Perhaps NuVasive’s CEO Alex Lukianov articulated it best when he said that this current year has been “the most challenging year that the spine market has ever seen.”
Despite the many and growing challenges, suppliers of spinal implants managed to sell $2.204 billion of products in the third quarter (3Q10) which was slightly under our $2.252 billion forecast. Much as we’ve been doing all this year, we are again moderating our outlook and have lowered our forecast for the year from $9.150 billion to $8.995 billion which represents a year-over-year (YOY) growth rate of 2.3%.
To recap, spinal implant revenue growth rates have declined from 11.1% in 2Q09 to a minus 0.6% in 2Q10. The good news is that growth rates in this quarter returned to positive territory and rose by a 1.6% year-over-year rate.
Three major trends, we believe, are affecting and moderating the outlook for spinal implant sales growth. Specifically:
More Difficult Reimbursement Policies — Private insurance payers have raised the hurdles to fusion reimbursement by, according to field reports, expanding the number of criteria for lumbar fusion approvals. Unless the patient exhibits and is diagnosed with spinal instability, sciatica, or stenosis we are hearing reports that reimbursers are denying coverage for lumbar fusion surgery. Whether the outcomes are more payer denials and just more hassle to payment, the end result, we think, will be to dampen overall procedure growth rates. To understand the level of risk associated with such new payer demands, we analyzed over 45, 000 patients who had lumbar fusion in the PearlDiver Technologies, Inc. private payer data base and found that only 30% were diagnosed with instability.
Technologies Shifting Back to Improving Fusion — No doubt about it. For three or four years now, the reimbursement environment for new technologies has been very difficult. Motion preservation devices in particular have been affected. As a result, we certainly saw at NASS (North American Spine Society) that the creative impulse is moving away from TDRs (total disc replacement) and toward either MIS, lateral access technologies or other approaches that can deliver improved fusion care outcomes.
Consolidation Could be on the Horizon — Conditions, we think, are good for consolidation among some of the industry’s medium sized players. This past year a number of smaller “tuck-in” acquisitions were announced (like Vertiflex’s technology sale to Exactech or Medtronic’s purchase of Osteotech). While we have not yet seen any large scale consolidation among the top ten spinal implant companies, we do think that pricing pressures, changing distribution requirements, and the rise of “outcome” sales create the conditions for the “urge to merge.”
Spine Is Stabilizing
In Table 1 we list and rank our 2011 and 2012 annual sales estimates for each major spinal implant company. The table illustrates that sales of spinal implants and their related biologic products rose 1.6% in 3Q10—which is certainly an improvement from the decline registered for 2Q10—and may indicate that the industry is beginning to stabilize. For all of 2010, we have moderated our outlook and are now estimating that spine revenues will rise 2.3% to $8.995 billion.
Table 1: Quarterly and Annual Sales Revenue for Spine Product Companies
| Revenue ($ millions) | 1Q10 | 2Q10 | 3Q10 | 4Q10E | 2010E | 2011E | 2012E |
| Medtronic | 880 | 829 | 830 | 820 | 3, 359 | 3, 426 | 3, 529 |
| DePuy | 258 | 260 | 242 | 244 | 1, 004 | 1, 034 | 1, 083 |
| Synthes | 245 | 245 | 235 | 248 | 973 | 1, 006 | 1, 044 |
| Stryker | 141 | 140 | 139 | 154 | 575 | 602 | 632 |
| NuVasive | 109 | 120 | 120 | 124 | 473 | 539 | 615 |
| Globus | 76 | 85 | 82 | 90 | 333 | 400 | 484 |
| Orthofix / Blackstone | 72 | 79 | 77 | 82 | 310 | 338 | 368 |
| Biomet | 56 | 62 | 58 | 60 | 236 | 243 | 252 |
| Zimmer | 60 | 58 | 57 | 60 | 234 | 236 | 246 |
| Alphatec | 38 | 45 | 45 | 43 | 171 | 194 | 213 |
| Pioneer Surgical | 32 | 31 | 32 | 33 | 128 | 148 | 167 |
| K2M | 27 | 25 | 24 | 27 | 103 | 126 | 152 |
| Orthovita | 24 | 24 | 23 | 24 | 95 | 106 | 118 |
| SeaSpine | 18 | 19 | 18 | 19 | 73 | 86 | 98 |
| LDR | 13 | 12 | 10 | 10 | 45 | 55 | 65 |
| Integra Spine | 11 | 12 | 10 | 11 | 44 | 49 | 56 |
| Osteotech | 11 | 12 | 11 | 12 | 45 | 51 | 54 |
| RTI Biologics | 7 | 8 | 10 | 11 | 35 | 35 | 43 |
| Spinal Elements | 8 | 8 | 8 | 8 | 31 | 37 | 43 |
| MEDICREA | 5 | 6 | 6 | 7 | 23 | 30 | 40 |
| Trans1 | 7 | 7 | 6 | 5 | 25 | 27 | 28 |
| ArthroCare | 4 | 5 | 4 | 6 | 19 | 20 | 22 |
| Exactech (Altiva) | 2 | 2 | 1 | 2 | 7 | 8 | 8 |
| U.S. Spine | 12 | 12 | 12 | – | 37 | – | – |
| Scient’X | 15 | – | – | – | 15 | – | – |
| Other | 150 | 145 | 144 | 162 | 601 | 685 | 790 |
| Total Revenues | $2, 281 | $2, 249 | $2, 204 | $2, 260 | $8, 995 | $9, 480 | $10, 151 |
| Total Growth | 6.3% | -0.6% | 1.6% | 2.1% | 2.3% | 5.4% | 7.1% |
Source: PearlDiver Technologies, Inc. estimates, Wall Street reports, SEC filings
Synthes, Globus, and DePuy are estimated revenues
Medtronic had not reported Q3 revenues as of the time this article was published
Table 2 displays market gains and losses for the quarter. We estimate that NuVasive and Globus gained 1.1% and 0.7%, respectively, in the quarter due to strong revenue growth. Medtronic continues to lag market growth rates and may not return to market growth until late 2011.
