. I'm gonna spend just a little bit of time taking a step back because not everybody knows the company that well, and I wanna make sure that you know a little bit about who we are as an organization, not just the financials, but what makes us us at Zimmer Biomet. The first one is a really important one. We are a mission-centric organization, and I'm gonna spend time talking about the mission of this company and why it's so important to the organization and its success. We play today in orthopedics, and we're a pretty big player in orthopedics, particularly in large joints and knees and hips. We are gonna be looking to diversify our business over time, but today we're a very real player in orthopedics.
As you can see that we are focused on innovation that actually matters, truly changes the curve for patients. We're looking to shape tomorrow in the spaces that we play. That's a big part of the mission of this organization and the culture promises that we make to each other. We're a global organization. We have about 18,000 team members, not employees, but team members around the world. We're in a bunch of different countries relative to infrastructure and over 100 countries from a revenue standpoint. We are a Fortune 500 company with about $7 billion in annual revenue. That revenue is split in this way. If you look from a geography standpoint, we do about 56% of our business in the U.S. and the rest, obviously, OUS. I would say actually for orthopedics, that's a pretty good split.
That's a healthy OUS business. I can tell you that our OUS business we have confidence in. It will continue to grow as well as our U.S. business. You can see also here from a distribution in our businesses, we're a little bit heavy in slow growth markets today. We play pretty heavily in knee and hip, those are both low single digit growth businesses. Our S.E.T. business differently than that is a 25% of our revenue, but it's faster growth. As you'll see as I get into this, we're looking to move more of our revenue into those faster growth markets and ultimately, as a result of that, increase the weighted average market growth of our business. That's kind of the financials of our organization.
This is really the heart and soul of our organization, and this is one that we spend a lot of time on. I can pretty much tell you every day this slide is presented at Zimmer Biomet. It is really the why we wake up in the morning, the what we do, what we believe in, where we're going, and how we actually show up as an organization. If you start right in the middle of this slide, it is the mission of this organization. It is the why we do what we do. It's the reason we get out of bed and work hard every day. The fact is we help patients around the world. We alleviate their pain, and we improve the quality of their life. When we do that, we help their family as well.
I can tell you that puts a skip in everybody's step at Zimmer Biomet, and we're focused on it, very focused on that mission. We actually measure it. We do this every eight seconds. Every eight seconds, 24 hours a day, seven days a week, somebody receives a product that our team members brought to life and made that patient better and their family better. Now on the other side of the slide, on the left side, this is basically what we believe in as an organization, the principles of our mission. We start first and foremost with our team members. We believe that our team members are the solution for continuous improvement. Listening to the diverse opinions of our team members and responding to how we need to change is the way we get better every single day.
The fact is, if our team members are happy, they're gonna make the rest of our constituents very happy. That's number one. Number two is we always, and trust me, I say always, put patient safety before profits of this company. We always make sure that that happens, and we do that through a fantastic quality system that we've put into place, and I'll talk more about that. We also put integrity first. We are here to win. Make no mistake. This company is here to win in the spaces that we play, but we will always win with integrity and compliance in mind. We're gonna be focused. You can read that mission statement and say we can go in a lot of different directions.
We wanna focus in the areas where we can make a difference for the patient. That goes into the next one, which is value. We're in those spaces. We want innovation that actually means something, that means something for the patient and our provider, and there's a fair value exchange as a result of that. That is a sustainable relationship. Otherwise, it's not sustainable. We wanna give back. We wanna make sure that we're giving back to those that are less fortunate around the world. We wanna give back to the communities where we work and play, and we wanna make sure that we're also giving back to our own team members when they're in need. On the right side of the slide is the where we need to go as an organization. We will become. We will become a destination workplace.
