Important disclosures appear on the last page of this report.

The Henry Fund

Henry B. Tippie School of Management

Luv Bhagria [luv-bhagria@uiowa.edu]

Zimmer Biomet Holdings (ZBH) September 17, 2017

Healthcare – Surgical Instrument Manufacturing Stock Rating SELL

Investment Thesis Target Price $121-123 We recommend a SELL rating for Zimmer Biomet Holdings, as the company struggles to innovate and efficiently complete the synergies mix of Biomet, leading to higher costs. Moreover, the supply chain inefficiencies compelled the CEO to step down. However, the acquisition of LDR Holding and Cayenne Medical, has opened the gates for more international growth opportunities and incremental revenues. Our model suggests an upside potential of merely 5.0% for Zimmer, with a target price range of $121-123. Drivers of Thesis

• Acquisition of Cayenne Medical and LDR provides growth: Both the acquisitions aim at increasing the revenues for potentially strong segments (Spine and Sports medicines). Moreover, it provides an added customer base and platform to tap into international markets. (Sports: CAGR 6.5% over next 5 years)

• New Products in Spine segment: With LDR’s acquisition in 2016, the firm is poised to have a strong foothold in the CDR (Cervical Disc Replacement) market (Spine: CAGR: 7.54% over next 5 years)

• Increasing geriatric population: An increasing aging population worldwide will further boost up the demand for pacemakers, diagnostic equipment, monitoring devices and other medical equipment, which will drive revenues and earnings over a longer term.

Risks to Thesis

• Lack of innovation and supply chain inefficiencies: Poor performance in first 2 quarters forced CEO to step down

• Delay in completing the synergy mix after Biomet merger: It has led to additional costs and lackluster performance in international markets

• Dental, Knee and Hip segments struggle to perform in Europe

Henry Fund DCF $121.65 Henry Fund DDM $74.47 Relative P/E Multiple $125.64 Price Data Current Price $115.47 52wk Range $95.63 – 133.49 Consensus 1yr Target $135.65 Key Statistics Market Cap (B) $23.35 Shares Outstanding (M) 202.195 Institutional Ownership 87.93% Five Year Beta 0.85 Dividend Yield 0.83% Est. 5yr Growth 8.24% Price/Earnings (TTM) 32.89 Price/Earnings (FY1) 13.15 Price/Sales (TTM) 3.00 Price/Book (mrq) 2.27

Profitability Operating Margin(mrq) 14.44% Profit Margin (mrq) 9.42% Return on Assets (TTM) 4.13% Return on Equity (TTM) 7.17%

Earnings Estimates Year 2014 2015 2016 2017E 2018E 2019E

EPS $4.26 $0.78 $1.53 $4.27 $4.37 $5.04

growth -7.4% -81.6% 95% 179% 2.4% 15.4%

12 Month Performance Company Description

Zimmer Biomet is a global leader in musculoskeletal healthcare, offering a wide range of orthopaedic, dental and other surgical products. The firms’ major products segments include Knees, Hips, Spine, Extremities and Trauma, Dental and Other products. Americas is the company’s largest operating segment, with U.S. accounting for 93% of the total sales in this region. In 2015, Zimmer bought the other medical device company, Biomet.

32.9

7.2 9.2

42.1

8.1 10.6

46.6

19.516.5

0

20

40

60

P/E ROE Net Margin

Data Source: Factset and Yahoo

ZBH Industry Sector

-26%

-16%

-6%

4%

14%

S O N D J F M A M J J A

ZBH S&P 500

Page 2

EXECUTIVE SUMMARY

We recommend a SELL rating for Zimmer Biomet as the firm is finding it hard to innovate in almost all the key segments. Moreover, the supply chain inefficiencies have been troubling the operations of international markets for the past many quarters. As a result, David Dvorak stepped down as the CEO of the company after 10 successful years. Firms’ Dental, Knee and Hips segment struggle with product-mix and stable growth, despite some key products’ strong performance.

However, the successful acquisitions of LDR Holding Corporation and Cayenne Medical have provided Zimmer some new hope. The spine and CMF segment looks to create dominance in the CDR segment, with some new and innovative products. Sports medicine segment might face incremental revenues with the addition of Cayenne’s markets and expertise.

As per our calculations, the intrinsic value of the company is $121.29, only 5% above the current market price of $115.47, putting the company’s rating as a sell.

COMPANY DESCRIPTION & ANALYSIS

Zimmer Biomet Holdings is a Warsaw, Indiana based company functioning in the Medical Appliances and Equipment industry. The company designs, manufactures and markets orthopaedic reconstructive products, sports medicines, trauma products, spine, dental implants and other related surgical products. In June 2015, the company acquired LVB Acquisition Inc., the parent company of Biomet Inc., thus forming the current company ‘Zimmer Biomet Holdings. Throughout 2016, the company invested in strategic ideas to broaden and diversify its musculoskeletal portfolio. Introduction of 50 new clinical technology solutions and services not only enhanced its core offerings but also expanded the presence across the market.

Customers: Zimmer’s primary customers include surgeons (Orthopaedic, neurosurgeons and oral surgeons), dentists, hospitals, healthcare dealers and other healthcare purchasing organizations.1

Products: Zimmer Biomet’s reports its sales by various products offered by them:

1. Knees 2. Hips

3. S.E.T (Sports medicine, surgical, extremities and trauma)

4. Spine and CMF (Craniomaxillofacial and Thoracic) 5. Dental 6. Other (bone cement and office based tech)

The revenue composition of the company by products (as of FY 2016) is shown below:

Source: SEC Filings, 10-K report ZBH

KNEES

Zimmer Biomet offers knee products that are used in total knee replacement surgeries, which typically includes a femoral component, a patella, a tibial tray and an articular surface.1 Apart from this, the company also offers products for partial knee replacement, early intervention and joint preservation products. This is the company’s largest segment accounting for nearly 36% of the net revenue. The revenue contribution by this segment has decreased over the past couple of years due to change in product mix after Biomet merger.

Competition: The knee segment has been showing tremendous growth in the Asia Pacific region, with stable revenues from Americas and EMEA markets. Zimmer Biomet is the leading provider of knee implants in the U.S. With approximately 40% market share in the industry, it dominates the industry leaving behind big companies such as Stryker (SYK), Johnson & Johnson (JNJ) and Smith and Nephew (SNN). Prior to the acquisition of Biomet, the company had 27% market share.

36%

24%

21%

6%

9%4%

REVENUE DECOMPOSITION (FY'16)

Knees

Hips

S.E.T

Dental

Spine & CMF

Other

Page 3

Data Source: SEC Filings, EDGAR

Most common people using the knee replacement surgery are Osteoarthritis patients. The proportions of people getting osteoarthritis is likely to increase due to overall aging of the population and the increasing rate of obesity. Prevalence of knee osteoarthritis is lower in men than women.3 Epidemiologists forecast the number of total prevalent cases of knee osteoarthritis to increase to 128 million by 2024 at a CAGR of 1.54% in 7 major markets combined (US, France, Germany, Italy, Spain, UK and Japan).4

Market Growth: According to Grand View Research, the knee implant market was nearly $9 billion in 2016, and is expected to increase to $12.4 billion by 2024, growing at a CAGR of 3.88%.5 The growth is majorly attributed to increasing demand in Asia Pacific, specifically due to rapidly expanding medical industry in India, China and Japan. However, North America is expected to dominate the knee implant market in size (currently 60% market share). Total knee replacement accounts for 75% of the surgeries and is expected to drive majority of the growth.

Strong growth in Americas; innovative and diverse offerings to maintain dominance

North America’s Total knee replacement market is estimated to grow at 2.2% CAGR through 2023.6 However, the company’s growth in this segment is facing a slowdown in U.S., while performing strongly in International markets. The company is trying to diversify its knee offerings with differentiated new technologies to complement the other product portfolio. As a result, we estimate the segment to face slowdown and grow at 0.8% in 2017. With robotic surgeries witnessing increased presence, coupled with acceleration in international

expansion, Zimmer’s knee surgeries segment is expected to grow at a faster pace in the latter half of our forecasted period.

Source: ZBH 10-K SEC filings, Henry Fund Model Projection

Some of the other small players in this segment are: Aesculap Implants Systems, Exactech Inc. (EXAC), Medacta, MicroPort Scientific (China), ConMed (CNMD), Kinamed, Inc., ConforMIS (CFMS), and OMNIlife science, Inc.

HIPS

Accounting for 24% of the total sales in FY 2016, hips replacement surgeries segment is the company’s 2nd biggest product line. These surgeries include procedures like replacing the head of the femur and the socket portion of the pelvis of the natural hip.

Competition: Like Knees segment, Hips surgeries segment is also witnessing robust growth in Asia Pacific (10.1% year-over-year growth in 2016, pro-forma basis).1

however, this growth was 0.7% y-o-y in Americas and -2.8% in EMEA on a pro-forma basis.

Data Source: SEC Filings, EDGAR

Most common reasons for hip replacement surgeries are the prevalence of osteoarthritis and trauma to hips. The demand for hip replacement implants has increased in the

40%

22%

21%

13%

4%

Market Share- Knee replacement

Zimmer

Johnson & Johnson

Stryker

Smith & Nephew

Others

2014 2015 2016 2017E 2018E 2019E

Revenue

($ Mil)1,895 2,277 2,752 2,774 2,829 2,900

Growth 1.8% 20.1% 20.9% 0.8% 2.0% 2.5%

Knees Segment

27%

20%19%

9%

1%

24%

Market Share- Hip Replacement

Zimmer

Johnson & Johnson

Stryker

Smith & Nephew

Exactech

Others

Page 4

last few years primarily due to the rising hip injuries and the subsequent demand for surgeries for the required correction.

Market Growth: According to Transparency Market Research, the global hip replacement surgeries market was roughly $6.8 billion in 2016, and is estimated to grow to $9.1 billion by 2024, growing at a CAGR of 3.9%.7 The growth will be driven by increasing number of adults above the age of 65, favorable reimbursement scenario, increasing health awareness among people and technological advancements in the artificial hip implant market.

Complementary products to drive growth, offset by pricing pressure

We forecast the Hips segment to increase at a net CAGR of 2.32% till the end of our forecast horizon (FY 2025), slower than the industry growth. This is because most of the growth is estimated to come from Asia Pacific, where Zimmer has yet to create its foothold. We believe that addition of some new technologically advanced products and their demand in the emerging economies will drive the growth for Zimmer in the coming years, partially offset by some pricing pressures.

Source: ZBH 10-K SEC filings, Henry Fund Model Projection

Some of the other small players in this segment are: B. Braun Melsungen AG (Germany), Exactech Inc. (EXAC), Medacta, MicroPort Scientific (China), DJO Global Inc., and Corin (U.K.).

S.E.T (Sports, Extremities and Trauma)

S.E.T segment includes:1

• Surgical products for surgeries

• Sports medicine for repair of soft tissue injuries (knee and shoulder)

• Biologics products for early intervention for joint preservation; support surgical procedures

• Foot and ankle, and extremities products for arthritic conditions and fractures

• Trauma products to stabilize damaged bones and surrounding tissues for natural healing

This segment accounts for slightly more than 21% in revenues for the company. Due to a wide range of products covered and a robust volume/mix, this product segment has shown consistent growth over the last 5 years. Even though, the segment grew more than 30% in revenues for the past 2 years, but it was primarily due to Biomet’s merger. On a pro-forma basis, the segment grew 4.7% y-o-y, helped by the addition of Cayenne Medical’s soft-tissue repair and reconstructive solutions business.1 In May 2016, Zimmer completed the acquisition of Cayenne Medical, an Arizona-based medical device company that specializes in sports medicines.8 This acquisition not only adds Cayenne’s sports medicine expertise to Zimmer’s business, but also provides them with an opportunity to expand its minimally invasive innovations.

Continued strength of this segment in Asia Pacific region, and growing emphasis on sales force specialization, makes this segment one of the key growth drivers for Zimmer in the next 5 years.

Competition: Below is a table of market share in Sports medicine according to Smith & Nephew’s website. The remaining 22% market share is owned by companies such as Zimmer Biomet (ZBH), ConMed (CNMD), Wright Medical Technology (WMGI), DJO Global and Otto Bock Healthcare (Germany). After the acquisition of ArthroCare in May 2014, Smith & Nephew created a strong sports medicine portfolio gaining immense market share.

Data Source: SEC Filings, Smith & Nephew, 20-F, FY 2016

However, the Trauma and Extremities is clearly dominated by Johnson & Johnson’s Depuy Synthes subsidiary. Below is a table of market share presented by Smith & Nephew in their annual report.

2014 2015 2016 2017E 2018E 2019E

Revenue

($ Mil)1,326 1,533 1,868 1,896 1,934 1,992

Growth -0.3% 15.6% 21.8% 1.5% 2.0% 3.0%

Hips Segment

Companies Market Share

Arthrex 29-33%

Smith & Nephew 20-24%

Johnson & Johnson 12-16%

Stryker 9-13%

Others Balance

Sports Medicine

Page 5

Data Source: SEC Filings, Smith & Nephew, 20-F, FY 2016

Arthrex recently introduced a new biceps implant system to reduce the occurrence of post-operative humeral fracture.9 Moreover, they signed an exclusive agreement with Orisis to develop a cartilage repair solution based on cellular regenerative technology.9

On the other hand, DePuy Synthes’ (Subsidiary of Johnson & Johnson) acquisition of BioMedical Enterprises in May 201612, as well as Stryker’s acquisition of Stanmore Implants Worldwide Limited in April 2016,13 strengthened their hold in the Extremities and Trauma products segment.

