2004 Orthopedic Industry Outlook: 15% revenue growth to $20 billion
BY EDITOR, DECEMBER 15, 2003
For the past three weeks the HealthpointCapital research staff has been preparing a detailed outlook for the Orthopedic Industry with special emphasis on Large Joint Reconstruction, Spinal Implants, Sports Medicine (including bracing) and Biologics. The result is our outlook for 2004, the conclusions of which are provided in a table on page 3. But first, a look back at 2003.
2003 will be remembered, we think, as the best year in Orthopedic history. It was the year that industry revenue growth, widely expected to slow after 2002's strong 14% expansion, soared to 17.8% adding fully $2 billion in incremental revenues. Cash flows grew even faster. This was the year of Spine and Biologics, as both benefited from the advent of products that, at a minimum, extended the continuum of care for back patients and may, in retrospect, be viewed as game changers. The two most dramatic new products in 2003 were Kyphoplasty and Infuse®.
2003 will also be remembered as the year of the big M&A deal. Zimmer, elbowing out Smith and Nephew for the right to pay a record $3.2 billion for Centerpulse, led the way. But right behind it was Synthes's gutsy purchase of Spine Solutions for $350 million (half now, half later if milestones are met). In total, the number of M&A transactions grew 125% and the dollar amount of these same transactions grew 8 fold to $6.3 billion from $750 million in 2002.
The orthopedic industry today is the largest sector in medical devices. It has the most revenues ($17 billion versus #2 cardio's $14 billion); it has the most companies (1,500 versus cardio's 500) and it addresses three of the largest chronic diseases: arthritis, osteoporosis and back pain. To put that in perspective, those three diseases encompass roughly 75 million patients in the U.S. – 3 times the number addressed by the cardiovascular market.
Three reasons, we believe, stand behind this industry's extraordinary performance in 2003;
Rising penetration rates of key patient markets. High surgical success rates (95+% in total joints and 80% in spine) are driving penetration rates in both the key arthritis and osteoporosis markets (patients 65 years and older) and the back pain market (patients 45-65 years of age). We believe this delivered record breaking unit volume growth in 2003.
Increased use of higher priced implants. Longer lasting, more flexible components which cost more but address the lifestyle needs of the older active patient are becoming the predominant type of orthopedic implant. Ceramic on ceramic hip components, mobile bearing knee, Oxynium components, Kyphoplasty treatment of vertebral compression fractures – all are premium priced, all are popular with both surgeons and patients. This, in turn, contributed significantly to revenue growth in 2003.
Favorable currency fluctuations. The U.S. Orthopedic component manufacturers or U.S. divisions of OUS firms produce, we estimate, in excess of 80% of all the orthopedic implants sold worldwide. The falling dollar (down 20-30% year to date against the Euro, the British Pound and the Japanese Yen) created a consistently favorable revenue report in U.S. dollars. We estimate that currency fluctuations accounted for as much as 2% of the year's reported revenue gains.
Two events that did NOT occur in 2003;
Medicare reimbursement decisions had NO discernible impact on list price decisions.
Baby boomers did NOT drive large joint reconstruction revenues. They did, however, drive spinal surgery revenues. Baby boomers are still, we think, five years away from significantly affecting large joint reconstruction revenues and ten years away from affecting vertebral compression fracture revenues.
For 2004, the trends that drove revenues in 2003 remain firmly in place. Penetration of arthritis and osteoporosis markets will continue, we think, at rates comparable to those we saw in 2003. Likewise, patients are just now learning about such components as ceramic on ceramic hips and Kyphoplasty. Oxynium will continue to gain share; biologics, we think, continues to grow at 17% rates, which are slower than those experienced from 1999-2002 as CryoLife's contamination scandal color surgeons' views of allograft and the market awaits the next line of therapeutic biologic products.
As we illustrate in the table below, orthopedic revenues for 2004 (currency fluctuation neutral) are expected to increase 15%, to $20 billion. Leading the growth, again, will be spinal implant, rising 24%, to $3.6 billion.
