Pricing Pressures Lower Spine Forecast Part II

Pricing pressures continue to affect spinal implant supplier revenues and we are, therefore, lowering our sales forecasts for spinal implant and instrumentation suppliers.  But not all companies were affected the same way by these market factors. 

Individual Company Commentary: Introducing Medicrea

Medicrea

We are leading off our company commentary with a new addition to our coverage list. Medicrea is a pure play spine company based out of Lyon, France; specializing in scoliosis, degenerative deformity, trauma, and tumoral diseases. The company’s initial public offering was in 2006, and shares now trade on the NYSE-Alternext. Medicrea implants have been used in over 40, 000 surgeries. Revenues rose 45% in 2009 to €13.1 million, equating to $20 million. Medicrea has been gaining market share in Europe and the U.S. According to CEO Denys Sournac, revenues were driven by the PASS-LP fixation system, which treats deformity. Also, the company will begin marketing its Graniva cervical disc prosthesis in Europe in July. We forecast 36.6% revenue growth for 2010 which, we believe will equate to €17.9 million, or $23.2 million.

NuVasive, Inc.

NuVasive delivered strong results in the first quarter. Revenues grew 36.4% to $101.9 million (versus $80 million in 1Q09), and the company was profitable for the quarter. Management reiterated full-year revenue guidance of $480 million–$500 million. NuVasive expects 25%–30% revenue growth in 2011, and stated that there is upside potential to that should FDA approval come faster than anticipated for the PCM cervical disc. While NuVasive does see pricing pressure, management’s ability to release innovative products has allowed the firm to minimize such pressures—at least as compared to other firms. We also note that NuVasive’s accounts are relatively new so there remains room for both procedural growth and mix expansion. For that reason, we have not detected as much product discounting for NuVasive as we have for some of its more established competitors.

NuVasive has laid the foundation for continued strong sales growth by emphasizing a steady stream of innovative product introductions which, in turn, is facilitating deeper account penetration. Specifically:

• NuVasive is expanding indications to address thoracic spine surgery and scoliosis. The XLIF corpectomy set is also gaining traction.

• In the next few months, XLIF researchers will likely, we think, be presenting the results of their studies in three peer-review journals.

• Management announced in its most recent conference call with analyists that they have filed for a PMA (Pre Market Approval) for the PCM cervical disc replacement device, and noted that if approval came in 2011, there was the potential for upside to revenue estimates.

We estimate 2Q10 revenues will be $116 million (31.1% YOY growth). We estimate full-year revenue 2010 to be $497.4 million, which is a 34.2% YOY growth.

TranS1, Inc.

First quarter 2010 revenues declined 22.8% to $6.7 million (down from $8.7 million in 1Q09). The company reported that surgeons performed 692 Axial Lumbar Interbody Fusion (AxiaLIF) procedures worldwide (537 domestic) in the quarter (down from 751 in 1Q09). Worldwide AxiaLIF procedure growth, a key driver of revenues, decreased 22.2% YOY in the fourth 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 procedures treating the complex spine, such as scoliosis or deformity cases, are not being as severely affected because the access code in question is not as critical for reimbursement. The company believes there is opportunity in the complex spine for the Trans1 approach and will present this to surgeons at the APSS (Association of Pre-sacral Spine Surgeons) meeting. The company’s direct sales force stood at 49 reps. The average selling price (ASP) of AxiaLIF was $11, 000 up $400 from 1Q09. We estimate 2Q10 revenues to be $6.3 million (-20.3% YOY growth)

Zimmer Inc.

Zimmer Spine struggled during the quarter and the business has not yet stabilized. Reimbursement pressures regarding the Dynesys Dynamic Stabilization system (which is a significant contributor to U.S spine revenues) and weak sales force execution continue to hurt revenue growth. Zimmer reported that spinal implant and biologic sales in 1Q10 were $60.0 million (down from $64.6 million in 1Q09 or 7.1%, 9% constant currency YOY). We estimate that the spinal implant products acquired from Abbott in 2008 contributed $19.5 million to revenues which is essentially flat with the immediately preceding quarter. The components of Zimmer’s spinal implant sales decline are as follows: a negative 9% based on procedure volume/mix, no impact from pricing, and a positive 2% based on foreign exchange for an overall 7% rate of sales decline.

Management noted that the domestic spine business struggled, but they see opportunities for growth in international markets. Spine revenues grew 15% in Europe and 18% in Asia Pacific. Management noted that both the Pathfinder MIS platform and the Ardis Interbody System sold better year-over-year. Zimmer’s spine division is hoping to return to spinal implant market sales growth rates by the end of this year through increased penetration in domestic markets and new MIS (minimally invasive surgery). Indeed, if management achieves these goals, it would mark a significant turnaround from the immediate past. We are forecasting that full-year 2010 revenues will rise 1.3% to $256.8 million. We estimate that Zimmer’s 2Q10 spine revenues will be $64.8 million (1% YOY growth).

Biomet, Inc.