Market Growth: According to Grand View Research report, the global sports medicine market is estimated to grow from $6.4 billion in 2016 at a CAGR of 7.7% through 2024.9 The major markets to focus will be U.S., Europe and Japan, which are estimated to contribute 80% of the revenue for the orthopaedic market. However, Asia Pacific is forecasted to be fastest growing market. The growth will be provided by increasing demand for minimally invasive surgeries and technological advancements in joint repair.9

Source: Grand View Research, Sports medicine industry

Knee-based applications are expected to dominate the segment’s growth, driven by increased occurrence of knee injuries in intense sports.9 Knee injuries are the most common injuries in some of the popular sports such as soccer, basketball, cycling, and running. Additionally, another report from Grand View Research mentions that the global trauma and extremities market is expected to increase at a CAGR of 7.9% through 2024, owing to rising urbanization, increasing road accidents and rising demand for improved healthcare.10

Huge potential to explore Sports medicine after Cayenne acquisition

Clearly, Zimmer Biomet has a huge gap to cover in S.E.T business and it can be presented as an opportunity for the company. While combination of Cayenne Medical’s business might strengthen the sports medicine portfolio, increased demand for comprehensive Total shoulder system and the Nexel Total Elbow might drive extremities business. On the other hand, steady sales in the trauma products section will contribute to the long-term growth.

Due to strong presence of S.E.T products in the U.S. and company’s plans to expand internationally, we believe the segment will grow at a CAGR of 6.50% through 2025, with revenue contribution of accounting for 27% of the net sales by the end of our forecast horizon. The company has merely 15% of revenues coming from Asia Pacific. Thus, we expect this segment to grow at 3.2% in FY 2017, and gradually pick up pace as more expansion occurs.

Source: ZBH 10-K SEC filings, Henry Fund Model Projection

Spine and CMF

The company’s spine products are used in providing solutions for back and neck pain caused by degenerative conditions, deformities or traumatic injury to the spine.1

Whereas, the CMF business provides face and skull reconstruction options and other products used for stabilizing bones of the chest for healing, generally after open-heart surgeries.

CompaniesMarket

Share

Johnson & Johnson 44-48%

Stryker 23-27%

Zimmer Biomet 9-13%

Smith & Nephew 6-10%

Others Balance

Trauma and Extremities

2014 2015 2016 2017E 2018E 2019E

Revenue

($ Mil)863 1,215 1,645 1,698 1,808 1,944

Growth 1.9% 40.7% 35.5% 3.2% 6.5% 7.5%

S.E.T Segment

Page 6

After Biomet’s merger, this segment has witnessed stability and strength in terms of both revenue growth and demand. The segment accounted for nearly 9% of the company’s net sales in FY 2016, up from 4.5% before the merger.1 On a pro-forma basis, this segment grew nearly 13.5% y-o-y in FY 2016 with a volume-mix of more than 15%.1 The growth was driven by addition of new innovative and differentiated technologies, namely Mobi-C cervical disc prosthesis. This product is now the most widely covered device for one and two level cervical disc replacement by commercial health insurers in United States.14 Moreover, the continued expansion of the CMF and thoracic segment positions the segment for robust growth in the coming 5 years.

In June 2016, the company announced its plans to acquire LDR Holding Corporation, a global medical device company specializing in the design and commercialization of proprietary surgical technologies, for a transaction value of $1 billion.16 This acquisition not only adds a premier spine platform to its portfolio but positions the company to capitalize on cervical disc replacement segment. Moreover, it offers Zimmer with a great opportunity to leverage LDR customer base and commercial channels.

Competition: Medtronic (MDT) and Johnson & Johnson’s DePuy Synthes covers nearly two-thirds of this market.

Data Source: SEC Filings, EDGAR

However, it is a fast-changing space, where innovation drives the growth and help them to achieve market share. With Zimmer Biomet coming up with advanced products and technologies in this segment, we might see them eating up some share from other companies.

Market Growth: According to the research by a group Markets and Markets, the global spinal implants market is estimated to be worth $17.27 billion by 2021, growing at a CAGR of 5.3%, with emerging markets such as India and China being the attractive markets.15 Rising healthcare expenditures, improving technologies in spinal surgeries, increasing geriatric and obese population, and growing demand for minimally invasive spine surgeries will be some of the key drivers for this segment.

LDR acquisition to help create significant dominance in CDR market

We forecast the Spine and CMF segment to continue its strong growth through addition of innovative products and through accelerated expansion in India. Moreover, the ongoing plan to accelerate the Vitality Spinal Fixation Systems will help the company to capitalize on the industry growth. LDR acquisition has given the company a great foothold in the CDR market, and a significant opportunity to leverage LDR’s customer base. As per our estimates, the segment is poised to grow at a CAGR of 7.54% through the forecast period, accounting for roughly 12% of net sales.

Source: ZBH 10-K SEC filings, Henry Fund Model Projection

Dental

This division has three primary product offerings: (a) dental reconstructive implants: for people without teeth or are missing one or more teeth, (b) dental prosthetic products: natural restoration to resemble the original teeth, and (c) dental regenerative products: soft tissue and bone rehabilitation.

The company’s dental segment has been facing tough conditions due to restructuring of the dental sale organization in certain European markets. On a pro-forma basis, the segment witnessed a 5.9% y-o-y decline in FY 2016.1 In Q2 of the fiscal year 2017, the company’s dental

Medtronic, 36.4%

Johnson & Johnson,

29.1%

Stryker, 15.1%

Zimmer Biomet,

5.0%

Nuvasive, 4.9%

Globus Medical,

4.2%

K2M Group, 1.8%

RTI Surgical, 0.6%

Others, 3.0%

Spine Market Share (FY 2016)

2014 2015 2016 2017E 2018E 2019E

Revenue

($ Mil)207 404 662 728 801 881

Growth 2.4% 95.2% 63.7% 10.0% 10.0% 10.0%

Spine and CMF Segment

Page 7

sales decreased 5.7%. However, U.S. dental sales growth was positive with a new General Manager leading the business. The company believes that the global dental implant market is still attractive, with a mid-single digit CAGR profile, and remains positive to reposition the dental portfolio.17 Dental segment accounted for 5.6% of net sales in FY 2016.1

Competition: Some of the big players in the dental implant market are as:

• Straumann Holding AG: headquartered in Switzerland

• Danaher Corp (DHR): brands include Nobel Biocare, Alpha-bio Tec, Implant Direct

• Dentsply Sirona (XRAY): brands include Astra Tech and MIS

• Henry Schein: brands include Camlog and BioHorizons)

Even though, the dental equipment market is segmented in all continents, Europe dominates the market in terms of market share. Some other players in the market include: Planmeca OY (Finland), Carestream health, A-dec Inc., AMD Lasers, Biolase Inc. (BIOL), Ivoclar Vivadent AG (Liechtenstein) and Midmark Corporation.

Market Growth: According to Markets and Markets research, the global dental equipment market is estimated to grow at a CAGR of 4.9% to reach roughly $7.5 billion by 2021, with Asia Pacific witnessing majority of growth. Growing dental diseases, technological innovation, and growing demand for dentistry in emerging markets are forecasted to be the major growth drivers.18 On the other

hand, the high prices of these equipment might play as a deterrent for some companies trying to expand to low-income regions.

Absence of any differentiated product; International expansion might be a big hurdle

Even though the company has a positive outlook with this segment, we believe that the strong position of other foreign companies in the international markets will play as a huge obstacle for Zimmer to expand in those regions, especially in Europe. Moreover, the price sensitive customers in Low-income regions will add on to the pricing pressure.

With no innovative product offering in this segment that can gain market share and create demand in future, we estimate the dental segment’s revenue contribution to decline to 4.7% by 2025 from 5.6% in 2016. We forecast the segment to grow at 1.99% CAGR through 2025, making it the smallest segment for Zimmer.

Source: ZBH 10-K SEC filings, Henry Fund Model Projection

Others

This category includes products for bone healing/bonding and other office based technology products, such as:

• PALACOS Bone Cement

• SpinalPak Spinal Fusion Simulator

It accounts for roughly 4.3% of the company’s net sales.

Competition: Zimmer competes with Depuy Synthes (Johnson & Johnson), Smith & Nephew and Stryker in the orthopaedic bone cement market.

Market Growth: According to a report by Grand View research, the global orthopaedic bone cement market is estimated to grow at a CAGR of 5.27% to reach $1.1 billion by 2025.19 Increasing number of orthopaedic surgeries and rising geriatric population will be the key growth drivers for this small market.

23%

19%

15%10%

7%

26%

Global Market Share- Implant Dentistry

Straumann Group

Danaher

Dentsply

Zimmer Biomet

Henry Schein

Others

2014 2015 2016 2017E 2018E 2019E

Revenue

($ Mil)243 336 428 432 445 454

Growth 1.5% 38.3% 27.5% 1.0% 3.0% 2.0%

Dental Segment

Page 8

With stable revenue coming from bone cement products, we estimate the segment to grow slightly lower than the industry wide growth due to product mix with other lower growth products. According to our estimates, the segment might grow at a CAGR of 5.22% through 2025, reaching $520 million in revenues.

Source: ZBH 10-K SEC filings, Henry Fund Model Projection

Geographic Sales: The company has three major operating regions:

Source: SEC Filings, 10-K report ZBH

CHANNELS:

The company markets/sells its products through 3 channels:

• Direct channel accounts: direct to healthcare institutions ($6.15 bil)

• Through stocking distributors and healthcare dealers ($1.46 bil)

• Direct to dental labs and practices ($0.08 bil)

Source: SEC Filings, 10-K report ZBH

Seasonality: The company also mentions in its annual report that the business faces a seasonality. Most of the products are utilized in the elective procedures, which declines during the summer months and witness increase during the latter end of the year.1

FORECASTING

Revenue

Revenue forecasts for the company are done based on product-wise growth prospects.

Source: ZBH 10-K SEC filings, Henry Fund Model Projection

We estimate the company’s revenues to grow at a CAGR of 4.00% through FY 2025 to reach $10.94 billion. Separate revenue forecasting for each segment has been discussed earlier in each segment analysis.

2014 2015 2016 2017E 2018E 2019E

Revenue

($ Mil)139 233 329 345 363 381

Growth -2.4% 68.4% 40.9% 5.0% 5.0% 5.0%

Other Segment

62%

23%

15%

SALES (FY'16) BY GEOGRAPHY

Americas

EMEA

Asia Pacific

Direct Channel

accounts, 80%

Stocking distributors

& healthcare dealers, 19%

Dental labs, 1%

SALES DISTRIBUTION BY CHANNELS

-

2,000.0

4,000.0

6,000.0

8,000.0

10,000.0

2015 2016 2017E 2018E 2019E 2020E 2021E

Zimmer Biomet Revenue Decomposition

Knees Hips S.E.T Dental Spine & CMF Other

Page 9

Margins

COST OF GOODS SOLD

The cost of product sold as a percentage of sales averaged around 18% before the Biomet merger. However, the figure took a massive jump to 24.5% of the sales after the acquisition of Biomet in 2015, primarily due to significant change in the product mix lowering down the average selling price. We expect the figure to drop down to the historical average of 19.5-20% of the sales by the end of our forecast horizon, as the company focuses to reduce this cost through channel optimization and efficient supply chain management.

Source: ZBH 10-K SEC filings, Henry Fund Model Projection

R&D EXPENSES

R&D as percentage of sales for Zimmer started declining before the Biomet merger from 5% to 4%. The figure jumped back to 4.76% after the merger, as more focus shifted to the new products introduced to the portfolio. Bigger companies generally tend to be stable in their research and development expenses. However, to remain technologically relevant in the market, the company must focus more on new operating markets, and thus, spend more on R&D. Specially, for Zimmer, we believe the company plans to focus its R&D expenses on Spinal and S.E.T products, with stable expenditure on Knee and Hips segments. Thus, we estimate R&D as percentage of sales to remain at the current levels for the next 3 years.

Source: ZBH 10-K SEC filings, Henry Fund Model Projection

SG&A EXPENSES

Historically, SG&A expenses as percentage of sales has declined from 42% of the sales in 2009 to 37.5% of sales in 2014. After the Biomet merger, the figure jumped to above 38%, to accommodate for the addition of a new business. As a company grows larger, we estimate these expenses to stabilize, with a downward bias. Thus, we estimate the figure to drop down steadily to 37.2% of the sales over the next few years, as they realize more efficiencies from synergy initiatives.

Source: ZBH 10-K SEC filings, Henry Fund Model Projection

PROFIT MARGINS

Operating margins of the company increased from 21.72% in FY 2010 to 22.2% in FY 2014, but dropped to 10.75% in 2016 primarily due to additional operational costs incurred after the Biomet, LDR and Cayenne Medical acquisitions. We forecast the operating margins to jump back to its historical average of 21% by FY 2021, as the company

3.60%

3.80%

4.00%

4.20%

4.40%

4.60%

4.80%

5.00%

2014 2015 2016 2017E 2018E 2019E 2020E 2021E

R&D as % of Sales

25.00%

27.00%

29.00%

31.00%

33.00%

35.00%

37.00%

39.00%

2014 2015 2016 2017E 2018E 2019E 2020E 2021E

SG&A as % of Sales

Page 10

focuses more on the sales of premium products in Spinal segment. This increase will eventually trickle down to net profit margins, and thus we estimate the profit margins to rise to 14.13% in FY 2021. Lower costs as part of optimizing synergies and higher revenues from premium priced products will drive these margins.

