Extremity industry suppliers sold $250.1 million dollars worth of products in the third quarter (3Q09), exceeding our forecast by $4.6 million, or close to 1.8%. As a result, we have raised our extremity industry revenue forecast for the fourth quarter to $282.5 million, which would represent a 13.9% year-over-year (YOY) growth. We have also raised our forecast of extremity product sales for 2009 from $1.028 billion to $1.037 billion. Though the growth of extremity product sales lost some momentum during the last few quarters due to the economic recession, the industry still reported growth of close to 12% each quarter. This strong and consistent revenue growth across the whole extremity product market is moving the industry towards the psychologically important mark of $1billion in total annual revenue.
Top reasons why we believe the extremity product market has been consistently increasing sales revenues are as follows:
- Procedure volumes continue to grow
- Extremity treatment is still a relatively new area when compared to large joint and spine treatment, and there is plenty of room for medical advancement
New treatment options such as the reverse shoulder arthroplasty and new ankle replacement products have helped create a surge in procedure volumes in recent years. Revenue increase in 3Q09 of 13.9% was the highest reported since 3Q08. Domestic sales continued its upward trend, but sales in international markets were almost nonexistent due to changes in foreign exchange rates. The companies which reported the highest, double-digit growth percentages were Biomet, Inc, Wright Medical Inc. and Zimmer, Inc. Zimmer, which struggled since 4Q08 with flat or low single-digit growth in the extremity product market, has rebounded with a solid, high double-digit revenue sales.
Table 1: Worldwide Extremity Product Earnings by Companies (2009-2012E)
|
Extremities Market |
2009 |
2010E |
2011E |
2012E | ||||
|
1Q09 |
2Q09 |
3Q09 |
4Q09E |
2009E | ||||
|
DePuy |
$65.60 |
$50.40 |
$55.50 |
$64.00 |
$235.50 |
$260.00 |
$292.50 |
$328.00 |
|
Tornier |
$39.20 |
$35.30 |
$38.80 |
$44.20 |
$157.50 |
$182.00 |
$205.80 |
$234.00 |
|
Zimmer |
$33.30 |
$33.70 |
$32.60 |
$34.00 |
$133.60 |
$145.00 |
$159.50 |
$177.00 |
|
Wright Medical |
$25.90 |
$25.60 |
$25.50 |
$29.40 |
$106.40 |
$128.20 |
$151.60 |
$177.70 |
|
Biomet |
$20.30 |
$22.90 |
$20.60 |
$21.80 |
$85.60 |
$98.20 |
$116.20 |
$135.30 |
|
ArthroCare |
$16.20 |
$17.30 |
$17.00 |
$18.00 |
$68.50 |
$78.70 |
$87.00 |
$94.50 |
|
Ascension Orthopedics |
$6.10 |
$5.50 |
$5.80 |
$6.80 |
$24.20 |
$31.00 |
$40.80 |
$50.60 |
|
Exactech |
$5.80 |
$5.10 |
$5.50 |
$6.50 |
$22.90 |
$31.20 |
$41.00 |
$52.80 |
|
Stryker |
$5.80 |
$4.80 |
$5.40 |
$6.40 |
$22.40 |
$24.80 |
$26.70 |
$28.90 |
|
Others |
$45.20 |
$40.40 |
$43.40 |
$51.40 |
$180.40 |
$203.50 |
$234.80 |
$268.20 |
|
Total |
$263.40 |
$241.00 |
$250.10 |
$282.50 |
$1, 037.00 |
$1, 182.60 |
$1, 355.90 |
$1, 547.00 |
|
YOY Growth |
11.8% |
11.6% |
13.9% |
14.0% |
12.8% |
14.0% |
14.7% |
14.1% |
Source: SEC filings, PearlDiver estimates and press releases. ArthroCare has not reported sales since 1Q08. Stryker sales represent only shoulder sales. Ascension and Tornier are estimates.
