Extremity Repair Market: Staying Alive

The extremities implant and repair market is staying strong despite the economic recession. The market may not be growing at its previous rapid pace, but growth remains reasonable and steady.

The first quarter of 2009 (1Q09) picked up where companies left off in 4Q08 when the market saw a slowdown in all sectors of orthopedics. Compared to the 18% growth rate in 1Q08, the 11.8% year-over-year (YOY) growth  in 1Q09 represents a significant decline in sales growth rates, but the total quarterly revenue of $262 million still rose from $236 million in1Q08. We estimate that the total annual growth rate for the extremities implant and repair market will come close to 13% for the year 2009 and increase slightly to a respectable rate of 15% for 2010.

Although the extremities repair and device market dropped to growth rates in the low teens (down from the prior year’s growth in the high teens and low twenties), it still fared better than other areas in orthopedics such as the large joint reconstruction market, spinal repair and implant market, and the trauma market.

Smaller companies also reported higher growth rates and closed in on the bigger companies that are showing the strains of the economic slowdown. Zimmer Holdings Inc. and DePuy Orthopedics Inc., for example, reported slower rates of extremity revenue growth while smaller companies like Wright Medical Group Inc, Tornier Inc., Exactech Inc., and Biomet Inc. reported higher revenue growth rates.

We believe that Wright Medical is the outright winner in terms of sales in the foot and ankle implant market while Tornier and DePuy are still fighting closely for the #1 spot within the sales of shoulder implants and instruments. We still find DePuy holding the largest piece of the shoulder implant market which in 2008 was worth approximately $500 million worldwide. The foot and ankle implant market, now led by Wright Medical, represents anywhere from $250 to $300 million worldwide. Zimmer, on the other hand, was again the worst performer among the major extremity product suppliers reporting a sales growth rate of only 4%.

The following table shows the major extremity companies with their 1Q09 earnings and future estimates through 2012.

Table 1: Worldwide Extremity Product Earnings by Company (2009-2012E)

Source: SEC filings, PearlDiver estimates and press releases. ArthroCare has not reported sales since 1Q07. Stryker sales represent just their shoulder sales. Ascension and Tornier represent estimates.

Despite slower revenue growth rate in 1Q09, DePuy still holds the #1 spot in total extremity implant sales and holds one-fourth of the total market share. Coming in at a close second and third are Tornier and Zimmer, respectively. Currently, DePuy, Wright Medical, Tornier, Zimmer, and Biomet make up 70% of the total extremity market. Chart 1 illustrates the market share by company for 1Q09.

Chart 1: 1Q09 Extremity Product Market Share

Source: Company’s SEC filings and press releases

Wright Medical Group Inc.

Wright Medical Technologies’ strong extremity product sales performance continues despite the market slowdown. One of the key reasons behind their success is the tremendous momentum Wright Medical has gained in foot and ankle product sales in the U.S. While the acquisition of INbone Technologies Inc. and A & M Surgical Inc.’s foot and ankle products injected fresh sources of revenue into the company, the sales figure reflects primarily its in- house products from the CHARLOTTE and DARCO lines of foot and ankle products.

For 1Q09 Wright Medical reported that sales of extremity products grew 26.3%, bringing quarterly revenues to $25.9 million, up from 1Q08 revenues of $20.4 million. The company drove its year-over-year growth with the continued success of the CHARLOTTE Foot and Ankle system and increased sales of the DARCO  plating systems, SIDEKICK external fixation systems and the recently added INBONE products acquired in 2Q08. Domestic extremity product sales increased by 34% in 2009, while the international extremity sales growth was comparatively low at 3%.

The company may not be able to repeat its 2008 annual growth of 42.7% anytime in the near future, but we still estimate a strong growth rate for 2009 in the range of 24%, which should bring Wright Medical across the $100 million extremity product sales mark. Sales of extremity products now represent 21.5% of Wright Medical’s total sales. The company’s share of the extremity repairs and implants market spiked close to 9.8% in this quarter, up from 8.7% in 1Q08, and we expect continuing improvements into 2010.