Source: ZBH 10-K SEC filings, Henry Fund Model Projection

RECENT DEVELOPMENTS

Misses Q2 FY 2017 Earnings Estimate

Zimmer Biomet reported its 2nd quarter financial result for FY 2017 on July 27, 2017, posting 1.1% y-o-y increase in the revenues to $1.95 billion, with 4.9% y-o-y decrease in sales in Europe. The revenues increased 2.3% y-o-y in Americas and 5.3%% in Asia Pacific market.17 Excluding the 240bps contribution from LDR Holding’s acquisition, the revenues decreased 1.3% y-o-y. Adjusted Diluted EPS came at $2.08, missing street estimates by 2 cents. The result summary is shown below:

Source: ZBH 10-Q SEC filing, Q2 2017 EDGAR

The company updated its FY 2017 revenue growth and expects it to be in range of 1.8% to 2.7%, whereas it

expects its revenue growth for third quarter of FY 2017 to be in range of -0.5% to +1%. We estimate the FY 2017 revenues to grow 2.5% y-o-y and GAAP diluted EPS to be $4.27, in line with the company guidance.17

Change in Leadership

In July 2017, David C. Dvorak stepped down from the Chief Executive Office/President post after 10 years of service. Zimmer’s Chief Financial Officer, Daniel P. Florin has been appointed as the Interim Chief Executive Officer.20 It is rumored that this decision came because of the company’s poor performance in the last couple of quarters, due to supply chain inefficiencies. Interim CEO Florin quoted that “While production output increased at our legacy Biomet manufacturing site in Warsaw, Indiana during the second quarter, certain brands did not achieve targeted production levels as quickly as anticipated.”

Recent Acquisitions

RespondWell Telerehabilitation Platform: In October 2016, the company announced the acquisition of this award winning Telerehabilitation technology which aims at providing a clinician-supervised post-surgical physical therapy regimen.21 The new value-based reimbursement, where the providers must provide better care to patients well after the discharge, will compel them to seek out for such at-home therapy options.

LDR Holding Corporation: In July 2016, Zimmer completed the acquisition of LDR Holding Corporation, a medical device company that specialized in the design of novel and proprietary surgical technologies for spine disorder patients, for a transaction value of $1 billion.22 This acquisition aimed at improving the company’s product portfolio, especially the Spine segment. Moreover, this deal not only allows them to have a strong foothold in the CDR (Cervical Disc Replacement) market, but provides them with a great platform to expand commercial channels and leverage LDR’s customer base.

Cayenne Medical: In May 2016, the company completed the acquisition of Arizona-based company, Cayenne Medical Inc. that specializes in sports medical technology. This deal was aimed at strengthening the company’s S.E.T.23 product segment. Cayenne offers Zimmer a strong market presence in a market dominated by some of the big players.

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

2014 2015 2016 2017E 2018E 2019E 2020E 2021E

Margins Forecast

Operating Margins Net Margins

Q2 2017 Q2 2016 Change

Knees 680.4$ 697.0$ -2.4%

Hips 469.8$ 477.2$ -1.6%

S.E.T 422.8$ 412.2$ 2.6%

Dental 110.4$ 118.0$ -6.4%

Spine and CMF 194.0$ 145.8$ 33.1%

Other 77.0$ 83.8$ -8.1%

Total 1,954.4$ 1,934.0$ 1.1%

Zimmer Biomet

Page 11

INDUSTRY TRENDS

Changes in Regulations

Healthcare Bill

The Republicans’ proposal of a new healthcare plan, which aims at repealing and replacing the Patient Protection and Affordable Care Act (PPACA or ACA), faced another setback in July 2017.

Senators John McCain, Lisa Murkowski, and Susan Collins voted against the senate’s proposed healthcare bill in July 2017, bringing it to an abrupt halt.24 According to Congressional Budget Office (CBO), the bill would have left 15 million American uninsured in 2018, with 16 million more by 2026. A lot of medical groups representing doctors in some medical specialties opposed this bill, as they believed the bill would harm the youngest American population. Although the ultimate future of this legislation is still unknown, it is noteworthy that if the medical device tax is not suspended permanently, it will hurt the bottom line of several medical device companies. Other issue to look out for is the healthcare reimbursement plans.

The only risk for the medical device companies is the delay and uncertainty regarding the implementation of the new healthcare regulation. With Republicans looking for a pseudo new healthcare bill, which will account for repeal of some minor conditions in Obamacare, we believe the repeal of Medical Device tax would be the priority. This might keep the investors on the edge.

Physician-Hospital Consolidation

Over the last couple of years, the Medicare program has encouraged the physicians to join forces with hospitals, to improve healthcare efficiency. However, this integration gives the consolidated customer stronger power to dictate prices from suppliers. On the other hand, this trend is negatively affecting the medical devices and equipment industry. Individual physicians have more freedom to purchase medical equipment than when they are a part of a hospital. As hospital networks gain higher pricing power, the order size increases and customer base decreases for medical device firms, further diminishing their margins.

With uncertainty regarding healthcare bill and changing employment dynamics, the basic struggle for the Zimmer Biomet will be to safeguard its operating margins and come up with new and innovative products. We estimate the company to handle this situation efficiently, with consistent margins and greater operational efficiency, primarily due to appropriate product mix and international market diversification.

MARKETS AND COMPETITION

Medical Equipment and Devices industry is a highly regulated and diversified industry, characterized by continued innovation and improvements. It is a defensive industry in terms of revenue and share price volatility. It is less economically sensitive and generally has inelastic demand for its goods and products. Some of the products can be extremely expensive and can face downward pricing pressures in low-income regions internationally.

Threat of new entrants is medium to low, primarily due to high initial capital requirements for research and development, as well as heavy regulations. Patent protection further limits new competition in the industry. Thus, a new company can enter the industry through a new innovative product. Most of the firms in the industry invest heavily on their R&D, and still faces declining returns on those investments, as the markets for several products saturate quickly. As a result, requirement for large economies of scale to sustain margins, as well as fast rate of technological changes pose huge challenge for new competitors.

Power of Suppliers in the industry is low, due to large number of players in that space with high intense competition among themselves. Most of the surgical tools and equipment, such as catheters, syringes and scalpels, require relatively inexpensive raw materials. However,

Page 12

some of the raw materials required for complex surgical tools, such as those required in Spinal surgeries, and Knee and Hip replacement surgeries can be expensive. The key material for orthopaedic implants is steel. IBIS World forecasts the price of steel to drop at a CAGR of 1.4% in the coming years, forcing the suppliers to lower their prices.25 Moreover, forward integration for suppliers is tough in an already competitive environment.

Power of Buyers is low to moderate. In terms of demand, this industry has fairly stable demand curve, with hospitals and other healthcare providers accounting for majority of the sales. With continuous demand for new and advanced medical devices and supplies by hospitals and physicians and large number of hospitals, the buyers have limited power to bargain. Due to continued innovation, most of the products are available through few players in the market. However, there is a potential risk from buyers due to physician-hospitals consolidation, which might lead to price sensitivity. In the Medical Device industry, it is vital that hospitals and physicians continue to be reimbursed appropriately, as they may be less likely to recommend procedures or devices that seem expensive.

Due to continuous innovation and improvements in technology, there is significant threat of substitutes. For instance, new surgical procedure or a competitive drug for the treatment can minimize the demand for a specific device. Thus, the firms not only need to stay on top of their competitors within the industry but stay aware of advancements within the whole healthcare ecosystem. However, an improved substitute generally comes at higher cost.

Peer Comparisons

Zimmer’s diverse product offerings imply that they compete with different players in different segments. Some of the competitors for Zimmer in this industry are as follows:

Some of the companies that Zimmer directly competes with based on its products are: Johnson & Johnson (Depuy Synthes), Stryker Corp., Smith & Nephew, Danaher Corp., and NuvaSive Inc.

Data Source: Bloomberg

Johnson & Johnson (Depuy Synthes): JNJ

Johnson & Johnson is a giant healthcare company with only a portion of sales coming from the medical devices segments. Strong cash position, wide international reach and formidable R&D focus makes it a strong player in the market. Zimmer Biomet competes with Depuy Synthes subsidiary of Johnson & Johnson in the Knee and Hip replacement surgeries segment, where Zimmer is the industry leader with 40% and 27% market share

Market Cap

($ Bil)

Revenue

(FY'17E)

EPS

(FY'17E)

P/E (ttm)P/E (Fwd

Yr 1)

Johnson & Johnson 351.95$ 75.83 $6.02 22.75 21.8

Medtronic Plc. 108.56$ 29.45 $3.41 27.64 23.5

Abbott Laboratories 89.24$ 26.51 $1.61 72.49 31.8

Danaher Corporation 58.86$ 18.05 $3.50 28.16 24.0

Stryker Corp 52.89$ 12.30 $5.46 32.12 25.8

Becton, Dickinson and Co. 45.29$ 12.07 $6.61 56.57 30.2

Boston Scientific Corp 38.76$ 8.95 $0.81 51.75 34.8

Baxter International Inc. 34.23$ 10.50 $1.92 38.81 32.5

Edwards Lifesciences Corp. 23.76$ 3.39 $3.71 34.43 30.2

Smith & Nephew 15.80$ 4.80 $1.56 18.74 20.8

Hologic, Inc. 10.97$ 3.05 $2.38 14.05 16.4

Varian Medical 9.66$ 2.72 $3.09 35.00 34.6

Integra Lifesciences Holding 4.03$ 1.13 $0.65 63.32 79.5

NuVasive Inc. 3.10$ 1.10 $1.16 92.09 52.6

Globus Medical Inc. 2.90$ 0.63 $1.22 27.16 24.5

Conmed Corp. 1.39$ 0.78 $0.51 92.72 97.2

ROE (ttm)Net

Margins

Dividend

Yield

R&D as %

of Sales (3

yr avg)

Johnson & Johnson 22.6% 22.5% 2.4% 12.3%

Medtronic Plc. 8.1% 13.8% 2.1% 8.2%

Abbott Laboratories 4.1% 5.0% 2.0% 6.8%

Danaher Corporation 8.8% 12.6% 0.6% 5.9%

Stryker Corp 17.8% 14.2% 1.2% 6.3%

Becton, Dickinson and Co. 7.7% 6.5% 1.4% 6.4%

Boston Scientific Corp 11.7% 9.0% N/A 11.3%

Baxter International Inc. 10.2% 8.9% 0.9% 6.0%

Edwards Lifesciences Corp. 26.5% 22.2% N/A 15.1%

Smith & Nephew 21.3% 18.5% 0.8% 4.9%

Hologic, Inc. 31.2% 25.6% N/A 8.1%

Varian Medical 22.4% 8.7% N/A 7.8%

Integra Lifesciences Holding 7.8% 6.3% N/A 5.7%

NuVasive Inc. 4.8% 3.5% N/A 4.8%

Globus Medical Inc. 12.8% 18.1% N/A 7.0%

Conmed Corp. 2.7% 2.0% 1.5% 3.9%

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respectively, compared to 22% and 20% for Depuy Synthes.

The company also competes with Depuy Synthes in the Spine and Sports, extremities and trauma (S.E.T) segment, where Johnson and Johnson’s dominance is clear. In Feb 2015, Depuy Synthes acquired Olive Medical Corporation, a Utah-based company specializing in Minimally Invasive Surgeries (MIS), which not only enhanced their sports medicine portfolio, but also allowed them to enter the arthroscopic visualization market.35

JNJ’s margins are close to 22%, way more than Zimmer Biomet, primarily because they of favorable product/mix from other lower cost segments. As a result, Johnson & Johnson’s ROE is close to 22.5%, as compared to 8% for Zimmer Biomet.

R&D as percentage of sales in higher for JNJ with 12.3% of sales, as compared to 4.42% for Zimmer Biomet.

Stryker Corp. (SYK)

As a result of healthcare reform challenges and pressure by hospitals to drive down implant prices, Zimmer reacted by buying its chief rival Biomet in 2015. However, Stryker’s pursuit of a merger with Smith & Nephew didn’t materialize and since then, it pursued small acquisitions. However, most of the company’s promotional spending is dedicated towards its surgical robot, the Mako Robot, which has been released this year for use in total knee procedures. On the other hand, Zimmer Biomet acquired Medtech SA, the maker of ROSA robotic device, in July 2016, and made a statement to tap into the lucrative surgical robotics market after staying on the sidelines for a while. However, there has been no fruitful outcome from those innovations.

Stryker’s forward one-year PE ratio is 32.12, which is much above our estimates of 27.1 for Zimmer. Stryker’s net margins are above Zimmer’s last two-years net margins, but we expect Zimmer’s margins to jump back to its historical average.

Stryker acquired orthopaedic oncology firm, Stanmore implants for $52 million in May 2016,13 strengthening its joint replacement business and Extremities-Trauma business. Stryker competes with Zimmer in almost all the product segments, beating them in sports, extremities and trauma segment, as well as in Spine surgery segment.

However, as mentioned before, Zimmer dominates the Knee and Hip replacement segment.

