Large Joints: Revenues on the Upswing

Large joint reconstruction industry suppliers sold $3.03 billion of products in the fourth quarter of 2009 (4Q09), exceeding our forecast by $156.9 million, or 5.5%. We have, therefore, increased our revenue forecast for the large joint reconstruction industry by 1.3% to $2.87 billion for 1Q10. We have also increased our full-year forecast for 2010 from $11.5 billion to $11.95 billion.

Prior quarters of 2009 could be described as rocky at best with a 1Q09 revenue decline of 2.6% year-over-year (YOY) and a 2Q09 revenue decline of 4.2%. Finally in the third quarter, the large joint reconstruction industry showed a stronger pulse with a revenue growth of 2.4%. Now the fourth quarter has brought 2009 to a close with a solid upward swing in revenue.

Three reasons, we believe, gave the industry its biggest revenue increase of the year:

• Procedure volumes continue to return in higher numbers
• Sales outside of the U.S. (OUS) improved dramatically
• Large companies with the most market share finally turned the corner from revenue declines

Fourth quarter results showed a YOY revenue increase of 9.2% for the overall large joint reconstruction industry as shown in Chart 1. While hip product revenues showed substantial growth in comparison to the previous three quarters, the greatest revenue growth came from the knee implant sector which increased 9.9%. Hip product revenue growth remained close behind, increasing 8.2% YOY.

Chart 1: Large Joint Reconstruction Market Revenue Growth (YOY)

Source: Company reports

The Upward Swing

After four quarters of relatively low or declining revenue growth, the last quarter of 2009 has sent the industry on an upswing. There is clear indication that procedure volumes are returning to higher levels. According to Jim Crines, Executive Vice President of Finance and Chief Financial Officer of Zimmer, Inc., “In the second half of 2009, we saw encouraging signs that orthopedic procedure volumes in certain markets were recovering.”

While Zimmer was helped by an increase in procedure volume and mix, pricing continued on a downward trend. According to Zimmer President and Chief Executive Officer David Dvorak, “Pricing on knee products on a consolidated basis in 4Q09 was down 0.7 % and on hip products, down 0.8%”

This sentiment was the common theme throughout each of the major large joint reconstruction manufacturers. Biomet, Inc. reported that average selling prices were down in both U.S. and OUS sales for both hip and knee products, as did Stryker, Inc. and DePuy, Inc. (a Johnson & Johnson company). But even with pricing decreases, the positive procedure volumes and mix have helped lead the sector toward much needed growth.

In addition, low OUS sales, which had been weighing heavily on quarterly growth, made positive increases as well. In 2Q09, both Stryker and Zimmer saw YOY declines of 13.5% and 13.1%, respectively, in OUS sales. This leveled out in the third quarter, with declines of only 1% and 0.3%. As of the end of 4Q09, Stryker bounced back with reported YOY gains of 12.7% in OUS sales, and Zimmer reported a YOY increase of 13.3%. Because of these positive gains, the major companies in the large joint reconstruction industry were able to hang on to their substantial shares of the total market, as shown in Chart 2.

Chart 2: Large Joint Reconstruction Market Share as of 4Q09

Source: Company reports

Zimmer, DePuy, and Stryker, the three largest manufacturers in this industry by market share, together account for 66.5% of the total large joint reconstruction market. With these three companies representing such a significant portion of the market, a successful quarter for each company has been a major boost for the entire sector.

Individual Company Commentary

Biomet, Inc.

Biomet, Inc. reported large joint reconstruction product sales of $357.8 million in its second quarter of 2010 (which ends November 30, 2009), an overall YOY increase of 12.0%. Hip repair product sales increased 8.0% YOY on strong U.S. sales of acetabular cups such as Ringloc and M²a-Magnum along with strong European sales of the Exceed ABT Advance Bearing Technologies System. Knee repair product sales increased 15.0% on the continued success of the Vanguard Complete Knee System.

DePuy, Inc. (a Johnson & Johnson company)

DePuy, Inc. reported large joint reconstruction sales of $732.8 million, a 10.4% increase from 4Q08. Hip repair product sales increased YOY by 12.0% to $338.2 million. We attribute the success to product mix and innovation, with new products as the aSphere M-Spec Femoral Head. DePuy reported knee repair product sales at $394.6 million, an increase of 9% YOY. We also attribute this success to the strength of the underlying business and new product launches, including the Sigma Knee Portfolio additions earlier in the year. 

Stryker, Inc.

Stryker, Inc. reported YOY revenue growth in both the hip and knee reconstruction markets. Overall, company officials reported large joint repair product sales to be $652.8 million, an increase of 10.5% over the previous year. Stryker hip repair product sales increased 10.0% YOY to $305.0 million on strong sales of Accolade, X3, and Trident product lines. Revenues for hip repair products exceeded Wall Street expectations of $302.1 million and PearlDiver expectations $282.8 million.

Knee repair product revenues increase 11.0% to $347.8 million, beating Wall Street expectations of $340.7 million and PearlDiver expectations of $335.1 million on the continued strength of the Triathalon product line.

Zimmer, Inc.

Zimmer, Inc. reported sales well above expectations in both hip and knee reconstruction markets with revenues of $333 million and $476 million, respectively. In total, large joint reconstruction product sales increased 8.6% from 4Q08 to $809 million in 4Q09 ahead of both Wall Street expectations of $789.9 million and PearlDiver expectations of $760 million.

New products such as the M/L Taper Hip Prosthesis and the Fitmore Hip Stem lifted revenues for hip repair products, and growth in knee repair product revenues increased with strong Flex Knee sales.

Looking Forward

The fourth quarter demonstrated evidence that procedure volumes are increasing at a greater-than-expected pace within the large joint reconstruction market. Taking this into account, we have increased our forecasts for the beginning of 2010 with a 6.4% YOY increase in hip product revenues across the sector, and an 8.4% increase in knee product revenues. In total, our forecast for the first quarter of 2010 reflects a 7.2% YOY increase across the large joint reconstruction market with gains on a per company basis shown in Table 1.

Table 1: Forecasted Hip and Knee Repair Revenues

As we have seen during the fourth quarter, OUS sales are finally showing growth after several painful quarters. These previously low sales have been a key piece to slumping revenues over the past year and the present strength of OUS sales will remain vital as revenues stabilize and return to long-term growth. In addition to OUS improvement, increasing procedure volumes have helped to end the year on an upswing, leaving the large joints reconstruction market poised for a positive start in 2010.

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