Spinal Repair Market: Swimming Upstream
Spring has brought the close of the first quarter, and spinal repair and implant companies are fighting against the strong currents of a damaged economy with losses in pricing and procedure volumes. Companies with significant international exposure also faced currency headwinds. Who were the best swimmers? NuVasive Inc., Trans1 Inc., and Alphatec Spine Inc. saw revenue growth of 56.3%, 45%, and 32%, respectively. In contrast to many other spine companies this quarter, procedure volumes and pricing appear to be strong and stable for NuVasive and Trans1. These two companies also derive the majority of their revenues from proprietary minimally invasive surgical (MIS) approaches to spine fusion. In a job market full of insecurity, are more people opting for MIS options which can allow for quick returns to work? Are companies that focus on procedures and devices with longer recovery times feeling the strain of this slow-to-recover economy?
Slowing Growth in the First Quarter
In Table 1 we list and rank the quarterly sales for each major spinal implant company for the first quarter of 2009 (1Q09). We also provide our estimates through 2011. As the table illustrates, we believe that sales of spinal implants and their related biologic products rose 8.1% in 1Q09, down from the 15.5% growth in 1Q08. Not all companies suffered from slowing growth, but the companies with the largest share of the market contributed disproportionately to industry revenues. Based on our estimates, Medtronic, DePuy, and Synthes comprise over 60% of the industry’s revenues, and, for example, Medtronic’s nearly stagnant reported growth of only 1.4% for 1Q09 brought down the growth rate of the market as a whole.
Because of this slowed growth, we are reducing our 2009 industry revenue growth estimates of spinal and related biologic products to 9.0%-9.5% from 10%-11%. For all of 2009, we estimate that revenues will rise 9.2% to $8.817 billion. Table 2 illustrates the currency and foreign exchange impact on growth in 1Q09 for select companies. Growth in constant currency illustrates the company’s revenue growth without the impact of exchange rate fluctuations.
Table 1: Spine Market Revenue Model
Source: PearlDiver estimates, Wall Street reports, SEC filings
Synthes, Globus, and DePuy are estimated revenues
Osteotech spine-related revenue assumes 70% DBM revenue is spine related
Abbott Spine revenues reported as part of Zimmer 4Q 2008
ArthroCare Spine has been delisted from the NASDAQ and has not reported revenues
Table 2: Currency Impact
Individual Company Breakdown
Table 3: Market Share Changes
Synthes and Globus revenues are estimated
Zimmer revenue growth includes Abbott acquisition
Privately Held Spinal implant Companies
Globus Medical has been a sales growth superstar and is now, we estimate, the largest privately held spinal implant company in the world. On April 30th, the company announced plans for continued international expansion. Globus now has operations in the UK, Belgium, Germany, and India, and the company expects revenue contributions from these operations as soon as 2010. But Globus is not the only fast-growing private company. We are tracking several other firms, including LDR Spine, SeaSpine Inc., Pioneer Surgical Technology Inc., K2M Inc., Scient’x, and Spinal Elements Inc, which are posting strong sales growth rates ranging from 20% to 40%—enough to keep Globus on its toes.
NuVasive is our spine MVP of 1Q09. First quarter revenues grew 56.3% to $80 million (vs. $51.2 million in 1Q08). Sales of Osteocel Plus, the stem cell based biologic, reached $5 million (6.25% of sales) for the quarter. Is the slow economy affecting procedure volumes? Not for NuVasive, which reported a 10% annual rise in procedure volumes with no slowdown in sight! CEO Alex Lukianov believes NuVasive will become the number four spinal repair and implant company in the world in terms of revenues in the coming years. NuVasive representatives also stomped on the rumors of changing reimbursement, calling them “bologna.”