R&D as percentage of sales in higher for SYK with 6.3% of sales, as compared to 4.42% for Zimmer Biomet.

Smith & Nephew (SNN)

Smith & Nephew is a British-based multinational medical equipment company headquartered in London. It competes with Zimmer Biomet in almost all the segments (Except Dental). Whereas, Smith & Nephew has more market share in the sports medicine segment, Zimmer dominates the industry in all other segments.

Although, its net margins of 18.5% is above the industry average, its R&D expenses as percentage of sales is in-line with that of Zimmer Biomet. Smith & Nephew’s Lucrative ROE is another metric that makes them a strong competitor to Zimmer Biomet.

Ratio Comparison

Zimmer’s has a current P/E multiple of 32 which is much lower than the industry’s P/E ratio of 42.10. However, this industry has large number of smaller businesses with large P/E ratios, driving up the industry average. Moreover, the higher PE multiple is due to the merger of Biomet driving down Zimmer’s earnings. A lower P/E (both TTM and forward) compared to its peers and overall industry implies that the company is undervalued with a potential to grow in value in the coming fiscal year.

Forward PE ratio pf 27.1 for Zimmer is estimated to be below its peer average of 29.4.

Margins

On the other hand, Zimmer has a ROE of 8%, which is in-line with industry average of 8.1%, but below its peer average of 13.1%. The company’s net margins for the FY 2016 are 3.98%, which is much below the industry average of 10.6%, and below the peer average of 12.3%. The margins for this industry as a whole is lower than the sector average of 16.5%, primarily due to low margin conventional equipment segment. Other industries in healthcare sector include pharmaceutical and biotechnology firms with high premium products.

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We expect Zimmer’s margins to jump once the synergies are incorporated into the business, to align with the industry average.

SALES BY GEOGRAPHY

Acquisition of LDR and Cayenne not only added revenue stream to the company’s pipeline, but also opened several paths for international expansion. Zimmer’s international revenues account for 37.5% of the net sales. As one of the top firms in the industry, having a strong international hold as compared to some of its other peers bodes well with the firms’ future growth and prospects.

Data Source: SEC Filings, EDGAR

ECONOMIC OUTLOOK

Increasing global GDP

According to IMF, economic activity is estimated to gain momentum in 2017, after a sluggish growth in 2016. Advanced economies are expected to grow by 1.90% in 2017 and 2.00% in 2018.26 The key driving factor will be the economic growth in emerging markets and developing economies (EMDE), which is estimated to be roughly 4.5% in 2017. GDP growth will translate to increased demand for better healthcare facilities, such as technologically advanced medical equipment for diagnosis and therapies. Much of the economic outlook depends on the new US administration and its policies with foreign nations. U.S. GDP grew at an annual rate of 3.0% in the second quarter of 2017 compared to 1.2% annualized growth rate in the first quarter of 2017.27 The rise in GDP in 2nd quarter

indicates an upturn in the private inventory investment and federal government spending. Real Gross Domestic Income (GDI) rose 2.9% in the 2nd quarter, compared to 2.7% increase in the 1st quarter of 2017.

Unemployment Data

According to Bureau of Labor Statistics, the unemployment rate in US has declined steadily over the last 5 years and currently sit at 4.4%, as of August 2017.28

The number of unemployed people stayed at 7.1 million. Employment in August increased in manufacturing. Construction, professional and technical services, mining, and Healthcare (compared to numbers in July). Statista research estimates the unemployment rate to remain close to 4.4% in 2017, indicating a steady rise in labor costs. However, the estimate forecasts the rate to increase gradually to 5% by the end of 2020. If ACA is repealed, the access to health insurances for low-income citizens will be much tougher. Increasing unemployment will only add fuel to the fire.

Interest Rates

Although, interest rates remain relatively low if compared to the historical figures, the fed interest rates have been rising over the past 12 months. The current Federal funds rate stand at 1.25%29, and the Fed expects to raise the interest rate once more in 2017 to 1.5%. Moreover, there

Company

Revenue

from

International

Segment

Abbott Laboratories 68.89%

Baxter International Inc. 58.09%

Johnson & Johnson 47.40%

Edwards Lifesciences Corp. 45.13%

Becton, Dickinson and Co. 44.78%

Boston Scientific Corp 43.25%

Medtronic Plc. 43.00%

Zimmer Biomet 37.50%

Stryker 27.00%

Hologic 21.10%

NuVasive 13.55%

Page 15

have been indications of raising the rates to 2% in 2018. The fed funds rate control short-term interest rates, including the LIBOR, banks’ prime rate and credit card rates. Rising interest rates will lead to decline in the M&A activity in the healthcare sector, as cost of borrowing will be higher. The current inflation rate stands at 1.94% as of August 2017. The federal reserve is aiming at a 2% inflation rate, but with interest rates rising, this figure seems a tough task.

CATALYSTS FOR GROWTH

Increasing global population

World population is expected to increase to 8.5 billion by 2030 from the current figures of 7.3 billion, reflecting a CAGR of 1.02%. However, the interesting fact is that Africa will account for more than 50% of the population growth over the next 34 years.30 It is evident that since most of the growth will occur in developing nations, where healthcare facilities are still in its embryonic stage, there will be huge demand for quality healthcare facilities in the coming few years. This provide a solid growth opportunity for healthcare firms in these markets. After LDR’s acquisition, Zimmer strengthened its international presence in most of the emerging markets.

Aging Population and Life Expectancy

Among the increasing global population, one of the fastest growing demographic is people aged 65+. Not only are they estimated to increase in number, but are also projected to increase in proportion. In most of the developed nations, older people demand greater medical attention and more healthcare services.31 Population above 65 years of age, who is more prone to have a knee and hip replacement, is the target demographic for most products at Zimmer Biomet. According to US Census Bureau, the number of adults aged 65 or more is estimated to increase at an average annual rate of 3.3% from 45.8 million in 2016 to 55.62 million by 2022.31 Moreover, they estimate people aged 65 and more to represent around 12% of the total population in 2030, up from 8.5% in 2015.32

Additionally, technological advancements in the healthcare sector over the past few decades resulted in increase in average life expectancy rates worldwide. Both factors translate to increase in number of people that would require access to healthcare.

Obese Population

Additionally, increasing cases of obesity in world will be another key driver. World health Organization reports that worldwide obesity has doubled since 1980. According to Centers for Disease Control and Prevention, more than that 36.5% of US adults are obese, leading to conditions like heart disease and type 2 diabetes.32 Worldwide, 39% of adults aged 18+ were overweight in 2014, out of which 13% were obese.33 This may lead to higher cases of trauma, knee and hip issues, and spinal surgeries. More than 60% of Zimmer’s sales are tied to obese patients.

Zimmer’s primary driver is their plan to capture new untapped segments in international markets. With Cayenne Medical’s and LDR’s acquisitions, Zimmer not only opened itself for lucrative markets, but also gained wider access to new international markets. Countries in South-East Asia and Mid-Africa provide a huge market for increasing the customer base. In terms of expansion areas, emerging markets and developing nations offer large growth opportunities for healthcare device firms, but offer challenges in terms of pricing in low income regions. Increasing GDP, rising standards of living, more purchasing power per capita and increasing demand for better healthcare facilities will drive growth in these areas.

Finally, increasing public and private health expenditures, along with favorable regulations will be other key driving factors for healthcare equipment industry.

INVESTMENT POSITIVES

• Healthcare Equipment and Devices is a defensive industry and is economically inelastic most of the times, due to indispensable nature of the service it offers to people. In this period of uncertainty regarding the

Page 16

economic outlook, healthcare is one of the best bets in terms of investments

• Zimmer’s diversified product line and comparatively strong international presence provides stability to revenues and margins

• Synergy efficiencies after the Biomet merger are gaining momentum. LDR and Cayenne acquisition not only helped in getting incremental revenues from a stable and lucrative segment, but also paved a way for strong international expansion

• Highly valued brand in a price-sensitive medical device industry where price premiums are positively correlated to brand relationships

• Aging population and increasing cases of Knee and Hip surgeries to increase demand for Zimmer’s devices

• Spine and S.E.T segments to thrive with the advancement of technology and innovation

INVESTMENT NEGATIVES

• Nearly 33% of Zimmer’s revenues come from International markets. Foreign exchange rate fluctuations will negatively affect the margins.

• High debt to create potential cash flow risks

• Delay in realizing synergies to drive the margins lower in the coming years

• Uncertain pricing regulations depending on the new healthcare bill

VALUATION

Revenue projections for FY 2017 are based on individual segmental revenue forecast and company’s guidance. (See Company Description and Analysis, Page: 2-9) Due to strong performance of new introductions in the Spine and CMF segment, as well as stable increase in the sports medicine revenues after the acquisition of Cayenne Medical, partially offset by lower growth in key Knee & Hips segment, we estimate the revenues to grow at a CAGR of 3.82% through FY 2025.

Capital expenditure forecast is based on company’s long-term guidance to focus more on new innovative products in spine and CMF, as well as S.E.T (Sports, extremities and

trauma) segment. We estimate the capital expenditure to fluctuate between the range 3.6% to 4% of the total revenues over the next few years.

Our calculations are based on three varying valuation methods – Discounted Cash Flow, dividend discount, and relative multiple (P/S). Differences in these methods revealed a model range of $74-125. However, the dividend discount model is insignificant as the company plans to decrease its payout ratio, and it may not correctly translate to intrinsic value. The relative P/E multiple valuation price target is almost as accurate as the DCF model with proper selection of the peers. Since most of them have different product mix in international and domestic markets, the relative P/S model reveals an inaccurate judgement of company’s intrinsic value. Therefore, we considered DCF price as the basis of our thesis.

Our DCF model gives a price estimate of $121.65, implying an upside of roughly 5.5% from the current market price.

WACC Calculations

RISK FREE RATE

To determine the risk-free rate, we used the 30-year Treasury bond yield, which stood at 2.72%, as of September 18, 2017.

Cost of Debt

To find cost of debt, we looked at Moody’s credit rating for Zimmer’s new note offerings, which was Baa3, implying a default premium of 1.60%. We then added that default premium to a risk-free rate (30-year treasury rate), which was currently 2.72%. This gave us the pre-tax cost of debt of around 4.32%.

BETA

A raw Bloomberg Beta of 0.85 was used for our calculations.

COST OF EQUITY

To determine cost of equity, we used a CAPM model. Our model incorporates a market risk premium of 4.8%, which reflects our expectations of forward-looking market conditions. This resulted in 6.80% cost of equity.

WACC

Page 17

Our weighted average cost of capital, through a CAPM model was 5.64%.

DCF/EP Models

Our model assumes a 2.66% terminal growth rate for NOPLAT. Our DCF price of $121.29 implies an upside of 5% from the current stock price. This is justified by incremental income resulting from growth in spine and CMF due to introduction of new products. Moreover, the company looks strong in capturing majority of the growth in international markets, compared to their relative peers.

Relative P/E Multiple

Zimmer’s relative P/E (Forward 1-Yr) multiple of 27.1 is below the industry average of 29.4, implying a stock price of $125.64. We believe that incremental increase in sales in Spine and CMF, as well as S.E.T segment has not yet translated into corresponding increase in the stock price of the company.

Sensitivity Analysis

Sensitivity analysis of our DCF model suggests that the price estimate is highly sensitive to 3 key metrics: beta, CV NOPLAT growth, and SG&A as % of sales. We used a beta of 0.85 for our model. With 0.77 as our beta, we estimate the company’s stock price to reach $138.71.

We used a 2.66% CV growth for NOPLAT. However, increasing it to 3.40% drives our price estimate to $149.47. According to our estimates, SG&A as % of sales should gradually increase to 36% of the sales. However, increasing the SG&A expenses to 40% of the sales, will result to 15% drop in our price estimate to $102.60. With such high SG&A as % of sales, the company’s intrinsic value remains highly sensitive to it.

On the other hand, it is moderately sensitive to cost of debt, risk-free rate, marginal tax rate and depreciation rate forecast.

