Good morning. Thanks for joining us at the 22nd Annual Needham Healthcare Conference. I'm Mike Matson, I lead the MedTech and Diagnostics Equity Research Team at Needham & Company. With me, we have Zimmer Biomet's CEO, Ivan Tornos, Executive Vice President and CFO, Suky Upadhyay, Senior Vice President, Investor Relations, and Chief Communications Officer, Keri Mattox. Instead of a standard presentation, we're gonna do a Q&A fireside chat format. If you do have questions that you would like to ask, you can submit them electronically through the Needham Conference website, or you can feel free to email them to me at mmatson@needhamco.com, I'll do my best to fit them in. With that, we're gonna go straight into the questions. I wanna start out with one on the orthopedics market.
The recon market, i.e., hips and knees, was really strong last year. We think the market grew about 8%, and that compares to kind of pre-pandemic growth of 3%-4%. Just wanna get your perspective on what you think is driving this growth. Are we you know, is this really the pandemic backlog finally starting to come through here?
Good morning, Mike and everyone. Thanks for having us. Great to be with you. you know, I would say there are a number of parallels between 2022 and 2023, so I'll just kinda, you know, jump right into this year relative to market and more specifically ZB. If you go back to how we position guidance for this year, we talked about growth rates normalizing, but the elements inside of that growth rate being not quite yet normal, a number of variables. And I kind of put those variables into two buckets. One is, you know, those market factors which we don't necessarily control, but we have to continue to navigate, and those things that we can control.
I would say in both of those situations, very pleased about how we're starting out the year. On the things that we control less of, so things like supply chain disruption, recovery, staffing issues, I would say all of those have turned out to be stable or improving, and the team is navigating those extremely well. On the execution, I've never been more optimistic about where ZB is going relative to innovation, commercial execution, discipline in our investment profile. I'm really pleased with how we're starting the year. I'm very encouraged about where we're going in 2023, both top and bottom line.
Okay, got it. Just, you know, you mentioned innovation, I want to kind of dig into some of your newer products. There were a few things that you highlighted at the AAOS meeting a couple of months or so ago. You know, I guess just starting in knees, you have launched the cementless knee, featuring OsseoTi Keel Tibia. Sorry. Can you give us an overview of the product and the market opportunity here?
Sure. I'll take that one, Mike. Good morning. Thank you for having us. Before I do that, there's so much to talk about innovation, and it's a great time to be here at Zimmer Biomet. We've gone from being in remediation mode four or five years ago to being fully in innovation mode. I'll talk about Persona OsseoTi, but I just wanna highlight a couple of things about innovation that I think you might have seen in the Academy. We did more than double our vitality index, the percentage of sales coming from new products. In 2022, we actually received the highest number of 510 approvals as compared to any peer in the segment.
As we think about the next four to five years, we see no less than 40 products being launched in the market. While we don't disclose the pipeline value, it's twice what it used to be, you know, four or five years ago. Lots to happen here. Why am I telling you all these data points before I tell you about Persona OsseoTi? Just today we're gonna spend an hour talking about what we got going on in hips, in knees, in shoulders, in robotics, in surgical, CMFT, organic and inorganic. Maybe we'll talk about that later. Now, relative to our Persona OsseoTi, it is sort of a cementless platform. As you mentioned, we launched that recently. Very encouraging trends. Early innings, but very encouraging trends in terms of adoptions.
Roughly 50% of our customers for Persona OsseoTi are the competitive accounts. We've seen a meaningful percentage of cemented users, those are customers who never used cementless, moving into Persona OsseoTi directly. The trends that we've seen of the combination of ROSA and Persona OsseoTi are very inspiring as well. In terms of the actual product, I won't give you all the technicalities, but I'll leave you with three things that resonate in the market: stability, versatility, and adaptability, if you will. We call them anatomic design. Stability, clinical data, market data already, customer feedback is extremely stable. You see immediate mechanical fixation. Literally post-op, you can see that the system, the spike keel design, is really fixating the device.
Long-term data, the bench data that we have shows extreme biological fixation and what we call lower micromotion. The knee actually doesn't move. That's the stability part. The versatility, and this may be one of the reasons why customers are moving into our Persona OsseoTi so quickly, is that as a surgeon, you can decide all the way to the last portion of the case, whether you wanna do cemented or cementless. That is important for a new user. You may not feel 100% confident that cementless is the way to go. You can wait until the end and make a decision there. Then the adaptability or anatomic design is about being part of the Persona family. You can customize the design for any and every patient. You use pretty much the same instruments as Persona.
