New Survey: Ortho’s Fastest Growing Sector is Extremities

Surveys come. Surveys go. But this one from RBC Capital Markets stood out for the unalloyed optimism expressed by surgeons in one specific corner of the orthopedics market—Extremities.

Imagine a medical products sector with no pricing pressure, growing surgery backlogs, high single-digit procedure growth rates and rising levels of implant and instrument innovation. Is such a place still available in U.S. healthcare? According to RBC’s October 28, 2014 survey of 50 U.S. foot/ankle surgeons, the extremities market has evolved into just such a place.

Here just a few quotes from the survey.

Pricing

“Approximately two-thirds of U.S. surgeons said that they have seen no signs of increasing pure implant pricing pressure in forefoot, midfoot and hindfoot implants and in ankle fusion procedures at their hospital/practice over the past 12 months, which makes foot/ankle one of the few orthopedic markets with little to no pricing pressure”

And it gets better.

“Overall surgeons said that pure implant pricing increases for forefoot, midfoot and hindfoot implants were approximately 1-2% in 2014 and surgeons expect similar 1-3% y/y [year-over-year] increases in 2015 depending on the type of procedure. Additionally, we believe that mix benefits from continued penetration of higher-priced implants (i.e. hammertoe implants and total ankles) are adding to the overall U.S. foot/ankle market growth. This gives us confidence that the U.S. foot/ankle market can continue growing 10%+ y/y in 2015.”

Growing Backlogs

“Surgeons expect their foot/ankle backlog to continue growing and anticipate that their backlog 6 and 12 months from now will be 4.3 weeks and 4.4 weeks, respectively. For 2015, U.S. surgeons point to expectations for high-single-digit y/y volume growth in the U.S. foot/ankle market.”

Innovation

“Surgeons expect total ankle penetration to increase by approximately 4-5 points annually over the next two years, reaching about 39% penetration by 2016. Said a different way, about 90-95% of U.S. surgeons say that penetration of total ankles will either stay the same or increase in their practice over the next one and two years.

“Stryker/Small Bone Innovations’ [SBi} S.T.A.R. total ankle was ranked as the highest quality total ankle replacement system, followed by Wright Medical’s [WMGI] INBONE and INFINITY listed as the #2 and #3 highest ranking total ankles. U.S. surgeons appear to be comfortable with the S.T.A.R. total ankle.

“WMGI is in the process of launching its much anticipated INFINITY total ankle, which management claims is: 1) more bone conserving; 2) easier to implant; and 3) more durable long-term relative to other total ankles on the market.”

The Survey

The Royal Bank of Canada is the largest bank in Canada serving 18 million customers worldwide. It also runs one of the most respected research groups on Wall Street. For an inside look at how respected RBC Capital Markets is on Wall Street, read Michael Lewis’s amazing book Flash Boys about the rise of high-frequency trading in the U.S. equity markets. There was plenty of bad behavior by many big name Wall Street firms documented in Flash Boys—except by RBC. It was, in fact an RBC employee who uncovered much of the shenanigans surrounding high frequency trading.

RBC is also, incidentally, the largest company in Canada.

The surgeon extremity survey was organized by Glenn Novarro, Managing Director at RBC Capital Markets and one of the more senior healthcare analysts on Wall Street. Formerly of Bank of America and Credit Suisse, Novarro is known for his thorough analysis and nearly 80% accuracy rating.

The three authors of the report were Glenn Novarro, Brandon Henry CFA (Associate Analyst) and Julia Kufman (Associate).

The RBC Extremity surgeon survey was inaugurated in 2010 and has steadily documented the rising level of surgeon optimism in this market. To a large extent, that optimism has occurred under the radar but has come from two easily recognized factors: innovation and a comparatively favorable reimbursement environment.

Today’s Extremity Market

According to Deaton Consulting the U.S. extremity implant market, which grew about 10% y/y in 2013, is a 152.8 thousand procedure market.

Shoulder implants represent the largest portion by far of the extremity implant market. It is also, by far, its fastest grower posting up a whopping 16% change between 2012 and 2013.

But the foot/ankle market, riding the success of SBi’s S.T.A.R ankle and with a handful of new total ankle and hammertoe products streaming into the market, is starting to accelerate.