REFERENCES

1. Zimmer Biomet Holdings, SEC filing 10-K, December 31, 2016

2. Arthritis foundation, www.arthritis.org 3. US National Library of Medicine, National Institutes of

Health, Knee osteoarthritis prevalence, www.ncbi.nlm.nih.gov

4. EpiCast report, Osteoarthritis market, Feb 24, 2016 5. Knee implant market size to reach $12.4 billion by 2024,

October 2016, Grand View Research 6. North American Total Knee Replacement Market,

MediPoint Research, May 2017

7. Hip Replacement Implant Market, Transparency Market Research, February 2017

8. Zimmer Biomet completes acquisition of Cayenne Medical, May 2016, Zimmer Biomet Investor Relations

9. Sports Medicine Market, March 2017, Grand View Research

10. Trauma and Extremities Market, October 2016, Grand View Research

11. Road deaths predicted to rise in developing countries, The World Bank

12. Depuy Synthes Announces acquisition of BioMedical Enterprises, May 2016, www.depuysynthes.com

13. Stryker buys orthopaedic oncology firm Stanmore Implants for $52 million, May 2016, www.meddeviceonline.com

14. Zimmer Biomet, Earnings Transcripts, Q4 2016, Seeking Alpha

15. Spinal implants and surgical devices market, November 2016, Markets and Markets Research

16. Zimmer Biomet To Acquire LDR To Enhance Innovation

And Growth Of Spine Business, June 2016, Zimmer

Investor Relations

17. Zimmer Biomet Q2 2017 Earnings transcripts, Seeking

Alpha

18. Dental Equipment Market, July 2016, Markets and

Markets

19. Orthopaedic Bone Cement Market, May 2017, Grand

View Research

20. Zimmer Biomet Announces Leadership Transition,

Zimmer Biomet Investor Relations, news, July 2017

21. Zimmer Biomet Acquires RespondWell®

Telerehabilitation Platform, Zimmer Biomet Investor

Relations, October 2016

22. Zimmer Biomet To Acquire LDR, Zimmer Biomet

Investor Relations, June 2016

23. Zimmer Biomet Completes Acquisition of Cayenne

Medical, Zimmer Biomet Investor Relations, May 2016

24. GOP Obamacare repeal bill fails in dramatic late-night

vote, www.cnn.com, July 2017

25. IBIS World, Medical Devices 2016

26. IMF- World Economic Outlook January 2017

Page 18

27. US Real GDP estimates, Bureau of Economic Analysis, August 30, 2017

28. Unemployment Rate, Bureau of Labor Statistics, September 18, 2017

29. Current Federal Reserve Interest Rates,

www.thebalance.com

30. UN Department of Economic and Social Affairs- World Population forecasts

31. U.S. Census Bureau- “An Aging World: 2015” 32. IBIS World: Number of adults aged 65 and older 33. Adult Obesity Facts, CDC Report 34. Obesity and Overweight, World Health Organization,

June 2016 35. Depuy Synthes Companies Acquires Olive Medical

Corporation, Feb 2015, www.jnj.com

IMPORTANT DISCLAIMER

Henry Fund reports are created by student enrolled in the Applied Securities Management (Henry Fund) program at the University of Iowa’s Tippie School of Management. These reports are intended to provide potential employers and other interested parties an example of the analytical skills, investment knowledge, and communication abilities of Henry Fund students. Henry Fund analysts are not registered investment advisors, brokers or officially licensed financial professionals. The investment opinion contained in this report does not represent an offer or solicitation to buy or sell any of the aforementioned securities. Unless otherwise noted, facts and figures included in this report are from publicly available sources. This report is not a complete compilation of data, and its accuracy is not guaranteed. From time to time, the University of Iowa, its faculty, staff, students, or the Henry Fund may hold a financial interest in the companies mentioned in this report.

Page 19

APPENDIX: 1

CompaniesKnee Revenues

(FY'16)

Zimmer Biomet (ZBH) 2,752$

Johnson & Johnson (JNJ) 1,524$

Stryker (SYK) 1,490$

Smith & Nephew (SNN) 932$

Others 265$

Global Knee Implant Market 9,284$

US Market Share 60%

US Knee Implant Market 5,570$

Data Source: SEC filings, Grand view research

CompaniesHips Revenues

(FY'16)

Zimmer Biomet (ZBH) 1,868$

Johnson & Johnson (JNJ) 1,361$

Stryker (SYK) 1,283$

Smith & Nephew (SNN) 597$

Exactech (EXAC) 47$

Others 1,598$

Global Hip Implant Market 6,800$

US Market Share 45%

US Hip Implant Market 3,087$

Data Source: SEC filings, Transparency Market research

CompaniesSpine Revenues

(FY'16)

Medtronic (MDT) 4,850$

Johnson & Johnson (JNJ) 3,880$

Stryker (SYK) 2,009$

Zimmer Biomet 662$

NuvaSive (NUVA) 647$

Globus Medical (GMED) 564$

K2M Group Holdings (KTWO) 237$

RTI Surgical (RTIX) 85$

Others 406$

Global Spine Surgical Market 13,340$

Data Source: SEC filings, Markets and Markets Research

Zimmer Biomet HoldingsRevenue Decomposition

Fiscal Years Ending Dec 31 2014 2015 2016 2017E 2018E 2019E 2020E 2021ETotal Segment Revenues: Knees 1,895.2 2,276.8 2,751.9 2,773.9 2,829.4 2,900.1 2,972.6 3,032.1 Hips 1,326.4 1,533.0 1,867.9 1,895.9 1,933.8 1,991.9 2,071.5 2,144.0 S.E.T 863.2 1,214.6 1,645.4 1,698.1 1,808.4 1,944.1 2,084.0 2,234.1 Dental 242.8 335.7 427.9 432.2 445.1 454.0 463.1 472.4 Spine & CMF 207.2 404.4 662.0 728.2 801.0 881.1 951.6 1,008.7 Other 138.5 233.3 328.8 345.2 362.5 380.6 401.6 425.7 Total Revenue 4,673.3 5,997.8 7,683.9 7,873.5 8,180.3 8,551.8 8,944.5 9,316.9

% Revenues: Knees 40.6% 38.0% 35.8% 35.2% 34.6% 33.9% 33.2% 32.5% Hips 28.4% 25.6% 24.3% 24.1% 23.6% 23.3% 23.2% 23.0% S.E.T 18.5% 20.3% 21.4% 21.6% 22.1% 22.7% 23.3% 24.0% Dental 5.2% 5.6% 5.6% 5.5% 5.4% 5.3% 5.2% 5.1% Spine & CMF 4.4% 6.7% 8.6% 9.2% 9.8% 10.3% 10.6% 10.8% Other 3.0% 3.9% 4.3% 4.4% 4.4% 4.5% 4.5% 4.6%Total % Revenue 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

Total Segment Revenue Growth: Knees 1.8% 20.1% 20.9% 0.8% 2.0% 2.5% 2.5% 2.0% Hips -0.3% 15.6% 21.8% 1.5% 2.0% 3.0% 4.0% 3.5% S.E.T 1.9% 40.7% 35.5% 3.2% 6.5% 7.5% 7.2% 7.2% Dental 1.5% 38.3% 27.5% 1.0% 3.0% 2.0% 2.0% 2.0% Spine & CMF 2.4% 95.2% 63.7% 10.0% 10.0% 10.0% 8.0% 6.0% Other -2.4% 68.4% 40.9% 5.0% 5.0% 5.0% 5.5% 6.0%Total Revenue Growth 1.1% 28.3% 28.1% 2.5% 3.9% 4.5% 4.6% 4.2%

Total Geographic Revenues: Americas 2,594.2 3,662.4 4,802.2 4,960.3 5,153.6 5,387.7 5,635.0 5,869.7 EMEA 1,269.5 1,417.8 1,730.4 1,732.2 1,799.7 1,881.4 1,967.8 2,049.7 Asia Pacific 809.6 917.6 1,151.3 1,181.0 1,227.0 1,282.8 1,341.7 1,397.5 Total Revenue 4,673.3 5,997.8 7,683.9 7,873.5 8,180.3 8,551.8 8,944.5 9,316.9

% Geographic Revenues: Americas 55.5% 61.1% 62.5% 63.0% 63.0% 63.0% 63.0% 63.0% EMEA 27.2% 23.6% 22.5% 22.0% 22.0% 22.0% 22.0% 22.0% Asia Pacific 17.3% 15.3% 15.0% 15.0% 15.0% 15.0% 15.0% 15.0%Total % Geographic Revenue 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

Total Geographic Revenue Growth: Americas -1.0% 41.2% 31.1% 3.3% 3.9% 4.5% 4.6% 4.2% EMEA 4.7% 11.7% 22.0% 0.1% 3.9% 4.5% 4.6% 4.2% Asia Pacific 2.4% 13.3% 25.5% 2.6% 3.9% 4.5% 4.6% 4.2%Total Revenue Growth 1.1% 28.3% 28.1% 2.5% 3.9% 4.5% 4.6% 4.2%

Zimmer Biomet HoldingsIncome Statement

Fiscal Years Ending Dec 31 2014 2015 2016 2017E 2018E 2019E 2020E 2021E(values and shares In millions)Sales 4,673.3 5,997.8 7,683.9 7,873.5 8,180.3 8,551.8 8,944.5 9,316.9 Cost of products sold (Excluding D&A) 959.5 1,425.6 1,878.4 1,614.1 1,636.1 1,710.4 1,744.2 1,816.8 Depreciation 268.6 375.0 466.7 464.8 465.0 475.8 495.7 523.9 Intangible Asset Amortization 92.5 337.4 565.9 587.4 568.2 554.0 552.3 546.8 Gross Profit 3,352.7 3,859.8 4,772.9 5,207.2 5,511.0 5,811.7 6,152.3 6,429.4 Operating Expenses: Asset Amortization (SG&A) 14.7 - 36.7 - - - - - Research and development expenses 187.4 268.8 365.6 376.4 388.5 401.6 412.7 424.9 SG&A expenses 1,750.7 2,284.2 2,932.9 2,834.5 3,061.8 3,200.1 3,332.2 3,449.7 Special Items 341.1 831.8 611.8 472.4 490.8 513.1 536.7 559.0 Total Operating Expenses 2,315.4 3,392.5 3,947.0 3,683.2 3,941.2 4,114.9 4,281.6 4,433.6 Income from Operations 1,037.3 467.3 825.9 1,524.0 1,569.9 1,696.8 1,870.7 1,995.9 Other expenses, net 46.7 36.9 71.3 52.6 65.7 64.4 70.5 70.2 Interest income 11.9 9.4 2.9 2.9 3.0 3.1 3.1 3.1 Interest expense 63.1 286.6 357.9 315.5 318.0 260.2 205.7 168.3 Income before income taxes 939.4 153.2 399.6 1,158.8 1,189.2 1,375.3 1,597.6 1,760.5 Provision from income taxes 220.2 7.0 95.0 301.3 309.2 357.6 415.4 457.7 Net Earnings 719.2 146.2 304.6 857.5 880.0 1,017.7 1,182.2 1,302.8 Less: Net loss attributable to noncontrolling interests (1.1) (0.8) (1.3) (1.6) (1.8) (2.1) (2.3) (2.2)Net Income for Zimmer Biuomet Holdings 720.3 147.0 305.9 859.0 881.8 1,019.8 1,184.5 1,304.9

Net income total per common share: Basic ($) 4.26 0.78 1.53 4.27 4.37 5.04 5.84 6.41Weighted avg no. of shares outstanding Basic 169.0 187.4 200.0 201.3 201.7 202.3 202.8 203.4

Annual Dividends 0.88$ 0.88$ 0.96$ 0.97$ 1.09$ 1.16$ 1.34$ 1.41$ Dividend payout Ratio 21% 112% 63% 23% 25% 23% 23% 22%Dividends paid 148.7 164.9 192.0 195.0 220.5 234.6 272.4 287.1

Zimmer Biomet HoldingsBalance Sheet

Fiscal Years Ending Dec 31 2014 2015 2016 2017E 2018E 2019E 2020E 2021E(figures in $ millions)ASSETSCurrent Assets: Cash and cash equivalents 1,083.3 1,459.3 634.1 2,868.4 3,287.1 4,527.8 5,067.3 5,826.2 Short-term investments 612.5 164.6 - - - - - - Accounts Receivables 912.1 1,446.5 1,604.4 1,576.0 1,654.4 1,749.2 1,847.6 1,934.7 Inventories 1,193.3 2,254.1 1,959.4 1,963.3 2,066.8 2,193.6 2,347.6 2,491.8 Prepaid expenses and other current assets 317.2 529.2 465.7 472.4 493.3 514.4 538.7 560.8 Deferred income taxes 194.9 - - - - - - - Total Current Assets 4,313.3 5,853.7 4,663.6 6,880.1 7,501.7 8,985.0 9,801.1 10,813.5

Property, plant and equipment, at cost 3,407.1 4,427.9 4,671.5 5,137.2 5,649.3 6,212.5 6,831.8 7,512.9 Less accumulated depreciation 2,121.8 2,365.3 2,633.6 3,098.4 3,563.5 4,039.3 4,535.0 5,058.9 Property, plant and equipment, net 1,285.3 2,062.6 2,037.9 2,038.8 2,085.8 2,173.2 2,296.8 2,454.0 Goodwill 2,514.2 9,934.2 10,643.9 10,643.9 10,643.9 10,643.9 10,643.9 10,643.9 Other Intangible assets, gross 1,411.5 9,888.3 10,481.7 10,185.0 10,333.4 10,259.2 10,296.3 10,277.7 Less accumulated amortization 808.0 1,142.0 1,696.3 2,283.7 2,851.9 3,405.9 3,958.2 4,505.0 Other Intangible assets, net 603.5 8,746.3 8,785.4 7,901.3 7,481.5 6,853.3 6,338.1 5,772.7 Other assets 941.7 563.8 553.6 567.3 589.4 616.1 644.4 671.3 Total Assets 9,658.0 27,160.6 26,684.4 28,031.3 28,302.2 29,271.5 29,724.4 30,355.3

LIABILITIES AND STOCKHOLDERS' EQUITYCurrent Liabilities: Accounts payable 145.2 284.8 364.5 373.5 388.0 405.7 424.3 442.0 Income taxes payable 80.3 147.2 183.5 93.1 95.6 110.5 128.4 141.5 Other current liabilities 798.5 1,185.9 1,257.9 1,129.5 1,195.7 1,273.5 1,354.9 1,442.1 Current portion of long-term debt - - 575.6 1,590.2 1,301.1 1,670.6 1,366.9 1,192.9 Total Current Liabilities 1,024.0 1,617.9 2,381.5 3,186.3 2,980.4 3,460.4 3,274.4 3,218.4 Deferred income taxes 45.9 3,150.2 3,030.9 2,751.4 2,490.5 2,218.8 1,918.1 1,578.7 Other long-term liabilities 610.9 1,005.7 936.3 951.2 1,029.7 1,113.8 1,170.6 1,226.1 Long term debt 1,425.5 11,497.4 10,665.8 10,700.2 10,689.9 10,574.0 10,536.9 10,482.2 Total Liabilities 3,106.3 17,271.2 17,014.5 17,589.1 17,190.6 17,366.9 16,900.1 16,505.5

