A new lawsuit claims the orthopedics company knew that supply-chain problems were hurting sales but didn't tell investors in a timely fashion.

Nancy Crotti

An investor in Zimmer Biomet Holdings Inc. has filed a class-action lawsuit alleging that the orthopedic giant misled investors last year about its financial performance.

The lawsuit, filed Dec. 2 in U.S. District Court in South Bend, IN, claims that the company and three of its executives misrepresented Zimmer Biomet's hip and knee device sales outside the United States in the first two quarters of 2016.

The lawsuit stems from a nearly 14% stock tumble to $105.40 per share following the company's Oct. 31 announcement of its third-quarter 2016 financial performance. Although sales were up 4% year-over-year to $1.83 billion, they fell short of expectations.

CEO David Dvorak, a defendant in the suit, at the time cited problems transitioning the company's combined supply-chain infrastructure, which led to shortfalls in the availability of implants and instrument sets during the quarter. Zimmer and Biomet closed their $14 billion merger in June 2015.

"As a consequence, we underestimated demand for certain key cross-sell brands within our existing customer base leading to a depletion of our safety stocks and also affecting our ability to capitalize on new customer opportunities," said CFO Daniel Florin during an Oct. 31 earnings call transcribed by Seeking Alpha. Florin and company treasurer Robert Marshall are also named as individual defendants in the suit.

The Q3 news sent the stock down by $17.15 per share, or nearly 14%,  $105.40. Three months earlier, the company issued revenue guidance for the full-year 2016 of $7.680 billion to $7.715 billion, and diluted earnings per share guidance of $1.50 to $1.75.

"In response to this challenge, we have accelerated work to enhance certain aspects of our supply-chain infrastructure as we harmonize and optimize our sourcing, manufacturing and quality management systems," Dvorak added during the call.

That apparently wasn't enough for shareholder Rajesh M. Shah, who filed the suit on behalf of himself and an unspecified number of shareholders who bought shares between Sept. 7, 2016 and October 31, 2016. On Sept. 7, company treasurer Robert Marshall reportedly told attendees at a Wells Fargo Securities healthcare conference that Zimmer Biomet's hip and knee device sales that slowed in the U.S. were offset by an "uptick in EMEA," adding that sales in the Asia-Pacific region, including China, have been "extremely stable."

"When you take it all together, it leaves us with a good sense of confidence in the sense that the market is relatively stable," Marshall said, according to the lawsuit.

"The Company is aware that a purported shareholder of Zimmer Biomet Holdings, Inc. recently filed a securities class action complaint in the Northern District of Indiana," company spokeswoman Monica Kendrick said in email. "The Company believes that there is absolutely no merit to the allegations in the complaint and it intends to vigorously defend the litigation."

Nancy Crotti is a contributor to Qmed.

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