We will become a best and preferred place to work for our team members. We will be a trusted partner for all of our constituents, from regulators to investors to customers to patients to our own team members. We will be a trusted partner, which means we do what we say, and we always do it the right way, and we will be a top quartile performer when it comes to total shareholder return. Around the mission are our culture promises, and we mean that on purpose. It's a promise to each other as a team that we will do these things. We will show up this way. This is how we show up. We're not here to play the game. We're here to win the game, so we're gonna focus to win. We absolutely want to shape tomorrow.
That's part of the mission of the company, and we're only going to do that if we have it through collaboration. We want to say ignite collaboration as a team. Okay, that's really who we are on one page and what we focus on. I tell people all the time, if you're doing something, doesn't connect back to this, stop doing it because we don't want you to. Right? I knew when I came into the organization about five years ago that there was no way that we could move all of that forward right away. If you remember correctly, we had a lot of challenges back five years ago, and I knew that we had to phase out the way that we were going to approach this. It isn't so much that these are independent of each other, these phases. There's a lot of connections between them.
It was the mind share that we would have in specific moments of the transformation of this company. The first one was hearts and minds. We needed to go to work on getting the hearts and minds of this organization aligned to the new ZB. Then we needed to transition from that and the execution challenges to true strategy and innovation. Then finally, in phase III, which we're in now, is transformation of the company for the long term. Okay, those are the three phases. If I dig into those more deeply, I could tell you that my philosophy on business is pretty simple. I believe that there are key variables to a successful business, and they've got to be in a specific order.
I look at mission, talent, and culture coming first, and that's the foundation, and then strategy, execution in that order all the time. It's not surprising when I got here at Zimmer Biomet, I focused on those things first. We built a One ZB mission, a One ZB culture, and we made sure that we didn't just send that out in a communication. We flew around the world, and we presented that mission, that purpose to the organization, gave out medallions, shook hands, and made sure that everybody was connected to that purpose, that bigger purpose. I can tell you, we do engagement surveys every year. Over 90% of our team members respond that they know the mission, they know the purpose, and most importantly, they know how they connect to that mission and purpose, which is very motivating for a team.
The other thing I did is to bring in the talent that we needed to transform the business. When you're gonna make transformation, you've got to have people come in, think differently about how you're gonna do business. We brought in a lot of people thinking differently about the orthopedic space. Through that, we also created some diversity on the leadership team. True diversity in the leadership team, where we went to from less than 20% diversity to almost 70% diversity. Usually when you do that trickles down. If you look at our VP positions, we have women in VP positions going up by 8% over that time frame and people of color by 6%. Make no mistake, we've got a lot more that we wanna do, but that's a lot of diversity of thinking in an organization.
I promise you, that is the way you make change. That is the way you continuously improve. Then we had to deal with the challenges that we had in execution, from supply to commercialization. We had a lot of them. On the supply side, if you remember correctly, we had more than four days of back order that we were dealing with. It's hard to believe we could continue to service the customer at all. After that period, when we fixed it, we had a long period of time until now, where everybody else is challenged with supply, of truly creating a supply-free issue for our team members and our customers. From a quality standpoint, we had some challenges. We had three warning letters coming in. In 2017, we had over 60 recalls. 60 recalls in one company.
Right now, we have one warning letter left, and we're on our path to be able to remediate that, working closely with the FDA. For two years running, we've been in the single digits from a recall standpoint. I would tell you that I think we have one of the best quality cultures, which is the most important in quality systems in the marketplace. Same with compliance. I don't think people knew or not, but we were in a monitorship, the DOJ, SEC monitorship, when we joined, and we put a lot of time, a lot of effort, and a lot of resources against ensuring that we got that certification. Again, I truly do believe we have a compliance culture that's second to none and a great compliance system.
From a commercial standpoint, when we came in, there was a trust factor issue between the commercial organization and the corporate organization. We went to work in solving that. Myself, Ivan Tornos. You know, we carried the bag in the past. We got connected with the team, and we made sure that that breakdown, that trust breakdown was eliminated. We also got to work at cleaning house. You know, there were folks that just weren't getting the job done. Once you start innovating and you start having a, you know, supply come out of the challenge, you can see who's doing the job and who's not. We consolidated pretty significantly. We went to the best leaders that we had, and we brought in new leaders as well. Then we specialized the commercial channel.