Stockholders' Equity: Common Stock and Paid-in Capital 4,333.4 8,198.3 8,371.6 8,481.5 8,591.3 8,701.2 8,811.0 8,920.9 Retained Earnings 8,362.1 8,347.7 8,467.1 9,129.6 9,789.1 10,572.3 11,482.1 12,497.7 Accumulated other comprehensive income 38.1 (329.0) (434.0) (434.0) (434.0) (434.0) (434.0) (434.0) Treasury Stock (6,183.7) (6,329.1) (6,735.8) (6,735.8) (6,835.8) (6,935.8) (7,035.8) (7,135.8)Total Stockholders' Equity (Zimmer Biomet) 6,549.9 9,887.9 9,668.9 10,441.2 11,110.6 11,903.7 12,823.3 13,848.9 Non-Controlling interests 1.8 1.5 1.0 1.0 1.0 1.0 1.0 1.0 Total Stockholders' Equity 6,551.7 9,889.4 9,669.9 10,442.2 11,111.6 11,904.7 12,824.3 13,849.9

Total Liabilities and Stockholders' Equity 9,658.0 27,160.6 26,684.4 28,031.3 28,302.2 29,271.5 29,724.4 30,355.3

Zimmer Biomet HoldingsCash Flow Statement(Figures in $ millions)Fiscal Years Ending Dec 31 2014 2015 2016Operating Activities:Net Income 719.2 146.2 304.6 Adjustments to reconcile net income: Depreciation 268.6 375.0 466.7 Intangible Asset Amortization 92.5 337.4 565.9 Asset Amortization (SG&A) 14.7 - 36.7 Biomet merger consideration compensation expense - 90.4 - Share-based compensation 49.4 46.4 57.3 Excess income tax benefit from stock option exercises (11.1) (11.8) - Inventory step-up 5.4 317.8 323.3 Gain on divestiture of assets - (19.0) - Debt extinguishments - 22.0 53.3 Deferred income tax provisions (90.5) (164.0) (153.2)Changes in operating assets and liabilities Income taxes (13.2) 244.7 (10.9) Receivables (40.4) (56.1) (137.8) Inventories (164.6) (205.4) 76.4 Accrued payable and accrued liabilities 116.1 (252.0) 28.7 Other assets and liabilities 114.4 (21.8) 21.2 Net cash provided by Operating Activities 1,060.5 849.8 1,632.2

Investing Activities: Additions to instruments (197.4) (266.4) (345.5) Additions to other property, plant and equipment (144.9) (167.7) (184.7) Purchases of investments (1,350.9) (214.8) (1.5) Sales of investments 1,282.2 802.9 286.2 Proceeds from divestiture of assets - 69.9 - Biomet acquisition, net of cash acquired - (7,760.1) - LDR acquisition, net of cash acquired - - (1,021.1) Business combination investments, net of cash acquired (54.3) - (421.9) Investments in other assets (4.1) (21.7) (3.0)Net cash used in Investing Activities (469.4) (7,557.9) (1,691.5)

Financing Activities: Proceeds from senior notes (250.0) 7,628.2 1,073.5 Proceeds from term loans - 3,000.0 750.0 Redemption of senior notes - (2,762.0) (1,250.0) Payments on term loan - (500.0) (800.0) Net proceeds under revolving credit facilities 2.3 0.1 (33.1) Dividends to shareholders (145.5) (157.1) (188.4) Proceeds from employee stock compensation plans 284.7 105.2 136.6 Restricted stock withholdings (7.7) (11.1) (6.3) Excess income tax benefit from stock option exercises 11.1 11.8 - Debt issuance costs (64.1) (58.4) (10.0) Repurchase of common stock (400.9) (150.0) (415.5)Net cash used in financing activities (570.1) 7,106.7 (743.2)Effect of exchange rate changes (18.3) (22.6) (22.7)Net increase (decrease) in cash and cash equivalents 2.7 376.0 (825.2)Cash and cash equivalents, beginning of period 1,080.6 1,083.3 1,459.3 Cash and cash equivalents, end of period 1,083.3 1,459.3 634.1

Zimmer Biomet HoldingsCash Flow Statement(Figures in $ millions)Fiscal Years Ending Dec 31 2017E 2018E 2019E 2020E 2021EOperating Activities:Net Income 857.5 880.0 1,017.7 1,182.2 1,302.8 Adjustments to reconcile net income: Depreciation 464.8 465.0 475.8 495.7 523.9 Amortization 587.4 568.2 554.0 552.3 546.8 Changes in Deferred income taxes (279.5) (260.9) (271.7) (300.6) (339.4)Changes in operating assets and liabilities Accounts receivable 28.4 (78.5) (94.8) (98.3) (87.1) Inventories (3.9) (103.5) (126.8) (154.0) (144.2) Prepaid expenses and other assets (6.7) (20.9) (21.1) (24.3) (22.1) Accounts payable 9.0 14.6 17.6 18.6 17.7 Income tax payable (90.4) 2.4 15.0 17.9 13.1 Other current liabilities (128.4) 66.2 77.8 81.3 87.2 Other long-term liabilities 14.9 78.6 84.1 56.8 55.5 Net cash provided by Operating Activities 1,453.1 1,611.3 1,727.6 1,827.6 1,954.2

Investing Activities: CAPEX (465.7) (512.1) (563.2) (619.3) (681.1) Change in intangible assets, net 296.7 (148.3) 74.2 (37.1) 18.5 Short-term investments - - - - - Decrease (increase) in other assets (13.7) (22.1) (26.8) (28.3) (26.8)Net cash used in Investing Activities (182.7) (682.6) (515.8) (684.7) (689.4)

Financing Activities: Change in current portion of long-term debt 1,014.6 (289.1) 369.5 (303.8) (174.0) Long term debt and other obligations 34.4 (10.3) (116.0) (37.0) (54.7) Proceeds from issuance of common stock 109.9 109.9 109.9 109.9 109.9 Repurchase of common stock - (100.0) (100.0) (100.0) (100.0) Dividends paid (195.0) (220.5) (234.6) (272.4) (287.1) Changes in Accumulated other comprehensive income - - - - - Net cash used in financing activities 963.9 (510.0) 28.9 (603.4) (505.9)

Net increase (decrease) in cash and cash equivalents 2,234.3 418.7 1,240.7 539.5 758.9 Cash and cash equivalents, beginning of period 634.1 2,868.4 3,287.1 4,527.8 5,067.3 Cash and cash equivalents, end of period 2,868.4 3,287.1 4,527.8 5,067.3 5,826.2

Zimmer Biomet HoldingsCommon Size Income Statement

Fiscal Years Ending Dec 31 2014 2015 2016 2017E 2018E 2019E 2020E 2021E(values In millions)Sales 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%Cost of products sold (Excluding D&A) 20.53% 23.77% 24.45% 20.50% 20.00% 20.00% 19.50% 19.50%Depreciation 5.75% 6.25% 6.07% 5.90% 5.68% 5.56% 5.54% 5.62%Intangible Asset Amortization 1.98% 5.63% 7.36% 7.46% 6.95% 6.48% 6.17% 5.87%Gross Profit 71.74% 64.35% 62.12% 66.14% 67.37% 67.96% 68.78% 69.01%Operating Expenses: Asset Amortization (SG&A) 0.31% 0.00% 0.48% 0.00% 0.00% 0.00% 0.00% 0.00% Research and development expenses 4.01% 4.48% 4.76% 4.78% 4.75% 4.70% 4.61% 4.56% SG&A expenses 37.46% 38.08% 38.17% 36.00% 37.43% 37.42% 37.25% 37.03% Certain items 0.46% 0.13% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Special Items 7.30% 13.87% 7.96% 6.00% 6.00% 6.00% 6.00% 6.00%Total Operating Expenses 49.55% 56.56% 51.37% 46.78% 48.18% 48.12% 47.87% 47.59%Income from Operations 22.20% 7.79% 10.75% 19.36% 19.19% 19.84% 20.91% 21.42% Other expenses, net 1.00% 0.62% 0.93% 0.67% 0.80% 0.75% 0.79% 0.75% Interest income 0.25% 0.16% 0.04% 0.04% 0.04% 0.04% 0.03% 0.03% Interest expense 1.35% 4.78% 4.66% 4.01% 3.89% 3.04% 2.30% 1.81%Income before income taxes 20.10% 2.55% 5.20% 14.72% 14.54% 16.08% 17.86% 18.90%Provision from income taxes 4.71% 0.12% 1.24% 3.83% 3.78% 4.18% 4.64% 4.91%Net Earnings 15.39% 2.44% 3.96% 10.89% 10.76% 11.90% 13.22% 13.98%Less: Net loss attributable to noncontrolling interests -0.02% -0.01% -0.02% -0.02% -0.02% -0.02% -0.03% -0.02%Net Income for Zimmer Biomet Holdings 15.41% 2.45% 3.98% 10.91% 10.78% 11.93% 13.24% 14.01%

Zimmer Biomet HoldingsCommon Size Balance Sheet

Fiscal Years Ending Dec 31 2014 2015 2016 2017E 2018E 2019E 2020E 2021E

ASSETSCurrent Assets: Cash and cash equivalents 23.18% 24.33% 8.25% 36.43% 40.18% 52.95% 56.65% 62.53% Short-term investments 13.11% 2.74% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Accounts Receivables 19.52% 24.12% 20.88% 20.02% 20.22% 20.45% 20.66% 20.77% Inventories 25.53% 37.58% 25.50% 24.94% 25.27% 25.65% 26.25% 26.74% Prepaid expenses and other current assets 6.79% 8.82% 6.06% 6.00% 6.03% 6.02% 6.02% 6.02% Deferred income taxes 4.17% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Total Current Assets 92.30% 97.60% 60.69% 87.38% 91.70% 105.07% 109.58% 116.06%

Property, plant and equipment, at cost 72.91% 73.83% 60.80% 65.25% 69.06% 72.65% 76.38% 80.64% Less accumulated depreciation 45.40% 39.44% 34.27% 39.35% 43.56% 47.23% 50.70% 54.30% Property, plant and equipment, net 27.50% 34.39% 26.52% 25.89% 25.50% 25.41% 25.68% 26.34% Goodwill 53.80% 165.63% 138.52% 135.19% 130.12% 124.46% 119.00% 114.24% Other Intangible assets, gross 30.20% 164.87% 136.41% 129.36% 126.32% 119.96% 115.11% 110.31% Less accumulated amortization 17.29% 19.04% 22.08% 29.00% 34.86% 39.83% 44.25% 48.35% Other Intangible assets, net 12.91% 145.83% 114.34% 100.35% 91.46% 80.14% 70.86% 61.96% Other assets 20.15% 9.40% 7.20% 7.20% 7.20% 7.20% 7.20% 7.20%Total Assets 206.66% 452.84% 347.28% 356.02% 345.98% 342.28% 332.32% 325.81%

LIABILITIES AND STOCKHOLDERS' EQUITYCurrent Liabilities: Accounts payable 3.11% 4.75% 4.74% 4.74% 4.74% 4.74% 4.74% 4.74% Income taxes payable 1.72% 2.45% 2.39% 1.18% 1.17% 1.29% 1.44% 1.52% Other current liabilities 17.09% 19.77% 16.37% 14.35% 14.62% 14.89% 15.15% 15.48% Current portion of long-term debt 0.00% 0.00% 7.49% 20.20% 15.91% 19.54% 15.28% 12.80%Total Current Liabilities 21.91% 26.97% 30.99% 40.47% 36.43% 40.46% 36.61% 34.54% Deferred income taxes 0.98% 52.52% 39.44% 34.94% 30.44% 25.94% 21.44% 16.94% Other long-term liabilities 13.07% 16.77% 12.19% 12.08% 12.59% 13.02% 13.09% 13.16% Long term debt 30.50% 191.69% 138.81% 135.90% 130.68% 123.65% 117.80% 112.51%Total Liabilities 66.47% 287.96% 221.43% 223.40% 210.15% 203.08% 188.94% 177.16%

Stockholders' Equity: Common Stock and paid-in capital 92.73% 136.69% 108.95% 107.72% 105.02% 101.75% 98.51% 95.75% Retained Earnings 178.93% 139.18% 110.19% 115.95% 119.67% 123.63% 128.37% 134.14% Accumulated other comprehensive income 0.82% -5.49% -5.65% -5.51% -5.31% -5.07% -4.85% -4.66% Treasury Stock -132.32% -105.52% -87.66% -85.55% -83.56% -81.10% -78.66% -76.59%Total Stockholders' Equity (Zimmer Biomet) 140.16% 164.86% 125.83% 132.61% 135.82% 139.19% 143.37% 148.64% Non-Controlling interests 0.04% 0.03% 0.01% 0.01% 0.01% 0.01% 0.01% 0.01%Total Stockholders' Equity 140.19% 164.88% 125.85% 132.63% 135.83% 139.21% 143.38% 148.65%

