Large joint industry suppliers sold $3.0 billion of products in the first quarter of 2010 (1Q10), exceeding our forecast of $2.87 million, or 4.6%. We have, therefore, increased our revenue forecast for the large joint reconstruction Industry by 2% to $3.03 billion for the second quarter of 2010. We have also increased our forecast for the year from $11.95 billion to $12.23 billion.
Prior to the fourth quarter of 2009, the industry had reported that sales growth rates had slowed and in one quarter even declined. But in the fourth quarter ending December 31, 2009, industry large joint recon sales rebounded and in the aggregate, manufacturers reported a year-over-year (YOY) revenue growth rate of 9.3%. Those very favorable fourth quarter trends continued into the first quarter of 2010 and from all appearances, it looks as if manufacturers have a full rebound on their hands—despite the fact that not all the team members are using the same playbook—yet. Highlights for the first quarter of 2010 were:
- Market leaders maintained revenue growth rates and that, in turn, powered the overall industry numbers
- Sales outside the U.S. (OUS) continued to grow at ever increasing rates
- Zimmer, the largest supplier of large joint recon products as measured by market share, was not able to report sales growth that matched the overall market growth rates.
First quarter results showed a YOY revenue increase of 11.1% for the overall large joint reconstruction industry as shown in Chart 1. While both hip and knee revenues continued their path of improvement, just as in the fourth quarter of 2009 knees again outpaced hip growth with 12.1% YOY and 9.8% YOY, respectively.
Chart 1: Large Joint Reconstruction Market Revenue Growth (YOY)
Source: Company Reports
The Rebound
As Chart 1 illustrates, industry sales declined during the first half of 2009 and, in effect, stabilized in 3Q09. Then the fourth quarter’s strong report demonstrated, in our opinion, that the industry’s revenue slump was broken. But one good quarter doesn’t qualify as an industry rebound. With the first quarter of 2010 reported, the industry now has two positive quarters in the books. As a result, it is easier to discern a positive trend pattern. In addition, the increasing rate of revenue growth appeared to be affecting virtually all players. We didn’t detect, for example, a narrow sales growth improvement but rather we saw in the first quarter across the board gains. Of the top seven manufacturers, for example, each and every one reported positive growth.
Much of prior year declines in revenue are attributable to a substantial drop in procedures volumes. As of the fourth quarter of 2009, these volumes seemed to be rebounding and in the just-completed quarter growth rates improved further. According to David Dvorak, President and CEO of Zimmer, procedure volumes are back to where they were before the 2009 downturn in both the Americas and Asia Pacific, although there remains room for recovery in Europe.
Despite the sluggish rate of recovery in European procedure volumes, overall OUS revenues continued to show very positive growth. Zimmer reported YOY revenue growth of 7% and 14% in hips and knees, respectively, while Stryker reported 11% growth in both categories.
While some positive aspects have returned to boost revenue growth rates, pricing continues to be one of this industry’s most important and difficult challenges. Both Stryker and Zimmer reported that recon pricing had fallen 1% or more for the quarter. Yet this negative pressure was offset by the procedure volume increases and positive product mix.
These factors combined led to a second consecutive quarter of positive revenue growth across the industry for all large joint reconstruction. The following bullet points illustrate the rate of year-over-year sales growth by company.
- DePuy – 14.5%
- Smith & Nephew – 13.6
- Biomet – 13.2%
- Stryker – 10.6%
- Wright – 8.9%
- Zimmer – 6.6%
These manufacturers combined accounted for 11.1% YOY revenue growth in overall large joint reconstruction, 9.8% in hips, and 12.1% in knees. The biggest laggard by percentage revenue growth was Zimmer, the current leader by market share. Excluding Zimmer, the rest of the overall large joint reconstruction market grew 12.7% YOY, 11.3% in hips, and 13.9% in knees.
Chart 2: Large Joint Reconstruction Market Share as of 1Q10
Source: Source: Company Reports and PearlDiver Analyst Estimates
Such percentages have market share implications as well. Zimmer, DePuy, and Stryker, the three largest manufacturers in this industry by market share as shown in Chart 2. Together these three manufacturers account for over 65% of the total large joint reconstruction market. Currently, Zimmer is the market share leader among the top three in both hips and knees, with 22.7% of the hip market and 26.2% of the knee market.
Just one year ago at this time, Zimmer held 25.2% of the large joint reconstruction market, 23.5% of hip reconstruction and 26.6% of knee reconstruction. Yet with another consecutive quarter lagging the market, DePuy who currently holds 22.4% of the hip market is poised to quietly slip past Zimmer in this key product category.
Individual Company Commentary
Biomet, Inc.
Biomet, Inc. reported large joint reconstruction product sales of $376.8 million in its third quarter of 2010 (which ended February 28, 2010), an overall YOY increase of 13.2%. Hip repair product sales increased 8% YOY with strong contributions from E1 Antioxidant Infused Bearings, Biolox delta Ceramic Femoral Heads, and the Taperloc Microplasty Hip Stems.
Knee repair product sales increased 17% on continued sales growth of the Vanguard Complete Knee System and the Antioxidant Infused Tibial Bearings.
