Extremity Implant Markets Revving Up
Extremities are like orthopedics NASCAR. Not only is it the fastest growing sector but it is also, we think, the most competitive. Companies selling extremity repair products posted the highest rates of sales growth of all the major orthopedic product sectors in the fourth quarter of 2008. The 12% year-over-year (YOY) growth for 4Q08 brought the market for extremity implants to an annual growth of 14.7% for the year. By contrast, sales of products for large joint repair struggled with a declining rate of growth. Knee implants, for example, grew just 3% in 4Q08. Demand for spinal implant and biologic products grew less than 10% in 4Q08. Finally, sales of trauma products rose at roughly half the rate of extremities coming in at 6% year-over-year. Though the revenue growth rate of extremities exceeded that of other markets in 2008, it did show a slight decline in the fourth quarter from the 15% rate it achieved over the previous three quarters in 2008.
Reviewing individual company performance for 2008, Wright Medical, we estimate, ended the year with the largest share of the foot and ankle implant market while Tornier led in sales of shoulder implants and instruments. We estimate, DePuy holds the largest overall market share and reported approximately a 10% rate of YOY sales growth. DePuy’s total sales of extremity implants and instruments for 2008 were $214 million, making it the first company to pass the $200 million milestone in extremity sales. By contrast, Zimmer, we estimate, was the worst performer among the major extremity product suppliers reporting less than a 3% rate of sales growth.
Table 1 shows the extremity companies with their fourth quarter earnings and future estimates.
Table 1: Worldwide Extremity Product Shipments by Company (2008-2010E)
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.
In 2008 DePuy sold more extremity implants and instruments than any other company but coming up strongly are Tornier and Wright Medical. For the full year, Tornier and Wright ended with 15.3% and 9.7% market shares, 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 the fiscal year 2008
Chart 1: 2008 Extremities Market Share
Source: Company’s SEC filings and press releases
For the fourth quarter ending December 31, 2008, Johnson & Johnson’s DePuy, the leading extremity company worldwide, reported 9.6% year-over-year growth with $57 million in product shipments. The growth rate was lower than we expected due to increased shoulder product competition from Tornier and Biomet and from Wright Medical’s INbone product in the foot and ankle sector. DePuy’s 4Q08 extremity sales growth was much less than the growth rates reported in 4Q07, when the company reported that extremity product sales grew by more than 67%. Of course the major cause of that growth rate was last year’s purchase of new product lines. Domestic extremity sales were 65% of the total reported for the fourth quarter.
DePuy’s share of the extremities market, we estimate, is now 23.3% —down slightly from the prior year’s 24%. DePuy’s 9.6% rate of extremity revenue growth for the fourth quarter fell short of our forecast by about 300 basis points. Given the increasingly competitive extremity market, the overall economic recession, we are reducing our 1Q09 sales growth estimate for DePuy from 8.2% to 6%.
Overall, for 2008, DePuy’s extremity business grew at an annual rate of 11.5%. The company’s two product spotlights are the Agility Ankle System and the Delta Shoulder System, which contributed significantly to DePuy’s extremity sales. DePuy still reigns as the shoulder division leader with over 25% market share. Tornier, Biomet, and Zimmer are, however, closing the gap, we think, and make this market one of the most intensely competitive. Tornier’s reverse shoulder system and Wright Medical’s ankle system will certainly keep DePuy on their toes in the coming years.
Zimmer Holdings reported minimal growth in its extremity sales for the quarter and was the slowest growing major extremity company. Fourth quarter extremity sales only grew 3%—a staggering drop from the 36% rate reported for the same period last year. Zimmer’s fourth quarter extremities revenue contributed $30 million to overall Zimmer sales of $1.03 billion and account for 3.0% of Zimmer’s total revenues which, although small, is still higher than the 2.6% reported for all of 2007. For the full year 2008, Zimmer’s extremity product sales rose 15.2% YOY bringing total extremity sales to $121 million.