Total Liabilities and Stockholders' Equity 206.66% 452.84% 347.28% 356.02% 345.98% 342.28% 332.32% 325.81%

Zimmer Biomet HoldingsValue Driver Estimation(figures are in $ millions)Fiscal Years Ending Dec 31 2014 2015 2016 2017E 2018E 2019E 2020E 2021EMARGINAL TAX RATE: Federal 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% State 0.8% -1.7% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% Foreign -14.2% -62.3% -11.0% -11.0% -11.0% -11.0% -11.0% -11.0%Marginal Tax Rate 21.6% -29.0% 26.0% 26.0% 26.0% 26.0% 26.0% 26.0%

EBITAOperating Revenues 4,673 5,998 7,684 7,874 8,180 8,552 8,944 9,317 - Product Cost 960 1,426 1,878 1,614 1,636 1,710 1,744 1,817 - Depreciation costs 269 375 467 465 465 476 496 524 - Amortization of Intangible assets 107 337 603 587 568 554 552 547 - Research and development expenses 187 269 366 376 389 402 413 425 - SG&A expenses 1,751 2,284 2,933 2,834 3,062 3,200 3,332 3,450 + Implied interest on operating leases 7 7 9 12 13 13 14 15 EBITA 1,407 1,314 1,446 2,009 2,073 2,223 2,421 2,570

LESS ADJUSTED TAXESIncome tax provision (benefit) 220 7 95 301 309 358 415 458 + tax shield on interest expense 14 (83) 93 82 83 68 53 44 - tax shield on interest income 3 (3) 1 1 1 1 1 1 + tax shield on certain item expenses 5 (2) - - - - - - + tax shield on goodwill impairment - - - - - - - - + tax shield on special item expenses 74 (241) 159 123 128 133 140 145 + tax shield on other expenses, net 10 (11) 19 14 17 17 18 18 + tax shield on interest on operating leases 2 (2) 2 3 3 3 4 4 Adjusted Taxes 321 (330) 367 522 539 578 630 668

CHANGE IN DEFERRED TAX LIABILITIES Net deferred tax liabilities (149) 3,150 3,031 2,751 2,490 2,219 1,918 1,579 Net change in deferred tax liabilities 123 3,299 (119) (280) (261) (272) (301) (339)

NOPLATNOPLAT= EBITA - adj taxes + change in DT liabilities 1,209 4,942 960 1,207 1,273 1,373 1,491 1,562

OPERATING CURRENT ASSETSAverage of cash on B/S 2008-2016 18.61% 18.61% 18.61% 18.61% 18.61% 18.61% 18.61% 18.61%x revenue 4,673 5,998 7,684 7,874 8,180 8,552 8,944 9,317 Normal Cash 870 1,116 1,430 1,466 1,523 1,592 1,665 1,734 Cash and cash equivalent 1,083 1,459 634 2,868 3,287 4,528 5,067 5,826

Lower or normal or actual cash 870 1,116 634 1,466 1,523 1,592 1,665 1,734 Accounts Receivables 912 1,447 1,604 1,576 1,654 1,749 1,848 1,935 Inventories 1,193 2,254 1,959 1,963 2,067 2,194 2,348 2,492 Prepaid expenses and other current assets 317 529 466 472 493 514 539 561 Operating Current Assets 3,292 5,346 4,664 5,477 5,737 6,049 6,399 6,721

OPERATING CURRENT LIABILITIES Accounts payable 145 285 365 373 388 406 424 442 Income tax payable 80 147 184 93 96 111 128 141 Other current liabilities 799 1,186 1,258 1,130 1,196 1,274 1,355 1,442 Operating Current Liabilities 1,024 1,618 1,806 1,596 1,679 1,790 1,908 2,026

NET OPERATING WORKING CAPITAL Operating CA- Operating CL 2,268 3,728 2,858 3,881 4,058 4,259 4,491 4,696 Net operating working capital 2,268 3,728 2,858 3,881 4,058 4,259 4,491 4,696

+ NET PPE Plant, Property and equipment 1,285 2,063 2,038 2,039 2,086 2,173 2,297 2,454 Net PPE 1,285 2,063 2,038 2,039 2,086 2,173 2,297 2,454

+ OTHER OPERATING ASSETS Other Intangible assets, net 1,412 9,888 10,482 10,185 10,333 10,259 10,296 10,278 PV of operating leases 160 202 284 284 291 303 320 342 Other assets 942 564 554 567 589 616 644 671 Other operating assets 2,513 10,654 11,320 11,037 11,214 11,178 11,261 11,291

- OTHER OPERATING LIABILITIES Other long-term liabilities 611 1,006 936 951 1,030 1,114 1,171 1,226 Other Operating Liabilities 611 1,006 936 951 1,030 1,114 1,171 1,226

INVESTED CAPITAL Invested Capital 5,456 15,440 15,279 16,005 16,328 16,497 16,878 17,215

VALUE DRIVERSNOPLAT 1,209 4,942 960 1,207 1,273 1,373 1,491 1,562

/ Beginning IC 5,008 5,456 15,440 15,279 16,005 16,328 16,497 16,878 ROIC 24.1% 90.6% 6.2% 7.9% 8.0% 8.4% 9.0% 9.3%

Beginning IC 5,008 5,456 15,440 15,279 16,005 16,328 16,497 16,878 x (ROIC - WACC) 18.5% 84.9% 0.6% 2.3% 2.3% 2.8% 3.4% 3.6%Economic Profit 926 4,635 89 345 370 452 560 610

NOPLAT 1,209 4,942 960 1,207 1,273 1,373 1,491 1,562 - Capital Expenditures 449 9,983 (161) 727 322 170 381 337

Free Cash Flow (FCF) 760 (5,041) 1,121 480 951 1,204 1,110 1,226

Investment Rate 37.1% 202.0% -16.8% 60.2% 25.3% 12.3% 25.6% 21.5%growth 9.0% 183.0% -1.0% 4.8% 2.0% 1.0% 2.3% 2.0%

Zimmer Biomet HoldingsWeighted Average Cost of Capital (WACC) Estimation

WACC = [Re * (E/V)] + [Rd * (1-t) * (D/V)] WACC 5.64%Re = Cost of EquityRd = Pretax cost of debtE = Market value of EquityD = Market Value of DebtV = E + Dt = Marginal tax rate

Cost of EquityRe = Rf + β [ E(Rm) - Rf]Rf 2.72% based on 30-year treasuryE(Rm)-Rf 4.80% Market premiumBeta (β) 0.85 Raw daily beta- BloombergRe 6.80%

Cost of Debt (Pre-tax)Rd 4.32%

Cost of preferred stockno preferred stock

Market Value of EquityShares outstanding 202,195,920 Share price $115.47E 23,347,562,882$

Market Value of DebtDebt (current and LT) 10,683,700,000$ PV of Operating Lease 284,211,858$ D 10,967,911,858$

Market Value of Firm (V) 34,315,474,740.48$

Weight of Equity 0.68Weight of Debt 0.32Weight of preferred 0marginal tax rate 26.00%

Zimmer Biomet HoldingsDiscounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models

Key Inputs: CV Growth 2.66% CV ROIC 9.79% WACC 5.64% Cost of Equity 6.80%

Fiscal Years Ending Dec 31 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E

DCF ModelPeriod 1 2 3 4 5 6 7 8 9NOPLAT 1,206.9 1,273.3 1,373.3 1,491.0 1,562.1 1,588.6 1,627.7 1,663.0 1,805.7 - Capital Expenditures 726.5 322.3 169.5 381.3 336.6 428.1 430.5 376.7 491.1 Free Cash Flow (FCF) 480.4 951.0 1,203.8 1,109.7 1,225.6 1,160.6 1,197.1 1,286.3 1,314.6 CV 44,082.4

Present Value of FCF 454.7 852.1 1,021.0 890.9 931.4 834.9 815.1 829.1 28,412.9 Value of Operating Assets 35,042.0$

Excess Cash - Short-term investments - Value of non-operating Assets -$ Value of Debt 10,683.7$ Value of Pfd stock -$

Others:PV of operating lease 284.2 PV of employee stock options 355.5 Long-term purchase obligations 315.3 Value of other liabilities 955.0$

Value of Enterprise 23,403.3$ Shares Outstanding 202.20 as of 9/17/2017Intrinsic Value 115.75$ 121.29$

EP ModelPeriod 1 2 3 4 5 6 7 8 9Economic Profit 344.6 370.0 451.8 560.0 609.6 617.1 631.9 642.9 764.4 CV 25,632.1 TO DISCOUNTEP 326.2 331.5 383.2 449.6 463.2 443.9 430.3 414.4 16,520.9 Total present value of EP 19,763.16$

Beginning Invested Capital 15,278.8 Value of Operating assets 35,042.0$

Excess Cash - Short-term investments - Value of non-operating Assets - Value of Debt 10,683.7$ Value of Pfd stock -

Others:PV of operating lease 284.2 PV of employee stock options 355.5 Long-term purchase obligations 315.3 Value of other liabilities 955.0$

Value of Enterprise 23,403.3$ Shares Outstanding 202.20 as of 9/17/2017Intrinsic Value 115.75$ 121.29$

Zimmer Biomet HoldingsDividend Discount Model (DDM) or Fundamental P/E Valuation Model

Fiscal Years Ending Dec 31 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E

EPS 4.27$ 4.37$ 5.04$ 5.84$ 6.41$ 6.08$ 6.32$ 6.54$ 6.72$ 2.82%

Key Assumptions CV growth 2.82% CV ROE 7.95% Cost of Equity 6.80%

Future Cash Flows Period 1 2 3 4 5 6 7 8 9 P/E Multiple (CV Year) 16.23 EPS (CV Year) 6.72$ Future Stock Price 109.14$ Dividends Per Share 0.97 1.09 1.16 1.34 1.41 1.28 1.33 1.50 Future Cash Flows 0.97 1.09 1.16 1.34 1.41 1.28 1.33 1.50 109.14

Discounted Cash Flows 0.91 0.96 0.95 1.03 1.02 0.86 0.84 0.89 64.50as of 9/17/2017

Intrinsic Value 71.05$ 74.46$

Zimmer Biomet HoldingsKey Management Ratios

Fiscal Years Ending Dec 31 2014 2015 2016 2017E 2018E 2019E 2020E 2021E

Liquidity RatiosCurrent Assets 4,313$ 5,854$ 4,664$ 6,880$ 7,502$ 8,985$ 9,801$ 10,813$ /Current Liabilities 1,024$ 1,618$ 2,382$ 3,186$ 2,980$ 3,460$ 3,274$ 3,218$ = Current Ratio 4.2 3.6 2.0 2.2 2.5 2.6 3.0 3.4

(Cash + Accounts receivables) 1,995$ 2,906$ 2,239$ 4,444$ 4,942$ 6,277$ 6,915$ 7,761$ /Current Liabilities 1,024$ 1,618$ 2,382$ 3,186$ 2,980$ 3,460$ 3,274$ 3,218$ = Quick Ratio 1.9 1.8 0.9 1.4 1.7 1.8 2.1 2.4

Cash assets 1,083$ 1,459$ 634$ 2,868$ 3,287$ 4,528$ 5,067$ 5,826$ /Current Liabilities 1,024$ 1,618$ 2,382$ 3,186$ 2,980$ 3,460$ 3,274$ 3,218$ = Cash Ratio 1.1 0.9 0.3 0.9 1.1 1.3 1.5 1.8

Activity or Asset-Management RatiosAnnual Sales 4,673$ 5,998$ 7,684$ 7,874$ 8,180$ 8,552$ 8,944$ 9,317$ /Average accounts receivables 924$ 1,179$ 1,525$ 1,590$ 1,615$ 1,702$ 1,798$ 1,891$ = Accounts receivable turnover 5.1 5.1 5.0 5.0 5.1 5.0 5.0 4.9

Number of days 365.0 365.0 365.0 365.0 365.0 365.0 365.0 365.0/Accounts receivables turnover 5.1 5.1 5.0 5.0 5.1 5.0 5.0 4.9= Average collection period 72.2 71.8 72.5 73.7 72.1 72.6 73.4 74.1

Cost of goods sold 1,321$ 2,138$ 2,911$ 2,666$ 2,669$ 2,740$ 2,792$ 2,888$ /Average Inventory 1,134$ 1,724$ 2,107$ 1,961$ 2,015$ 2,130$ 2,271$ 2,420$ = Inventory turnover 1.2 1.2 1.4 1.4 1.3 1.3 1.2 1.2

Number of days 365.0 365.0 365.0 365.0 365.0 365.0 365.0 365.0/Inventory Turnover 1.2 1.2 1.4 1.4 1.3 1.3 1.2 1.2= Days in inventory 313.4 294.3 264.2 268.5 275.5 283.8 296.8 305.9

Financial Leverage Ratios(Total Debt 1,426$ 11,497$ 11,241$ 12,290$ 11,991$ 12,245$ 11,904$ 11,675$ + PV of Operating leases) 160$ 202$ 284$ 284$ 291$ 303$ 320$ 342$ /Total Assets 9,658$ 27,161$ 26,684$ 28,031$ 28,302$ 29,272$ 29,724$ 30,355$ = Debt Ratio 0.16 0.43 0.43 0.45 0.43 0.43 0.41 0.40

