“Climate is what we expect, weather is what we get.” – Mark Twain
Why were the first quarter’s surgery volumes so strong—indeed, besting most analysts’ forecasts? Furthermore, why did the majority of orthopedic management teams raise sales and earnings guidance for the year?
Answers to those questions seem to be fairly obvious. For example:
- More insured patients: We know this to be true because the U.S. Department of Human Health Services reported that 20 million more people have health insurance today than they did in 2010. We also know that there are millions more employed people today than at any time in the past decade and that also means more insured patients.
- More elderly patients: We also know this to be true. According to the census bureau, the number of people in the United States who are north of 65 years of age is more than 40 million, which is higher than at any time since…well, ever.
- More arthritis: This is also an easily confirmable fact given #2 above (the incidence of arthritis increases with age) and data from the American Arthritis association and the American Academy of Orthopedic Surgeons.
Or so we thought.
It’s the Weather!
One explanation for the first quarter’s rousing surgery volume and sales reports that most analysts missed, including yours truly, is the weather.
Joanne Wuensch, senior analyst for BMO Capital Markets, noted that there were only 2 winter storms in the first quarter of 2016 compared to 6 in the first quarter of 2015 and 6 in Q1, 2014 and fully 16 in Q1, 2013.
Could weather have, in effect, juiced up the surgery volumes to start this year?
Weather Anecdote:
One summer evening during a violent thunderstorm a mother was tucking her small boy into bed. She was about to turn off the light when he asked with a tremor in his voice, ‘Mummy, will you sleep with me tonight?’ The mother smiled and gave him a reassuring hug. ‘I can’t dear, ‘she said. ‘I have to sleep in Daddy’s room.’
A long silence was broken at last by a shaken little voice saying, ‘The big sissy.’
Ms. Wuensch, who is one of the top medical technology analysts in the United States, put the issue this way in her May 11, 2016 note to clients.
“While weather is a clear factor in agricultural and tourism-related businesses, it can also be one in MedTech. Non-emergency surgical procedures are generally scheduled in advance and can be delayed into subsequent quarters due to inclement weather. Meteorologists have reported this winter’s El Nino, which causes warmer and dryer weather in the North and Northeast, to be the strongest in nearly 20 years. This effect can be quantified by the number of major storms reported by National Oceanic and Atmospheric Administration (NOAA): there were only 2 winter storms in 1Q16comparted to 6 in 1Q15, 6 in 1Q14 and a whopping 16 in 1Q13. This could indicate that fewer scheduled procedures were canceled by weather, allowing them to be included in 1Q16 volume, contributing to volume increases in the quarter—and potentially draining volumes for 2Q.”
Orthopedics Is a Consumer Business
Orthopedics is a consumer business. As in most consumer businesses, particularly those which require customers to travel some distance, weather and location are powerful determinants of sales activity.
There’s a technical term for a sunny, warm day which follows two rainy days. It’s called Monday.
What are, for example, the three most important factors for a successful retail store? Location, location, location.
How often does Wal-Mart talk about weather in its quarterly sales reports? All the time.
Also noteworthy is the extent to which consumerism is seeping into the orthopedic business model. Those orthopedic entrepreneurs that seem to be most disruptive are those who think about orthopedics as a consumer business (example: ambulatory surgery centers (ASCs), strip mall-based urgent orthopedic care centers like OrthoNOW) and are decoupling orthopedics from the tyranny of appointments, hospital settings or even closing hours (24 hour service).
Someday, orthopedic care will be as consumer oriented as any major retailer.
Multiple Factors
Correlation does not causation make.
While weather probably did push surgery volumes higher in the first quarter, the climate for orthopedic surgery is being influenced by many other factors—including greater numbers of insured patients, an aging population and rising incidence rates of musculoskeletal diseases. Ms. Wuensch also added innovation and such company-specific factors as execution capabilities to the mix.
As Ms. Wuensch stated it in her report; “In sum, we view the 1Q16 organic growth rate improvement as multi-factorial, with a healthy dose of weather-related benefit, followed by the impact of declining unemployment rates, and a combination of internal execution, consolidation benefits, and R&D/new product cycles.”
Another old saying about the weather is: “If you don’t like the weather in Texas (or Oklahoma), just wait a minute.”
In short, what happened in the first quarter may well stay in the first quarter.
There is no assurance that the good weather we enjoyed at the start of 2016 will stay put through the rest of the year.
Did all the managements who raised their sales and earnings guidance for the year understand the role of weather in their first quarter report?
Could there be, perhaps, a retreat/regression to the mean in Q2?
“You don’t need to be a weatherman to know which way the wind blows.” – Bob Dylan.
Wuensch said as much in her report.