Wright Medical’s management stated that its goal is to become the market leader in foot and ankle product sales, and, based on reported sales results for 2008 and the first quarter of 2009, we estimate that Wright Medical has edged out DePuy as the leader in the overall foot and ankle product market worldwide. Wright Medical’s strong performance in the last few years has set it apart from other extremity product companies, and we believe Wright will most likely hold the position of leader in the foot and ankle market well into the future.

DePuy Orthopedics Inc.

For the first quarter ending March 30, 2009, Johnson & Johnson’s DePuy, the leading extremity product company worldwide, reported a 7.5% YOY growth (down from the previous year’s growth rate of 13%) with $65.6 million in product shipments. The growth rate was slightly higher than our prior forecast of 6%, probably due to the company’s strong growth in shoulder product shipments. Domestic extremity product sales represented the majority of its total sales for the first quarter.

DePuy’s share of the extremity product market is, we estimate, now 24.9%, down slightly from the prior year’s first quarter of 25.8%. For 2Q09, we estimate DePuy’s extremity sales will continue to grow at almost the same rate of 7.4%. Given DePuy’s higher-than-expected growth and with a strong double-digit growth in its shoulder product division (which represents 80% of its market), we have increased our forecast from a moderate 6.5% to 8.9% for the full year of 2009.

The company’s two product spotlights are the Agility Ankle System and the Delta Shoulder System, which contributed significantly to DePuy’s extremity product sales. DePuy still reigns as the shoulder division leader with more than one-fourth of the total shoulder product market share. Tornier, Biomet, and Zimmer are, however, closing the gap and increasing competition in the market. Tornier’s reverse shoulder system and Wright Medical’s ankle system already pose a stiff challenge for DePuy. With Biomet’s new second generation of reverse shoulder products, the competition will get even more intense.

Zimmer Holdings Inc.

Zimmer Holdings reported minimal growth again in its extremity product sales for 1Q09, coming in as the slowest growing company in the market. Sales growth for 1Q09 was 4.1%, only slightly better than the 4Q08 growth of 3% and a staggering drop from the 1Q08 growth of 28%. Zimmer’s first quarter extremity product revenue contributed $33.3 million to overall Zimmer sales of $993 million and account for 3.3% of Zimmer’s total revenues, up slightly from 3% in 1Q08.

In 2008, 77% of Zimmer’s extremity product sales were in the domestic market which grew by 10% YOY. Zimmer’s European extremity sales reported a negative growth of 16% and so did the Asian market with a decline of 3% YOY. European sales represented 18% and Asia Pacific accounted for just 5% of total extremity product sales.

Even with a weak two quarters, Zimmer held on to its #3 rank in the extremity product market with 12.6% market share, down slightly from its 13.2% share in 4Q08. 1Q09 sales were driven by Zimmer’s Bigliani/Flatow Shoulder Solution and the Zimmer Trabecular Metal Reverse Shoulder System in the North America division, while the Anatomical Shoulder System and the Coonrad/Morrey Total Elbow lead extremity product sales in Europe. The Coonrad/Morrey Total Elbow lead the Asian market.

Given the recent decline in Zimmer’s growth, PearlDiver estimates Zimmer’s 2Q09 sales growth will be only around 5%, a much slower growth rate than the 19% YOY growth reported in 2Q08. Zimmer’s decline in market share is due mostly to competition from Tornier, DePuy and Biomet. Zimmer also lacks involvement in the lower extremity product market, causing them to loose share in the total market. For the full year of 2009, we estimate that Zimmer will experience less than a 6% annual growth earning them close to $128 million.

Biomet Inc.

