First Quarter Orthopedics Scorecard: A-

With Stryker, DePuy Synthes, Zimmer Biomet and a handful of other large suppliers reporting first quarter sales results, it is clear that orthopedic product sales will hit a record for Q1 2016 and exceeded Wall Street expectations by about $100 million.

For the first quarter ending March 31, 2016, 11 orthopedic product suppliers representing approximately 69% of industry revenues reported $6.3 billion in orthopedic product sales, 1.54% higher than Wall Street’s analysts expected.

Among the reasons given by Wall Street for such strong reports were:

• Orthopedic pricing was slightly better than expected. That doesn’t mean that prices rose. One analyst had estimated that prices had declined 2.1% in Q4 2015. That decline moderated in the first quarter—falling only 1.7% year-over-year.
• Demand for hip and knee implants improved. “Global recon market growth appears to have accelerated sequentially primarily on U.S. knees strength.” – Craig Bijou, Wells Fargo
• New product launches.

Of course, more insured patients (Obamacare plus eight years of rising employment rates) and an aging population had something to do with it too.

Sector Performance

Large Joints: According to Wells Fargo analyst Craig Bijou, results from DePuy Synthes, Stryker and Zimmer Biomet (which represent about 80% of all large joint implant sales) indicate that sales of implants and instruments for large joint reconstruction accelerated in the first quarter of 2016.

“U.S. recon growth (4.9% vs. 3.8% in Q4) was driven by strong sequential acceleration in U.S. knees (+5.7%) which is encouraging given the strong Q4 growth (+4%). OUS [outside U.S.] knees were likely flat sequentially. On the hip side, WW [worldwide] hip growth (+2.5%) improved 140 bps [basis points] over Q4 (+1.0%), driven by OUS hip growth which was depressed in Q4. U.S. hip growth was largely in-line with the prior quarter (+3.7% vs +3.5% in Q4). – Craig Bijou, Wells Fargo

Mike Matson, Needham & Company’s senior analyst, came to the same basic conclusion, writing: “We estimate that the recon market grew by 4% CC [constant currency] in 1Q16. Based on actual results from J&J, SYK, and ZBH, and estimates for SNN, we estimate that global recon growth was 4% CC in 1Q16 vs. 2% CC in 4Q15 and our 1% CC estimate. We estimate that global knee growth was 5% CC and that global hip growth was 2% CC.”

Spine: DePuy Synthes, NuVasive, Stryker Spine and Orthofix reported strong year-over-year spine hardware sales for the first quarter. In the aggregate, spine hardware sales also exceeded expectations for the start of 2016.

DePuy Synthes, in particular, reported rebounding spine sales from 2015. Said Matson: “JNJ’s worldwide spine growth was 0% CC vs. (6%) CC in 4Q15. JNJ’s U.S. spine growth improved to 4% from (1%) in 4Q15, while its OUS spine growth improved to (6%) CC from (13%) CC in 4Q15.”

Extremities: Extremity implant and instrument sales, however, didn’t follow the large joint lead in the first quarter.

Stryker and Zimmer reported that sports medicine, extremities and trauma sales growth rates slowed in the first quarter.

One major bright spot, however, was Orthofix which reported that sales of extremity implants and instrumentation jumped a strong 15.6%, year over year.

Company Performance

ConMed Corporation (CNMD): ConMed’s sales AND earnings topped Wall Street’s estimates and management raised its guidance for the rest of 2016.

Quick Take: “CNMD’s 1Q16 revenue and EPS beat consensus and management raised guidance to reflect more favorable exchange rates. The good news is that SurgiQuest sales exceeded our estimate and the integration seems to be going well. The bad news is that organic growth worsened in 1Q16 vs. 4Q15. Management highlighted several factors that caused the slower growth and they seem to be genuinely one-time in nature.” – Mike Matson, Needham & Company

DePuy Synthes Companies (JNJ): Led by strong knee implant and instrument sales, DePuy Synthes put up a notably strong start to 2016 after a lackluster year in 2015. Spine, in particular, rebounded nicely from its minus 6% growth rate in 2015. All-in-all, a solid performance for DePuy Synthes and lays the basis for a rebound year in 2016.

