Spinal Implant Sales Growth Moderating

Matt Menze, PearlDiver Spine Analyst • Wed, August 18th, 2010

Animal Spine – GaylaLin, 2008/Wikimedia Commons

Spine industry suppliers sold $2.283 billion of products in the second quarter (2Q10), falling short of our forecast of $2.418 billion. We have therefore decreased our forecast for the year from $9.490 billion to $9.150 billion, or 4.1% year-over-year (YOY) growth. The rate of spine industry revenue growth has declined sequentially for the last four quarters. Industry revenues grew 11.1%, 9.9%, 8.6%, and 6.4%, respectively, for 2Q09, 3Q09, 4Q09 and 1Q10. This was capped by just 0.9% growth this quarter.

Three major trends, we believe, are affecting the outlook for future growth in spinal implant sales:

Continued hospital pricing pressure exacerbated by “me too” products - Orthopedic manufacturers reported that prices for spinal implants declined by mid-single digits, which is consistent with last quarter’s commentary. However, in contrast to last quarter, mix and procedure volumes are not offsetting price decreases and that has produced meager year-over-year revenue growth for the second quarter of 2010. Exacerbating the hospital pricing pressure is, we believe, a general lack of differentiation among products. As a result, hospitals that are attempting to cut implant costs were successfully able to switch to lower cost suppliers for some types of spinal implants.

NuVasive’s argument on “legacy” products and open surgery - NuVasive believes that MIS treatments for spine disorders will one day comprise 80% of the market. While 80% is a bold number, we agree that the market will continue to move decisively in that direction, and companies with product portfolios which emphasize MIS will have some greater measure of pricing and product mix power.

Private payer reimbursement pushback is moving beyond new technologies - Private payers are scrutinizing traditional spine fusion/surgery claims and focusing on the “medical necessity” of the procedure before granting reimbursement. Payers may be more inclined to reimburse for spinal stenosis and spondylolisthesis cases than discogenic back pain.

Sequential Revenue Growth Declines for Four Straight Quarters

In Table 1 we list and rank our 2011 and 2012 quarterly sales estimates for each major spinal implant company. As the table illustrates, sales of spinal implants and their related biologic products rose just 9% in 2Q10, down from 11.1% growth in 2Q09. For all of 2010, we estimate that spine revenues will rise 4.1% to $9.150 billion.

Table 1: Quarterly and Annual Sales Revenue for Spine Product Companies

Revenue ($ millions)	1Q 10	2Q 10	3Q 10E	4Q 10E	2010E	2011E	2012E
Medtronic	880	865	835	834	3, 414	3, 465	3, 535
DePuy	258	260	248	248	1, 014	1, 074	1, 128
Synthes	245	245	242	255	987	1, 040	1, 095
Stryker	141	140	139	156	576	602	635
Zimmer	60	58	59	64	241	254	269
Orthofix/Blackstone	72	77	73	79	300	327	357
Biomet	56	62	61	62	241	253	265
NuVasive	109	120	130	142	501	606	728
Globus	76	85	85	102	348	435	598
Alphatec	38	45	49	56	189	221	254
Pioneer Surgical	32	31	32	33	128	148	148
K2M	27	25	24	27	103	126	152
Osteotech	11	12	12	13	47	51	54
Orthovita	24	24	25	26	99	110	125
ArthroCare	4	5	4	6	19	20	22
Scient'X	15	-	-	-	-	-	-
SeaSpine	18	19	18	20	75	86	98
RTI Biologics	7	8	10	11	35	35	43
U.S. Spine	12	12	12	13	50	58	65
Integra Spine	11	12	12	12	46	52	59
Trans1	7	7	7	7	28	29	31
LDR	13	12	11	13	49	61	77
Spinal Elements	8	8	8	8	31	37	43
MEDICREA	5	6	6	7	23	30	40
Exactech (Altiva)	2	2	1	2	7	8	8
Other	150	145	150	155	600	684	773
Total Revenues	$2, 281	$2, 283	$2, 252	$2, 349	$9, 150	$9, 811	$10, 600
Total Growth	6.3%	0.9%	3.8%	6.1%	4.1%	7.2%	8.0%

Source: PearlDiver estimates, Wall Street reports, SEC filings, Synthes, Globus, and DePuy are estimated revenuesOsteotech spine-related revenue assumes 70% DBM revenue is spine related

Table 2 displays market gains and losses for the quarter. We estimate that NuVasive and Globus gained 1.3% and 0.9%, respectively, in the quarter due to strong revenue growth. Medtronic continues to lag market growth rates and may not return to market growth until 2012.