A lot of changes that we've made to make sure that we eliminated that as an execution challenge. We moved to phase II, which was really moving more towards a true five-year strategic plan. As important as deciding what we were going to do, we decided what we're not going to focus on, and that was a big part of what we did. We created strategic pillars as a result of that. I promise you, everyone in the organization has a strategic pillar or sub-pillar that goes right down to their individual objectives. Everybody is aligned on the strategy of this company, and everybody's moving it forward. We also then built the organizational structure, operating mechanisms to make sure that we held ourselves accountable for the discipline around focusing in these areas. We shifted our innovation as a part of this strategy change.
We didn't want to just be a product company. We wanted to be a solutions company and truly bring data-driven ecosystem to the market. That's what we did with ZBEdge. You can see the impact. We went from a very low Vitality Index to more than doubling that over the time from 2018 to 2022. We have a very rich pipeline that says we can do another 50% on top of that over the next three years. I'll talk more about that in a second. It paid off. You know, Q2 2020 was the first time in 20 quarters that this company was able to be at or above market in our large joints business, which is obviously the two of the biggest businesses that we have.
Ever since that time, as we look at the eight-quarter trend, we've been pretty consistently above market in both, either at or above market in both. You also look at top quartile performance. That's one of our strategic objectives. If I look at the five years that we've been transforming the company, if you take COVID out of it, the two years where COVID was a heavy impact, and you look at those two years with no COVID, and then 2022, where it was a limited impact, we've had two out of those three years as a top quartile performer in total shareholder return, actually in the 90th percentile versus our peer group. That's not hand-selected peer group. That's ISS and Glass Lewis peer groups that they've assigned to us. Okay? Clearly it's working. You can see the innovation.
We're getting accolades for being an innovator again in the orthopedic space. That is part of the mission, that's part of shaping tomorrow, and we're getting noticed for it again. This is really the, you know, the stats. Over the last five years, we launched 54 products, and very importantly, it's not just the short-term revenue growth that you get from the products. These are very focused in those markets that are faster growth, in our growth drivers. Not surprisingly, above 4% growth markets. That means that you're building scale for sustainable revenue growth, not just short-term revenue growth. As we look forward, same thing. We've got 40 new products just over the next three years. You can see acceleration in the NPI.
That innovation flywheel is really moving, and those innovations will also be focused in those faster growth markets so that we can build scale and increase our weighted average market growth. Down at the bottom, this is the way we change the innovation. If you look at this, we played pretty specifically in the intraoperative phase. We looked at the operation itself, the implant you're gonna use, the tools, the instruments that you're gonna use to do the procedure, and maybe the procedural approach. We did not look at the full continuum. Now we're focused on data collection before, during, and after, and we're using those data insights to be able to change the way we care for patients. A different view of how we innovate as a company as well.
We move to phase III, which is really transforming the portfolio of the company, transforming the operating model of the company so that we become more efficient and ultimately continuing that next-level talent development. I can tell you that this is an important area. We started this in about 2020. Obviously, the first part of this, the transformation of the portfolio, was a bit disrupted because of the COVID pressure on our business. As you know, it was disproportionate to us. We have over 80% of our business in elective procedures, COVID was tough times for us and put a damper on the amount of capital that we had to spend in transforming the portfolio.
We've been focused on this for a while, and you can see on the right side of this slide, we've had some activity, either removing things out of the portfolio, acquiring things, or doing partnerships. On the operating model side of the business, hey, we had a lot of transformation to do, and we've been focused on it. The fact is we needed to consolidate the way we did things. We needed to change reporting lines to make sure that we could do that consolidation, and we needed to make sure that once we did that, we brought those operating models to GBS locations. We didn't even have Global Business Services back in that time in 2020. In 2020, we put those in place. We have three locations around the globe, and we're maximizing that transformation of our business model.
