Large Joints: Revenues Increase, Pulse Strengthens

Large joint industry suppliers sold$2.7 billion of products in the third quarter (3Q09), exceeding our forecast by$126.4 million, or 4.9%. We have, therefore, increased our forecast for the large joint reconstruction industry by 4.5% to$2.9 billion for the upcoming fourth quarter. We have also increased our forecast for the year from$10.8 billion to$11.0 billion.

Prior quarters had been marked with declines in revenue, with decreases of 2.6% year-over-year (YOY) in the first quarter, and 4.2% in the second quarter. These positive results from the third quarter, however, show signs of a strengthening pulse within the large joint reconstruction industry.

Two reasons, we believe, caused this change toward positive revenue increases within the large joint reconstruction industry:

• Procedure volumes stabilized after two quarters of decline.
• European sales are recovering after steep declines in the second quarter.

Third-quarter results showed year-over-year revenue increases of 2.4% for the overall large joint reconstruction industry as shown in Chart 1. Specifically, the greatest revenue growth came from the knee implant sector, which increased 2.7% YOY, contrasting sharply with declines in growth over the previous two quarters. In addition to the progress within the knee sector, the hip sector also made progress. Prior to the third quarter, hip revenues had declined 2.5% and 5.2% YOY in the first and second quarters, respectively. Third-quarter reported earnings showed that revenues increased a modest 2.1% YOY

Chart 1: Large Joint Reconstruction Market Revenue Growth (Year-Over-Year)

Source: Company reports

A Strengthening Pulse

Whether the volume of large joint reconstruction procedures came from deferrals or an increase in patients feeling comfortable about moving forward with surgery, the numbers indicate that procedure volumes are stabilizing. When asked about knee and hip procedure volumes, Johnson & Johnson’s Worldwide Chairman of Medical Devices and Diagnostics Alex Gorsky said, “We’ve seen some slight softness in price offset by some mix so overall we’re seeing it about flat… we have not seen any additional deterioration.”

President and CEO of Zimmer Inc. David Dvorak, also echoed this point: “Although there continues to be some uncertainty about the rate at which procedure volumes will return, we believe this quarter’s results suggest the early indications of stabilization and potential trends towards more normalized growth rates.”

In addition to stabilizing procedure volumes, sales of large joint reconstruction products outside the United States (OUS) improved vastly over 2Q09. As we reported in August, each of the top three large joint reconstruction manufacturers saw brutal decreases in year-over-year revenue:

• DePuy – declined 14.0%
• Stryker – declined 13.5%
• Zimmer – declined 13.1%

As of the end of 3Q09, revenues had again decreased year-over-year for each of these manufacturers, but these were only minor decreases in comparison to 2Q09:

• DePuy – declined 0.5%
• Stryker – declined 1.0%
• Zimmer – declined 0.3%

Along with the vast improvement to OUS sales overall, Stryker’s hip product line actually gained ground during the third quarter with year-over-year sales increasing 1%.

Despite these significant improvements over the quarter, pricing pressure continued to have a negative impact on implant revenues. Stryker commented during its quarterly call that hip and knee implants continued to see low-single-digit pricing declines for both hip and knee product lines. Zimmer’s hip product revenue growth was impacted by a pricing decline of 1.1% while its knee product revenue was impacted by a pricing decline of 1.2%.

Based upon Zimmer, the market leader in terms of market share, pricing pressure during the third quarter was the most pronounced within the domestic market. Specific to Zimmer, in the domestic market hip and knee products faced pricing declines of 1.7% and 1.5%, respectively. In the European market, hip pricing declined 1.4% while knees decreased 0.2%. In the Asia-Pacific market pricing actually improved in hips “about half a point, but we still have negative pricing in knees of about half a point” according to Jim Crines, EVP, Finance and CFO of Zimmer.

Yet even with each of the manufacturers experiencing pricing pressure domestically and abroad, some are gaining ground. As shown in Chart 2, Zimmer remains the largest company by market share within the large joint reconstruction industry closely followed by DePuy and Stryker. Over the course of the last fiscal year, Zimmer has lost ground to Biomet, DePuy, Stryker, and Wright—decreasing 1.2% from 26.0% of the large joint reconstruction market at the end of 3Q08. The biggest gain from any one of Zimmer’s competitors was an increase in market share by Biomet from 10.1% one year ago. 

Chart 2: Large Joint Reconstruction Implant Market Share as of 3Q09

Source: Company reports

Third Quarter Breakdown

Biomet, Inc.

Biomet, Inc. reported large joint reconstruction product sales of$342.6 million in its 1Q10 (which ends August 31, 2009), an overall YOY increase of 4.3%. Hip repair product sales increased 2.0% YOY on the success of their press-fit stems. Knee repair product sales increased 6.0% on strong sales of the Oxford Partial Knee System and Vanguard Complete Knee System.

DePuy, Inc.

DePuy, Inc. reported large joint reconstruction sales of$640 million, a 2.7% increase from the third quarter of 2008. The company’s hip division reported sales of$296 million, above Wall Street consensus expectations of$280 million and PearlDiver Technologies, Inc. expectations of$279 million. This represents a YOY revenue growth rate increase of 3.9%. DePuy reported knee repair product sales at$344 million, an increase in revenue of 1.7% from 3Q08, above Wall Street expectations of$330 million and PearlDiver expectations of$337 million.

Smith & Nephew, Inc.