If you're a Persona user, it's a seamless move into a cementless. Again, stability, versatility, adaptability, anatomic design are our compelling factors. It's just a great product, and again, the feedback has been outstanding so far, so very, very encouraging to see where we're at.
I would just building on what Ivan said, I would just say financially, it's equally attractive just from a mix shift perspective on ASP as well as well as EBITDA. We're pretty excited about that. When you put that cementless application together with ROSA, you've got a pretty powerful combination.
Absolutely.
I think a lot more to come on that.
Okay. Can you give us an update on where your cementless knee penetration was prior to the launch and kind of where you think it could go over time? I know you had a prior, cementless knee that, this is sort of replacing, I guess.
Sure, sure. Absolutely. Maybe I'll start by again saying this is early innings, but we're in the mid-teens when it comes to cementless penetration. Trabecular Metal has been the legacy design. Again, early in the launch, we've seen the uptick already, both from a penetration standpoint and the margins and financial upside that Suky was talking about. As we think about the North Star, if you will, competitors are reporting 40, 50, north of 50% penetration. That's the standard for us. And I think there's gonna be two catalysts happening here, maybe three. Catalyst number one is the new design that appeals to a large segment of cementless and cemented users. That's number one. Number two is robotics.
The reason why competitors have seen maybe a deeper penetration of cementless is because of that combo of a robot platform and cementless. Now that we have, I would call it the optimal design, as we see ROSA penetration increasing with this new design, that will be a catalyst as well. The third catalyst or driver in this equation, why we're being so bold about where cementless is going, is the shift to ASC. As we see more cases going into the ASC, we see that cementless will increase as well. Time matters in an inpatient unit, but time is critical in the ASC.
Those are the three reasons for why we feel so confident that this design, this platform, can get into the 40%, 50%, and north of 50% penetration at the right margin, as Suky alluded to.
You know, the prior Trabecular Metal knee cementless tibial component that you had, you know, why wasn't that more successful? What are the other advantages for OsseoTi? I think you said at AAOS it's also a better cost profile for OsseoTi compared to Trabecular Metal as well.
Sure. I'm not sure, Mike, that I would call it not successful. There are literally hundreds, if not thousands of customers using TM. The technology's been around for a while, and you got thought leaders who will now switch from TM to something else because they love the design, how it works, and the clinical data associated with TM. That said, the fact that Persona OsseoTi has a different design, what we call a four-spike, keel tray, it matters. That provides that short-term mechanical fixation that I mentioned earlier, and the longer-term biological fixation. It's a different design that gives you that intraop, opportunity to decide to go cemented or cementless. We didn't have that with TM. There are different cost dynamics and margin dynamics and whatnot.
That's more internal. No, I wouldn't say that TM was not successful. By all means, I think TM will continue to have a segment of users, while our new design will generate a far larger pool of customers wanting to use Persona OsseoTi.
Okay. There's a cost advantage too or with the titanium one?
Absolutely. Absolutely. It's a cost advantage, with the new design, and a better margin profile.
Okay. All right. Wanna move to Persona IQ. This seems to be a really cool product. I, you know, it's one of the first times I can remember Zimmer being first to market with some kind of advanced technology like this, at least in a long time. You know, I think you've been in a limited launch. Can you maybe just give us an update on how the product's been received and when you expect to initiate a full launch?
Yeah. You used the word cool, and I guess you are a cool company with a cool product when in the same week you make it to the Stephen Colbert show and the Wall Street Journal, the column on the future of everything. Actually, that, those are two accurate data points. We were in the Wall Street Journal last week and the Stephen Colbert. Don't ask me how we got there, but we were there. Beyond those anecdotal data points, yes, limited launch mode still. I would say we're doing a full clinical launch, generating all kinds of data points. We got close to a billion data points on a sizable amount of implanted units already. With that clinical launch, we're trying to validate four things.
