Spine Market Update: Still Fighting

Sales of spinal implants and biologics, the largest sector in orthopedics, reported respectable results last quarter even as the clouds of an economic free fall were gathering. Despite a challenging economic backdrop, sales of spinal implants and related biologics rose by double digit, year-over-year rates in 2008. Clearly, these growth rates are not likely to repeat themselves in the difficult environment of 2009. Although the possibility of double digit industry revenue growth is NOT off the table for 2009, the group of private spinal implant companies that led the market in 2008 will, we estimate, continue to post rapid rates of sales growth this year.

Spine: Revenue Growth in the Fourth Quarter

In Table 1 we list and rank the quarterly sales for each major spinal implant company for calendar year 2008. We also provide our estimate for sales, by company, for the first quarter of 2009 and for full year 2009. As the table illustrates, we believe that sales of spinal implants and their related biologic products rose 9.7% in 4Q08—a sharp retreat from the 12.6% sales growth rate posted in 3Q08. Driving the overall numbers down were low single-digit growth rates posted by Medtronic (spine only grew 3%), Orthofix (spine grew 2.2%) and DePuy (spine grew 5%-6%). Adjusting for the $22 million (our estimate) contribution from the Abbott Spine acquisition, Zimmer’s spine revenues fell from $55.5 million in 4Q07 to $50 million in 4Q08. We estimate that Abbott’s sales of spinal implants declined from their pre-acquisition levels as well. Finally, we do not yet know the impact of ArthroCare’s restated financial results.

Our forecast of spinal implant and biologic product sales for 2009 is partly-sunny. We are forecasting that sales of spinal and related biologic products will increase 9.5%-10% to $2.189 billion in 1Q09. For all of 2009, we estimate that revenues will rise 11.1% to $8.971 billion. Procedure volumes, we expect, slowed in the first quarter but should begin to accelerate in the second half of the year which would firm up pricing and translate into strong second half revenue growth.

 Table 1: Spine Market Revenue Model

Revenue ($ millions)	2Q08	3Q08	4Q08	2008	1Q09	2009 Full Year
Medtronic	859	829	832	3, 389	907	3, 610
DePuy	249	221	222	922	250	980
Synthes	217	213	226	867	237	975
Stryker	128	121	139	507	134	583
Kyphon
Zimmer	55	50	72	231	75	310
Orthofix / Blackstone	63	61	66	252	65	274
Biomet	53	51	55	211	52	210
Abbott	27	29		86
NuVasive	57	67	75	250	75	348
Globus	44	46	50	178	54	246
Alphatec	24	26	28	101	29	124
Pioneer Surgical	23	23	24	92	27	112
K2M	15	15	16	60	20	83
Osteotech	14	12	12	52	12	48
Orthovita	19	21	21	77	21	91
ArthroCare	14	14	16	55	15	65
SeaSpine	11	11	12	45	14	60
RTI Biologics	10	11	12	42	9	42
U.S. Spine	7	7	8	29	10	39
Integra Spine	0	9	10	19	10	41
Trans1	6	6	7	25	7	34
Spinal Elements	5	4	5	18	6	25
Exactech (Altiva)	2	1	2	7	2	8
Other	143	137	142	558	159	663
Total Revenues	$2, 044	$1, 984	$2, 051	$8, 075	$2, 189	$8, 971
Total Growth	13.9%	12.7%	9.6%	12.9%	9.7%	11.1%

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

2008 Spine Market Share Changes by Company

On an individual company basis, the small, private manufacturers continued to take share from the large companies in 2008. Medtronic CFO Gary Ellis expressed concern regarding market share losses in a third quarter conference call. However, he noted that a number of new products are coming online that could not only stop the decline, but allow Medtronic to GAIN market share over the coming 24 months. To put Mr. Ellis’s comments in perspective, to increase Medtronic’s spine and biologics sales growth rate from the current 3% to, say, 13% (which it would need to be to gain share), the firm would have to add $440 million in new annual sales. 