Total Debt 1,426$ 11,497$ 11,241$ 12,290$ 11,991$ 12,245$ 11,904$ 11,675$ / Total Equity 6,550$ 9,888$ 9,669$ 10,441$ 11,111$ 11,904$ 12,823$ 13,849$ = Debt to Equity ratio 0.22 1.16 1.16 1.18 1.08 1.03 0.93 0.84

Profitability Ratios(Sales - COGS) 3,353$ 3,860$ 4,773$ 5,207$ 5,511$ 5,812$ 6,152$ 6,429$ / Sales 4,673$ 5,998$ 7,684$ 7,874$ 8,180$ 8,552$ 8,944$ 9,317$ = Gross Margin 71.74% 64.35% 62.12% 66.14% 67.37% 67.96% 68.78% 69.01%

Net Income 720$ 147$ 306$ 859$ 882$ 1,020$ 1,185$ 1,305$ / Sales 4,673$ 5,998$ 7,684$ 7,874$ 8,180$ 8,552$ 8,944$ 9,317$ = Net Profit Margin 15.41% 2.45% 3.98% 10.91% 10.78% 11.93% 13.24% 14.01%

Net Income 720$ 147$ 306$ 859$ 882$ 1,020$ 1,185$ 1,305$ / Average Total Assets 9,619$ 18,409$ 26,923$ 27,358$ 28,167$ 28,787$ 29,498$ 30,040$ = Return on Assets 7.49% 0.80% 1.14% 3.14% 3.13% 3.54% 4.02% 4.34%

Net Income 720$ 147$ 306$ 859$ 882$ 1,020$ 1,185$ 1,305$ / Average Total Equity 6,424$ 8,219$ 9,778$ 10,055$ 10,776$ 11,507$ 12,363$ 13,336$ = Return on Equity 11.21% 1.79% 3.13% 8.54% 8.18% 8.86% 9.58% 9.78%

Zimmer Biomet HoldingsRelative Valuation Models

EPS EPS P/S P/S Market Cap (B)Ticker Company Price 2017E 2018E P/E 17 P/E 18 2017E 2018EJNJ Johnson & Johnson 131.11$ $6.02 $7.25 21.8 18.1 4.64 4.63 351.95$ MDT Medtronic Plc. 80.21$ $3.41 $3.93 23.5 20.4 3.69 3.57 108.56$ ABT Abbott Laboratories 51.20$ $1.61 $2.33 31.8 22.0 3.37 3.15 89.24$ DHR Danaher Corporation 83.93$ $3.50 $3.83 24.0 21.9 3.26 3.13 58.86$ SYK Stryker Corp 140.78$ $5.46 $6.39 25.8 22.0 4.30 4.03 52.89$ BDX Becton, Dickinson and Co. 199.75$ $6.61 $8.81 30.2 22.7 3.75 3.35 45.29$ BSX Boston Scientific Corp 28.06$ $0.81 $1.07 34.8 26.3 4.33 4.04 38.76$ BAX Baxter International Inc. 62.44$ $1.92 $2.40 32.5 26.1 3.26 3.13 34.23$ EW Edwards Lifesciences Corp. 112.08$ $3.71 $4.10 30.2 27.4 7.00 6.36 23.76$ HOLX Hologic, Inc. 38.98$ $2.38 $1.34 16.4 29.2 3.60 3.32 10.97$ VAR Varian Medical 106.98$ $3.09 $4.23 34.6 25.3 3.56 3.44 9.66$ IART Integra Lifesciences Holding 51.67$ $0.65 $1.22 79.5 42.2 3.57 3.29 4.03$ NUVA NuVasive Inc. 61.03$ $1.16 $1.66 52.6 36.8 2.83 2.68 3.10$ GMED Globus Medical Inc. 30.00$ $1.22 $1.40 24.5 21.4 4.64 4.23 2.90$ CNMD Conmed Corp. 49.50$ $0.51 $0.96 97.2 51.4 1.78 1.73 1.39$

Average 29.4 27.5 3.6 3.4

ZBH Zimmer Biomet Holdings $115.47 4.27 4.37 27.1 26.4 3.0 2.8

Implied Value: Relative P/E (EPS17) $ 125.64 Relative P/E (EPS18) 120.39$ P/S Ratio (EPS17) 141.31$ P/S Ratio (EPS18) 138.25$

Present Value of Operating Lease Obligations (2016) Present Value of Operating Lease Obligations (2015) Present Value of Operating Lease Obligations (2014) Present Value of Operating Lease Obligations (2013)

Operating Operating Operating OperatingFiscal Years Ending Dec 31 Leases Fiscal Years Ending Dec 31 Leases Fiscal Years Ending Dec 31 Leases Fiscal Years Ending Dec 31 Leases2017 70 2016 59 2015 47 2014 482018 59 2017 45 2016 36 2015 392019 48 2018 34 2017 27 2016 282020 39 2019 26 2018 21 2017 202021 28 2020 22 2019 20 2018 16Thereafter 89 Thereafter 46 Thereafter 32 Thereafter 41Total Minimum Payments 332 Total Minimum Payments 232 Total Minimum Payments 183 Total Minimum Payments 192Less: Interest 47.59 Less: Interest 29.45 Less: Interest 22.69 Less: Interest 24.92PV of Minimum Payments 284.21 PV of Minimum Payments 202.35 PV of Minimum Payments 160.21 PV of Minimum Payments 167.18

Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases

Pre-Tax Cost of Debt 4.32% Pre-Tax Cost of Debt 4.32% Pre-Tax Cost of Debt 4.32% Pre-Tax Cost of Debt 4.32%Number Years Implied by Year 6 Payment 3.1 Number Years Implied by Year 6 Payment 2.1 Number Years Implied by Year 6 Payment 1.6 Number Years Implied by Year 6 Payment 2.6

Lease PV Lease Lease PV Lease Lease PV Lease Lease PV LeaseYear Commitment Payment Year Commitment Payment Year Commitment Payment Year Commitment Payment1 69.5 66.6 1 59.1 56.7 1 46.5 44.6 1 47.6 45.62 58.7 53.9 2 44.7 41.1 2 36.1 33.2 2 39.2 36.03 47.6 41.9 3 33.9 29.9 3 27 23.8 3 27.7 24.44 38.9 32.9 4 26.4 22.3 4 21.4 18.1 4 20.4 17.25 28.4 23.0 5 21.8 17.6 5 19.6 15.9 5 16 13.06 & beyond 28.4 65.9 6 & beyond 21.8 34.8 6 & beyond 19.6 24.7 6 & beyond 16 30.9PV of Minimum Payments 284.2 PV of Minimum Payments 202.4 PV of Minimum Payments 160.2 PV of Minimum Payments 167.2

Effects of ESOP Exercise and Share Repurchases on Common Stock Balance Sheet Account and Number of Shares Outstanding

Number of Options Outstanding (shares): 7,901,000Average Time to Maturity (years): 6.20Expected Annual Number of Options Exercised: 1,274,355

Current Average Strike Price: 86.21$ Cost of Equity: 6.80%Current Stock Price: $115.47

2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025EIncrease in Shares Outstanding: 1,274,355 1,274,355 1,274,355 1,274,355 1,274,355 1,274,355 1,274,355 1,274,355 1,274,355Average Strike Price: 86.21$ 86.21$ 86.21$ 86.21$ 86.21$ 86.21$ 86.21$ 86.21$ 86.21$ Increase in Common Stock Account: 109,862,131 109,862,131 109,862,131 109,862,131 109,862,131 109,862,131 109,862,131 109,862,131 109,862,131

Change in Treasury Stock 0 100,000,000 100,000,000 100,000,000 100,000,000 100,000,000 100,000,000 100,000,000 100,000,000Expected Price of Repurchased Shares: 115.47$ 123.32$ 131.70$ 140.64$ 150.20$ 160.41$ 171.31$ 182.95$ 195.38$ Number of Shares Repurchased: - 810,924 759,327 711,014 665,774 623,414 583,748 546,606 511,827

Shares Outstanding (beginning of the year) 200,000,000 201,274,355 201,737,786 202,252,814 202,816,155 203,424,735 204,075,676 204,766,283 205,494,032Plus: Shares Issued Through ESOP 1,274,355 1,274,355 1,274,355 1,274,355 1,274,355 1,274,355 1,274,355 1,274,355 1,274,355Less: Shares Repurchased in Treasury - 810,924 759,327 711,014 665,774 623,414 583,748 546,606 511,827 Shares Outstanding (end of the year) 201,274,355 201,737,786 202,252,814 202,816,155 203,424,735 204,075,676 204,766,283 205,494,032 206,256,560

VALUATION OF OPTIONS GRANTED IN ESOP

Ticker Symbol ZBHCurrent Stock Price $115.47Risk Free Rate 2.72%Current Dividend Yield 0.83%Annualized St. Dev. of Stock Returns 24.79%

Average Average B-S ValueRange of Number Exercise Remaining Option of OptionsOutstanding Options of Shares Price Life (yrs) Price GrantedRange 1 7,901,000 86.21 6.20 44.99$ 355,462,634$

Total 7,901,000 86.21$ 6.20 49.83$ 355,462,634$

DCF DCF121.29$ 0.77 0.79 0.81 0.83 0.85 0.87 0.89 0.91 0.93 121.29$ 3.90% 4.10% 4.30% 4.50% 4.78% 5.00% 5.20% 5.40% 5.60%

4.20% 140.71 135.96 131.43 127.10 122.96 119.00 115.20 111.56 108.07 1.80% 104.41 103.88 103.36 102.83 102.10 101.53 101.00 100.48 99.954.23% 140.18 135.46 130.95 126.64 122.52 118.58 114.80 111.18 107.70 2.00% 108.15 107.60 107.06 106.51 105.75 105.15 104.60 104.06 103.514.26% 139.66 134.96 130.47 126.19 122.09 118.16 114.40 110.80 107.33 2.20% 112.32 111.75 111.18 110.61 109.82 109.19 108.62 108.05 107.484.29% 139.14 134.46 130.00 125.73 121.65 117.75 114.01 110.41 106.97 2.40% 117.02 116.42 115.82 115.22 114.39 113.73 113.14 112.54 111.944.32% 138.71 134.05 129.60 125.36 121.29 117.40 113.68 110.10 106.66 2.66% 124.10 123.47 122.83 122.19 121.29 120.59 119.95 119.32 118.684.35% 138.10 133.48 129.06 124.83 120.79 116.93 113.22 109.66 106.24 2.80% 128.38 127.72 127.05 126.39 125.46 124.73 124.07 123.41 122.744.38% 137.59 132.99 128.59 124.39 120.37 116.52 112.82 109.28 105.88 3.00% 135.35 134.65 133.94 133.24 132.25 131.48 130.78 130.07 129.374.41% 137.08 132.50 128.12 123.94 119.94 116.11 112.43 108.91 105.52 3.20% 143.46 142.71 141.96 141.21 140.16 139.33 138.58 137.83 137.084.44% 136.57 132.01 127.66 123.50 119.52 115.70 112.05 108.54 105.16 3.40% 153.02 152.22 151.41 150.60 149.47 148.58 147.78 146.97 146.16

DCF DCF121.29$ 24.0% 24.5% 25.0% 25.5% 26.0% 26.5% 27.0% 27.5% 28.0% 121.29$ 18.8% 19.8% 20.8% 21.8% 22.8% 23.8% 24.8% 25.8% 26.8%

2.60% 126.18 126.62 127.06 127.51 127.95 128.40 128.85 129.31 129.76 32.00% 149.25 146.48 144.04 141.90 139.97 138.30 136.78 135.42 134.192.63% 124.42 124.85 125.29 125.73 126.17 126.61 127.06 127.51 127.96 33.00% 144.31 141.62 139.26 137.17 135.30 133.68 132.21 130.89 129.702.66% 122.69 123.12 123.55 123.98 124.42 124.86 125.30 125.74 126.18 34.00% 139.37 136.76 134.47 132.45 130.64 129.06 127.63 126.35 125.202.69% 120.99 121.42 121.84 122.27 122.70 123.14 123.57 124.01 124.45 35.00% 134.43 131.90 129.68 127.72 125.97 124.44 123.06 121.82 120.702.72% 119.60 120.02 120.44 120.87 121.29 121.72 122.15 122.59 123.02 36.00% 129.49 127.04 124.89 122.99 121.29 119.82 118.48 117.28 116.202.75% 117.69 118.10 118.52 118.94 119.36 119.78 120.21 120.64 121.06 37.00% 124.55 122.18 120.10 118.26 116.62 115.19 113.90 112.74 111.702.78% 116.08 116.49 116.90 117.32 117.73 118.15 118.57 119.00 119.42 38.00% 119.61 117.32 115.31 113.54 111.95 110.57 109.32 108.20 107.202.81% 114.50 114.91 115.32 115.73 116.14 116.55 116.97 117.38 117.80 39.00% 114.67 112.46 110.52 108.81 107.28 105.95 104.74 103.67 102.692.84% 112.95 113.35 113.76 114.16 114.57 114.98 115.39 115.80 116.22 40.00% 109.72 107.59 105.72 104.08 102.60 101.32 100.16 99.13 98.19

Beta

Pre-tax Cost of Debt

R&D as a % of Sales

CV growth of NOPLAT

Risk Free Rate

Marginal Tax Rate Depreciation Rate

SG&A as % of Sales