Number one, what is the value proposition of the device? Number two, what is the best way to monetize the this device moving forward? Number three, what's gonna be the best way to ensure that the customer has the best experience? How we set up the base station, how we integrate everything to the rest of the data portfolio, ZBEdge. The fourth thing, maybe results and usual glitches that happens, we have this level of complex technology. That's what we're trying to achieve through the clinical trial. As we get into later in the year, we'll be ready to do a full commercial mode.
I'll tell you, the fact that we're getting NTAP, new technology add-on payment from CMS, the fact that we've seen so many customers, key thought leaders wanting to jump on Persona IQ, is extremely encouraging in terms of the groundbreaking capabilities of this platform. More to come as we get later into the year, but so far so good.
Okay. I guess the sort of skeptical view of Persona IQ is that it's a solution looking for a problem. In other words, there's not really a clearly defined use case and, you know, but yet it's being sold at a higher price. You know, how would you address this concern, and when do you think we'll kinda find that killer app for this device?
Sure. I'm not sure it's a solution looking for a problem. As a matter of fact, the data will point out that is not a solution looking for a problem. If you and I do, if you and I conduct a surgery or if you and I go through a knee surgery, the responses that you'll give your surgeon, the responses I'll give the surgeon are gonna be very subjective. Your level of pain may be higher or lower than what it really is. Same for me. The way you report how you walk in post-surgery is gonna be different than me. The way that you think about the quality of your walk, your gait, your speed, and whatnot is gonna be different.
When the surgeon asks you how's your range of motion, you may say something that is not accurate, I may say something that's not accurate. Now multiply those two data points, you and I, times millions of patients. What Persona IQ is bringing really is objectivity to a subjective world. I mean, it may take close to three decades, and a lot of the feedback we hear from customers, from patients, is highly qualitative. Persona IQ is gonna make this very quantitative. That, that in itself is extremely patient-centric, and it's gonna bring a level of objectivity that wasn't here before. That's from a patient standpoint. From a physician standpoint, the ability of a surgeon to re-engage a patient before it's too late is very meaningful.
Through recovery curves, through the data we're getting through Persona IQ, I, as the surgeon, can tell whether Mike is moving in the right direction or not, whether Carrie is gonna fail before she actually fails. As a payer or provider, this is meaningful because it lowers the cost of readmission. Down the road, potentially, this is something as we get the data, not there yet today. Persona IQ can identify loosening an infection. There's multiple variables that tell you that this is truly a solution for a real problem. killer app, as you call it, when are we gonna get there? Again, we gotta go through clinical before we get there. Moving in the right direction, we should be there sometime around late 2023, if not early 2024.
Okay, got it. I think your agreement with Canary Medical includes other types of orthopedic applications or implants. You know, can you tell us about your plans to expand the smart implant technology to other areas? I don't know if you can talk about timing or, you know, the specific, you know, implants or-
Yeah.
that you're targeting with that.
Certainly, Mike. Obviously for competitive reasons, I won't go into timelines or specific designs, but our vision in this journey is to bring data and smart devices across the entire portfolio. To that end, we think in hips, we think in shoulder, and we think in different designs within these verticals. We do have that agreement. It's a great partnership with Canary Medical, and we're excited about what's to come in that space.
Okay. All right. I guess just with regard to Canary Medical, you know, you're partnering with this external company, this could be kind of become a key technology for Zimmer Biomet. You know, at what point does it make sense, either economically or strategically, to, you know, maybe acquire Canary Medical or ensure that, you know, that it, you know, doesn't fall in the hands of competitors or something like that?
Yeah. Did Bill Hunter, the CEO of Canary, ask you to ask me that question or just that's your question here today? Look, the partnership is working really well. The level or the way the contract is designed, I don't think there is a risk right now. I know there's no risk right now of this falling in the hands of a competitor. Right now we are where we need to be, and down the road, who knows? From a contracting standpoint, I think we have all the right conduits to make sure this is a sustainable partnership for the long term, so no worry about that. So far everything is working great.
All right. I wanna move on to the hip side. I think some of your newer products there include G7 and Avenir Complete. Can you give us an overview of these products and anything else that I'm missing there that's new and exciting in the hip area?
