Systems vs Pieces and Parts and the Future of Orthopedics

Is anyone left in the upper echelons of DePuy, Stryker, Zimmer, Synthes or Medtronic who doesn’t believe Navigation and Robotics is the future of orthopedic and spine surgery?

If so, then the first half report from Stryker probably sent them to the orthopedic equivalent of Siberia.

For the second quarter of 2019 Stryker reported that sales rose 9.9% (8.5% organic) and, as they’ve done for each of the last 12 quarters, cited Mako robotics as one catalyst for that exceptional growth rate. Not only was that number (9.9%) higher than Zimmer (1.2%), DePuy (0.6%) or Synthes (Trauma +1.7%, Spine -0.9%) but the growth came off a respectably high sales base line—$3.7 billion.

As if that weren’t enough, Stryker’s sales growth rate was higher than Wall Street’s analysts expected.

BMO Capital Market’s Wuensch said: “Stryker revenue of $3.65B (up 8.5% organic) outpaced the Street’s $3.60B estimate, with continued Mako highlights. Operating margins expanded to 25.9% from 25.7% y/y, and EPS of $1.98 (up 12.4%) surpassed the consensus’ $1.94 and management’s $1.90-1.95 guide. Further, management increased 2019 organic revenue guidance to 7.5-8.0% from 6.8-7.5%.”

“Key takeaways: Mako was again in focus, benefitting not just Stryker’s Knee but also its Hip franchise, placing 44 units worldwide including 35 in the U.S. (versus 39 worldwide and 29 in the U.S. in 2Q18), reaching a total worldwide installed base of 700+ and 600+ in the U.S. In 2Q19, 18,000+ Mako procedures were performed, indicating utilization up 80% y/y, including double-digit growth in Hip procedures.”

Wells Fargo’s Biegelsen and Singh said: “SYK placed 44 MAKO systems in the quarter, including 35 in the US that is up from 37 systems, including 30 in the US a year ago. The company now has a global installed base of over 700 systems, including approximately 600 in the US.”

“SYK is seeing strong implant pull through on its MAKO system that is driving share gains in knees. It is interesting to note that SYK is seeing pull through across its recon portfolio, not just in knees. Management explained that customers that purchase MAKO for knee implants are now using it for other procedures such as hips. SYK is seeing strong uptake of its MAKO hips, including its new 3D printed Trident hip cup and noted on the call that utilization for MAKO in hip procedures was up double-digits y/y.”

Needham’s Matson said: “Mako placements and procedures saw strong Y/Y growth. Organic Orthopaedics growth improved to 5.6% from 5.0% in 1Q19; sales of $1.273B met consensus of $1.274B. SYK placed 44 (35 in the US and 9 outside the US) Mako systems during 2Q19, which was up from 35 in 1Q19 and 39 in 2Q18 and below our estimate of 51. There were ~18,000 Mako Total Knee procedures (up >80% Y/Y) and ~27,000 total Mako. SYK noted it is seeing more momentum with Mako Total Hips.”

Ever find yourself in a race you didn’t know had started?

Sooner than they probably expected, orthopedic and spine companies who sell pieces and parts, will find themselves in a race with companies that sell systems.

While this day has been coming for a long while—actually since the launch of Medtronic’s StealthStation in 1995—the 2nd quarter of 2019 will probably be remembered as the moment that intelligent surgery systems became a driver of market share.

Intelligent surgery systems—at the moment defined as Navigation + Robotic Assist (N+RA)—are firmly entrenched in the early adopter market but seem inevitably to be entering the early majority segments of the orthopedic and spine surgeon markets.

It’s about precision surgery.

Surgical implants and instruments are free-hand tools. For decades, they’ve been getting smaller, easier to use and as, sorry, idiot proof as possible. Of course, payers and purchasers focused almost entirely on these discrete units of the surgical process.

If, however, payer focus shifts to systems, how will implants and instruments establish and maintain differentiation?

Stated another way, how do you sell pieces and parts when your competitor is selling systems and, in that way, controlling the process of surgery itself?

Mid-Year Orthopaedic Supplier Report Card

In terms of market share shifts, here’s how the top analysts at Wells Fargo and Cantor Fitzgerald quantified that in their respective wrap ups for the hip and knee sectors.

Knees: Worldwide sales of knee implants, these two analyst groups wrote, rose between 2.5% and 3.1% in the June quarter. That compares to sales growth in 2018 and 2017 of 1.6%-2.0%, 2.4%-2.5%, respectively.

Both Wells Fargo and Cantor Fitzgerald report that global knee sales grew faster than U.S. sales for the first half of 2019.

The largest supplier of knee implants and instruments remains Zimmer Biomet with an estimated global market share of about 36%. Second largest supplier is Stryker at approximately 22%, followed by JNJ’s DePuy. Together, Zimmer, Stryker and DePuy account for approximately 78% of all knee implant and instrument sales in the world. Of the top three, Stryker is reporting the fastest sales growth rate and is clearly gaining share on market leader Zimmer Biomet.

Hips: Worldwide sales of hip implants, these two analyst groups wrote, rose between 2.7% and 3.0% in the June quarter. That compares to sales growth in 2018 and 2017 of 1.6%-1.8%, 1.6%-1.7%, respectively.

Both Wells Fargo and Cantor Fitzgerald report that global hip sales grew faster than U.S. sales for the first half of 2019.

The largest supplier of hip implants and instruments remains Zimmer Biomet with an estimated global market share of about 33%. Second largest supplier is DePuy at approximately 25%, followed by Stryker. Together, Zimmer, DePuy and Stryker account for approximately 81% of all hip implant and instrument sales in the world. Of the top three, Stryker is, again, reporting the fastest sales growth rate and is gaining share on market leader Zimmer Biomet.

Pricing: Both Wells Fargo and Cantor Fitzgerald track knee and hip implant pricing trends and both noted that prices are likely to continue to decline at 2-3% year-over-year rates for the rest of 2019. However, for Stryker and DePuy, pricing pressures improved slightly this year compared to 2018.

Looking Ahead

While the business of providing musculoskeletal implants, instruments, biologics, imaging, diagnostics and services remains the largest sector in medicine—measured by numbers of patients if not also revenues—it is also a slow yet steady growth industry dealing with significant regulatory oversight, expensive R&D and long-term pricing pressures.

How does such an industry meet its paramount objective of advancing the expensive science of treating patients with chronic, multifactorial diseases and the resulting break down of hundreds of millions of musculoskeletal systems?

The answer may well lie more in productivity tools (robotics, navigation and, eventually, predictive Big Data based algorithms) than in revolutionary or disruptive implants or instruments.

These are interesting times, indeed.