Table 2: Market Share Changes
|
Company |
3Q09 |
3Q10 |
Est. Market |
|
NuVasive |
4.4% |
5.5% |
1.1% |
|
Globus |
3.1% |
3.7% |
0.7% |
|
Alphatec |
1.5% |
2.0% |
0.5% |
|
Orthofix |
3.1% |
3.5% |
0.4% |
|
Trans1 |
0.3% |
0.3% |
0.0% |
|
Stryker |
6.4% |
6.3% |
0.0% |
|
Biomet |
2.7% |
2.6% |
-0.1% |
|
DePuy |
11.2% |
11.0% |
-0.2% |
|
Synthes |
10.9% |
10.6% |
-0.2% |
|
Zimmer |
2.8% |
2.6% |
-0.3% |
|
Medtronic |
39.7% |
37.7% |
-2.1% |
Source: PearlDiver Technologies, Inc. estimates, Wall Street reports, SEC filings
Individual Company Commentary
Medtronic, Inc.
Worldwide spinal implant and biologics revenues fell 9.4% to $829 million in the quarter (which is Medtronic’s first quarter of its fiscal year), down from $915 million in same period a year earlier. Revenues in Medtronic’s core spinal product business, which now includes Kyphon, declined 10.6% in the quarter to $622 million. Sales of biologic products decreased 5.4% to $207 million (down from $219 million in 2Q09). Management attributed the declines to slowing market growth, driven by weaker procedure growth and increased pricing pressures in the form of lower ASP’s. Revenues per procedure also declined. As a consequence, Medtronic does not anticipate a return to market growth rates until 2012. We forecast calendar year fourth quarter revenues will decline 2.6% to $820 million.
DePuy Spine Inc.
DePuy Spine, the second largest spine company in the world, reported that third quarter spinal repair and implant revenues were flat YOY. We estimate third quarter revenues were $242 million. Mid-single-digit price declines and softer procedure volumes impacted domestic revenue growth. Other factors weighing on growth included the weak economy (high unemployment), uncertainty facing potential patients, and discontinued extensions of COBRA insurance. Moving forward, DePuy should benefit from its Cougar lateral spine system and its EXPEDIUM Vertebral Body Derotation (VBD) system for scoliosis patients. We forecast full-year 2010 revenues will be essentially flat at $1.003 billion. We estimate 4Q10 spine revenues to be $244 million (1.7% YOY growth).
Synthes Spine
We estimate that third quarter spinal repair and implant revenues at Synthes Spine declined 0.6% to $234.6 million. Synthes anticipates a tougher spine market moving forward, and indicated that innovation could be impacted by regulatory challenges. Revenue growth was low due to external challenges facing the spine market, as well as product launch delays. In the third quarter, Synthes initiated a limited release of Matrix Spine which is a comprehensive lumbar pedicle screw system. We forecast full-year 2010 revenues will grow 1.9% to $976 million. We estimate 4Q10 spine revenues will be $248 million (0.9% YOY growth).
Stryker Corporation
Stryker Spine continued to struggle along with the overall spine market in the third quarter, but still managed modestly positive growth overall. In 3Q10, Stryker’s spinal repair and implant revenue growth grew 1% to $139.4 million (vs. 14% growth in 3Q09). Revenue growth in the domestic spine product business was flat YOY while international revenues grew 4% constant currency YOY. Stryker did note that some stability was emerging in the spine business, but that challenges remain. At NASS 2010, Stryker displayed its iVAS Inflatable Vertebral Augmentation System, which is a kyphoplasty-like product.
We remain cautious for the remainder of the year in spine even though management indicated that there may be some momentum in the spine business. We estimate that 4Q10 revenues will grow to $154.3 million (1.7% YOY growth). We estimate full-year 2010 revenue to be $575.2 million (3.0% YOY growth).
NuVasive, Inc.