We estimate that Synthes gained market share in 2008 and will continue to increase its percentage of the spinal implant market in 2009. At these rates we think it’s likely that Synthes will surpass DePuy in annual sales and become the world’s second largest spine company in 2009. In its 4Q08 press release, Synthes management noted that it had seen both accelerating revenue growth and increased market share in 2008. However, management failed to provide hard numbers in their quarterly conference call. As a result, we think it is highly likely that DePuy spine remained the number two industry supplier at the end of 2008. Although Zimmer gained market share in 2008 it came as a result of the purchase of Abbott’s spinal implant division and not organic growth.

Table 2: TOP Spine Company 2008 Revenue Growth and Market Share 

Company	Revenue Growth	Est. Market Share Δ	Company	Revenue Growth	Est. Market Share Δ
NuVasive	62.1%	0.9%	Medtronic	3.0%	-2.5%
Globus	45.0%	0.5%	Biomet	-0.3%	-0.3%
Trans1	53.3%	0.1%	Orthofix	3.7%	-0.3%
Alphatec	26.5%	0.1%	DePuy	6.0%	-0.7%
Stryker	19.6%	0.3%
Synthes*	19.8%	0.6%
Zimmer*	17.0%	0.1%

Synthes and Globus revenues are estimated
Zimmer revenue growth includes Abbott acquisition

Privately Held Spinal implant Companies Take Share

Globus has been a sales growth superstar and is now, we estimate, the largest privately held spinal implant company in the world. But they are not alone. We have been tracking several other private companies and the following firms are posting product sales growth rates which range from 20% to 40%. These companies include SeaSpine, Pioneer Surgical, K2M, and Spinal Elements.

Public Spinal Implant Companies

NuVasive – 2008 Market Share Gain: +0.9%

We estimate that NuVasive gained 90 basis points in market share for 2008. The company’s full year 2008 revenues grew 62.1% to $250 million (vs. $154.2 million in 2007). In the final quarter of the year, sales rose to $74.5 million, up 58.7% year-over-year. Management provided 2009 revenue guidance of $345-$350 million. That equates to revenue growth of 40%. We think the firm will continue to gain share in 2009 and is well on its way to hitting the psychologically important goal of $500 million in annual revenues.

Sales of Osteocel Plus, the stem cell based biologic, reached $5.6 million for the final quarter in 2008 ($10 million total in 2008 since being launched in 3Q08) and will ultimately, we estimate, contribute $100 million to NuVasive’s top line. We belived Osteocel Plus revenues will reach $28 million in 2009. On a quarterly basis, we are forecasting flat Osteocel Plus revenue growth in Q1 as NuVasive begins to distribute the product through its own sales force. For 2009, we are forecasting that management will introduce 10 new products. Responding to questions at an early Q1 investor conference (Roth Capital Partners Annual Growth Stock Conference), management stated that their surgeons were NOT experiencing a slowdown in procedure volumes. 

Stryker – 2008 Market Share Gain: +0.3%

Stryker Spine continues to report above average sales growth even as senior management continues to cite a challenging overall economic environment. In 4Q08, Stryker’s spine revenues grew 15% to $139.2 million and led all Stryker divisions in terms of revenue growth. For the fiscal year 2008, spine revenues grew 19% to $507.5 million (vs. $424.4 million in 2007). Revenues were driven by inter-body and lumbar products. The company also reported that international spine revenues grew at a double-digit pace for the second straight quarter. We are estimating that Stryker Spine will report a solid performance in 1Q09 with revenues rising 12.6% to $134.1 million.

Alphatec – 2008 Market Share Gain: +0.1%

On January 13th, Alphatec reported preliminary fourth quarter revenues and provided guidance for 2009. Alphatec’s fourth quarter revenues grew 33% to $28.4 million (vs. $21.3 million in 4Q07). This marked the sixth consecutive quarter of record revenues and the third straight quarter of year-over-year revenue growth exceeding 25%. While the year-over-year comparisons may be tougher to make in 2009, several developments contributed to the high sales growth in 2008 and, we estimate, will continue to drive revenue growth in 2009. Specifically:

We estimate that Alphatec’s 2009 revenue growth will exceed 20% and that overall sales will reach $124 million. For the first quarter of 2009, we are estimating that sales will reach $28.6 million. In the 2009 revenue guidance call, Alphatec’s CEO, Dirk Kuyper, noted that the company is being very conservative regarding the impact that its aging spine products will have on revenues. The potential exists for upside in 4Q09 should these products be cleared on schedule.