Biomet’s first quarter spinal repair and implant revenues (fiscal 3Q10) increased 4.3% YOY to $56.1 million, falling short of PearlDiver estimates of $58.5 million. U.S. sales rose 3%. This marks the sixth consecutive quarter of single-digit U.S. spine hardware growth. During the April 14 conference call, management stated that strong growth in spine hardware sales was offset by a slight decline in the spinal stimulation business. Management also noted that they were also experiencing spinal implant pricing pressures. The ESL PEEK-OPTIMA 4 Posterior Spacer was Biomet Spine’s top performer and helped to increase the overall sales growth rates for Biomet’s interbody products. Biomet’s Polaris Deformity System helped drive sales growth for the company’s thoracolumbar product line. The MaxAn Anterior Cervical Plate System, which was launched nationally during the first quarter, contributed to Biomet’s overall cervical hardware sales growth in the quarter.

We estimate that 2Q10 (Biomet’s 4Q10) revenues will be $65 million (5.7% YOY revenue growth) and for  calendar year 2010 revenues will be $250.6 million (7.3% YOY revenue growth).

Stryker Corporation

Stryker Spine delivered strong revenue growth both on an absolute level and as compared to such rivals as DePuy and Biomet. In 1Q10, Stryker’s spinal repair and implant revenues rose 10% to $141.5 million (up from $128.6 million in 1Q09). Stryker’s domestic spine product business grew just 5% YOY (vs.4% in 4Q09). The company reported that overall international spine product revenues increased 25% during the quarter (+16% constant currency). As we heard from virtually every other spinal implant company, Stryker management also said that pricing pressures were affecting sales growth rates. In addition, management mentioned that there were gaps in their spine portfolio that was keeping sales growth rates down. Stryker launched two cervical plating systems in order to fill this gap and to help bring unit volume growth rates closer to the company’s historic growth rates. Management is guiding analysts to expect better top-line spinal implant growth rates in the second half of the year—which is when new products will be available. Stryker expects pricing pressure to continue throughout the year, but procedure volumes to remain strong, growing in the high single digits.

We estimate that 2Q10 revenues will grow 10.6% YOY reaching $155 million. We estimate that full-year 2010 revenue will be $624.5 million (11.8% YOY growth).

Orthofix International

Orthofix Spine began 2010 with solid spinal implant sales growth rates. First quarter spinal repair and implant sales rose 8% to $71.7 million (up from $66 million in 1Q09), falling short our estimates of $73.65 million. Spine revenues now represent 52% of the company’s total revenues. Spine stimulation revenue increased 12% to $41.9 million while implant and biologic revenues increased 3% to $29.8 million. International revenues were strong as well. While overall spinal implant and biologic revenue increased 3%, it should be noted that revenues from metal implants grew 10%.This was driven by the Firebird pedicle screw system and the PILLAR interbody device. Orthofix continues to gain share in the spine stimulation market. The just completed quarter is the tenth consecutive quarter of double-digit revenue growth. Indeed, Biomet noted a slight decline in spine stimulation sales during their call. Biomet’s loss may have been Orthofix’s gain. 

Trinity Evolution continued to gain market momentum as supply issues are solved and additional surgeons have access to the product. While little has been released publicly regarding the patent infringement lawsuit that NuVasive announced at its second quarter conference call, Orthofix CEO Alan Milinazzo stated that the company “absolutely did not infringe” on the patent.

Management anticipates revenue growth to increase throughout 2010 and believes that Orthofix can grow above spine market growth rates in the long term. We estimate that 1Q10 spine revenue will rise 8.2% to $76.5 million and full-year 2010 spine revenues will grow 9.4% to $305.48 million.

Alphatec Spine, Inc.

Alphatec began 2010 on a strong note and once again posted revenue growth well above market rates. On May 10, Alphatec reported record first quarter revenues and reiterated full-year 2010 revenue guidance of $220 million to $225 million. Alphatec’s fourth quarter revenues grew 25.6% to $38.4 million (up from $30.6 million in 1Q09). U.S. revenues grew 19.4% in 1Q10, exceeding overall spinal repair and implant market growth rates—which are 6.4% overall. U.S. revenues were driven by the ILLICO minimally invasive retractor system. This marked the eleventh consecutive quarter of record revenues and the ninth straight quarter in which YOY revenue growth has exceeded 25%. In 1Q10, international sales, (Europe and Asia) comprised 26% of revenues, or $10 million, up from $6.8 million in 1Q09.

During the quarter, Alphatec entered the stem cell space by entering into an exclusive distribution agreement with Parcell Spine, LLC. Alphatec will be distributing Parcell’s proprietary osteoprogenitor adult stem cell product. The company also continues to execute its strategy to become the leader in the aging spine. Over 900 patients have been treated with the Osseofix Spinal Fracture Reduction System in Europe. OsseoScrew, which is an expandable pedicle screw designed to be used in osteoporotic patients was launched in Europe in 4Q09 and this will continue throughout 2010 along with the launch of HeliFix.

Alphatec continues to execute well by broadening its core product portfolio, entering high growth markets such as minimally invasive surgery, and innovating products for the aging spine patient. Uptake also seems to be positive in Europe and Asia for Alphatec products. For 2Q10, we estimate that sales for the combined entity (Alphatec and Scient’x) will reach $60.7 million.

Looking Forward

While growth in the spine market has declined over the past few quarters, and pricing pressure has become more apparent, we believe that strong fundamentals will continue to drive revenue growth in the future, albeit at a slower pace.