NuVasive delivered strong results in the third quarter, but was not immune to the macro challenges facing the spine market. Revenues grew 26.7% to $120.3 million (versus $94.9 million in 3Q09). This fell short of PearlDiver estimates of $129.9 million. Management lowered full-year 2010 revenue guidance to $470 million – $475 million from $485 million – $495 million. Revenue guidance for 2011 was also lowered to 10% – 20% growth. The main culprit for the revenue shortfall was a decline in procedure volumes driven by private payer reimbursement denials regarding lumbar fusion surgery.
We estimate 4Q10 revenues will be $124 million (16% YOY growth). We estimate full-year revenue 2010 to be $472.95 million, which is a 27.7% YOY growth rate.
Zimmer Inc.
Zimmer reported that spinal implant and biologic sales in 3Q10 were $56.5 million (down from $61.7 million in 3Q09) down 8.4% YOY. The reported revenue decline includes a negative -6% based on procedure volume/mix, -1% from pricing, and minus 2% based on foreign currency exchange. Negative volume/mix was the primary driver of the revenue shortfall. The spine division remains challenged overall, despite double digit growth in Europe and strong uptake of the PathFinder MIS pedicle screw system. Reimbursement challenges continued regarding the Dynesys Dynamic Stabilization System. We forecast full-year 2010 revenues will decline 7.6% to $234.2 million, down from our previous forecast of $240.9 million. We estimate 4Q10 spine revenues to be $59.8 million (-5.2% YOY growth).
Orthofix International
Orthofix spine reported strong third quarter results that outpaced overall market growth. Spinal implant and stimulation sales rose 13.7% to $77.4 million (up from $68.1 million in 3Q09), surpassing our estimate of $73 million. Spine stimulation revenue increased 9.1% to $43.2 million while implant and biologic revenues increased 20% to $34.2 million. The growth in spinal implants and biologics revenue was driven by U.S. sales of the Firebird pedicle screw system, Pillar SA interbody device, and the Trinity Evolution allograft. The fourth quarter will see a limited release of the Phoenix minimally invasive pedicle screw system, which is based on the Firebird platform. At NASS, the company showcased its Direct Vertebral Rotation (DVR) device for spinal deformity.
Management believes that it can produce double-digit revenue growth in the coming year by releasing new products and leveraging its successful spine stimulation business. We estimate 4Q10 spine revenue to rise 10.1% to $81.9 million and full-year 2010 spine revenues to grow 10.9% to $309.7 million.
Biomet, Inc.
Biomet’s third quarter spinal repair and implant revenues (fiscal 1Q11) were $57.9 million (flat YOY growth). It should be noted that this was because Biomet reclassified $1.3 million in spine revenues reported in 3Q09, which lowered reported revenues in that quarter. U.S. sales rose 2%. The spine stimulation and hardware businesses grew modestly during the quarter, but were offset by declines in the biologics business. During the conference call held on October 12, 2010, management noted that it had seen mid-single-digit price declines in spine, which was not a change from the prior quarter. The company expects the Polaris Deformity System and the Trivium Derotation System to drive growth moving forward. At NASS 2010, the company highlighted the new Enclave Anterior Spinal System and the Valiant Anterior Lumbar Plate System.
We estimate 4Q10 (Biomet’s 2Q11) revenues will be $59.5 million (1% YOY revenue growth) and calendar year 2010 revenues to be $235.5 million (.9% YOY revenue growth).
Alphatec Spine, Inc.
On November 8, Alphatec reported that second quarter revenues grew 49% to $44.8 million (up from $30.1 million in 3Q09). Revenues grew 2% on a pro forma basis. Please note that Alphatec has divested out of one of its Japanese subsidiaries and is reporting its operating results as discontinued operations in 2009 and 2010. Alphatec revised full-year 2010 revenue guidance to $170 million – $172 million, down from $177 million – $182 million. During the call Alphatec stated that pricing had stabilized for the company, but uncertainty with regard to procedure volumes prompted the lowered guidance. Management also echoed concerns voiced by NuVasive, in that private payers are slower to reimburse lumbar spinal fusion cases for degenerative disc disease. At NASS, Alphatec launched its PureGen Osteoprogenitor Cell Allograft, which will compete with the Orthofix and NuVasive stem cell products.
For 4Q10, we estimate that sales will reach $42.5 million and full-year pro-forma revenues to be $182.6 million (6.9% YOY growth).
Turbulent Waters Facing the Spine Industry
Challenging regulatory, reimbursement, and pricing environments have contributed to a marked slowdown in revenue growth in the spine industry over the past several quarters. As private payers increasingly scrutinize spine fusion pre-authorizations, a return to the double-digit revenue growth of the past seems unlikely. There is also the potential that spine fusion cases involving just degenerative disc disease could continue to face reimbursement challenges by private payers and that would, we expect, affect future growth rates even more negatively. Our new revenue forecasts reflect our view that the spinal implant industry will grow, at best, at mid-single-digit growth rates and that the landscape will become even more competitive over the coming years.
Chart 1: Spine Market Shares (3Q10)
Source: PearlDiver Technologies, Inc.
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