Yeah. Great to be talking about hips once again, 'cause I think for the last two years it's been all about robotics and knees. G7 and Avenir Complete, as we mentioned, is part of our portfolio. It's much broader than that. I know we have great platforms around Arcos revision systems, mixed reality, ROSA Hip, and whatnot. Relative to G7 and Avenir, G7 is the only modular system in the market that can be used seamlessly for primary and complex revisions. It is a comprehensive portfolio that has great data around joint stability. It's simple, efficient, and the keyword for pretty much every device at Zimmer Biomet is customizable. Similar to Persona in knees, G7 is personalized. It's highly customized to patients.
We have reported so far close to three million system combinations using one instrument platform. Think about how elegant that is in operating room, where you can use one instrument platform for different hip designs for multiple patients. Relative to Avenir, it's been one of the fastest-growing products at Zimmer Biomet. We launched that right before the pandemic. It's a great solution in the direct anterior space. It's designed to deliver speed and efficiency in an operating room. It's got, again, all kinds of stem lengths, highly versatile, using simple instruments. Again, speed, efficiency, effectiveness, solid clinical data in a growth space like is the direct anterior space.
Again, those are two, G7 and Avenir, two of a group of hip products that we're launching along with surgical impactors that give us confidence that we're gonna continue to move in the right direction in the hip segment.
Okay. I wanted to follow up with the direct anterior approach. You know, can you just provide an overview of what that is, why it's important and, you know, how big of a part of the hip market that is right now and how big it could be? You know, I think it's just a less invasive approach for doing hip replacement, maybe provide a little color there.
Yeah, I think you did an awesome job in defining what it is. Is by definition, you go front versus posterior. Is less invasive. You spare more tissue. There is less pain associated. Is less complex surgery, so surgeons tend to like it, especially here in the U.S. Penetration of direct anterior has gone from somewhere in the 15% to, depending on who you ask, Academy, Hip Society, our customers, somewhere in the 40%-50%. It is a solution that gets vastly utilized in an ASC setting, and with the growth of ASC, that's gonna continue to move there. We're playing in a leading capacity in that space, you know, through robotics, our ROSA robotics, which has that application, through Avenir Complete, we're a major force in direct anterior.
Tim, answering your question, probably 40%-50% of cases, and growing, or the revenue in that space is pretty similar to that.
Okay. Got it. I did have a question that was emailed to me, it related to hips, I figure I'll just go and ask it now since we're talking about hips. I guess, you know, J&J this morning apparently noted some kind of supply issue in their hip business. You know, is this something you have heard about or are aware of just in terms of the competitive dynamics? You know, could that be an opportunity for Zimmer to pick up some share if they have some supply constraints there?
Yes, we heard some of it in the U.S. anecdotally, and I don't wanna really comment on a competitor's pain today, but clearly we always have an ability to help patients that don't have a current solution, so they need a plan B. We'll be ready, you know. Certainly supply these days is tough on everybody, but we'll be ready to provide a solution to patients when needed and when possible. We did hear about it, so yes, absolutely.
Okay, got it. Then the other product that you showed at AAOS was this powered hip impactor. Can you maybe just explain the product, the market opportunity, the timing? I can't remember if you gave us any specific timing on when you plan to launch that.
Yeah. Let's start with the name. I think it's a cool name. Second time I use the word cool. The name of the product is HAMMR, like an actual hammer. What it is, it's a substitute for a mallet. Going back to you and I going through a hip surgery, a hip surgeon will actually use a mallet, a hammer, about 1 million times throughout the career of the surgeon. Imagine that. Imagine the potential injury, imagine the pain, imagine the life of a surgeon that is doing that. That's point number one that you address with a surgical impactor.
Less force that you needed., you know, like literally going, you know, a few hundred times, you know, per day, per week, going through a mallet. For the patient, it's a faster procedure. It's a more accurate procedure. The case is more efficient. Different surgeons, your surgeon is gonna use different force than my surgeon. That impacts the level of potential tissue damage. That's what HAMMR does. It's a surgical impactor that is gonna reduce potential injury for that surgeon. It's gonna drive a shorter, better case. In our case, HAMMR can actually help in placing the device.
In our case, HAMMR, I say in our case, because other competitive offerings don't have this, we can reduce or increase the force apply based on the anatomy of the patient, based on the actual surgery that we're gonna be undertaking. Those are some of the key characteristics. Around relative to your question on when we're gonna be launching, the plan remains, as we mentioned at Academy, to launch around mid-year. So far the feedback has been outstanding. We're in the final validation processes. Again, at Academy in Vegas, if you were there, you probably noticed that the voice of customer, the feedback was very solid. Excited about it. More to come in the summertime.