From a talent development standpoint, again, it was one of the first things that we focused on at the top level of the house. Now I wanna make sure in 2020 and beyond that we focus on actually driving it down through the entire organization, that we're selecting the best talent and that we're developing that best talent and that we're ensuring that we're retaining the best talent. That is, in my opinion, the second most important thing in driving a sustainable business. That's really the future of the organization. This is the transformation of the organization. When we think about the portfolio transformation, which is one of the most important, we thought about it in three ways. You know, first. This is outside of the financial metrics that you would meet on acquisitions or divestitures. We thought about it in three ways.
Number one, this might surprise you because I said we wanted to diversify away from just large joints, but we wanna look at potentially adding scale in the faster growth sub-markets of knees and hips. Those are pretty slow growth markets, but they are very attractive fast growth sub-markets of knees and hips. Robotics, it could be the ASC setting, it could be a direct anterior approach to hip. We wanted to build scale in those areas in faster growth parts of our large joints business, because if we do that, we can drive our weighted average market growth rate up over the broader market growth. That's the intent. That's true portfolio management. The other piece was being able to build revenue and/or scale in two areas.
One, in orthopedic areas that we already play, like sports and extremities, but build scale in those areas. Two, truly look at opportunities that would get us outside of orthopedics, diversify this organization beyond orthopedics, and make sure that we're moving away from elective procedures. The final thing is to make sure we're looking at active portfolio management in two ways. It's not just what comes in, but it's what goes out. There are certain businesses that we looked at and said, "You know what? These are not the right businesses for us. We wanna make sure that we remove them from the organization and give them an opportunity to grow somewhere else." What did we do so far, even though we've been capital constrained because of COVID?
The fact is we knew that because we were capital constrained, we could at least move the initiative forward by moving things out of the portfolio. We spun our spine and dental businesses, set up an opportunity for them to be successful because they can focus on investing in their business like they should, and it set us up to be able to focus on our core growth drivers. At the same time, through that spin, we increased our weighted average market growth, which is an intent that we're focused on. We increased our revenue growth and our profitability as a company. We also used the limited capital that we had to acquire the companies that you saw before in our SCT business and also in the ASC setting.
We did technology relationships to make sure that where we didn't wanna build competency in the organization, we had those partnerships to move ZBEdge forward. We wanted all along, we were very disciplined in paying down debt, and as a result of that, really bettering our debt-to-leverage ratio. Going forward, as a result of that, we're gonna have a lot more cash to put to work in phase III of the transformation. Now, clearly, we wanna make sure that we stay investment grade. That's the goal. We're gonna stay investment grade, and we wanna make sure that we hold firm to our dividend. Outside of that, with the capital that we're gonna have, and it's gonna be stronger capital going forward, we wanna deploy that to transform the portfolio of this company. As you can tell, it's been a pretty busy five years.
You know, we've had a lot going on in each of these phases. There's no question in my mind we have corrected the integration challenges that were in place. We filled the gaps associated with purpose and mission in this organization and culture in this organization and talent. We fixed a lot of the execution challenges, anywhere from quality to regulatory to, you know, to compliance to the commercial challenges that we had. I can tell you now. Even though it's been limited capital and internal investment, we've leveraged those investments to ensure that we increase our weighted average market growth, going from somewhere close to 3% to somewhere close to 4% over the last five years.
With that momentum that we have, that stability of the company that we have today, and the way the organic business is running, and with the product pipeline that we have that is as rich as I've ever seen, and a better balance sheet looking forward, I feel very confident. I feel very confident this company, ZB, is positioned well for the future, and that means we're positioned well for growth. With that, we'll move to the Q&A.
Good. We have, Suky, the CFO, and Ivan, COO, joining Bryan here to help out with questions. Maybe we could kick off, you know, if we look back 2020 and 2021, orthopedics was fairly impacted by COVID and hospitalizations, ICU beds filled with COVID patients. I look at 2022, it looks like this market recovered very nicely and appears to be sort of back to normal, if not maybe on track to do a little better than normal. What are you seeing from the inside, and how do we look at these trends, U.S. and outside the U.S. with respect to that?
