Corporate Ortho’s 1st Half Sales Report
Robin Young • Thu, August 17th, 2017
Patient demand for orthopedic products and services remains an extraordinarily powerful and enduring engine of revenue growth for suppliers and providers alike.
For the first half of 2017, these arthritic and injured patients fueled a 4.95% rise in recon surgeries as compared to the same period in 2016.
That rate of growth was above the average rate of 4.4% recorded over the past 6.25 years.
Arthritis is the primary underlying physiological reason for recon surgery and 52 million people worldwide have been diagnosed with arthritis.
For many reasons, but primarily aging, the number of patients diagnosed with arthritis will increase by another 50% between now and 2040.
The recon procedure growth rates we have recorded for the past 25 quarters (average 4.4%) are likely to remain at these levels for decades.
Beyond recon, these same factors, principally aging, are fueling rising demand for extremity and spine procedures.
Global extremity procedure growth rates for the first half of this year came in at between 7-10%. Extremity procedures, fueled by reverse shoulder surgeries, are the fastest growing sector of orthopedics.
Spine and trauma procedure growth rates were under 2% for the first half of 2017—a continuation of the patterns we saw in 2016.
Pricing and Other Headwinds
The orthopedic industry is in transition toward higher rates of cost efficiency and product (patient outcome) quality. Other industries have been through similar disruptions. The auto industry, for example, moved from cars like the best-selling 1968 Pontiac Grand Prix with a 3.8 liter, V8 gas engine (16 miles per gallon) to one of this year’s top seller, the 2017 Toyota Camry with a 2.5 liter, hybrid engine (51 miles per gallon), remote sensors, cameras and internet connectivity.
Can orthopedics similarly execute a three-fold improvement in cost efficiency—while also incorporating new procedures, technologies and treatment paradigms?
As the following chart makes clear, orthopedic suppliers are dealing with steady pressure to find more efficiencies.
One major venture capital firm described the situation as follows in a recent report to its investors:
“The future of addressing the large numbers of patients with increasing disease severity will require the semi-automation of skilled labor (nurses, doctors, and technicians) in healthcare. We will see this where technology will be used to help physicians choose between therapies based on the specific attributes of a patient, as well as in diagnostics like imaging where machine learning can be used to ‘pre-read’ or provide ‘clinical decision support’ to radiologists.”
New technologies, therefore, need to be able to drive greater efficiencies as well as improved patient outcomes.
Hip Implant Sales
As the following chart illustrates, the initial Obamacare bump in procedure volumes occurred between Q2 2013 and Q2 2015. Thereafter growth rates settled into a 1-2% year-over-year rate—which is less than the average 4.4% procedure growth rate. The difference reflects the impact of pricing pressure. If Obamacare morphs into Trumpcare, 15-20 million people will likely lose healthcare insurance. In that case, this chart will, we think, return to negative territory—as it was for all of 2011.
The fastest growing sector in hip replacement is anterior hip approach. Fueled by articles in The New York Times, The Wall Street Journal and The Washington Post, the anterior approach is being increasingly demanded by patients who believe it will help them to recover from surgery faster and with less pain. Various top studies show, however, that the anterior hip learning curve is long and difficult—raising the risk of complications during the first 20-40 cases—and essentially no outcome difference between anterior and posterior patients in the long term.
The market for hip implants and instruments remains dominated by four companies: DePuy, Zimmer Biomet, Stryker and Smith & Nephew.
Knee Implant Sales
Sales of knee implants and instruments grew by 2.9% in the first half of 2017, which was about twice as fast as hip implants.
The growth patterns for knees between 2011 and 2017 display many of the same influencers as hips—namely an Obamacare bump, then a return to more average growth rates and, more recently, steady as she goes at between 2.5-4.0%.
Losing health insurance is the single biggest risk to these growth rates in the future. If some version of Trumpcare is signed into law, then these growth rates will reverse.
Robotics is the single biggest factor raising knee arthroplasty efficiency. Quoting again from the venture capital community annual reports:
“Doctors won’t become robots in 2017, but they will augment their capabilities with artificial intelligence and machine learning approaches to diagnose and surgically treat patients and improve efficiency.”
Key players are Stryker’s Mako and Smith and Nephew’s Navio.
Spinal Implant and Instrument Sales
Spinal implant sales for the first half of 2017 likely came in around 0.5%. Medtronic Spine had not reported as of the date of this article, but given its report for the three months ended April, 30, 2017 (spine sales rose 2.8% on a year-over-year basis – inclusive of BMP), we expect that Medtronic Spine will increase the global spine growth rate of 0.1% to a number closer to 0.5-1.0%.
No orthopedic sector has been hit with as severe headwinds as spine.
For example, payers including Centers for Medicare and Medicaid Services (CMS), continue to give short shrift to excellent clinical outcome and cost efficiency data regarding motion preservation devices. The near continuous battle with payers over the correct and necessary treatment of severe back pain has introduced cost inefficiencies which have had a long term effect on companies, providers and the capital markets.
Corporate Mergers and Acquisitions
Over the past five years, the 6 largest suppliers of orthopedic products and services have made 38 acquisitions. The largest were DePuy’s purchase of Synthes, Zimmer’s purchase of Biomet and LDR Spine, Stryker’s purchase of MAKO and, finally, Smith & Nephew’s purchase of ArthroCare and Blue Belt.
One purchase that was widely forecast by Wall Street traders that did NOT happen was Stryker’s rumored interest in buying Smith & Nephew.
Other acquisitions which did not occur were the mega insurance mergers. Under Obamacare, those mergers seemed pre-ordained. No longer, especially in the face of strong opposition from the Department of Justice and the American Medical Association.
Although orthopedics is a highly concentrated industry, there is likely to be continued purchases of small technology companies by the larger, cash rich diversified suppliers.
So, no change in the pace of M&A activity in orthopedics.
For the remainder of 2017 and continuing for the next couple years, we expect to see the following.
- More standardization of basic implants and instruments
- Increased focus on smarter devices and AI driven logistical services—robotic assist devices, for example
- New forms of outpatient instrumentation and treatment protocols
- Continued cost containment strategies from reimbursers
In other words, keep an eye on the Toyota Camry.