Is this a product that, I guess, what's the kind of business model here?
Sure.
Is it just a capital sale, or is this something that would be more like a, your conventional instrument where you kind of loan it out to customers that are use, you know, as a way to kinda, you know, leverage the, you know, that into the implant sales?
Yeah. Similar to robotics, optionality is the word that comes to mind. You know, in some cases we'll sell the, we'll sell the device. More often than not, the idea is to place the device in a contractual agreement for a pull-through. Again, similar to robotics. The emphasis is gonna be obviously on making sure that we service in existing accounts, in our Biomet accounts. There will be, out of the gate, a big emphasis on bringing the device to competitive accounts in exchange for that hip pull-through.
Okay. All right. Are there any other new products that I didn't mention that you're excited about that you'd like to talk about?
Well, here's what I have to be careful, because I can spend an hour talking about innovation. Again, 40 to 50 new products coming in. I mentioned cementless is really excited. We talked about Persona IQ. Hip Insight, another, I would call it major discussion at the Academy meeting in Las Vegas. We are the only company with an FDA-approved platform, using mixed reality in surgery, in hip surgery. Literally bringing holograms of the patient anatomy into the case, driving speed, efficiency, accuracy, with mixed reality. HoloLens goggles that drive that opportunity. This is highly scalable. The potential is limitless. It can get integrated with robotics. At some point, in some cases, it can even substitute robotics, based on everything we've seen.
That is a meaningful product launch that so far is going really well. I like where we are with our shoulder portfolio with Identity, customizable implant, highly versatile. You can do inlay, onlay cases. A ton of products in sports med by organic and inorganic means. Recently we acquired Embody. The collagen implants, rotator cuff surgery and whatnot, that's going really, really well early on. CMFT, that is, all kinds of products on rib, sternum. Again, we're gonna spend an hour there. You know, ZBEdge, there is a ton in that regard, you know. Different applications in robotics, different data platforms, different versions of mobility. I would say going back to excitement, truly the innovation story is compelling. Settle stuff going on, and I don't see today any major gaps from a portfolio standpoint.
anything that would lead me to believe that we cannot compete in any of the given spaces where we participate. I can tell you truthfully, Mike, that was not where we were four, five years ago.
Yeah. Okay. Then, you know, Zimmer Biomet also seems to be at the forefront of orthopedics when it comes to data and AI. AI is getting a lot of attention these days, generally, in the tech industry and elsewhere. You've branded your efforts here as ZBEdge. Can you just give us an overview of the program, what it entails, and how it differentiates Zimmer Biomet?
Sure. I like where we're at, and I think you're right. We are leading this space. What I like about what we call our ZBEdge portfolio, it's not a bunch of gadgets in a category. It's not an end-to-end solution. It's what I call an in-to-end solution. Everything is fully integrated. In our ZBEdge portfolio, every device either uses data from another device or feeds data to another device, and that includes products, data platforms, robotics, and everything within the ecosystem. It's truly an integrated solution across the entire patient occur. It's not just in the operating room. We engage the patient pre-surgical through mymobility.
We engage the patient in the operating room, and we continue to engage the patient through mymobility, Persona IQ, and other platforms to come for the long term, and the long term is really the long term. All of that is simplified in an application that or a platform, a dashboard I would call OrthoIntel. This is not information, this is data that a surgeon can use. We are the only company that I know of today that fully integrates every single platform. Only company I know of that has an exclusive agreement with both Apple and Microsoft. That is cool in itself, you know, third time that I use the word. Again, we lead in this space. We've made bold commitments from an investment standpoint in this space.
I think it's still within the early innings, but we're not slowing down. Really a differentiated solution, Mike.
Okay, got it. Another key part of Zimmer Biomet strategy has been portfolio management. I wanna talk a little bit about that. I think, you know, there's one aspect here that, you know, everyone hears portfolio management, and they think of acquisitions or maybe divestitures, but I think part of this may be underappreciated, and that could be the part where you've kind of reallocated your internal resources and investments to focus on higher growth and higher margin categories. Can you maybe just talk about what you've been doing kind of behind the scenes there in terms of reallocating resources to higher growth opportunities?
