Joint Reconstruction Market: Frozen Stiff

It may be spring outside, but it’s a cold economic winter for the major companies in the large joint reconstruction market. First quarter sales reports confirmed that over the previous three months, the market moved from a stand-still to a backward fall as revenue growth shifted into reverse. Zimmer, Inc. took the biggest fall, but they certainly weren’t alone. This decline in growth is lowering estimates for the major players during the remaining three quarters of 2009, but can the smaller companies take hold of the reins and close the gap with market leaders? 

Chart 1: Global Reconstruction Market Revenue Growth (Year-Over-Year)

Source: Company Reports

Chart 1 displays global, year-over-year (YOY) revenue growth rates for the hip reconstruction market, knee reconstruction market and the overall large joint reconstruction market. Prior to the first quarter of 2009, YOY growth rates had begun to decline yet still remained positive through the fourth quarter of 2008. However, as of 1Q09, we estimate that the total reconstruction market took a step in reverse with a 1.6% decrease in the revenue growth rate. Knee reconstruction market revenues were hit hardest, declining 1.8% YOY, followed closely by hip reconstruction market revenues with a decline of 1.4%.

Fortunately, the news is not all negative. Despite the fact that each of the major players within the large joint reconstruction market reported some of the lowest revenue growth figures in recent memory, not all companies took steps backward. Biomet Inc. and Wright Medical, Inc. for example, still managed positive growth during this quarter of contraction.

First Quarter Breakdown

Biomet, Inc. reported large joint repair product sales of $335.6 million in its third quarter of 2009 (which ends February 28, 2009), an overall YOY increase of 4.2%. Hip repair product sales increased 5% YOY driven by the success of the Taperloc Hip Stem and M2A Magnum Acetabular Systems. Knee repair product sales increased 3.5% thanks to the continuing strong sales of the Vanguard Complete Knee System and the Oxford Partial Knee.

DePuy, Inc. reported large joint reconstruction sales of $621 million, a 1% decrease from 1Q08. The hip reconstruction market reported sales of $281 million, in line with Wall Street consensus expectations and our PearlDiver expectations. This represents a YOY revenue growth rate increase of 2.2%. However, DePuy reported knee repair product sales at $340 million, a decrease in revenue growth of 3.4% from 1Q08, $23 million below consensus Walls Street expectations and $27.1 million below PearlDiver estimates.

Exactech, Inc. reported large joint reconstruction product sales of $25.1 million, a YOY increase of 0.8%. Hip repair product sales increased YOY 3.0% from $6.4 million in 1Q08 to $6.6 million, while knee repair product sales remained flat YOY at $18.5 million. Reported revenue for both hip and knee repair product sales remained in line with PearlDiver estimates.

Smith & Nephew, Inc. reported large joint reconstruction product sales of $377 million, a YOY increase of 3.6%. Hip repair product sales increased YOY 2.0% to $177.5 million, above Wall Street estimates of $159.5 million and in line with PearlDiver estimates. Smith & Nephew knee repair product sales increased YOY 5% to $199.5 million, also above Wall Street estimates of $177.5 million and in line with PearlDiver estimates.

Stryker, Inc. reported revenue decline in both the hip and knee reconstruction markets. Large joint repair product sales decreased by 2.0% over the previous year, slipping to a total of $564.8 million. Stryker hip repair product sales declined YOY 2.1% to $266.7 million, and knee repair product revenues declined 2% to $298.1 million. Despite negative growth, revenue for hip repair products exceeded Wall Street expectations of $250.4 million and PearlDiver expectations $255.96 million, while knee repair product revenue fell below Wall Street expectations of $312.5 million and PearlDiver expectations of $313.2 million.

Wright Medical, Inc. reported large joint reconstruction product sales in line with PearlDiver and Wall Street expectations, totaling $72.3 million, an increase of 3.1% over 1Q08. Wright Medical reported hip repair product sales of $41.9 million, a YOY revenue increase of 5%, but the knee repair product sales struggled with a YOY increase of only 0.7% totaling $30.4 million.

