Economic Slowdown Strains Joints

The economic slowdown may be putting a strain on joints as well as wallets. Sales reports from the fourth quarter of 2008 confirm slowing in the large joints reconstruction market as revenue growth nearly screeched to a halt. Even though third quarter 2008 growth was still considerable, the further slowing of sales, especially by market leaders Zimmer and Stryker, dragged revenue growth down to a new low during the fourth quarter. This dramatic decline in revenues is lowering estimates for 2009 sales, but there is still hope for strong growth in some of the market’s smaller companies.

Graph 1: Global Reconstruction Market Revenue Growth (Year-Over-Year)

Source: Company Reports

Graph 1 displays global, year-over-year revenue growth rates for the hip reconstruction market, knee reconstruction market, and the overall large joint reconstruction market. Prior to the fourth quarter 2008, year-over-year growth rates had held an exceptionally high level through the 2007 and 2008 fiscal years, reaching 16.9% just one year ago during the fourth quarter of 2007. However, as of the fourth quarter 2008, PearlDiver Technologies, Inc. analysts estimate revenue growth for the total reconstruction market to be significantly lower, at only 1.8%. Knee market revenues are still growing at 2.9% year-over-year, but hip market revenue growth has almost completely halted at 0.5%.

Fourth Quarter Breakdown

Biomet, Inc. reported large joint reconstruction sales of $319.5 million in its second quarter 2009 (which ended November 30, 2008), an overall year-over-year increase of 8.3%. Hip sales grew 10% year-over-year thanks to the strength of the M2a-Magnum Acetabular System, and knee sales grew 7% as demand continued for the Oxford Partial Knee System and the Vanguard Complete Knee System. 

DePuy, Inc. reported large joint reconstruction sales of $663 million, a 3.4% increase over fourth quarter 2007. The hip market reported sales of $302 million, well below Wall Street consensus expectations of $330 million and PearlDiver expectations of $322.6 million. Yet year-over-year this was still a positive growth of 6.7%. Knee sales, reported at $361 million, only grew 0.8% over fourth quarter 2007, $24 million below consensus Wall Street expectations and $18.5 million below PearlDiver estimates.

Exactech, Inc. reported large joint reconstruction sales of $22.3 million, an increase of only 0.5% from the fourth quarter. The hip market reported sales of $5.3 million, falling slightly below Wall Street expectactions of $5.6 million and showing a decrease in hip sales year-over-year of 7%. Knee market revenues still maintained positive year-over-year growth of 3%, reported at $17 million, but still below Wall Street expectations of $18.4 million.

Smith & Nephew, Inc. reported continued growth of 7.1% large joint reconstruction revenues, at $384.9 million. Within the hip market, sales grew 5.0% reaching $181.7 million, beating Wall Street expectations of $173 million and falling below PearlDiver expectations of $185.1 million. Knee market revenues grew at 9.0% reaching $203.3 million, below PearlDiver expectations of $208.9 million and above Wall Street expectations of $193 million.

Stryker, Inc. reported revenue growth exceptionally lower than normal, with total large joint reconstruction sales of $590.6 million, an increase of only 1.0% over the previous year. Stryker maintained 7.9% growth in knees at $313.3 million, but revenues of $277.3 were a significant decline of 5.9% in hips. Revenue growth for knees and hips were well below both Wall Street and PearlDiver expectations.

Wright Medical, Inc. reported exceptionally strong growth in the large joints reconstruction market, including both knee and hip markets. Total sales for large joints was reported at $71.7 million, a 16.2% increase over fourth quarter 2007 sales. Hips accounted for $41.9 million, growing 21.8% over fourth quarter 2007 sales and in line with both Wall Street and PearlDiver expectations. Knee revenues were only slightly below expectations at $28.8 million, growing 9.2% year-over-year.

Zimmer, Inc. reported sales well below expectations in both knees and hips, with revenues of $431 million and $314 million, respectively. In total, large joint reconstruction sales accounted for $745 million in revenue, down 4.8% from fourth quarter, 2007. Knees were down 3.2% and hips down 7%.

Graph 2: Fourth Quarter Large Joint Sales Growth
 

Source: Company Reports

Overall, the major competitors within the large joint reconstruction market reported positive growth. Within the hip market, three companies in total reported negative year-over-year growth and only one company (Zimmer) reported negative growth in knees. 

With the majority of large joint reconstruction companies reporting significant, positive growth, how is it possible that the overall market grew by only 1.8%? It all boils down to market share. In the hip market, Stryker and Zimmer hold 43.4% of the global market share, and both companies reported negative year-over-year sales growth. DePuy and Zimmer comprise 47.4% of the knee market, and reported revenue growth of only 0.8% and -3.2%, respectively. The slow or negative growth of two major companies within each sector has, in effect, created a fourth quarter of minimal growth within the large joint market.

The true impact of these large companies is easy to see in their absence. Within the hip market, excluding Zimmer and Stryker from the equation, the remaining companies experienced solid revenue growth of 7.6%. The same is true of the knee market. Without Zimmer and DePuy, the remaining companies’ year-over-year revenue growth increased by 7.9% during the fourth quarter.