Yeah. Maybe I'll take that one, Ivan. You know, Mike, I think you characterized it well. We are clearly sort of chapter three of our overall transformation journey. Chapter one being about mission, talent, culture, fixing the execution issues that plagued the company. Chapter two being really about innovation leadership, and I think you see the proof points with ZBEdge. Chapter three now being about, you know, going on offense, if you will, on active portfolio management. You're right, there's an organic and an inorganic component to that. On the organic side, you know, some of the proof points there, we've launched over 50 products over the last three to five years. We expect at least 40 products over the next three to five years.
The vast majority of those products that we're launching are in categories that are growing well above our current WAMGR, right? The whole idea and the notion here is that we're investing in subcategories with faster growth, with very good profitability profiles. That's, that's really the strategy from an R&D perspective. You see that play out in, as Ivan talked about, the most 510(k) submissions last year, as well as approvals of all of our peer set. You see that in the improvements in our vitality index, which we expect to double yet again over our strat plan period. It really comes about if you think about our sub-segment.
You know, within our traditional hip and knee business, we're looking at things that are really related to tech and data, and that's evidenced by our relationship with Canary, with Microsoft, with Apple. Beyond that, we start to look in our existing SET portfolio, where we expect to double down from an organic perspective, but also from an inorganic perspective. That's really gonna be around CMFT, around sports and upper extremities. We think that there's also good opportunities to continue to round out our portfolio in lower extremities.
Beyond that, while we may not be looking organically to divest, beyond our existing portfolio, I think given the strength of our balance sheet, the strength of our execution, the stability in the markets we're seeing, we do think there could be over time a potential to diversify beyond our existing portfolio into spaces that, you know, offer, as I said, diversification, good growth, but also a potential platform to continue to roll up into. You know, we're excited both organically as well as inorganically on our opportunities for active portfolio management.
Okay. Then, within the SET business, you know, you're in some higher growth markets already. I think you've... It's, for me, it's still a little unclear, you know, kind of which of those businesses you have dedicated sales teams and, you know, where you're kind of expanding those sales teams. You know, within SET, if we kind of go, you know, sports, extremities, trauma, and then even extremities, if you kind of break that into upper and lower extremities, is do you have separate sales teams for each of those kind of businesses at this point or?
Yeah, I can maybe cover that briefly here. Maybe start with defining SET because I think that's a legacy acronym that no longer applies for our book of business. We have six businesses within SET. We got our upper extremity shoulder, we got a sports medicine, we got our trauma, we got our foot and ankle, we got our restorative therapies, and then we got our CMFT, craniomaxillofacial thoracic. Again, six different businesses, three letters in the acronym. People get confused. We are overindexing. We're focusing primarily on three of those six businesses. Upper extremities, sports medicine, and then CMFT. That's not to say we're not doing anything in the other three, but that's where the vast majority of time, money, and focus is going.
In the areas where we need to be specialized, we already are specialized. In the areas where we need to invest and amplify the number of reps, sports medicine example, that's happening. Doubling, even tripling the number of dedicated resources in that space. I would say right now, given the portfolio additions, the focus, the specialization is there. In the key businesses within SET, we have exactly what we need to compete. In parallel, we've created an ASC structure. We enlarged the number of people, or we hired more people in the contracting side of the business to make sure that along with innovation, we get the right contracts. I believe we're in a good position to compete in the areas that matter the most within SET.
Okay, got it. Since we're still on portfolio management, someone did just submit a question about, you know, what areas you're kind of interested in. You know, would you be interested in, you know, things like, outside of... You mentioned things outside of orthopedics, so, you know, like a cardiovascular, peripheral, et cetera, type company.
Yeah. We're not gonna get into therapeutic areas for competitive reasons. There's some more obvious adjacencies to our existing musculoskeletal portfolio than others. You know, diabetes, interventional cardiology are probably not high on the list. You know, the good thing is there are a number of strategic areas that you can get into beyond orthopedics that we think are quite attractive, so.
Okay, got it. Couple on the international business. You know, I guess I'll focus mainly on China just 'cause it's kind of been a sore spot for the industry given all the VBP, value-based purchasing. You know, can you just remind us where you are with VBP and kind of when you expect that to be fully baked into the numbers?