Table 2: Market Share Changes

Company	2Q09	2Q10	Est. Market Share Δ
NuVasive	3.9%	5.2%	1.3%
Globus	2.8%	3.7%	0.9%
Alphatec	1.4%	2.0%	0.6%
Orthofix	3.1%	3.4%	0.2%
Synthes	10.6%	10.7%	0.2%
Biomet	2.7%	2.7%	0.0%
Trans1	0.3%	0.3%	0.0%
Stryker	6.2%	6.1%	-0.1%
Zimmer	2.8%	2.5%	-0.3%
DePuy	11.9%	11.4%	-0.5%
Medtronic	40.5%	37.9%	-2.6%

Source: PearlDiver estimates, Wall Street reports, SEC filings

Individual Company Commentary

Alphatec Spine, Inc.

Alphatec posted strong revenue growth in 2Q, but did not meet consensus expectations. On August 6, Alphatec reported that second quarter revenues grew 55% to $38.4 million (up from $29.4 million in 2Q09). Please note that Alphatec has divested in one of its Japanese subsidiaries and is reporting its operating results as discontinued operations in 2009 and 2010. Revenues grew 10% on a pro forma basis. Revenue growth was hampered by integration challenges regarding the Scient’X acquisition, an unanticipated slowdown in Europe, and continued pricing pressure (mid-single digits). Alphatec revised full-year 2010 revenue guidance to $188 million–$193 million, down from $220 million–$225 million.

For 3Q10, we estimate that sales reach $49 million and full-year revenues to be $188.9 million (10.6% YOY growth on a pro forma basis).

Biomet, Inc.

Biomet’s second quarter spinal repair and implant revenues (fiscal 4Q10) increased just 0.8% YOY to $62 million, falling short of PearlDiver estimates of $65 million. U.S. sales rose 1%. Spine was the slowest growing unit at Biomet in the quarter, lagging even the struggling dental business. The spine stimulation business grew during the quarter, but was offset by declines in the spine hardware and biologics businesses. During the conference call held on July 13, 2010, management noted that it had seen mid-single-digit price declines in spine, which were offset by increased volume and mix. However, the business did face tough year-over-year comparisons as the quarter marked the anniversary of revenue gains driven by high volume producers hired in 2009. The company expects the Polaris Deformity System, the Trivium Derotation System, and the Solitaire C system to be growth drivers in the future.

We estimate 3Q10 (Biomet’s 1Q11) revenues will be $61 million (2.9% YOY revenue growth) and calendar year 2010 revenues to be $240.8 million (3.1% YOY revenue growth).

Medicrea

Medicrea, which we began covering last quarter, posted strong second quarter revenue growth. Revenues rose 36% in 2Q to €4.5 million, equating to about $5.6 million. Revenues were driven by the PASS-LP fixation system, which treats deformity. There are currently over 50 surgeons using the product, and Medicrea expects to continue gaining new surgeon users throughout the year. The company raised €2.5 million in additional capital in the second quarter as well. We forecast 37.4% revenue growth for 2010 which, we believe will equate to €18 million, or $23 million. We estimate third quarter revenues will grow 44%, to €4.47 million.

NuVasive, Inc.

NuVasive delivered strong results in the second quarter despite an overall industry slowdown and continued to gain market share. Revenues grew 35.1% to $119.6 million (versus $88.5 million in 2Q09). Management increased the low end of full-year revenue guidance to $485 million–$500 million which equates to 25%–30% revenue growth in 2011. Management commented that pricing pressure would likely continue regarding legacy spinal implants but less so in such high growth areas such as MIS, biologics, or specific areas of motion preservation. NUVA’s product portfolio seems to be in the right place at the right time.