Twelve companies supply approximately 98% of all foot/ankle implants and instruments. Those companies and their respective market shares—as estimated by RBC—are:

The merger of Wright with Tornier will mean that five companies (Arthrex, DePuy/Synthes, Smith & Nephew, Stryker/SBi and Wright Medical) will have approximately 78% of the foot/ankle market.

RBC’s survey of active foot/ankle surgeons reports that three companies, Arthrex, DePuy/Synthes and Stryker/SBi have increased their market shares the most over the last 12 months.

Said Novarro of the results: “We were a bit surprised to see JNJ/Synthes once again at the top of this list although the acquisition of Synthes by JNJ has increased the company’s presence in the foot/ankle part of the trauma space. Separately, we were not surprised to see SYK/SBi toward the top of this list. Recall that SYK began to build a dedicated foot/ankle sales force over two years ago to call on podiatrists post the completion of the privately held Memometal in early July 2011. This investment has obviously been paying off for the company as SYK’s foot/ankle business has been growing about 30%+ y/y. Additionally in late June 2014, SYK announced that it was acquiring Small Bone Innovations, a leader in the total ankle space with its S.T.A.R. total ankle.”

And, not surprisingly, the surgeons also selected the same companies (Arthrex, DePuy/Synthes, SYK/SBi along with Wright Medical) as the companies with the best products and training programs for physicians. Isn’t it always the case? The best training combined with top products equals growing market share.

Again, to quote directly from Novarro’s survey: “Interestingly, the top three manufacturers that have increased their foot/ankle presence most in hospitals over the past 12 months were also listed as the top manufacturers that have the best product/procedure training for foot and ankle procedures. More specifically, about 20% of U.S. surgeons listed SYK/SBi as the manufacturer with the best product/procedure training, followed by DePuy/Synthes at about 18% and Arthrex at about 16%. Wright Medical was #4 on the list as about 14% of surgeons said that WMGI provides the best product/procedure training for foot/ankle procedures.”

The Rise of Total Ankle

Give the V-Bros (Tony, Mark and John) credit. After their amazing success pioneering motion preservation in spine, they turned their attention to ankle replacement. As before, the brothers accurately spotted the opportunity very early on and then went through the grueling effort to raise the capital, design the implants and instruments and then run the regulatory and reimbursement gauntlet. As in spine motion preservation where the V-Bros implant (Pro-Disc) is the unquestioned market leader, in foot/ankle the S.T.A.R. ankle is market leader and is inspiring an entirely new generation of innovative ankle replacement products.

The Scandinavian Total Ankle Replacement (S.T.A.R) is the only PMA approved mobile bearing total ankle on the U.S. market. It has been on the market for five years. It has near universal reimbursement and U.S. surgeons are comfortable, generally, with it. In the RBC survey, surgeons characterized the S.T.A.R. as being easy to use with well-engineered instrumentation.

But competition has heated up—all to the benefit of both patients and physicians. Wright Medical’s Inbone and the new INFINITY total ankle’s received top marks in the RBC survey.

Novarro is forecasting that the U.S. total ankle market will grow at a 20%+ compound annual rate over the next five years arriving to an annual $325 million to $350 million revenue rate by 2018.

Here Comes Hammertoe

Finally, RBC’s survey documented that heavy marketing of new hammertoe implants is quickly making this small corner of orthopedics a hot area. Fundamentally, the innovation here is to use an implant instead of a K-Wire. Said Novarro: “U.S. surgeons have increased their hammertoe implant penetration from about 19% in 2012 to 28% currently. Additionally, about 85-90% of U.S. surgeons say that their hammertoe implant penetration will either stay the same or increase over the next one or two years.”

About 1.2 million patients present annually for hammertoe and roughly half (600, 000) receive treatment. It’s a small market. Novarro estimates it at about $75 million to $95 million in annual sales. However, if $500 hammertoe implants catch on as replacements for K-Wires, then the market could blossom into a $300 million segment. The big players are Arthrosurface, Biomedical Enterprises, Integra LifeSciences, Orthopro, Tornier, Wright Medical and Stryker.

Thanks

Many thanks to the team at RBC for allowing us to cherry pick their outstanding surgeon survey. For more information, please contact the RBC team at glenn.novarro@rbc.com.