Zimmer, Inc. reported sales well below expectations in both hip and knee reconstruction markets with revenues of $300 million and $429 million respectively. In total, large joint reconstruction product sales dropped 7.0% from 1Q08 to $729 million—the largest revenue decline of the top competitors. Zimmer’s reported future outlook indicated expectations of a “soft” second quarter as well.

Chart 2: First Quarter Large Joint Sales Growth

Source: Company Reports

Impact on Market Share

As illustrated in Chart 3, each of the top large joint repair product manufacturers (DePuy, Stryker, and Zimmer) have seen a decline in growth from 1Q08 through 1Q09. Meanwhile, their smaller competitors have maintained positive growth. According to the latest PearlDiver numbers, this has had a clear impact on market share as Stryker’s share of the large joint reconstruction market eroded from 19.26% to 19.15% and Zimmer dropped from 26.19% to 24.71%.

Chart 3: Large Joint Sales Growth Trend by Company

Source: Company Reports

The result is an increased market share of the overall large joint reconstruction market for Biomet from 10.76% to 11.38% and for Smith & Nephew from 12.16% to 12.78%. Both Wright Medical and DePuy also made slight gains in share on the declines suffered by Stryker and Zimmer.

Table 1: Large Joint Reconstruction Market Share

Source: Company Reports

Their numbers aren’t pretty, but, despite a rough first quarter, Zimmer remains the leader in the hip reconstruction market. However, that lead is growing smaller and smaller. As of 1Q08, Zimmer held 24.75% of the hip reconstruction market. Only one year later, they lost an impressive 8% of their share of the market, dropping to 22.82% of the global market share. Although not as drastic a fall as Zimmer, Stryker, the third largest of the hip repair product manufacturers, has also lost a small percentage of its market share, failing to capitalize on Zimmer’s losses.

As Zimmer loosens the reins on their lead, they open up more opportunities for competition. With Zimmer shedding market share in the hip reconstruction market, DePuy, Biomet, and Smith & Nephew are all making gains. Since the 1Q08, DePuy has narrowed the gap on the market leader significantly, increasing market share from 20.63% to 21.37%. Biomet has increased their share from 10.17% to 10.83%, and Smith & Nephew have moved from 13.05% to 13.50%.

Zimmer’s bleeding of market share was not just in the hip reconstruction market but in the knee reconstruction market as well. Over the last year, their market share dropped from 27.35% in 1Q08 to 26.30% during the 1Q09. However, while DePuy successfully grabbed market share from Zimmer in the hip reconstruction market, they faltered in the knee reconstruction market, dropping from 21.21% to 20.85%.

The biggest benefactors of these market share losses were Smith & Nephew whose share increased from 11.45% to 12.23% and Biomet whose share increased from 11.24% to 11.85%.

Earnings Forecast

With three quarters still left to go in 2009 and market leaders showing little improvement, we estimate a continued slowing of growth in the second quarter for the total hip reconstruction market, followed in the third and fourth quarter by low but improving growth. In total, we expect (0.7%) growth for quarter two, 2.9% growth for quarter three, and 4.6% growth for quarter four of 2009. Overall, this growth expectation is equivalent to 1.6% growth for the year.

Table 2: Forecasted Hip Revenues

Source: Company Reports and PearlDiver Research

In the knee reconstruction market, we expect very limited growth in the second quarter for the overall market, followed in the third and fourth quarter by continually improving revenue growth. In total, we expect 0.5% growth for second quarter, 3.5% growth for third quarter, and 4.6% growth for fourth quarter of 2009. Overall, this sales growth expectation is equivalent to 2.2% growth for the year.

Table 3: Forecasted Knee Revenues 

Source: Company Reports and PearlDiver Research

Despite declining revenue growth for the large joint reconstruction market, the overall revenues still remain stable. With our estimations of slow, but positive revenue growth over the course of 2009, the market could thaw out from this quarter of frozen, and in some cases, negative growth rates. Smaller competitors such as Biomet, Smith & Nephew, and Wright Medical continue to warm the market with revenue growth and increased competition. Overall, the sector itself and its market leaders continue to show signs that large joint replacement manufacturers are still standing on their feet.

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