SAN FRANCISCO – Wall Street warmed a bit to Zimmer Biomet Holdings Inc., adding almost $2 billion to its market valuation on a fourth quarter earning pre-announcement at the J.P. Morgan Healthcare Conference in San Francisco. But the orthopedic giant still hasn't recovered all the ground it lost on disappointing third quarter earnings due to supply issue problems.

The Warsaw, Ind.-based company plunged from an almost $26 billion market cap to about a $20 billion valuation on earnings reported at the end of October. Now, it's at about $23 billion – so, a substantial, if partial, recovery.

The company attributed its fourth quarter rebound to improving sales growth in joint reconstruction and robust performance in its S.E.T. business, which encompasses surgical, sports medicine, foot and ankle, extremities and trauma products.

"We currently hold important market leading share positions in several large joint categories: knees, hips and shoulders and, in this regard, we hold anywhere from 30 percent to 30-plus percent market share on a global basis," said Zimmer Biomet President and CEO David Dvorak.

"We're equally enthusiastic about our opportunity to accelerate our top-line growth by expanding our share in some of these other product categories," citing S.E.T in particular.

Knee products accounted for $721 million in net sales in the fourth quarter, up 1.8 percent from a year earlier, while hip products gained 2.8 percent to $482 million. S.E.T. was up 6.6 percent in the fourth quarter to $430 million.

SOLVING THE SUPPLY CHAIN

Supply chain problems, part of the transition integrating Biomet, were cited in the third quarter as the reason for why Zimmer Biomet underwhelmed Wall Street, predicting flat quarterly revenues.

"Third-quarter revenue was below our expectations primarily due to execution issues within our large joint supply chain, which led to degradation in order fulfillment rates late in the quarter as well as our performance in dental," said the company's CFO Dan Florin.

Dvorak was upbeat that the supply chain problems had been resolved, as were the initial reactions from Wall Street analysts based on the better-than-expected fourth quarter revenue figures. We "continue to make good progress on harmonizing and optimizing our supply chain in our manufacturing and quality systems," he said to the J.P. Morgan audience.

The combined company has already wrought $225 million in net EBIT synergies; it continues to be on target for a total of $350 million in synergies by mid-2018, Dvorak said. The company expects the three-year integration process of Biomet to be complete in 2018.

Zimmer Biomet has $1.5 billion in debt, largely from the Biomet acquisition. It expects to reduce its leverage ratio to 2.5x in 2018. By 2020, the company expects to have more than $2 billion in annual free cash flow that it will direct toward continued M&A and/or shareholder dividends and share repurchases.

MAXIMIZING M&A

Zimmer noted that it launched 50 new products and solutions in 2016. Dvorak underscored four areas that the company will continue to invest in: joint preservation, motion preservation, personalized procedures, as well diagnostics and infection.

"Now, in each case our core focus is to enhance patient outcomes but uniquely because of our concentration on the musculoskeletal space, we're at the same time looking to address issues that reside within the episode of care and help through deeper partnerships address those potential risk areas," summed up Dvorak on the focus of innovation.

Zimmer Biomet was an active acquirer last year, making eight acquisitions for a total of $1.5 billion. It seems poised to continue in that vein this year; the company said in the J.P. Morgan breakout session that it expects about 10 percent of its 2017 growth to be organic.

Dvorak noted that last year's acquisition enabled the company to diversify in musculoskeletal health, or expand into other platform technologies.

"On musculoskeletal health we can make investments in technologies that we believe are going to be transferable and leverageable across all anatomical sites," said Dvorak. Amongst these deals he counted the LDR acquisition, as well as the purchases of Cayenne Medical and Compression Therapy Concepts.

He continued to highlight some of the platform deals including the MedTech, CD Diagnostics and Respond Well acquisitions, "So MedTech – I mentioned our intelligent instrumentation portfolio. This is the ROSA Robotics technology developed at the point of the acquisition with a focus on brain applications and spine applications."

"CD Diagnostics, we collaborated with them through a joint development arrangement going back years, developed a one-of-a-kind diagnostic test for periprosthetic joint infection. We believe that the know-how and capabilities of this group can solve other diagnostic challenges within the musculoskeletal space and we're going to invest to do just that."

He added, "Respond Well is a telerehabilitation platform, think about that in the context of signature solutions and you can see how that end-to-end offering comes together in a manner that can be very value-creating and attractive to the provider networks."

WHITHER MORE GROWTH?

In addition to M&A, Zimmer Biomet is working to advance its fastest-growing product categories with targeted R&D spending, as well as to improve its sales channel. Dvorak highlighted the S.E.T. and spine businesses, in particular as ripe for penetration by further Zimmer Biomet products.

On the sales force front, the company is willing to beef up its staffing in order to expand musculoskeletal sales, as well as the specific S.E.T. and spine markets.

"At this point in time we're in a great position to continue to expand our specialized sales forces so whether it's spine or trauma or sports medicine, we are building specialized sales forces across the globe to fully take advantage of the completeness of those product portfolios at this point in time. That was not so much the case historically with either the freestanding Zimmer or Biomet businesses," said Dvorak.

Zimmer Biomet reported 2016 preliminary revenue of $7.684 billion that's an increase of 28.1 percent, or 3.4 percent on an adjusted pro forma constant currency basis, over 2015. These figures finished slightly higher than company estimates based on solid fourth quarter results. The company also guided to the upper end of its existing EPS estimated range of $7.90 to $7.95.