4Q:04 Orthopedic Wrap-up
BY JOHN CHOPACK, MARCH 14, 2005
We have aggregated the 4Q:04 and 3Q:04 reported revenues (includes the effects of foreign currency) for 16 public orthopedic companies. Although we would have liked to use revenue growth rates which excluded foreign currency, a majority of the companies report revenues that include the effects of currency. Therefore, in order to keep a consistent comparison we were forced to use reported revenues.
Of the 16 orthopedic companies listed in Table 1, 9 of them reported 4Q:04 revenue growth rates which were the same or slower than the 3Q:04. Growth in the spine market and biologics remains strong while growth in large joint revenues has slowed.
Hip and Knee Revenues
The biggest take away from the 4Q:04 financial season is the slowing growth in large joint revenues. Four of the six large joint manufacturers which reported both 4Q:04 and 3Q:04 hip revenue growth rates had experienced a slowdown during the 4Q:04. Additionally, four of the six also experienced a slowdown in the rate of knee revenues.
We suspect that the slight slow down in hip revenues is a consequence of individual company's premium priced alternate bearing surfaces fully penetrating their customer base. For example alternate bearing surfaces including ceramic-on-ceramic and metal-on-metal products represent approximately 60% of Wright Medical's and 35% of Stryker's acetabular liners. We believe it is unlikely that either company will experience a higher penetration of these products in the upcoming quarters.
We believe that upcoming growth drivers within in the hip and knee market include additional FDA approvals of ceramic-on-ceramic hip products as well as metal-on-metal hip resurfacing devices. Smith & Nephew just recently gained approval for a ceramic-on-ceramic hip, Exactech is likely to gain FDA approval of its ceramic hip near the end of this year or the beginning of next year and Wright Medical is anticipating an FDA approval of its metal-on-metal hip resurfacing product later this year. Within the knee market we anticipate that further penetration of MIS surgical total and unicompartmental procedures will continue to be growth drivers. We also expect Zimmer's highly cross-linked tibial insert to gain traction within Zimmer's customer base.
Spine Revenues
Although 4 of the 7 companies reporting spine revenue growth rates experienced a slowdown, the rate of growth of these products remains the strongest in orthopedics. The two companies experiencing the strongest growth in spine revenues included Nuvasive and Kyphon and both only sell products within the spine market.
DePuy reported a 17% increase in spine revenues during the 4Q:04 despite gaining the first FDA approval for a disc arthroplasty implant. The clear issue, which has limited penetration, is the lack of appropriate reimbursement for the Charite. In our opinion there is no short-term solution to the problem and it may take DePuy several quarters to overcome the problem. Synthes' ProDisc is likely to be the next disc to gain approval sometime this year.
Source: Companies' reports
Biologics
The biologic sector is currently one of the smaller (as determined by size of revenues) in orthopedics. However, similar to the spine market, two of the companies focused exclusively on this market, Orthovita and LifeCell, reported two of the top overall revenue growth rates in orthopedics. Orthovita revenues totaled $7.1 million during the 4Q:04 which was a 62% increase over the 3Q:04. LifeCell reported revenues of $16.6 million during the 4Q:04 which was a 49% increase over the 4Q:03. LifeCell's product revenues were driven by further penetration of its Alloderm products as well as increased sales of its GraftJacket product.
Wright Medical reported a significant slowdown in its biologic revenues during the 4Q:04. During the 4Q:04, Wright's biologic revenues increased by 11% over the 4Q:03 which down from the 28% rate of growth experienced during the 3Q:04. Management indicated that it anticipated that the slowdown was likely to occur for the next couple of quarters. Wright's ongoing battle with the FDA regarding its ADCON product is something we will be keeping our eye on.
Trauma Revenues
Two companies in particular demonstrated strong revenue growth from trauma implants: Stryker and Orthofix. Stryker, which has contracts with the U.S. military, reported a 23% increase in revenues from trauma products during the 4Q:04. Orthofix reported a 16% increase in trauma implant revenues during the quarter. Zimmer experienced a 10% slowdown in trauma revenues between the 3Q:04 and 4Q:04.
Extremity Revenues
Only two companies currently report extremity product sales, Wright Medical and Biomet, both of which experienced slight upticks in revenue growth between the 3Q:04 and 4Q:04. Wright's extremity products increased by 11% during the 4Q:04, however, this is well below the 20+% growth experienced during most of 2003. Wright is likely to continue to be hurt by the loss of its Newdeal product line to Integra during the near-term. The company has already launched a 'next-generation' product line to replace the Newdeal line.