Table 1 illustrates the quarterly sales performance of each of the extremity companies. The 3Q09 growth of 13.9% was surprisingly higher than our estimate of 12.3%. Innovation and increased demand have been the keys of success for this market.
As in quarters one and two, DePuy continues to hold the #1 spot as the worldwide extremity product market leader in terms of total revenue. Tornier, a privately held company from France, is #2 and Zimmer, Inc. is holding on to the #3 spot. Chart 1 illustrates the market share by company for 3Q09.
Chart 1: 3Q09 Extremity Product Market Share
Source: Sec filings and PearlDiver estimates
Individual Company Breakdown
Zimmer Holdings, Inc.
Zimmer Holdings had a surprisingly strong third quarter. Following poor performances in the past two quarters, 3Q09 sales of $32.6 million, a 19% increase YOY, has given the company momentum again. The company’s extremity product sales now represent 3.4% of its total sales—an increase from 2.9% in 3Q08. The total sales for the nine months ending September 30, 2009 are $99 million, an increase of 10% compared to total sales of the prior year’s nine-month period.
Zimmer’s domestic sales for the quarter represented 77.6% of its total extremity product sales with a growth of 25% YOY. The Bigliani/Flatow Shoulder Solution and the Zimmer Trabecular Metal Reverse Shoulder System led its extremity product sales in the U.S.
The European market, which holds 16.3% of Zimmer’s extremity product sales, reported a 5% decline from 3Q08. The Asia-Pacific market, which holds just 6.1% of Zimmer’s total extremity product sales, reported a 33% growth from 3Q08.
Extremity products were the second best performing market for Zimmer behind products for the spine, which helped raise revenue 24% YOY due to the acquisition of Abbott Spine in 4Q08. For 4Q09 we estimate that Zimmer will report its second quarter of double-digit growth for the year at 13% YOY, bringing in $34 million in sales.
Biomet, Inc.
Privately held Biomet again had a highly successful quarter. In 3Q09 extremity product sales totaled $20.6 million, a 17.9% YOY worldwide growth from 3Q08. Sales in the domestic market grew by a whopping 39%. Biomet now holds about 8.2% market share, a slight increase from 8.0% in 3Q08.
The shoulder surgeon community has also strongly received Biomet products, especially the second-generation reverse shoulder prosthesis device which the company rolled out in May 2009. Worldwide demand has been strong for the comprehensive reverse shoulder system as well as the primary shoulder system. Other products showing strong demand are the Discovery Elbow and the ExploR Modular Radial Head.
Biomet has become one of the top manufacturers in the upper extremity product market, and we expect the company to report double-digit growth in the fourth quarter as it did in the third. For 4Q09 we estimate that Biomet will report 19.8% YOY growth from sales of $21.8 million. The reverse shoulder device will be a key factor for the future success of Biomet.
Wright Medical Technology, Inc.
Wright Medical is one of the top foot and ankle product suppliers in the world, distinguishing itself from other companies that focus primarily on the upper extremities. However, Wright Medical has not completely written off upper extremity products, and the company also has a shoulder system (Olympia) in the market. The company’s extremity division represents 21.6% of its net sales worldwide, an increase from 19.5% in 3Q08.
For 3Q09 Wright Medical reported a growth of 17.7%, taking in $25.5 million in extremity product sales. While this is nowhere near the 38% growth in the prior 3Q08, it is still a significant increase, making Wright Medical one of the top three foot and ankle product suppliers in the world (next to DePuy and Tornier).
Wright Medical’s success in the third quarter was primarily due to the 24% increase in its domestic sales of products such as INBONE, the CHARLOTTE Foot and Ankle System and the acquisition of Rayhack in 2008. International sales, however, dropped 10% in the third quarter. The previous quarter also showed an 8% decline in international sales due to a distributor transition in Australia and the unfavorable foreign exchange rates.