We estimate 3Q10 revenues will be $129.9 million (36.9% YOY growth). We estimate full-year revenue 2010 to be $500 million, which is a 35% YOY growth rate.

Orthofix International

Orthofix spine reported strong second quarter results with spinal repair and implant sales rising 11% to $78.7 million (up from $70.7 million in 2Q09), surpassing our estimates of $76.5 million. Spine stimulation revenue increased 12% to $44.9 million while implant and biologic revenues increased 10% to $33.8 million. Lumbar and cervical implant revenues grew 16%, and were strong contributors to overall spine growth. Key product contributors were the Firebird pedicle screw system and the PILLAR interbody device. Orthofix continues to gain share in the spine stimulation market, with this quarter marking the eleventh consecutive quarter of double-digit revenue growth.

Management believes that Orthofix is on track to earn $300 million in spine revenues for full-year 2010. We estimate 3Q10 spine revenue to rise 7.2% to $73 million and full-year 2010 spine revenues to grow 8.3% to $302.4 million.

Stryker Corporation

Stryker Spine struggled in the second quarter citing increased pricing pressure, reimbursement challenges, a slight procedural slowdown, and product roll-out delays. In 2Q10, Stryker’s spinal repair and implant revenue growth was essentially flat at $140 million (vs. 9.4% growth in 2Q09). The domestic spine product business declined 3% YOY while international revenues grew 7% YOY. Stryker expects the challenges in spine to continue throughout the year. We estimate that 3Q10 revenues will be essentially flat YOY at $138.5 million. We estimate full-year 2010 revenue to be $576 million (3.1% YOY growth).

TranS1, Inc.

First quarter 2010 revenues declined 8.3% to $7.2 million (down from $8.8 million in 2Q09). The company reported that surgeons performed 667 Axial Lumbar Interbody Fusion (AxiaLIF) procedures worldwide (541 domestic) in the quarter (down from 671 in 2Q09). Worldwide AxiaLIF procedure growth, a key driver of revenues, decreased 16.2% YOY in the second quarter. Domestic procedure volumes actually grew sequentially in the quarter.

Physicians are encountering problems being reimbursed by payors due to the category III CPT (Current Procedural Terminology) code under which AxiLIF is being reimbursed. However, Trans1 has addressed this issue over the last several quarters, and as a result, the business is stabilizing domestically. The average selling price (ASP) of AxiaLIF was $12, 100 up 13.1% from 2Q09. We estimate that 3Q10 revenues will be $6.8 million (-8.3% YOY growth).

Zimmer Inc.

Zimmer reported that spinal implant and biologic sales in 2Q10 were $57.9 million (down from $64.2 million in 2Q09) down 10% (-9% constant currency) YOY. The 10% reported revenue decline includes a negative 9% based on procedure volume/mix, no impact from pricing, and minus 1% based on foreign currency exchange. Negative volume/mix was the primary driver of the revenue shortfall. Reimbursement pressures regarding the Dynesys Dynamic Stabilization system and overall pushback from private payors continue to negatively affect revenue growth.

Management stated that they expect the domestic spine business will stabilize by the end of the year and they also see opportunities for international market growth. We forecast full-year 2010 revenues will decline 5% to $240.9 million, down from our previous forecast of $256.8 million. We estimate 3Q10 spine revenues to be $59 million (1% YOY growth).

Looking Forward: Spine Industry Facing Continued Headwinds

This spine industry, we believe, is facing extremely challenging regulatory, reimbursement, and pricing environments. This is negatively affecting pricing, mix, and procedure volumes-the key drivers of revenue growth. Hospital pushback and reimbursement pressures are negatively impacting pricing. Regulatory challenges could slow the rate of new product introductions, which could in turn lessen the impact of new technologies on mix. Furthermore, reimbursement pressures could slow procedure volumes. However, there is hope for companies developing technologies with compelling cost propositions that improve outcomes.

Chart 1: Spine Market Shares (2Q10)