Sales results for the first quarter of 2012 for the “big five” orthopedic device companies (The Big Bones) are now in. Those five manufacturers—Biomet, Inc., DePuy Orthopaedics, Inc., Smith & Nephew, plc, Stryker Corporation and Zimmer Holdings, Inc.—make up about 90% of the orthopedic market for hips, knees, extremities and trauma.
Who won the battle of the Big Bones and who lagged behind? Which product categories moved the market? We’ll tell you how Wells Fargo Analyst Larry Biegelsen called the quarter in a minute.
First the good news.
Based on quarterly SEC reports, Biegelsen estimates the worldwide orthopedic reconstructive market grew by 2.1%, while patient visits to hospitals for hip, knee and shoulder procedures are all up since the first of the year. In the U.S. recon growth was only 1.1%, but up from a 2.1% decline in the last quarter of 2011.
Commentary from the companies has generally been positive, but most have cautioned about reading too much into this quarter’s results. Biegelsen believes first quarter results were a positive for the ortho industry, and is cautiously optimistic that the industry will continue to rebound in 2012.
Patients Returning
Ortho procedure volumes are trending upward. On a rolling three-month basis, Wells Fargo’s hospital procedure volume shows that knees, hips and spine procedure volume has improved for the last two months (Figure 1).
Shoulder procedure growth has leveled recently but is still hovering around 10%.
Biegelsen believes the data shows a positive trend and is consistent with recent management commentary suggesting stable to slight improvement in procedure volume.
Figure 1: Rolling 3-Month Orthopedic Volume
Source: IMS Health and Wells Fargo Securities, LLC estimates.
Note: Adjusted for one extra day in February 2012.
The bad news? It was hard to find, but one quarter doesn’t make a trend and caution remains as the Supreme Court wrestles with a health insurance mandate, Congress dithers over a broken public purse and, trying to push new technologies through the FDA remains an expensive proposition for device makers.
Recon Recovery?
Companies are cautiously optimistic. Figure 2 shows year-over-year (YOY) and sequential growth rates for hips, knees and extremities. Spine and trauma are not included in this article. Biegelsen provides comments on the market categories:
Figure 2: Recon, Knee & Hip YOY Growth Analysis
Source: Company reports and Wells Fargo Securities, LLC estimates.
Note: Q1 2012 growth excludes the impact of one extra day selling day for applicable companies; quarterly market growth figures include Wells Fargo Securities estimates for the companies that have not yet reported or information is not available.
Biegelsen said all five ortho companies saw sales growth accelerate during the quarter and the orthopedic market appears to be “stable at worst and likely improved slightly” in the quarter.
Knees Lift Market
The increase in recon sales was largely driven by knee sales, which rose 2.8%. Knees also recovered in the U.S. where sales rose 1.1%, recovering from a 2.1% decline in sales the last quarter in 2011. Hips, extremities and trauma sales were essentially in line with the previous quarter. (Figure 3).
Figure 3: Quarterly Recon, Knee & Hip Growth*
* Market growth rates include Biomet, JNJ, SNN, SYK, WMGI, ZMH and others.
Source: Company reports and Wells Fargo Securities, LLC estimates.
Note: Growth excludes the impact of one extra day selling day for applicable companies.
Winners and Laggards
Reconstructive
Biegelsen estimates that Biomet’s 3.2% rise in recon sales topped The Big Bones, followed by Smith & Nephew and Stryker, both up 2.5%, and Zimmer rising 2.4%. All beat the estimated 2.1% market growth. DePuy sales only rose 1.3%, while Wright Medical Group, Inc., not quite big enough for the Big Bones club, saw sales decline 15.2%.
In the U.S., Stryker grew the fastest at 3.9% and Wright continued to see sales drop by 15.2%.
Figure 4: Global and U.S. Recon (Hip & Knee) Growth
Source: Company reports and Wells Fargo Securities, LLC estimates.
Note: Q1 2012 growth excludes the impact of one extra day selling day for applicable companies.
Knee Winner – Smith & Nephew
The U.S. knee market rebounded as all five large ortho companies reported that sales growth rates improved during the quarter. As we mentioned earlier, worldwide knee sales rose 2.8%
Smith & Nephew blew away the field by announcing that sales of knee implants rose 6% during the quarter. Stryker also beat market growth, advancing 3.4%. The rest trailed the market, with Wright at the bottom reporting a 5% year-over-year decline in knee implant sales.
In the U.S., all companies except Wright and Zimmer (down 10.7% and up 0.3%, respectively) beat the market growth rate of 1.8%. Stryker and Smith & Nephew grew 3.3% and 3.0%, respectively, while Biomet and DePuy sales rose 2.4% and 2.3%
Biegelsen did not see a meaningful shift in knee market share in the quarter.
Hip Winner – Biomet
Worldwide, Biomet, Zimmer and Stryker (4.4%, 2.5% and 1.5%) beat market rate growth of 1.2%. DePuy sales rose 1%. Wright and Smith & Nephew saw sales decline by 10.0% and 2.0%. Smith & Nephew attributed its decline in sales to being associated with the metal-on-metal hip controversy.
In the U.S., where the hip market grew 1%, Biomet and Stryker reported sales increases of 5.4% and 4.7%, respectively. Everybody else reported declines. Wright’s sales fell the most, declining 20%, followed by Smith & Nephew, off 4%, and DePuy and Zimmer dropping 0.6% and 0.5%.
Extremities – Exactech By a Mile
The extremities market appears stable with high single-digit growth. (Figure 5). Biegelsen estimates that extremities growth was 7.4% in the first quarter, slightly lower than 8.3% growth reported in the last quarter of 2011.
Figure 5: WW Extremities Market Growth
*Market growth rates include ARTC, Biomet, JNJ, EXAC, TRNX, WMGI, ZMH and others.
Source: Company reports and Wells Fargo Securities, LLC estimates
Note: Q1 2012 growth excludes the impact of one extra day selling day for applicable companies; quarterly market growth figures include Wells Fargo Securities estimates for the companies that have not yet reported or information is not available.
Exactech is pretty much lapping the field when it comes to growth rates (see Figure 6) as their sales rose 37% during the quarter. They’ve been crushing the competition since the third quarter of 2010. Biomet and Tornier, Inc. are the only others with steady double-digit sales growth with increases of 16.4% and 11.3% in the first quarter.
DePuy was the laggard with sales rising only 3% during the quarter. DePuy’s growth rate has been below market growth in eight out of the last nine quarters.
Figure 6: Quarterly WW Extremities Growth by Company
Source: Company reports and Wells Fargo Securities, LLC estimates.
Note: Q1 2012 growth excludes the impact of one extra day selling day for applicable companies; quarterly growth in indicate Wells Fargo Securities estimates the companies that have not yet reported or where information is not available.
2012
Despite a strong first quarter, Biegelsen says device manufacturers have been hesitant to update guidance. He thinks the companies are remaining conservative as they wait for additional signs of sustained improvement before declaring a recovery.
One quarter doesn’t make a year, but it’s a good start.