Sure. Maybe I'll start, and Suky, if you wanna add some color commentary as well. So, first of all, I would say that, yes, 2022 ended up being a lot better than we expected. As you remember, we set our guidance in the beginning of 2022, assuming that the COVID pressure that we experienced in 2021, kinda given a recency bias, would actually go through 2022. That didn't happen. You know, the good news is, after Q1, we saw a great recovery and procedures came back, and that certainly helped our year, no question about it. I would just say that I wouldn't call it normal, though. You know, we're in a better place. Procedures feel good. They're actually at about typical historical procedural volumes, but the way you get there is different.
You know, there's a lot of variables that are anything but normal, but the combination of those things have gotten us to kinda normal procedures. We would expect that to continue into 2023. You're still gonna have supply challenges that are gonna be, you know, a challenge for every organization as we move into 2023, and that does put a governor on revenue growth. You are still gonna have challenges associated with cancellations, you know, procedure cancellations. Not the way we used to, where you have ICU runs, and as a result, you don't have capacity, but because people are getting sick and can't do the procedure. That's gonna be offset by the fact that we have a lot of innovation coming and we have some easier comps in the first quarter.
I think it's, you know, unusual in the sense that you've got a lot of variables you typically wouldn't have, but I think that the procedure volume will be about normal.
If said another way, demand seems to be-
Demand is back. Yeah.
-Coming back to normal. It's more industry factors that hopefully are temporal and should resolve in the near to midterm.
Agreed. Yeah, that's the right way to think about it.
You talked about on the slides, Zimmer Biomet's weighted average at market growth has improved from 3% the last few years, up to close to 4%.
Right.
You talked about how in a normal environment, and also 2023, Zimmer Biomet should have a four handle.
Right
... In the guidance range. You know, we'd love to all see Zimmer Biomet do weighted average end market growth, and with the innovation you're having get above market growth. You know, how should we think about how, you know, get to market, and then how far above market do you think you can realistically do with all the technology that you're bringing to market?
Sure. It really kinda depends on. First of all, we want the same thing. We want the same thing. That's the intent. In the areas that we've chosen as growth drivers, that's the absolute intent. You know, if we're focused on a specific business and we have specific growth drivers in mind, and we're over-indexing on our spend in those areas, R&D, commercial infrastructure, acquisition, we fully expect those categories to grow above market, no question. In those areas that we're using to fund those investments, we would expect more market or even sub-market growth, and we're okay with that balance. The key thing to us, though, Robbie, is really building that weighted average market growth rate up. That doesn't lie.
If your revenue is in those markets, you should be able to at least get the average of those markets and that growth rate. I'm hyper-focused, the team is hyper-focused on continuing to increase that weighted average market growth. As we have more balance sheet to work with going forward, we absolutely intend to do that. The most important thing for us is get more of our revenue in those faster growth markets to make it easier to be able to have that sustained growth.
I guess there's sort of three levers you can pull, not just Zimmer Biomet, but the whole industry.
Sure
... To get growth up and you specifically. You can grow volumes, you know.
Mm-hmm.
Probably in the markets you're in, it's a bit more mature, so volumes aren't going to move a whole lot. In some of them, yes. Mix with new products-
Mm-hmm
... And that can help, and then also price, and that's the one I wanna hit on for a minute.
Right
... 'Cause we have seen price go from minus maybe two, three a couple years ago to better and better. Where did you end or, you know, qualitatively, you haven't reported fourth quarter results, how have you done throughout 2022, and what's on deck for 2023 in terms of pricing?
Yeah. We did pretty well in 2022, I'm gonna let Suky answer this because he has the most elegant answer that I've ever heard.
Okay.
I'm gonna pass it to him.