Impact on Market Share

Even though the majority of companies consistently continues to grow, there has been, by PearlDiver estimates, an erosion of market share by Zimmer and Stryker. Displayed in Table 1, Stryker has lost some ground with respect to the large joint market from fourth quarter 2007 to present, while Zimmer has dropped from 26.4% to 24.6%.

Table 1: Large Joint Reconstruction Market Share

Q407 Market Share

Q408 Market Share

Change of Market Share

Biomet

9.9%

10.5%

0.6%

DePuy

21.6%

21.8%

0.3%

Exactech

0.7%

0.7%

0.0%

Smith-Nephew

12.1%

12.7%

0.6%

Stryker

19.7%

19.5%

-0.2%

Wright

2.1%

2.4%

0.3%

Zimmer

26.4%

24.6%

-1.8%

Other

7.5%

7.8%

0.3%

Total

100.0%

100.0%

0.0%

Source: Company Reports

Within the hip market, these shifts are even more dramatic. As of the fourth quarter 2007, Stryker held a market share of 21.74%, which has since dropped to 20.4%, a 6.74% decrease in share. Zimmer has experienced even greater erosion with market share decreasing from 24.91% to 23% during the same time frame. 

Stryker was able to counter some of its market share loss in the hip market with a slight gain in the knee market, improving from 18% at year end 2007, to 18.7% at year end 2008. DePuy and Zimmer, however, reported the greatest decreases within the knee market. DePuy dropped from 22.2% to 21.6% while Zimmer plunged from 27.6% to 25.8%, a 6.5% decrease.

The biggest benefactors of these market share decreases in hips and knees were Biomet, Smith & Nephew, and Wright Medical. According to PearlDiver estimates, within the hip market, Biomet’s share increased from 9.24% to 10.1%, DePuy increased from 20.88% to 22.2%, Smith & Nephew increased from 12.77% to 13.3%, and Wright Medical increased from 2.54% to 3.1%.

Within the knee market, Biomet moved from 10.5% of the market to 10.9%, Smith & Nephew increased from 11.6% to 12.2%, and Wright Medical increased from 1.7% to 1.8%. While these gains are not drastic, they do signal that market share leaders are losing ground. 

Earnings Forecast

Looking forward into 2009, PearlDiver analysts estimate slow but steadily increasing growth within the hip market. In total, only 1.2% revenue growth is expected for the first quarter, 3.3% growth for quarter two, 4.1% growth for quarter three, and 6.5% growth for quarter four of 2009. Overall, this growth expectation is equivalent to 3.8% growth for the year.

Table 2: Forecasted Hip Revenues (in Millions)

2Q09 E

3Q09 E

4Q09 E

2009 E

2010 E

Biomet

$140.4

$137.7

$145.1

$139.7

$562.8

$591.0

DePuy

283.25

304.22

296.40

326.16

1210.03

1258.43

Exactech

6.59

6.04

5.83

5.72

24.18

24.66

Smith &-Nephew

177.48

193.98

166.42

190.79

728.67

765.10

Stryker

255.96

279.48

272.40

295.32

1103.16

1136.25

Wright

44.41

48.44

43.95

49.56

186.36

201.27

Zimmer

323.40

339.57

300.76

329.70

1293.43

1332.23

Total

$1, 231.5

$1, 309.4

$1, 230.9

$1, 336.9

$5, 108.7

$5, 308.9

Source: PearlDiver Research

In the knee market, PearlDiver analysts also expect slow but steadily increasing revenue growth, although at a level slightly higher than hips. In total, 4.1% revenue growth is expected for the first quarter, 4.2% growth for quarter two, 6.2% growth for quarter three, and 6.2% growth for quarter four of 2009. Overall, this sales growth expectation is equivalent to 5.2% growth for the year.

Table 3: Forecasted Knee Revenues (in Millions)

2Q09 E

3Q09 E

4Q09 E

2009E

2010E

Biomet

$188.1

$181.8

$197.8

$196.8

$764.5

 833.3

DePuy

367.12

388.50

348.45

379.05

1482.10

1593.26

Exactech

18.32

20.71

17.76

18.11

74.90

79.39

Smith & Nephew

199.50

211.05

192.05

221.60

824.20

865.41

Stryker

313.22

328.71

317.04

333.66

1292.63

1357.26

Wright

32.01

33.38

31.56

33.67

130.62

137.15

Zimmer

449.46

471.67

439.77

459.02

1819.92

1838.12

Total

$1, 567.7

$1, 635.8

$1, 544.4

$1, 641.9

$6, 388.8

$6, 703.9

Source: PearlDiver Research

These forecasted earnings reflect a market experiencing decreased growth but still retaining its overall stability. Despite lower-than-expected growth numbers from the market leaders, smaller companies continue to gain ground. Companies such as Biomet and Wright are expected to continue at a higher rate of growth throughout 2009. In the midst of this economic slowdown, it looks like the large joint reconstruction market is still strong enough to weather the storm, yet the landscape may look significantly different once it’s over.