Recon Heading Back Toward Ground?
Large joint reconstruction industry suppliers sold $2.9 billion of products in the second quarter (2Q10), falling just short of our forecast of $3.0 billion. We have, therefore, held our forecast for the large joint reconstruction industry at $3 billion for the 3Q10. We have slightly decreased our forecast for the year from $12.2 billion to $12.04 billion, primarily reflecting the second quarter results.
One year ago at this time reported sales from companies supplying large joint reconstruction implants and instruments were actually declining year to year (down 4.2%). Of all the suppliers reporting last year, only Biomet and Exactech posted mid-year sales gains, and in knees Biomet stood alone. Finally, for the second half of 2009, sales of large joint recon products rebounded nicely and posted a respectable 8% rate of sales growth for those last two quarters of 2009.
For the second quarter of 2010, large joint recon sales rose 4.5% which is actually a slower rate of sales growth than the final quarters of 2009, but clearly stronger than the same quarter in 2009. At the one-year mark sales growth is clearly in positive territory but it is moderating from the rebounding growth rates of the end of last year. Here are some highlights from the second quarter sales reports for large joint recon sales:
- Sales growth rates outside the U.S. (OUS) were stable but less than those of the first quarter
- U.S. sales growth rates were mixed
- Pricing pressure continues to weigh on revenue growth rates
Manufacturers of large joint recon implants and instruments reported that aggregate sales rose 4.5% year-over-year (YOY) as illustrated in Chart 1. Sales of both hip reconstruction and knee reconstruction products grew although sales of knee products rose 4.8% YOY which outpaced sales of hip products (up 4.3% YOY) for the fourth consecutive quarter.
Chart 1: Large Joint Reconstruction Market Revenue Growth (YOY)
Source: Company Reports
The Slow Down
As Chart 1 illustrates, industry sales growth rates had rebounded during the fourth quarter of 2009 and the first quarter of 2010. In prior quarters revenues had actually declined from year-earlier levels. Now sales growth rates of large joint products appear to be slowing again.
At this time a year ago, unstable OUS sales were at the core of overall large joint product revenue declines. During the second quarter of 2009, all three of the market leaders in large joint reconstruction reported that sales of hip, knee or both products had declined from prior year levels. Zimmer, the market leader, reported that its sales of hip products fell 14.9% outside the U.S. and that its knee products were down 11.2%.
Better markets for U.S. large joint recon products outside the U.S., not surprisingly, were also at the core of the sales growth rebound during 4Q09 and 1Q10. In the fourth quarter of 2009, Zimmer reported a 9.8% YOY increase in OUS hip sales and a 17% increase in OUS knees. Stryker also had impressive gains with a 13% YOY increase in both OUS hips and OUS knees. The first quarter of 2010 showed similar OUS results—Zimmer hips increased 7.0%, Zimmer knees 14.4%, and Stryker hips and knees 11%. We believe DePuy’s OUS sales lagged their competitors by one quarter, and in the first quarter of 2010 rose by 6% in OUS hip sales and 8% in OUS knee sales.
But of course this story doesn’t end in the first quarter. The good news with OUS sales revenues is that the top two producers by market share as shown in Chart 2, Zimmer and DePuy, continued to report that sales of hip and knee products continue to grow outside the U.S. For the 1Q10 Zimmer reported that its OUS large joint recon sales rose 2.4% in hips and 4.2% in knees while, we estimate, DePuy managed to increase its OUS hip sales by 3.7% and knees by 3%. Stryker, #3 in market share, reported that OUS sales increased 4% in hips but declined 5% in knees.
Chart 2: Large Joint Reconstruction Market Share as of 2Q10
Source: Company Reports and PearlDiver Analyst Estimates
For U.S. sales, Zimmer clearly had strong results to report. For the 2Q10 Zimmer posted a 3.5% rate of hip sales increase which was the same rate as 1Q10, and a 2.9% rate of sales increase for knees which was lower than the 3.6% reported growth in the first quarter of 2010. Stryker also posted large joint sales increases at a rate which was below those in the first quarter of 2010. In Stryker’s second quarter, sales of hip implant products rose 2% YOY, down quite a bit from the first quarter’s 7% rate of hip sales growth. Sales of Stryker knee implants rose 4% in the second quarter, which was a much slower rate of growth than the 12% Stryker reported in 1Q10.
Pricing pressures are clearly the #1 cause of these sluggish revenue growth rates. According to Catherine Owen, Stryker's Vice President of Strategy, “We’re not seeing anything different on the pricing trends in terms of the pricing pressure that existed in the recon market.” Price cuts in Japan did impact large joint recon sales, especially knees according to David Dvorak, Zimmer's Chief Executive Officer.
Quarter by Company
Biomet, Inc. reported that it sold $371.3 million of large joint reconstruction products in its May quarter (which is Biomet’s fourth quarter of 2010), up 13.0% YOY. That rate of growth was the highest of all major large joint implant companies. Biomet’s hip repair product sales increased 10.0% YOY to $148.2 million, in line with PearlDiver expectations. Knee repair product sales increased 15.0% to 223.1 million, also in line with PearlDiver expectations.
DePuy, Inc. (a Johnson & Johnson company)
DePuy, Inc., we estimate, sold $667.8 million of large joint reconstruction products, up 5.8% increase from 2Q09. Hip repair product sales, we estimate, increased YOY by 6.4% to $291.5 million. We attribute the success to product mix and newer products such as the ASPHERE Contoured Metal Head and continued use of the traditional Pinnacle Hip Solutions.
DePuy reported that knee repair product sales increased 5.4% to $376.6 million YOY. We also attribute this success to the strength of the underlying business and sales from the Sigma Knee Portfolio.
Stryker, Inc. reported low rates of YOY revenue growth rates for both hip and knee reconstruction markets. Overall, company officials reported that sales of large joint repair product sales rose 1.7% to $592.1 million. Stryker’s hip repair product sales increased 2.9% YOY to $285.2 million while its knee repair product revenues increased 0.5% to $306.9 million. Both hips and knees were well below PearlDiver and Wall Street expectations due to unexpected slower performance in the U.S. and continued slow rates of sales growth in Europe.
Zimmer, Inc. reported that its large joint reconstruction sales rose 3.3% YOY to $770.2 million, which was in line with PearlDiver expectations. Hip repair product sales rose 3.0% to $317.2 million led by Fitmore and M/L taper sales. Knee repair products increased 3.5% to $453 million with the help of patient-specific instruments.
Looking ahead, there are a several factors which we anticipate will have a positive impact on sales growth rates in the second half of 2010. First, while the growth rates were not as impressive as the first quarter of 2010, there is a returning sense of stability to growth rates.
Additionally, a number of new products are expected to have a positive impact. For example, the continuing rollout of Stryker’s ADMX3 hip system, the Zimmer Continuum Cup Hip System, and Wright Medical’s Evolution Medial Pivot Knee System.
With these reasons in mind, we are forecasting the following performance for large joint recon sales in the current quarter:
- Sales of large joint recon products will likely rise 7.0% YOY
- Sales of hip recon products will likely increase 5.7% YOY
- Sales of knee recon products will likely rise 8.1% YOY
- Gains on a per company basis are shown in Table 1
Table 1: Forecasted Hip and Knee Repair Global Revenues ($ in millions)
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