In 2008, 73% of Zimmer’s extremity sales were from the domestic market which grew by 19.2% YOY. Zimmer’s European extremity sales increased 11.2% compared to a mere 2.9% increase in Asia. European sales represented 21% and Asia Pacific accounted for 6% total of total extremity sales
Even with a weak fourth quarter, Zimmer held on to its #3 rank in the extremity market with 13.2% market share. A strong line of leading products certainly helped them keep their position. Zimmer’s Bigliani/Flatow Shoulder Solution and the Zimmer Trabecular Metal Reverse Shoulder System lead their extremities sales in the North America division. The Anatomical Shoulder System and the Coonrad/Morrey Total Elbow lead extremities sales in Europe, while the Coonrad/Morrey Total Elbow lead in the Asian market.
Given the recent decline in Zimmer’s growth in large joints and extremities, PearlDiver estimates Zimmer’s 2009 first quarter sales growth to be around 4%, a much slower growth rate than 1Q08, when the company reported 28% year-over-year growth. A key factor in Zimmer’s decline in market share, we believe, is stiff competition from Tornier and Biomet. Lower extremity companies are quickly gaining market share in areas where Zimmer does not have products. Looking ahead to 2009, we are forecasting that Zimmer extremity sales growth will likely come in between 5% to 7% YOY—barring, of course, any merger or acquisitions activity.
Wright Medical Technologies
Wright Medical Technologies’ strong extremity sales performance in 2008 is in part due to the company’s strong commitment to innovation as demonstrated, we think, by the its CHARLOTTE line of foot and ankle products and the 2008 acquisition of INbone Technologies and A & M Surgical’s foot and ankle products. Wright Medical’s management has stated that its goal is to become the market leader in foot and ankle product sales and, based on reported sales results for 2008 is, we think, closing the gap with overall market leader DePuy. Wright’s market share in total extremities sales spiked to 9.7% in 2008 from 7.7% in 2007. At this rate of growth, it may be just be a matter of time, we think, before Wright Medical, with its steady stream of innovative product launches, becomes the #1 foot and ankle product supplier.
For 4Q08 Wright Medical reported that sales of extremity products grew 30.5%—bringing quarterly revenues to $24.8 million. For all of 2008, Wright Medical reported a 42.7% annual growth which was higher than its previous year’s growth of 38%. Sales of extremity products now represent 19% of Wright Medical’s product sales. Wright’s U.S. extremity business grew on the strength of rising shipments of the DARCO and CHARLOTTE product lines and product sales from its April 2008 acquisition of INbone Technologies. International sales were driven primarily by Wright’s DARCO plating systems.
Wright Medical’s strong performance in 2008 sets the company up, we think, to become the leader in the foot and ankle market by the end of 2009. We estimate that revenue for the first quarter of 2009 will grow by 22% year-over-year, and we predict that sales for the full year 2009 will rise 23%. One year ago, in 4Q07, the company reported that its extremity product sales (off a low base) rose 61% to almost $19 million. By the end of 2009, we are predicting Wright Medical will surpass the $100 million mark in extremity product revenues and become the fourth largest supplier behind DePuy, Tornier, and Zimmer.
Biomet’s fiscal year starts on June 1st and ends on May 30th. For the calendar year 2008 fourth quarter, (September 2008 to November 2008) Biomet had, we estimate, $18.4 million in extremity sales and almost all of those sales were from shipments of implants and instruments for the upper extremity. The total extremity sales for the calendar year 2008 were, we estimate, $74.3 million —which is a 12.4% rate of YOY growth. Biomet, which became a private company in 2007, now holds, we estimate, 8.1% of the global extremity market, which is a slight decrease in share from 2007.
Biomet’s upper extremity division has been engaged in fierce competition with strong product offerings from Tornier, DePuy, and Zimmer. The company’s new Comprehensive reverse shoulder system is a next generation’s reverse shoulder prosthesis that offers intra operative flexibility. Biomet’s most prominent extremity products include the Bio Modular shoulder system and the Copeland Humeral system.