You're right, Robbie. Historically, we've been about a 200-300 basis point price erosion company since the merger of Zimmer and Biomet. Through the third quarter of 2022, we were doing much better. We were about 150 basis points of price erosion. I would say that's really driven by kind of two factors. One are area of things that are-- we consider transitory or temporal, the other being more structural. The transitory type things, are around, one, we didn't see as much in contract period renegotiation by hospitals or accounts. In other words, they were not approaching us midway through their contracts to try and get price concessions. There's a variety of reasons for that. I won't go into a lot of detail, but that was one lever.
The second was because you saw some COVID impact earlier in the year, many accounts didn't hit their volume thresholds, which then made them eligible for more discounts. Those two things we consider more temporal and helped in that 150 basis points versus our historical average. The things that's more exciting to me are the more substantive and structural changes we're making around price. One, we've invested a lot in hiring the right capabilities to set the right pricing strategies, to set the right corridors, to set the right governance, in pricing within the company.
The second is we've invested substantially into systems, data, and analytics, which are helping us better understand the elasticity of pricing at the account level, helping us understand better the profitability of pricing decisions that we're making across the globe, in a variety of other levers that are more fundamental or substantial or structural in nature. If you put all that together, we think as we move into 2023, we're likely gonna be at the lower end of that historical average of 200-300 basis points with an opportunity to do better if some of those temporal things continue into 2023. I'll tell you, we've not stopped continuing to focus on pricing and to get that number even lower as we move beyond 2023.
Do those comments hold on a global basis? Are you able to take price or give less price in international markets as well as the U.S.?
Yeah. We've seen that across the board. The U.S., EMEA has done a fantastic job in that. Even within Asia-Pacific, our performance relative to the company average is even much better. I don't know.
I'll just say we had, in 2022, probably, you know, every single region performed better from a pricing perspective, 2022 versus 2021.
If I go back to the three drivers of growth, volume, price, and mix. If we touch on mix, which I view more as new products, you have a lot. You have robotics with ROSA. You have Persona IQ. You have cementless, amongst others.
Mm-hmm.
Maybe you could just give us an update on where you stand and how you feel about each of those as it relates to the business and your goals as Zimmer Biomet, where you wanna be with those launches.
Sure. Maybe I'll make a, just a top-line comment, if you wouldn't mind hitting the specifics. What I would say is, first of all, one of the maybe underappreciated things that we're seeing right now in orthopedics is that technology adoption is pretty rapid right now, and you're seeing it across all the major players, and pretty much all providers are moving in that direction. That's important because to your point, as you bring in new technology that has more value, you get more revenue for a procedure, more mix benefit. I truly do believe as you see that adoption continue in robotics and data and things like cementless, you're going to see the overall market growth rate in orthopedics go up. It has to, just mathematically speaking, as you're bringing that innovation in.
The other thing that innovation does for us specifically is when you bring innovation, your Vitality Index goes up, you're negotiating with the customer changes, 'cause now you're bringing in new technology, you've got a longer-term contract, and as a result of that, your price stability is better. Both of those things are happening with us, obviously, but also as a market as well. Ivan?
Robbie, first of all, I'm happy that we're talking about innovation versus remediation, which we're talking about, four or five years ago.
I think we all are.
It's truly a competitive advantage for us. Just a couple of data points, and then I'll elaborate on the products. As you saw in the presentation, our Vitality Index more than doubled over the last three, four years. We're gonna be increasing that by at least 50%. 40 new product launches in the next two years. The number that we expect internally is higher than that, but 40 is the commitment that we got. It's probably 50/50 data technology solutions, and the other 50% core implants. In the core implant side, we're very excited about launching what we call Persona OsseoTi, which is our cementless platform.