Smith & Nephew, Inc. reported large joint reconstruction product sales of$334.0 million, flat by YOY comparison with 3Q08. Hip repair product sales increased YOY 0.6% to$158.0 million, above PearlDiver estimates of$148.0 million. Knee repair product sales decreased YOY 0.6% to$176 million, slightly above PearlDiver estimates of$172.0 million.

Stryker, Inc.

Stryker, Inc. reported revenue YOY revenue growth in both the hip and knee reconstruction markets. Overall, large joint repair product sales were reported to be$591.6 million, an increase of 4.5% over the previous year. Stryker hip repair product sales increased YOY, breaking a streak of three quarters marked by decline with a 4.0% YOY increase in 3Q09 to$280.5 million. Revenues for hip repair products exceeded Wall Street expectations of$265.3 million and PearlDiver expectations$267 million. Knee repair product revenues increase 5.0% to$311.1 million, beating Wall Street expectations of$294.9 million and PearlDiver expectations of$295.3 million.

Wright Medical, Inc.

Wright Medical, Inc. reported that large joint reconstruction product sales increased YOY 5.9% to$70.2 million. Hip repair product sales increased YOY by 6.6% to$40.1 million, above PearlDiver estimates of$37.0 million and Wall Street estimates of$37.2 million. Knee repair product sales increased 5.0% YOY, to$30.1 million, slightly above Wall Street estimates and in line with PearlDiver estimates.

Zimmer, Inc.

Zimmer, Inc. reported sales well above expectations in both hip and knee reconstruction markets with revenues of$288 million and$417 million, respectively. In total, large joint reconstruction product sales increased 0.3% from 3Q08 to$705 million.

Looking Forward

The third quarter showed very positive signs and better-than-expected results, and we have increased our forecasts for the large joint reconstruction industry. Finishing out 2009, we expect 1.8% YOY revenue increase in the hip product market, 4.8% increase in the knee product market, and 3.5% overall increase for large joint reconstruction market revenues in the fourth quarter with gains on a per company basis shown in Table 1.

Table 1: Forecasted Hip and Knee Repair Revenues

3Q09 A

4Q09 E

2009 E

4Q10 E

2010 E

2011 E

2012 E

Biomet*

$342.6

$333.6

$1, 340.5

$345.6

$1, 389.2

$1, 474.2

$1, 588.6

  Hips

$143.2

$140.5

$560.8

$141.5

$580.0

$603.2

$631.8

  Knees

$199.4

$193.1

$779.6

$204.1

$809.2

$871.0

$956.8

DePuy

$640.0

$685.7

$2, 577.7

$723.7

$2, 720.3

$2, 900.6

$3, 132.7

  Hips

$296.0

$311.0

$1, 162.0

$332.1

$1, 240.8

$1, 302.8

$1, 407.0

  Knees

$344.0

$374.7

$1, 415.7

$391.6

$1, 479.5

$1, 597.8

$1, 725.7

Exactech

$24.1

$24.1

$98.9

$25.0

$102.5

$107.5

$112.8

  Hips

$6.8

$6.3

$26.4

$6.4

$26.9

$27.7

$27.7

  Knees

$17.3

$17.8

$72.5

$18.6

$75.6

$79.7

$85.1

Smith & Nephew

$334.0

$376.0

$1, 415.0

$433.3

$1, 630.5

$1, 734.4

$1, 891.6

  Hips

$158.0

$176.0

$666.0

$202.2

$765.1

$811.0

$875.9

  Knees

$176.0

$200.0

$749.0

$231.1

$865.4

$923.4

$1, 015.7

Stryker

$591.6

$618.0

$2, 356.8

$618.6

$2, 359.4

$2, 455.1

$2, 590.9

  Hips

$280.5

$282.8

$1, 107.1

$284.7

$1, 114.5

$1, 147.9

$1, 205.3

  Knees

$311.1

$335.1

$1, 249.6

$333.8

$1, 244.9

$1, 307.2

$1, 385.6

Wright

$70.2

$75.5

$289.2

$78.8

$302.0

$317.6

$339.0

  Hips

$40.1

$44.5

$167.5

$46.2

$174.2

$182.4

$194.3

  Knees

$30.1

$31.0

$121.8

$32.6

$127.8

$135.2

$144.7

Zimmer

$705.0

$760.0

$2, 940.0

$782.0

$3, 025.2

$3, 172.5

$3, 327.2

  Hips

$288.0

$313.0

$1, 209.0

$321.6

$1, 242.2

$1, 318.3

$1, 371.0

  Knees

$417.0

$447.0

$1, 731.0

$460.4

$1, 782.9

$1, 854.2

$1, 956.2

Total

$2, 707.5

$2, 872.8

$11, 018.0

$3, 006.9

$11, 529.1

$12, 161.9

$12, 982.8

  Hips

$1, 212.6

$1, 274.1

$4, 898.8

$1, 334.8

$5, 143.7

$5, 393.4

$5, 713.1

  Knees

$1, 494.9

$1, 598.7

$6, 119.2

$1, 672.1

$6, 385.4

$6, 768.6

$7, 269.8

* adjusted to match fiscal year of Jan 1 to Dec 31

Source: Company reports and PearlDiver Research

As we have seen during the third quarter, even with European revenues still down slightly, in comparison to the third quarter of 2008, the overall return of these revenues to near stability is a drastic improvement over the second quarter of 2009 and a key piece of the equation for a strengthening pulse in large joint reconstruction revenues. In addition, the stabilization of procedure volumes has set the pace for a solid fourth quarter.

For more articles by this author, please select the following link:

http://www.pearldiverinc.com/pdi/large.jsp