DePuy, Inc. (a Johnson & Johnson company)
DePuy, Inc. reported large joint reconstruction sales of $710.8 million, an increase of 14.5% over the first quarter of 2009 beating PearlDiver estimates of $684.7 by 3.8%. Hip repair products increased YOY by 15% to $323.2 million on strong sales of acetabular and cementless systems. DePuy reported knee repair product sales at $387.6 million, an increase of 14% YOY on the “strength of the underlying business complimented by the new product launches.”
Stryker, Inc.
Stryker, Inc. reported large joint reconstruction sales of $634.7 million, a YOY revenue increase of 10.6%. This revenue growth beat PearlDiver estimates by 5.7% on stronger-than-expected knee sales which increased 12% to $344.0 million. Hip revenues grew 9% YOY to $290.7 million on encouraging results from both the ADM and Rejuvenate product lines.
Zimmer, Inc.
Zimmer, Inc. reported large joint reconstruction sales of $777.0 million, a YOY revenue increase of 6.6% and only slightly above PearlDiver estimates of $767.2 million. Hip sales grew $5.4 million? YOY to $316.0 million on a strong quarter for revision product lines. Knee sales increased 7.4% YOY to $461 million with strong contributions from the partial knee product lines.
Looking Forward
The first quarter of the year demonstrated continued strengthening within the large joint procedure market. Procedure volumes are returning to their pre-recession levels, OUS revenue numbers again show continued improvement, and—most importantly—for the second quarter straight manufacturers are reporting rising rates of sales and unit volume growth rates. Based upon the strength of the quarter and the better-than-expected signs of stability, we are increasing our forecast for the second quarter of 2010 as follows:
- The large joint reconstruction market is expected to grow 10.3% YOY
- The hip reconstruction market is expected to grow 9.2% YOY
- The knee reconstruction market is expected to grow 11.2% YOY
- Gains on a per company basis shown in Table 1
Table 1: Forecasted Hip and Knee Repair Global Revenues ($ in millions)
| 2009 A | 1Q10 A | 2Q10 E | 2010 E | 2011 E | 2012 E | |
| Biomet* | $1, 364.7 | $379.8 | $376.8 | $1, 505.4 | $1, 598.1 | $1, 723.4 |
| Hips | $569.1 | $153.8 | $149.8 | $605.0 | $629.2 | $659.1 |
| Knees | $795.6 | $226.0 | $227.0 | $900.4 | $968.9 | $1, 064.4 |
| DePuy | $2, 624.8 | $710.8 | $709.9 | $2, 923.7 | $3, 139.3 | $3, 331.2 |
| Hips | $1, 189.2 | $323.2 | $308.3 | $1, 314.1 | $1, 393.0 | $1, 462.6 |
| Knees | $1, 435.6 | $387.6 | $401.6 | $1, 609.6 | $1, 746.4 | $1, 868.6 |
| Exactech** | $102.7 | $27.5 | $27.4 | $112.3 | $117.8 | $121.2 |
| Hips | $26.9 | $6.6 | $7.0 | $29.3 | $30.2 | $27.7 |
| Knees | $75.8 | $20.9 | $20.4 | $83.0 | $87.6 | $93.5 |
| Smith & Nephew | $1, 416.7 | $395.3 | $392.3 | $1, 564.3 | $1, 734.4 | $1, 891.6 |
| Hips | $668.2 | $183.7 | $180.6 | $730.8 | $811.0 | $875.9 |
| Knees | $748.5 | $211.6 | $211.7 | $833.4 | $923.4 | $1, 015.7 |
| Stryker | $2, 400.6 | $634.7 | $643.4 | $2, 643.5 | $2, 855.8 | $3, 050.0 |
| Hips | $1, 129.3 | $290.7 | $307.6 | $1, 238.4 | $1, 331.3 | $1, 411.1 |
| Knees | $1, 271.3 | $344.0 | $335.8 | $1, 405.1 | $1, 524.5 | $1, 638.9 |
| Wright | $290.0 | $78.7 | $80.6 | $318.7 | $335.1 | $357.6 |
| Hips | $167.9 | $46.3 | $46.4 | $185.5 | $194.3 | $206.9 |
| Knees | $122.2 | $32.4 | $34.2 | $133.2 | $140.8 | $150.7 |
| Zimmer | $2, 989.0 | $777.0 | $794.9 | $3, 162.7 | $3, 281.4 | $3, 442.1 |
| Hips | $1, 229.0 | $316.0 | $321.9 | $1, 275.1 | $1, 318.3 | $1, 371.0 |
| Knees | $1, 760.0 | $461.0 | $473.0 | $1, 887.6 | $1, 963.1 | $2, 071.1 |
| Total | $11, 188.5 | $3, 003.7 | $3, 025.2 | $12, 230.5 | $13, 062.0 | $13, 917.2 |
| Hips | $4, 979.6 | $1, 320.2 | $1, 321.4 | $5, 378.2 | $5, 707.2 | $6, 014.3 |
| Knees | $6, 209.0 | $1, 683.5 | $1, 703.8 | $6, 852.3 | $7, 354.8 | $7, 902.8 |
* adjusted to match fiscal year of Jan 1 to Dec 31
** estimated
Source: Company Reports and PearlDiver Estimates
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