As part of Biomet’s third fiscal quarter (February 2009 quarter) sales results, management announced that the company had posted good double-digit extremity sales growth rates which were stronger than the overall market growth rate. We are therefore estimating Biomet’s extremity business grew just over 12% year-over-year in the quarter. We are also estimating that Biomet’s current development in upper extremity product lines will deliver a solid 15% rate of sales growth for the year ending May 30, 2009.
Exactech Inc., represents less than 2% of the extremity market worldwide, yet is reporting rapid revenue growth off an admittedly low base. For the fourth quarter Exactech reported that extremity product shipments reached $5.0 million, a 56% annual year-over-year growth rate, which easily surpassed our estimate of 35%. Total sales for fiscal year 2008 amounted to $16.8 million. We estimate that extremity sales will continue to grow at strong double-digit rates at Exactech on the strength of the increasingly popular Equinoxe shoulder system (which doctors use for total shoulder replacement, reverse shoulder replacement, and other shoulder-related procedures). We are now estimating that Exactech’s extremity sales will grow 37% for 1Q09 and can rise to $23 million by the end of 2009.
For 2008, Tornier’s sales rose 13% to $141 million, which was actually a slower rate growth than management had originally forecast. Again, strong competition from Biomet and Exactech, we think, played a role in keeping Tornier’s 2008 growth rate at a still respectable 13%. Tornier’s lead products are the Aequalis Shoulder System and the NexFix MTP Fusion System.We estimate the company will likely increase sales by less than 12% in 2009—again, under management’s expectations. This slower-than-expected rate of growth is due to, we think, the strong competition in the foot and ankle market from Wright Medical and the product offerings from Biomet and Exactech in the shoulder sector. Overall, DePuy still holds the biggest shoulder implant market share at between 25%-28%, but Tornier is closing the gap and accounts for, we estimate, 20% to 22% of the total shoulder market.
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. Tornier’s product sales include some large joint sales in Europe and, of course, extremity product repair implants and instruments.
Other Extremity Companies
The remaining companies that serve the extremity markets are mostly privately held companies or public companies which do not report extremity sales separately, but there are some with potential for fast growth. Ascension Orthopedics, based in Austin, Texas, is an extremity company that reported revenues in 2007 of $14 million. We estimate its 2008 sales exceeded $18 million and we are estimating that sales in 2009 will rise 25% to 30%. Small Bone Innovation (SBi), Arthrex, Integra LifeSciences, Orthofix, Smith & Nephew, and Acumed are other companies that have established a good foundation in the extremities division. SBi, we estimate, grew sales at a 16% resulting in $12 million in revenue for 2008. Integra LifeSciences reported in excess of 20% year-over-year sales growth for the year 2008. Stryker does not play a big part in the extremities area, but it does have a small segment in the shoulder division, and reported 2008 sales reached $21 million.
For the quarter ending December 31, 2008, extremity product shipments increased 15% year over year to $920 million. In the fourth quarter of 2008, growth rates slowed considerably to a still strong 12.1%. For the first quarter of 2009, an overall dismal economic environment will, we expect, keep extremity product sales growth rates at 10% YOY—which is down by about 200 basis points from our previous 1Q09 growth rate estimate of 12%. For the full year 2009, we are estimating that sales will grow by 12%.
Shoulder, foot and ankle products dominate the extremity market with well over 65% of the total product shipments. Tornier and Exactech, we expect, will continue to perform well with their shoulder products while Biomet and Exactech will definitely grow at a rapid rate on the strength of their new reverse shoulder devices (Biomet’s rolls out in May 2009). Wright Medical will, we think, continue to dominate the foot and ankle market and might even surpass DePuy in terms of overall extremity sales by the end of 2009. Zimmer will struggle in its extremity sales as the upper extremity market is facing stiff competition. Even though the extremities market is only a small slice of the orthopedics industry, we estimate that it will reach new heights in 2009 with global product sales of more than $1 billion dollars. The increasing competition and strong growth rates promise to make 2009 an exciting one for extremities.
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