Trans1 – 2008 Market Share Gain: +0.1%

Trans1’s fourth quarter revenues grew 48% to $7.4 million. Full year revenues increased 55.3% to $25.3 million. The company reported that 768 AxiLIF procedures were performed in the quarter (vs. 590 in 4Q07). AxiLIF procedure growth, a key driver of revenues, rose 30.2% for the fourth quarter and 37.4% for 2008. Targeted surgeon education programs, positive press, and a maturing sales force (10 months average tenure) drove revenue growth. The company also had the national launch of its AxiaLIF 2L, which enables Trans1’s unique approach to be used in two-level fusions. In a February 24, 2009 conference call, Trans1 stated that, despite the struggling economy, they were not seeing a significant negative impact on procedure volumes.

However, procedure growth has been declining on a sequential basis. Regarding percutaneous nucleus replacement product (PNR), management has stated that they expect to receive a CE mark in late 2009 or early 2010. We estimate that Trans1’s first quarter revenues will reach $7.5 million (+25.1%) and for the full year 2009, revenues can range between $33 and $35 million.

Zimmer Spine – 2008 Market Share Gain: +0.1%

Zimmer reported that spinal implant and biologic sales in 4Q08 reached $72 million (vs. $55.5 million in 4Q07) up 29% year-over-year. Zimmer’s purchase of Abbott Spine in 2008 contributed $22 million to revenues. Fiscal year 2008 spine revenues rose 17% to $231 million (vs. $197.6 million in 2007). For 2009, Zimmer management states that spine product revenue growth will lag the overall spinal implant market growth rates, (which we estimate will grow 10%-11% in 2009) in part, due to the integration of Abbott Spine into Zimmer Spine. Abbott Spine was a $100 million dollar business pre-acquisition, and it appears that Abbott Spine’s revenues will decline in 2009 and may, by 2010, return to pre-acquisition levels. Zimmer’s purchase of Abbott Spine was an expensive purchase which may not, we estimate, significantly contribute to sales growth. In a conference call with analysts, the company noted that cash outlays for the quarter for the Abbott acquisition were $363 million. We estimate that Zimmer Spine’s 1Q09 spinal implant and biologic revenues will be $74.9 million and flat ex-Abbott.

Medtronic Sofamor-Danek – 2008 Market Share Loss: -2.5%

Worldwide spinal implant and biologics revenues rose 3% to $832 million in the January quarter, (which is Medtronic’s third quarter of its April fiscal year) up from $808 million in same period a year earlier.  Sales in the January 2009 quarter (which is roughly comparable to the calendar fourth quarter) were unfavorably affected by foreign currency exchange rates and resulted in an $11 million adverse effect. Medtronic’s core spinal implant and biologic business, excluding Kyphon, grew 3.4% in the January quarter (vs. 3.5% in 3Q08), to $684 million, lagging overall industry growth. Kyphon registered sales of $148 million in the quarter, down 0.7%. Sales of biologic products in the January quarter declined 0.5% to $205 million (vs. $206 million in 3Q08). Sales of biologics products have been affected, we believe, by the issues surrounding the off-label use of Infuse.

Medtronic’s spine division derived 21% of its revenues in the January quarter from outside the U.S. (OUS). Those revenues grew 4.8% year-over-year to $174 million in the just reported quarter. Spinal implant sales rose 11.4%, which helped offset the -12.2% decline in reported Kyphon sales. U.S. revenues grew 2.5% yr/yr to $658 million.

We estimate that spine sales in the final quarter of Medtronic’s fiscal year (February, March & April) will rise 4.4% to $907 million. We expect sales of Kyphon products to improve in the current (April) 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. Table 3 presents our estimates for Medtronic by business segment.