Yeah. you know, we did a lot around VBP back in 2021. As we moved through 2022, we effectively sunset the impact of VBP. We expect 2023 to be relatively clean from a VBP standpoint. we still think that that was the right decision. We believe that China is a large, high unmet need, under-penetrated market when it comes to orthopedics. Our first step was really to ensure that we were in a position to win and grow in that space. so that business is performing as expected. we're now working on the second level of that overall strategy, which is to continue to work on margin improvement in that particular market. So far so good.
We're happy with the results we've seen so far. Just as a reminder, you know, China now represents, you know, low single digits as an overall revenue contributor and probably even less on a profit. More room and opportunity for growth. But again, things are sort of transpiring as we expected.
Just given the degree of price declines that we've seen there, I mean, you're still able to make, you know, attractive margins and it makes sense to stay in that market?
Yeah. I mean, it is, it's still a profit-making business for us. It is below the company average, no doubt. The team has got a strategy in place to improve those margins over the next three to five years. We'll just have to see how that journey plays out. I'm confident they will be able to improve margins. We think, again, the strategy's playing out so far. Now if things change, we certainly could relook at it and make a different decision. Again, things are playing out as expected so far.
Okay. All right. I think we've got about five minutes left, so I've gotta get to a few financial questions here. Maybe just with regards to inflation, I mean, the, kind of economic data, CPI, PPI, I mean, it's been coming down. It's still, you know, above normal levels or pre-COVID levels.
Yeah.
You know, are you starting to see any of this in terms of your cost structure?
Yeah. There's a number of moving parts. Overall, we feel pretty good about how inflation fits into our original guidance for this year. Things have been relatively stable. There have been some moving parts inside of that. We are still seeing a little bit of some spot buying that's creating a little bit of pressure. We're seeing pricing on from some of our contractors go up for a variety of reasons. That's being largely offset by declines in energy costs. Right now, I'd say it's still early in the year, overall, we're seeing things as relatively stable.
If we do see things decline from a raw materials perspective, or continued declines on energy and freight, you could see that Potentially provide a tailwind to overall cost of goods over time. You know, similar to the cost increase, the cost decrease will get capitalized, so you'll see a lot of that tailwind sort of towards the end of the year or into 2024, if it should happen. The key takeaway right now is, things are stable, and I think that's a good first step.
Okay. Then, you know, you mentioned pricing, your kind of vendor pricing, but your own pricing, I think you've been trying to raise prices to your customers. Can you maybe talk about that and, you know, what if we ultimately get back to kind of normal inflation of around 2%, you know, do you think that the industry kind of reverts back to the typical price declines? You think this could be more of a permanent, you know, favorable change for pricing for the industry?
Yeah. You know, where the industry ultimately goes on price, it's always been incredibly competitive in a tough environment in MedTech or in life sciences just in general. We've put a number of things structurally in place that is gonna improve our overall pricing performance from where we've been historically. We're seeing that play out so far in the early part of 2023, which is great to see. We're gonna continue to drive that strategy. I think the more important thing for us is what we see in the marketplace is that if you improve outcomes, if you bring efficiency to the healthcare environment, you can still, you can still get value in your pricing.
What's exciting is about our innovation, our portfolio, and the ability to mix shift up into new products, that's where we think we've got a more exciting look. Make no mistake, we're definitely performing better on just the underlying price.
Okay. With regard to operating expenses, this will be my last question because we're almost out of time here. You know, can you leverage operating expense, particularly if you know, if the industry returns to kind of a more normal growth where hips and knees are growing 3% or 4%, let's say Zimmer is kind of like 4%, maybe 5%, and sustainably grow OpEx at a slower pace than that and drive leverage?
Yeah. Absolutely. You know, if we're in that sort of normalized growth, normalized market, 4%-5%, let's call it as an illustration on top line growth. You know, with stable gross margins, we see the ability to grow expenses slower than revenue. You know, those are effectively the building blocks to our margin expansion story. I can tell you, the ability to mix shift our investments to the most important spots of our portfolio and our company, it's in our DNA. I feel very good about our ability to do that, and therefore our ability to grow expenses slower than revenue.
Okay, great. I think we're at the 10:55 mark here, so we're gonna have to wrap up. Thank you for coming to our conference. Hope you have some good meetings.
Thank you, Mike. Great. Thanks, Mike.