The clinical work we've done with this product shows that it is gonna be the most stable cementless knee in terms of both short-term mechanical fixation and long-term biological fixation. Versatile. It's the only platform where you can choose to go cemented or cementless all the way to the end. It is the Persona system, so you can personalize it. That's gonna be a transformational product. I think it's gonna increase not just cementless penetration, but the use of robotics. We got two Mixed Reality launches that happened in late 2022, that are more into 2023 with great momentum around Mixed Reality. Obviously, we still are doing great things with robotics around both knee and hip.
We got what I think is gonna be the most transformational shoulder launch in the last five years, and that is Identity, another personalized shoulder solution that is gonna shorten both the procedure as well as the recovery. Persona IQ remains a very attractive product launch. We're gonna be moving at some point in 2023 from the limited clinical launch, or rather commercial launch to a full launch. I think that's gonna mark a before and after in orthopedics. Obviously, we're very excited about the organic or rather inorganic place. We acquired Embody, which gets us into a fast growth subsegment of sports med, and that's gonna give us an opportunity also to expand in the rotator cuff repair category.
I'm not gonna go through all 40 products, don't worry about it, but I'm very excited about the pipeline today and what's happening here in the next two years.
If I think about knees where there's a lot of innovation happening right now, probably the best way to grow your revenues would be to get a lot of cementless knees on as many robotic surgeries as you can. Where do you stand now in terms of robotic use in knee surgeries and penetration of cementless? I know it's still in the early days, but any metrics you have.
I can take it. I think you provided the question and the answer. It's in the low teens, which is a tremendous opportunity. Frankly, the reason why cementless has been in the low teens is because we're missing this form factor device that we're launching now, literally in the next, you know, few weeks. We're gonna be doing the first real cases. I do think that that's gonna increase cementless penetration. Now also the fact that we have cementless in combination with ROSA is gonna increase ROSA penetration as well. I think it's been a while since we reported the penetration with robotics, so I won't get into that. Clearly, the expectations are very high in terms of the growth there.
In addition to that, the fact that we're launching two new indications in robotics is also gonna create a situation. There's gonna be a higher adoption, and that's gonna increase penetration as well. Very excited about where we are in both opportunities.
Maybe if we shift to extremities. You've had some really high growth rates there. You have a new shoulder launching. How do you think about just when you're allocating capital? Do you put more into higher growth segments like this and just did some M&A in sports med?
Yeah.
Is this where you're really focusing your efforts, or am I just, you know, am I missing something from the outside of the business?
No, no, you're a 100% accurate. If you just think about the presentation, the intent of transform, but also innovation. I look at transforming the portfolio in two vectors. The first is a dedicated and disciplined focus for research development and commercial infrastructure, which is gonna be around those faster growth categories. The second would be around what we define as active portfolio management, which is either acquiring, building partnerships, or getting rid of assets. If I think about the innovation cycle, remember, we had 54 products launched over the last five years, 40 coming over the next three years. Most all of those are in those faster growth markets, which the intent is to be able to drive the weighted average market growth up of the business.
As we look at more activity on the, on the M&A side or the active portfolio management side with a freed up balance sheet, that would be the same intent. Pick those areas that we have a right to win, that we're playing in today, and build scale so that we can drive, again, more of our revenue in those faster growth markets. At some point, potentially diversifying, as I said, outside of orthopedics.
Yeah. Maybe if I take a step back here. We'll get your full earnings in a month or so. Any comments? I think people are really focused on just any updates you're willing to provide qualitatively on fourth quarter and also specifically China, where it's a dynamic situation right now and you do have some exposure.
I'll just say, you know, broadly from a fourth quarter perspective, we're within the guidance range that, you know, we provided or better. From a China perspective, I would tell you that, you know, it's a unique environment for sure. In the beginning of the December timeframe, you know, we had challenges in China, not necessarily getting stuff out of China from a manufacturing standpoint, but commercially speaking in China. We saw that, you know, pretty draconian policies to keep people in with zero-COVID policy, put a damper on procedures, and then everything opened up, you know, and everybody was out, and everybody got COVID, and everybody was going into the ICU, and that put a damper on procedures. December for us was, you know, a little challenging in China.
