One year from now, here is what we will be saying about the orthopedic industry:
- 2014 was the year of the knee. Three factors converged in 2014 to push knee reconstruction surgery growth rates well above consensus forecasts. Those factors are reduced reimbursement for HA [hyaluronic acid]injections, new knee implant designs and greater numbers of patients courtesy of both Obamacare and an ever more arthritic baby boomer generation.
- One of spine’s young turks was acquired. LDR, Globus and NuVasive started 2014 as the three fastest growing, most innovative spinal implant companies in orthopedics. By year’s end one had been acquired.
- Orthopedic equity valuations rose less than 10% on average in 2014. While orthopedic equity valuations ended 2013 up a stellar 33%; in 2014 investors either sat on their profits (and dollar cost averaged) or took profits. Overall, orthopedic equity valuations rose less than 10% in 2014. Three companies (Orthofix, Symmetry and Baxano), however, rebounded smartly from their poor 2013 stock performances.
- For the fourth year in a row, outpatient care was the fastest growing form of orthopedic care.
- Medical Device Tax was not repealed. Despite a determined effort on the part of AdvaMed and major medical device companies, Congress chose to keep the added revenues. On the plus side, physician pay reform passed.
- Overall, the number of orthopedic procedures rose 7.5% in 2014. The combination of a steadily improving economy, Obamacare and key product and process innovations pushed the overall number of orthopedic procedures up 7.5%—exceeding even the most optimistic forecast.
Welcome to 2014
An increasingly arthritic baby boomer generation plus Obamacare means that the number of patients darkening the doors of clinics is expanding at an accelerated rate. It also means that everyone will be busy this year.
Where will these new patients go for treatment? Care delivery is going through its greatest period of change since maybe ever.
Implant technology remains stolidly rooted in the 510(k) innovation model. The last two major innovations—two incision hips and MoM hips—well, we know how they turned out. But the Persona and Attune knees have excited surgeons for good reason—better fit implants with minimal learning curve.
Stem cells for knees—now that’s interesting—but will the FDA make it yet another stillborn technology?
So, here are our fearless predictions for 2014.
2014 Will Be the Year of the Knee
Piper Jaffray analyst Matt Miksic noticed an interesting connection between the volumes of HA scrips and U.S. knee reconstruction procedures. Said Miksic his December 16, 2013 report, “During periods of rising (HA) scrip growth, we generally see U.S. knee growth slowing. Throughout 2H11 and 1H12, HA scrips growth slowed corresponding to gradual increases in U.S. knee growth during the same period. As HA scrips rose to record levels of growth in 2009 and 2010, we saw knee growth continue to decline through the end of the year, despite the typical seasonality.”
Indeed, the chart accompanying Miksic’s note showed a clear inverse correlation between HA scrips and U.S. knee recon growth rates. When HA scrips growth rates rose, knee recon fell. And vice versa.
HA reimbursement is tightening up and those injections will likely slow in 2014, we believe, setting the stage for an upward bias to knee procedure growth rates.
Adding to the tailwind are two new designs: Zimmer’s Persona and DePuy’s Attune which are generating genuine excitement and interest among surgeons. While both systems are off-the-shelf systems, they still offer a higher degree of personalization for the patient. In addition, both systems are natural evolution of knee implants and are not only more efficient in terms of instrumentation but offer better fit (and therefore outcome) to the patient.
Finally, a new forecast from CMS [Centers for Medicare and Medicaid Services] raised the expected growth rate of medical procedures in 2014 substantially. According to CMS, improving economic conditions, an aging population and the coverage expansion from the Affordable Care Act (ACA) will move national health spending growth from 3.8% in 2013 to 6.1% in 2014!
NuVasive, Globus or LDR – Who Gets Bought in 2014?
These three spine companies are the fastest growing spinal implant companies in the market and each one has paced sales growth with a drumbeat of innovation. The odds that one of these three is purchased in 2014, we think, is about 50/50—which in the world of M&A are high odds.