NuVasive continues to make smart technological acquisitions such as its entrance into the stem cell market via Osteocel. Prior to its quarterly conference call NuVasive also announced the acquisition of Cervitech for $47 million with an additional payment of $33 million contingent upon the FDA approval of their Porous Coated Motion (PCM) artificial cervical disc. Recognizing the importance of time to market, NuVasive believes that the PCM is 3 to 4 years ahead of Cerpass (NuVasive’s artificial disc in development) in terms of regulatory approval, and could provide $100 million in annual revenues within three years of commercialization. To us, this seems a little too optimistic, but NuVasive has proven doubters wrong in the past.
It’s hard to argue with success. We are raising our full year revenue estimates to $359.2 million, a 43.7% year-over-year (YOY) growth. This includes an estimated $29 million in 2009 revenues from Osteocel and $14 million in sales outside of the U.S.
The economy has finally caught up with Stryker Spine. In 1Q09, Stryker’s spinal repair and implant revenues grew 8% (11% constant currency) to $128.6 million (vs. $119.1 million in 1Q08), and led all Stryker divisions in terms of revenue growth, but it did fall short of our estimates of $134.1 million. Revenues were driven by inter-body and lumbar products. The company reported that international spine revenues declined 2% during the quarter (+9% constant currency). Spine revenues in Japan saw low double-digit growth and Europe saw mid single-digit growth.
Management struck a cautious tone during their quarterly conference call, noting that hospital capital expenditures remained constrained, currency headwinds continue, and that they were seeing some “pockets” of weakness regarding spine procedure volumes. While pricing in the spinal repair and implant market held up better than that of the large joint repair and implant market, management acknowledged that the environment was challenging. Beyond this, Stryker still believes that the market as a whole could grow in the high single digits this year. Based on this, we are lowering our 2009 full year revenue estimates to $552 million (8.8% YOY growth) and 2Q09 revenues to $138.3 million (7.9% YOY growth).
Alphatec Spine Inc.
On May 4th Alphatec reported strong first quarter revenues and increased revenue guidance for 2009. Alphatec’s first quarter revenues grew 32% to $30.6 million (vs. $23.2 million in 1Q08). U.S. revenues grew 27.7% in 1Q09, reaching much higher than the overall spinal repair and implant market growth of 10%. This marked the seventh consecutive quarter of record revenues and the fourth straight quarter of YOY revenue growth exceeding 25%. This was also the first quarter of positive EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization). Alphatec acknowledged that they had seen pricing pressure and some extended payment terms from customers. However, they have not seen a slowdown in procedure volumes. In our view, the key has been execution.
- Alphatec secured the licensing rights to AmnioClear, an in vivo wound covering derived from the amniotic membrane that delivers a defensive barrier at the site of surgery.
- The company launched 8 new products in 2008 and is on track to launch 11 in 2009.
- Alphatec executed new distribution agreements in Belgium, Denmark, Germany, Italy, The Netherlands, Austria, and Spain.
- The company continues to take the lead in the treatment of the aging spine, and entered into a license agreement with Helix Point, LLC, which provides Alphatec Spine with rights to develop and commercialize Helifix and Helifuse, proprietary concepts for two interspinous devices to treat lumbar spinal stenosis.
- Alphatec now has over 85 distributors in the U.S. representing over 240 sales reps with a goal of having over 85% exclusivity.
We are raising full year revenue estimates to $126.5 million from $124 million. For the second quarter of 2009, we are estimating that sales will reach $30.2 million. In the second half of the year, we expect to see contributions from Alphatec’s growing aging spine treatment portfolio as well.
Trans1 joined NuVasive as a MIS based company with a strong start to 2009. Trans1’s first quarter revenues grew 45% to $8.7 million (vs $6 million in 1Q08), exceeding our estimate of $7.5 million. The company reported that physicians performed 889 Axial Lumbar Interbody Fusion (AxiaLIF) procedures worldwide (751 domestic) in the quarter (vs. 673 in 1Q08). AxiLIF procedure growth, a key driver of revenues, increased 32.1% YOY in the first quarter. Despite a challenging economy, Trans1 has not seen a drop off in procedure volumes.