Wright Medical’s extremity sales for 3Q09 represent 10.2% of the total extremity product market worldwide, which is up from 9.9% in 3Q08. Taking into account the slight decline in growth over the last three quarters, we estimate that 4Q09 will bring the company’s total sales to $29.4 million with a growth rate of 18.5% for the fourth quarter. We estimate that total extremity sales for the year will be around $106.4 million, which represents an annual growth of 19.7%.
DePuy Orthopaedics, Inc.
For 3Q09, Johnson & Johnson’s DePuy, the leading extremity product company worldwide, reported $55.5 million in product sales. This represents just over an 11% YOY growth, consistent with the last two quarters of 2009. DePuy experienced exceptional growth and brand acceptance with their Delta Xtend (reverse shoulder prosthesis) and Global AP (anatomical shoulder system).
DePuy’s share of the extremity product market for 3Q09 is, we estimate, 22.2%, down from 22.8% in 3Q08. DePuy’s major market is its upper extremities product line, especially the shoulder system, which represents around 80% of DePuy’s total sales and is the driving force behind the company’s growth. DePuy still reigns as the number one upper extremity product supplier in the world in terms of revenue and is one of the top three foot and ankle product suppliers.
DePuy, however, faces stiff competition from Tornier, Biomet, and Zimmer within its shoulder market while Wright Medical continues to be the one of the top three supplier in the foot and ankle arena. For 4Q09, we estimate that DePuy’s extremity sales will continue to grow at a consistent double-digit rate just over 12% —buoyed by a strong shoulder device market. For 2009 we estimate slightly over 10% growth with total annual sales of $235.5 million.
Exactech, Inc.
Exactech holds a tiny portion of the extremities market, but the company’s innovative line of shoulder products is getting attention and gathering momentum. For 3Q09 Exactech reported a growth of 31% in its shoulder division, which is exactly similar to the 31% growth in 2Q09. Sales for the quarter increased to $5.5 million from $4.2 million in 3Q08.
For the first nine months of 2009, sales of Exactech extremity products were up by 38% to $16.4 million, compared to $11.8 million for the same period of 2008. This was due to the continued success of the Equinoxe Shoulder System. We estimate that the shoulder division for 4Q09 will grow in the neighborhood of 30%, bringing in $6.5 million in sales. Extremity product sales for 3Q09 are now 2.2% of the total extremity market share worldwide, up from 1.9% in 3Q08.
Other Extremity Companies
Tornier, Inc., the second largest extremity product manufacturer, is still maintaining double-digit growth in the range of 15% for the quarter. We estimate that Tornier will report around $157.5 million in total extremity sales for 2009, a solid 12% annual growth rate. Tornier’s lead products are the Aequalis Shoulder System and the NexFix MTP Fusion System.
Integra LifeSciences Holding Corporation reported low double-digit sales growth for the 3Q09 in its extremity reconstruction sales. According to management, forefoot product sales were weaker compared to its hindfoot and midfoot products, which were the stronger components in its extremity reconstruction market. Integra’s international extremity market growth improved on both a dollar basis and in constant currency. We estimate that Integra LifeSciences’ annual extremity product sales for 2009 to be at $75 million.
Small Bone Innovation, Inc. (SBi), Arthrex, Inc., Orthofix International N.V. and Acumed LLC have also reported strong double-digit growth for 3Q09. Stryker Corporation, which does not play a significant role in extremity treatment, reported an estimated 2% quarterly growth in its shoulder division sales.
Looking Forward
The extremity reconstruction market continues to be a small yet exciting slice of the orthopedic industry. Companies are posting strong results and will continue to do so. We expect the fourth quarter will be similar to the third quarter with growth of about 14% bringing the sales to $282.5 million.
PearlDiver research indicates that with the fourth quarter total, the extremity market will cross the billion dollar mark and report $1.04 billion in sales for 2009. Management of the extremity product companies sees strong growth potential and believes that their sector may become one of the fastest growing sectors in orthopedics.
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