Who might be buying? Biomet, Zimmer, Orthofix, Integra and Stryker are logical candidates.
For 2014, procedure growth should accelerate for many of the same reasons we mentioned for knee recon procedures—improving economy and coverage expansion. But pricing pressures remain tough forcing innovators to be more evolutionary than revolutionary. Sales growth for 2013 will probably come in 2-3%. Next year, procedure growth seems likely to reach 4-6% but continued difficult reimbursement will probably dampen overall spinal implant growth rates to levels that are only slightly better than 2013.
For the major spinal implant companies who are looking for double-digit spine growth, M&A will be the way to go.
Outpatient Care Will Be the Fastest Growing Care Sector
Orthopedic care is now provided in offices of the family practitioner, the internist, the orthopedist’s ambulatory surgical center, the pain management clinic, the pharmacy, the physical medicine specialist, the rheumatologist, the sports medicine clinic and, of course, the chiropractor. Among established orthopedic programs at large hospital networks, the fastest growing practice sector is outpatient orthopedic care.
According to a 2013 survey of hospital executives, 69% are embracing outpatient care as their principal means for revenue growth. According to the HealthLeaders Media Industry Survey 2013, 69% of hospital leaders and 66% of health system leaders identify outpatient care expansion as their No. 1 strategy to grow in this era of ever tightening reimbursement rules and millions of newly insured patients coming into the system courtesy of the Affordable Care Act.
Finally, “outpatient” care is increasingly defined as a diversified approach to orthopedic care and encompasses everything from knee injections at the pharmacy to arthroscopic care at an ambulatory surgery center.
The Medical Device Tax Will not Be Repealed but Physician Pay Reform Will Pass
Physician pay in Medicare Part B (aka: Sustainable Growth Rate – SGR) has done more to generate physician ill will toward Medicare specifically and government intrusion generally than any other action since it was passed in 1997.
Key bipartisan committee leaders in the U.S. House and Senate have now agreed on legislation to permanently and totally repeal the SGR and replace it with a new and smart set of physician performance standards.
The cost of the repeal is estimated by the Congressional Budget Office at around $116 billion—well below the $350 billion estimate from just two to three years ago.
Which brings us to the Medical Device Tax. The good news is that a non-binding commitment to repeal the Medical Device Excise Tax (MDET) was in the just passed and soon-to-be-signed into law by Obama budget. The specific language, while non-binding, does create a political pathway for repeal. But, any repeal that does not include an alternative funding source will not be supported by Obama. Add in the new funding requirement to pay for the $116 billion repeal of the SGR and we think that MDET likely gets pushed off to 2015 or later. Not this year.
2014 Will Be a Year pf Accelerated Orthopedic Procedure Growth
Courtesy of Wells Fargo analyst Larry Biegelsen, we saw CMS’ annual forecast for total U.S. health spending. This forecast was published in October 2013. CMS now expects that annual health spending will shift into a higher growth gear in 2014. In 2013, say CMS’ analysts, health spending likely grew 3.8% year-over-year. But for 2014 health spending is going to ratchet up to 6.1%. This represents a whopping 230 basis point jump in a single year.
According to CMS, an improving economy plus coverage expansion in the Affordable Care Act and an aging population are the causes.
Interestingly enough, the largest reason for such a higher rate of spending growth is the ACA. CMS’ analysts estimate that of the 2.3% jump in growth from 2013 to 2014, 1.6% of it comes from the ACA. Put another way…70% of the growth increase is coming from ACA’s coverage expansion.
Expect a Busy and Successful Year
The New Year, it appears, will be particularly busy with more orthopedic procedures scheduled than in 2013, more points of care and expansion by several care providers to make room for millions of new patients.
The news out of Washington will be mixed. Large joint surgeons may well be the busiest guys in the hospital—followed by their techs, nurses and industry sales reps.
So, enjoy the football games on January 1st, eat hearty, sleep well—even if it’s on the couch—because 2014 promises to be one of the best in a long while.