Quick Take: “While investors have hammered for JNJ to split the company up, management squashed the idea on its 1Q16 earnings call and delivered the goods to prove it.” – Joanne Wuensch, BMO Capital Markets

Exactech, Inc. (EXAC): Last year was a building year in terms of new product launches and sales channel growth. The first quarter was a clear indication that Exactech’s moves in 2015 are paying off in 2016. Said CEO David Petty in this quarter’s press release: “We also are seeing increased benefit from improvements we have made to the U.S. sales channel and expect that momentum to continue.”

Sales growth was across the board with extremity sales continuing to put up very strong year-over-year revenue growth.

Integra LifeSciences Corporation (IART): Integra beat sales AND earnings estimates and raised the guidance for the rest of 2016. This is the most common refrain among orthopedic companies reporting in the first quarter.

Quick Take: “Strong 1Q topline, but expenses keep flow-through muted. Adjusted Gross Margins saw a 240 bps improvement to 69.2% but were more than offset by a higher operating expense ratio of 50.5% driven by adjusted SG&A margins which were higher by 150bps and R&D margins which were 60bps higher than 1Q15. So while top line revenues saw a large uptick, a good portion of the revenues were reinvested behind the Omnigraft launch and R&D for lower extremities.” – Glenn Novarro, RBC Capital Markets

NuVasive, Inc. (NUVA): NuVasive’s first quarter sales beat Wall Street’s consensus by $10 million. U.S. spinal hardware sales were the engine of the quarter’s growth and, based on management’s comments to analysts, will be for the full year as well.

Quick Take: “NUVA’s U.S. Spinal Hardware grew 11.6% on an organic basis, the 5th consecutive quarter of growth acceleration, significantly faster than our estimate (+8%). NUVA’s core Lumbar business grew 13% in the quarter. Strong growth of disposables was offset by negative Biologics growth.” – Lei Huang, Wells Fargo

Orthofix International N.V. (OFIX): Orthofix had a particularly impressive first quarter handily beating consensus sales estimates. Since taking the CEO reigns, Brad Mason and his team have made operational improvements and key hires which, this quarter, appear to have delivered the results.

Mason commented on the quarter saying: “The commercial and operational improvements made over the last two years continue to drive the net sales growth for the company’s BioStim and Biologics SBUs. The increase in net sales in the Spine Fixation SBU was primarily due to the continued success of its growth strategy and higher than expected international cash collections.”

Stryker Corporation (SYK): With strong orthopedic sales to start the year, Stryker’s management raised its estimates of organic revenue growth from 5-6% to 5.5-6.5%. For a company posting up about $5 billion in annual orthopedic revenues, the higher guidance reflects about $25 million more sales than originally expected.

Quick Take: Wells Fargo’s analyst Bijou wrote that Stryker delivered a surprisingly strong operating leverage largely as a result of a strong gross profit increase. “The higher GM [gross margins] was driven by the suspension of the medical device tax (60 bps), positive mix due to higher U.S. sales and stronger growth of its higher margin products and less pricing pressure. SYK expects similar GM improvement throughout the rest of the year and is focused on driving operating leverage in 2016 and beyond.”

Zimmer Biomet Holdings Inc. (ZBH): The effects of Zimmer’s merger with Biomet continue to wash through the numbers. On a pro-forma, organic basis, Zimmer Biomet’s sales were up 1.2% from the prior year which was slightly above the Street’s conservative estimates for the quarter.

Demand for hips and knees, in particular, was strong and that supported management’s decision to raise revenue guidance to a range of $7.52-7.6 billion from $7.415-$7.49 billion.

All tables created by RRY Publications, LLC