However, management noted that some delays were caused by insurers requiring, in general, a second opinion before spine fusion procedures. The average selling price (ASP) was $10, 600, up 13.9% from 1Q08. This is partly due to the fact that 22% (195 cases) of the procedures were 2-level (fusing 2 vertebral levels in the lumbar spine) and 261 of the cases (29%) were 360° fusions, which command higher ASPs. The company’s direct sales force stood at 65 at the end of the quarter, and there are plans to expand it to 80 by the year’s end. Eighty-two surgeons were trained in the quarter and 205 were trained on the 2-level procedure.
Encouraged by solid ASPs, an expanding sales force and the surgeon training on the 2-level procedure, we are raising estimates for 2Q09 to $8.8 million (47.9% YOY growth). For the full year 2009, we estimate revenues to be $35.8 million.
Zimmer Spine continues to struggle. Zimmer reported that spinal implant and biologic sales in 1Q09 were $65 million (vs. $54 million in 1Q08) up 20% (24% constant currency) YOY. But the devil is in the details! Abbott Spine contributed $19.8 million to revenues, down 10% sequentially from $22 million in 4Q08. Excluding the Abbott acquisition, spine revenues declined 17%, falling from $54 million in 1Q08 to $44.8 million in 1Q09.
Table 4: Zimmer 1Q09 Sales Growth Contributors
Source: SEC Filings
Management acknowledged that they had seen some de-synergies in both the Abbott and Zimmer legacy spine businesses as the company cross-trains distribution channels. Beyond this, they are focusing on the strongest distribution networks, so revenues are also being lost from the historically weak channels. The company also acknowledged competitive and reimbursement pressures regarding the Dynesys Dynamic Stabilization system. While this proves troublesome for Zimmer, it also implies that competing companies are possibly gaining share in this emerging market.
Zimmer noted that this could be the worst quarter for their spinal repair and implant division, and we see the challenges outlined in the first quarter continuing into 2Q09. We are reducing our full year estimates from $310 million to $279.6 million. We estimate 2Q09 spine revenues to be $67 million (+21.8% YOY). This is based on revenue in the Zimmer legacy business contributing $47 million and Abbott accounting for $20 million.
Worldwide spinal implant and biologics revenues rose only 1.4% to $881 million in the quarter, (which is Medtronic’s fourth quarter of its April fiscal year) up from $869 million in same period a year earlier. Revenues grew 4% on a constant currency basis. Sales in the April 2009 quarter (which is roughly comparable to the calendar first quarter) were far below the overall spinal repair and implant market. Medtronic’s core spinal implant and biologic business, excluding Kyphon, grew 1.1% in the April quarter. Kyphon registered sales of $154 million in the quarter, up 2.7%. Sales of biologic products in the April quarter declined 2.7% to $215 million (vs. $221 million in 4Q08).
Medtronic’s spine division derived 21.6% of its revenues in the April quarter from outside the U.S. Those revenues grew 2.2% YOY to $190 million in the just reported quarter. Spinal implant sales rose 5.2%, which helped offset declines of -7.7% and -5.3% in biologics and the Kyphon business, respectively.
In the quarterly conference call, management noted that they are working to revitalize the core product pipeline, leverage the Kyphon business by increasing cross-selling, and marketing new PEEK (polyetheretherketone) products. The company also mentioned that Medtronic is working on the G5 system, a new posterior pedicel screw system. There were over 20, 000 Kyphoplasty procedures performed in the quarter.
We estimate that spinal repair and implant sales in the second quarter of Medtronic’s fiscal year (May, June and July) will rise 2.7% to $883 million. We expect sales of Kyphon products to improve in the current (July) quarter and that sales of biologic products will likewise regain some modest traction. For the remainder of 2009, we are not expecting to see any catalysts for increased growth coming from Medtronic’s expected product launches and we are estimating that pricing in 2009 will be flat compared to 2008. The company expects to return to market growth rates in 2011. Table 3 presents our estimates for Medtronic by business segment.