You know, the good news or bad news, however you wanna look at it, is it's become a smaller part of our overall business. Even with that disruption, it was captured in the guidance range that we provided, and we're gonna look at it the same way in 2023.
Great. Suky, you consistently said the past few public speakings, quarters and such, that there should be a four handle in the top line for organic sales growth for 2023. Even though it's not a normal year, you think you can get there. Down the P&L, there are some known headwinds that you've talked about, what's flat to modest margin expansion. Is that still the right way to be thinking about 2023 down the P&L?
It is the right way, at that 4% operational growth rate, which, you know, there's gonna be some FX headwind that's moderated a bit as we saw the dollar moderate sort of at the very end of the fourth quarter. FX will still be a headwind year-over-year. We talked about gross margin having about 100 basis points of pressure, 2023 versus 2022, because of extraordinary inflationary costs that capitalize from 2022 into 2023. Having said that, you know, I've been really impressed with what the commercial and supply chain teams have done to offset some of that. We do feel like we can make a dent into that 100 basis points of erosion year-over-year. That, I think, is a new inflection point for 2023.
Having said that, we still think, you know, somewhere around maintaining year-over-year operating margins and slightly improving is still a good starting point for us.
Okay. The balance sheet looks like in a much better position than it was just a few years ago. You spun off ZimVie, did a small acquisition last week. Maybe just update us on how you're thinking about M&A in general-
Mm.
As it relates to the business and how M&A ranks within your desire for use of cash.
Yeah. There's either one of us could answer that and it would be the exact same answer. That's the good news. What I would say is it's a big part of the phase III of the company. First and foremost, we're gonna stay investment grade. We're gonna stay committed to the dividend that we have committed to. Outside of that, with the freed up balance sheet, we expect to deploy a lot of that money to M&A. And we haven't been sitting on our hands even though we've been more cash-strapped because of COVID. We definitely have targets that we're interested in pursuing.
I would expect on a go-forward basis, just looking on the short-term to mid-term, probably more of those tuck-in size deals, short to midsize deals that are probably, at this point, a little closer to the vest in areas that we play in today. I think in times that are a little bit uncertain from a macro perspective, probably better to stay a little closer to what you know and what you're in. You know, make no mistake, we've got a lot of talent in the organization that has a lot of experience in other parts of med tech, and we're looking at all areas right now.
Tim, it's been a difficult environment just given valuations the past two-plus years.
Yeah.
Do you think they've rationalized enough to make more deals happen?
It feels like every asset other than ones we're interested in have, you know what I mean? It feels like a lot of folks that we would be interested in obviously are pretty fast growth in attractive markets, and those are, you know, those are tough commodities to come by. So what you find is maybe they haven't moderated as much as others. Even if they have, sometimes the boards don't actually, you know, wanna recognize that change in value. That said, there's no question that there's been some moderation, and we're gonna try to take advantage of that. On the other side of that coin, you know, capital's a little more expensive to come by.
We have a minute or two left. I wanna ask one question that I get a lot from investors, and I guess I have my own views, but a lot of people look to elective procedures within orthopedics as potentially very exposed to an economic downturn 'cause the best corollary is what we saw.
Mm.
-A decade plus ago. My view is, it's gonna be very different this time given where the healthcare system is.
Yeah.
Do you agree or disagree with that?
I'd agree, but maybe with a little more color on it.
Yeah.
I think that, if there is a recession, if it's not linked to higher unemployment, then I don't think we're gonna have the same impact on elective procedures. Even if it is, for some reason, we see a recession, we see unemployment go up, people don't have the same insurance coverage, I do believe you've got the backlog of patients waiting that could fill that open capacity. There is capacity constraint from a provider standpoint. If we see patients fall out because they're not covered anymore, I think they would quickly be covered by those that are in the backlog.
Great. We're out of time. I wanna thank all of you for joining, and thanks everybody for listening.
Thanks, Robbie.
Thanks, Robbie.
Thanks.