Table 3: Medtronic Quarterly Revenue Growth (Calendar year Estimates)

Total Revenues ($mm)	1Q08	2Q08	3Q08	4Q08	2008	1Q09
Implants	498.0	477.0	485.0	479.0	1, 939.0	529.9
% growth	10.2%	5.1%	5.0%	5.3%	6.4%	6.4%
Biologics	221.0	221.0	198.0	205.0	845.0	223.0
% growth	15.7%	16.3%	0.0%	-0.5%	7.6%	0.9%
Kyphon	150.0	161.0	146.0	148.0	605.0	154.4
% growth				0.7%		2.9%
Total Spine Revenue	869	859	829	832	3, 389	907
% growth	35.1%	33.4%	25.6%	3.0%	23.0%	4.4%
% growth ex Kyphon	11.8%	8.4%	3.5%	3.5%	6.7%	4.7%

Source: SEC filings and PearlDiver estimates

Biomet Spine – 2008 Market Share Loss: -0.3%

Biomet’s fourth quarter spinal implant revenues increased 8% year-over-year to $55.3 million. Sales in the U.S. rose 10%. The company’s management cited solid growth in both hardware and spinal stimulation device sales. During a January 13th conference call with analysts, management attributed the turnaround in spinal implant sales to the result of solidly executed new product launches in 2008 and the stabilization and recent expansion of Biomet Spine’s sales force. During the quarter, the company launched a PEEK version of its Solitaire anterior spinal system, the second generation Ballista percutaneous pedicle screw system, and the AccuVision MIS spinal exposure system. In the current quarter, management promised analysts that they would release the Polaris deformity system in 5.5 mm and 6.35 mm diameter rods.

Orthofix/Blackstone – 2008 Market Share Loss: -0.3%

Sales for the final quarter of 2008 rose 2.2% to $65.8 million (vs. $64.4 million in 2007). Spine stimulation revenue increased 11% to $37.4 million while implant and biologic revenues fell 7% to $28.2 million. It should be noted, however, that the sales of spine products through the Blackstone unit increased 9% from the preceding quarter. Such sequential quarterly growth was impressive. Total spinal implant and biologic revenues for 2008 rose 4% year-over-year to $252.2 million.

Certainly, last year was a challenging one for Orthofix highlighted by the loss of its distribution rights for the popular Trinity-Osteocell product, overall distributor instability, and management changes. Most recently, Ramius Capital, an activist shareholder group, challenged management and the board of directors and agitated for both new board membership and the sale of the company’s Blackstone spine and biologics division (acquired in 2006).

Fourth quarter spinal implant and biologic sales (comprised of Blackstone and spine stimulation) represented about 49% of the company’s total revenues. Problems at Blackstone hurt the company’s stock price significantly in 2008. At the start of 2008, Orthofix’s stock price was trading for $55 per share. By the end of the year, the company’s share price had fallen by more than 80% to a low of $8.65. With good news from the company, including debt reduction and better-than-expected sales at Blackstone, the stock price has recovered to about $15 per share.

That being said, we do NOT expect that Orthofix will sell its Blackstone unit anytime soon and, in our opinion, CEO Alan Milinazzo has an effective and strong strategy to return to industry average and potentially higher rates of spinal implant and biologics sales growth rates. Milinazzo  has guided analysts to expect an 8%-12% rate of sales growth in the Blackstone unit for 2009. Here are three key points that should drive growth: 

Table 4: Orthofix/Blackstone Spine Quarterly Revenue Growth

Revenue ($ millions)	1Q08	2Q08	3Q08	4Q08	2008	1Q09
Spine Stimulation	34.5	35.4	35.5	37.4	142.8	37.6
% growth	15.9%	12.5%	11.4%	11.0%	12.2%	9.0%
Hardware / Biologics	28.0	27.3	25.8	28.2	109.3	27.0
% growth	6.1%	-9.1%	-12.4%	-7.5%	-5.7%	-3.6%
Total Spine Revenue	$62.5	$62.7	$61.3	$65.6	$252.1	$64.6
% growth	11.3%	2.0%	0.0%	2.2%	3.7%	3.4%

Source: SEC filings and PearlDiver estimates

Spine 2009

The spine industry enters 2009 facing significant uncertainty driven by challenging economic conditions. Questions about elective procedure volumes and pricing in the midst of constrained hospital budgets could provide for a difficult year full of tough choices.

However, the spine industry has strong underlying fundamentals and a key ingredient to growth in orthopedics: innovation. While the days of 18%-20% industry wide growth are probably gone, PearlDiver estimates that 10%-12% growth in the coming years is achievable.  

Chart 1: Estimated 2009 Spine Market Share