Table 5: Medtronic Quarterly Revenue Growth (Calendar Year Estimates)
Source: SEC filings and PearlDiver estimates
Biomet spine is continuing its turnaround, led by strong domestic growth. Biomet’s first quarter spinal repair and implant revenues (Fiscal 3Q09) increased 7% YOY (9% constant currency) to $53.8 million, exceeding PearlDiver estimates of $52 million. Sales in the U.S. rose 15%. The company cited solid growth in both hardware and spinal stimulation devices and stated that hardware and orthobiologics grew 17% in the U.S. during the quarter. Internationally, growth was soft in Europe.
In the conference call held on April 14, 2009, the company attributed the turnaround to the result of solid execution on new product launches, upgrades to sales management and distribution stabilization, and the focus on a separate spinal product sales force. During the quarter the company launched the PEEK version of the Solitaire anterior spinal system. The quarter also saw the successful rollout of the Polaris deformity system in 5.5mm and 6.35mm diameter rods. While the company did not disclose its spinal stimulation sales, it said that spine stimulation growth was more related to hardware growth, and that it was unclear as to whether the recent controversy over off-label usage of InFuse was having an impact.
Pressures on spine instrumentation pricing were less than pressures in the reconstructive segment, but they exist nonetheless. Based on the call, we believe that there may be some softness on elective procedure volumes due to economic headwinds, but that it will not significantly impact Biomet’s spinal repair and implant business. We are increasing our 2Q09 (Biomets 4Q09) estimates to $56.9 million (7.2% YOY revenue growth) from $52.1 million. Also of note is that the second generation Ballista percutaneous pedicle screw system and the AccuVision MIS spinal exposure system was launched near the end of 2Q and may contribute more so in the 4Q.
Orthofix spine, we believe, is well on the road to recovery. First quarter spinal repair and implant sales rose 5.6% to $66.1 million (vs. $62.5 million in Q108), exceeding our estimates of $64.6 million. Spine stimulation revenue increased 12% to $37.2 million while implant and biologic revenues decreased 1% to $28.8 million. It should be noted, however, that the sales of spine products through the Blackstone unit increased 2% from the preceding quarter. Growth in implants was lead by thoracolumbar and cervical spine implants, which increased 5%. Such sequential quarterly growth is evidence of a steady turnaround. Orthofix continues to gain share in the spine stimulation market, with this quarter marking the sixth consecutive quarter of double-digit growth in a market growing only 6%-7%. Orthofix is estimated to have 50% market share in spine stimulation, with Biomet and DJO as the other competitors. Trinity (Osteocel) saw $6 million in spine sales and $1.3 million in orthopedics.
Here are four key points that should drive growth:
- On April 15th, Orthofix announced an agreement with MBA group to expand distribution of its spine implant and biologic products into the UK market.
- On May 5th Orthofix announced the limited market release of Trinity Evolution.
- Sales of new products such as the Firebird Pedicle Screw System and the PILLAR SA inter-body devices are strong at the outset.
- Orthofix continues to focus on building its distribution network.
Orthofix CEO Alan Milinazzo reiterated that the company is comfortable with annual revenue growth of 8%-12% and stated that they expect sequential growth. Our 2Q and full year estimates are in Table 6.
Table 6: Orthofix/Blackstone Spine Quarterly Revenue Growth
Source: SEC filings and PearlDiver estimates
At the close of the first quarter, companies continue to fight against the strong backward currents of today’s challenging economy. The pace of innovation and change in this hypercompetitive market is remarkable. While some larger companies are feeling the strain of the damaged economy, the MIS based companies are staying strong and maintaining or increasing ASPs. Demand for their procedures continues to increase, and it could help shift the rank order of top companies as the year moves on into a landscape of ever-changing economic and regulatory environments.
Chart 1: Estimated 2009 Spine Market Share
For more articles by Matt Menze, please go to: http://www.pearldiverinc.com/pdi/spine.jsp.