For the first quarter of the calendar year 2009 (December 2008 to February 2009), Biomet, which became a private company in 2007, made, we estimate, $20.3 million in extremity product sales. Almost all of those sales were from shipments of implants and instruments for upper extremities. Compared to 1Q08, when Biomet reported a 16% YOY growth, the company dropped slightly in 1Q09 to a 13% growth rate. Biomet’s market share worldwide in 1Q09 was about 7.7%. The company’s primary products, such as the Bio Modular shoulder system and the Copeland Humeral system, helped carry the slowed but steady growth. Biomet’s upper extremity division has been engaged in fierce competition with strong product offerings from Tornier, DePuy, and Zimmer.

Biomet rolled out its new Comprehensive Reverse Shoulder System in May, the next generation reverse shoulder prosthesis that offers intra-operative flexibility. The reverse shoulder procedure is growing at such a fierce pace that the new generation products will undoubtedly accelerate Biomet’s future growth. We estimate Biomet will deliver over a 15% sales growth rate earning it $85.7 million for the year 2009. Since we anticipate the new products will be targeted for sales in the third and fourth quarter, we believe the growth in 2Q09 will be in the proximity of 12.4%, similar to 1Q09.

Exactech Inc.

Exactech is a small, rapidly growing orthopedic company that is quickly gaining market share within the orthopedic market, especially in the extremity product market. For 1Q09, Exactech reported a massive growth of 57% in its shoulder division and is climbing the ladder quietly but quickly. Exactech reported that its extremity product shipments reached $5.8 million, and the company easily surpassed our growth rate estimate of 38%.

We believe that Exactech’s extremity product sales will continue to grow at strong double-digit rates on the success of the increasingly popular Equinoxe shoulder system (which doctors use for total shoulder replacement, reverse shoulder replacement, and other shoulder-related procedures) as well as its introduction of new shoulder and humerus lines of products in the late third and fourth quarters of 2009.

While we may not see the 2008 growth rate of 78% again, with the significant earnings in recent quarters, we now estimate Exactech extremity product sales for 2009 will grow in the neighborhood of 48%. This will earn the company close to $25 million .The year 2010 also looks promising with new products scheduled to be launched later this year.

Tornier Inc.

Tornier, the second largest extremity product supplier, was founded in France but, due to a private equity buy-out in 2006, is now based in Minneapolis, Minnesota. Sales in 2008 were $141 million. We estimate sales for this quarter place the company in the 11% growth range. Strong competition from Biomet, Wright Medical, and Exactech played a role in holding Tornier’s 1Q09 growth rate at 11%. Tornier’s lead products are the Aequalis Shoulder System and the NexFix MTP Fusion System. Product sales include large joint sales in Europe and extremity product repair implants and instruments. For the year 2009, we estimate the company will grow at a rate of 12%, with sales close to $157 million. We estimate the second quarter growth will hold at approximately 11% to 12%.

Other Extremity Companies

The remaining companies in the extremity product market are mostly privately held companies or public companies which do not report extremity product sales separately. There are some with potential for fast growth. Ascension Orthopedics Inc., a privately held company, will grow at an estimated 30% rate in 2009 and earn close to $24.6 million in sales. Small Bone Innovation Inc. (SBi), Arthrex Inc., Integra LifeSciences Holding Corporation, Orthofix International N.V., Smith & Nephew Inc., and Acumed LLC have also established a good foundation in the extremity product division. Integra LifeSciences’ first quarter extremity product sales revenue grew in the low teens. We estimate its first quarter growth was in the range of 10% to 12%, representing an estimated $25 million in sales.

With the close of the first quarter, the extremity repair and implant market as a whole is staying alive in 2009 despite economic woes. Growth rates are down but still stable. Larger companies like Zimmer are feeling the strain of the market slowdown, and smaller companies like Wright Medical are using strong product lines to drive up growth rates and capture top spots in their individual market niches. New product releases in the second half of the year promise to turn up the heat for the competition, and we’ll be watching for changes in the weather as we continue to forecast this competitive market in 2009.

For more articles by Dev Joshi: http://www.pearldiverinc.com/pdi/ext.jsp